Deutsche Bank Markets Research

Rating Company Date 16 June 2016 Buy Sinopec Kantons Initiation of Coverage Asia China Reuters Bloomberg Exchange Ticker Price at 15 Jun 2016 (HKD) 3.81 Energy 0934.HK 934 HK HSI 0934 Price target - 12mth (HKD) 5.25 Oil & Gas 52-week range (HKD) 6.48 - 3.44

HANG SENG INDEX 20,468

Proxy for China's rising crude oil Vitus Leung Johnson Wan imports; initiating with Buy Research Analyst Research Analyst (+852 ) 2203 6158 (+852 ) 2203 6163 Unique energy logistics company; initiating with Buy on 37% upside potential [email protected] [email protected] The wind has changed in favour of Sinopec Kantons, a subsidiary of Sinopec and its flagship logistics arm for handling oil imports, with a gas pipeline, LNG vessels and oil storage. On organic growth, we expect an upturn in Kantons’ Price/price relative return on assets in the coming years; it should benefit from liberalisation of 9.0 import oil quota, resumed gas demand growth and a surge in LNG imports. 8.0 ROIC could rise from 10.6% in 2015 to 13.0% in 2018E. Kantons trades at a 7.0 deep discount to peers; hence its favourable risk-reward warrants a Buy rating. 6.0 5.0 Beneficiary of teapot refiners’ ramp-up with surge in import crude oil 4.0 Kantons’ dominance of oil jetties in Shandong (five VLCC berths in Qingdao 3.0 and Rizhao) should allow it to benefit from a rise in teapot refiners’ utilisation 6/14 12/14 6/15 12/15 and a surge in crude oil import volumes. A healthy GRM should mean a rise in Sinopec Kantons HANG SENG INDEX (Rebased) imports, as teapot refiners have used only 30% of the quota since Nov 2015. We expect Kantons’ throughput to rise from 187mntons in 2015 to 230mntons Performance (%) 1m 3m 12m in 2018E (+44mntons). Key catalyst: new NDRC approval of the oil import Absolute 5.0 -2.3 -39.4 quota, with 33m tonnes of the quota left to be applied (+60% of current levels). HANG SENG INDEX 3.8 0.9 -23.8 Yuji resumes pipeline growth; lower impact from regulatory changes Source: Deutsche Bank

Gas demand growth has returned after the gas price cut in Nov 2015. We expect Yuji gas volume growth to record a 10% CAGR in 2015-18E, after a 7% Stock data drop in 2015, and ROE to improve to 18% in 2018E from 11% in 2015. We also see potential regulatory changes in pipeline tariffs, which could be Market cap (HKDm) 9,472 benchmarked to ROA and utilisation rates. Yuji Pipeline could do better as its Market cap (USDm) 1,221 ROA is only 4-6% in 2015-18E, vs. the potential benchmarked ROA of 8%. Shares outstanding (m) 2,486.2 Valuation; risk-reward Major shareholders Sinopec Corp Our target price of HK$5.25/share is based on sum-of-the-parts, using DCF for (60.34%) the Huade oil jetty and Yuji gas pipeline with WACC of 9.8% and 0% terminal Free float (%) 40 growth, NAV for LNG vessels, DDM for equity-accounting oil jetties and Avg daily value traded 1.3 overseas oil storage facilities, and 1x EV/EBITDA for vessel charter due to (USDm) uncertainty over charter renewals in 2017. Our target price implies 1.15x 17E Source: Deutsche Bank P/B, representing 8% and 27% discounts to Chinese ports and gas peers, respectively, although Kantons has a premium ROIC over 2016E-18E. Risk: DB vs. Consensus Lower-than-expected crude oil import volume; changes in government policy Year DB EPS Cons vs Cons towards teapot refiners. (HK$/shr) EPS Forecasts And Ratios (HK$/shr) 2016E 0.45 0.47 -3% Year End Dec 31 2014A 2015A 2016E 2017E 2018E 2017E 0.49 0.52 -6% EBITDA (HKDm) 1,365.3 1,284.1 1,258.8 1,293.1 1,409.8 2018E 0.55 0.57 -4% Reported NPAT (HKDm) 1,017.8 1,027.0 1,129.6 1,212.0 1,369.3 Source: Bloomberg Finance LP, Deutsche Bank estimates DB EPS FD(HKD) 0.46 0.43 0.45 0.49 0.55

DB EPS growth (%) 129.0 -6.3 5.7 7.3 13.0 PER (x) 15.1 12.2 8.4 7.8 6.9 EV/EBITDA (x) 9.9 6.4 5.1 4.3 3.2 DPS (net) (HKD) 0.05 0.05 0.05 0.10 0.14 Yield (net) (%) 0.7 1.0 1.4 2.6 3.6 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close

______Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.

16 June 2016

Oil & Gas Sinopec Kantons

Model updated:15 June 2016 Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E

Running the numbers Financial Summary Asia DB EPS (HKD) 0.20 0.46 0.43 0.45 0.49 0.55 Reported EPS (HKD) 0.21 0.41 0.41 0.45 0.49 0.55 Hong Kong DPS (HKD) 0.04 0.05 0.05 0.05 0.10 0.14 BVPS (HKD) 4.0 5.0 3.8 4.2 4.6 5.0 Oil & Gas Weighted average shares (m) 2,340 2,486 2,486 2,486 2,486 2,486 Sinopec Kantons Average market cap (HKDm) 16,229 17,181 13,001 9,472 9,472 9,472 Enterprise value (HKDm) 8,404 13,526 8,174 6,451 5,524 4,538 Reuters: 0934.HK Bloomberg: 934 HK Valuation Metrics P/E (DB) (x) 34.6 15.1 12.2 8.4 7.8 6.9 Buy P/E (Reported) (x) 33.0 16.9 12.7 8.4 7.8 6.9 Price (15 Jun 16) HKD 3.81 P/BV (x) 2.14 1.23 1.22 0.91 0.84 0.77

Target Price HKD 5.25 FCF Yield (%) 0.1 1.2 8.9 13.9 5.8 5.3 Dividend Yield (%) 0.5 0.7 1.0 1.4 2.6 3.6 52 Week range HKD 3.44 - 6.48 EV/Sales (x) 0.4 0.7 4.0 3.3 3.0 2.3 Market Cap (m) HKDm 9,472 EV/EBITDA (x) 29.9 9.9 6.4 5.1 4.3 3.2 EV/EBIT (x) 86.3 16.6 11.2 9.4 7.7 5.4 USDm 1,221 Income Statement (HKDm) Company Profile Sales revenue 23,356 20,670 2,044 1,952 1,811 1,937 Sinopec Kantons was established in 1998. It is the flagship Gross profit 155 916 839 785 772 895 logistic arm of Sinopec for crude oil import. Sinopec EBITDA 281 1,365 1,284 1,259 1,293 1,410 Kantons primarily engages in the operation of oil jetties, Depreciation 172 541 539 556 558 562 long-distance gas pipeline assets, LNG vessels and oil Amortisation 11 12 14 14 14 14 storages. EBIT 97 813 730 689 721 835 Net interest income(expense) -1 -198 -183 -196 -191 -175 Associates/affiliates 457 490 554 682 728 777 Exceptionals/extraordinaries 0 0 0 0 0 0 Other pre-tax income/(expense) 109 104 118 124 134 143 Profit before tax 662 1,208 1,219 1,299 1,393 1,579 Price Performance Income tax expense 171 190 192 170 181 210 Minorities 0 0 0 0 0 0 9.0 Other post-tax income/(expense) 0 0 0 0 0 0 8.0 Net profit 491 1,018 1,027 1,130 1,212 1,369 7.0 DB adjustments (including dilution) -22 123 42 0 0 0 6.0 DB Net profit 469 1,141 1,069 1,130 1,212 1,369 5.0

4.0 Cash Flow (HKDm) 3.0 Cash flow from operations 408 1,113 1,475 1,695 925 1,075 Jun 14Sep 14Dec 14Mar 15Jun 15Sep 15Dec 15Mar 16 Net Capex -395 -901 -313 -377 -377 -577 Sinopec Kantons Free cash flow 13 212 1,162 1,318 549 498 HANG SENG INDEX (Rebased) Equity raised/(bought back) 0 0 0 0 0 0 Margin Trends Dividends paid -87 -428 -353 -137 -242 -342 Net inc/(dec) in borrowings 0 0 0 -1,586 -581 -500 75 Other investing/financing cash flows -709 -612 -551 228 361 426 60 Net cash flow -783 -828 259 -176 86 81 45 Change in working capital 227 -107 364 606 -187 -125

30 Balance Sheet (HKDm) 15 Cash and other liquid assets 1,622 799 1,058 881 968 1,049 0 Tangible fixed assets 1,973 8,441 7,781 7,594 7,401 7,445 -15 13 14 15 16E 17E 18E Goodwill/intangible assets 0 0 0 0 0 0 EBITDA Margin EBIT Margin Associates/investments 6,213 7,078 7,746 7,713 7,973 8,377

Other assets 1,382 1,935 1,029 899 879 879 Growth & Profitability Total assets 11,191 18,252 17,614 17,088 17,220 17,750 Interest bearing debt 0 4,183 3,939 5,535 4,954 4,454 20 14 Other liabilities 1,334 1,565 4,263 1,148 892 896 0 12 Total liabilities 1,334 5,748 8,202 6,683 5,846 5,349 -20 10 Shareholders' equity 9,847 12,465 9,373 10,366 11,336 12,363 8 -40 Minorities 10 39 39 39 39 38 6 Total shareholders' equity 9,856 12,504 9,412 10,405 11,374 12,401 -60 4 -80 2 Net debt -1,622 3,384 2,881 4,654 3,986 3,405 -100 0 Key Company Metrics 13 14 15 16E 17E 18E Sales growth (%) 6.0 -11.5 -90.1 -4.5 -7.2 7.0 Sales growth (LHS) ROE (RHS) DB EPS growth (%) 23.4 129.0 -6.3 5.7 7.3 13.0

Solvency EBITDA Margin (%) 1.2 6.6 62.8 64.5 71.4 72.8 EBIT Margin (%) 0.4 3.9 35.7 35.3 39.8 43.1 Payout ratio (%) 16.7 12.2 12.1 12.1 20.0 25.0 50 100 ROE (%) 6.0 9.1 9.4 11.4 11.2 11.6 40 80 30 Capex/sales (%) 1.7 4.4 15.3 19.3 20.8 29.8 20 60 Capex/depreciation (x) 2.2 1.6 0.6 0.7 0.7 1.0 10 40 Net debt/equity (%) -16.5 27.1 30.6 44.7 35.0 27.5 0 20 Net interest cover (x) 88.1 4.1 4.0 3.5 3.8 4.8 -10 -20 0 Source: Company data, Deutsche Bank estimates

13 14 15 16E 17E 18E

Net debt/equity (LHS) Net interest cover (RHS)

Vitus Leung +852 2203 6158 [email protected]

Page 2 Deutsche Bank AG/Hong Kong

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Oil & Gas Sinopec Kantons

Investment thesis

Outlook We favour Kantons, an energy logistics company, for its stable earnings stream, improving assets returns and the potential to outperform oil and gas peers with on-going reforms and deregulation amid a volatile commodity price environment. Kantons is clearly a beneficiary of China’s increasing reliance on imported crude oil and rising appetite for supplies from teapot refiners as they utilise their crude oil import quotas. Its dominant position in the oil jetty market gives Kantons an increasingly valuable asset. Key catalysts are 1) new NDRC approvals on crude oil import quota; and 2) reassurance of China gas demand growth.

Kantons has a long track record in M&A and has been perceived as a beneficiary of Sinopec’s assets reshuffle. However, its share price has plunged since M&A activity stalled in 2014 and the return from its largest acquisition, Yuji Pipeline, is lower than expected due to a shortfall in transmission volume in 2015. However, we now believe the tide has turned. Kantons should start to re-rate as previously acquired assets become profitable and it is also a likely beneficiary of a surge in crude oil imports.

Our positive views are based on: 1) independent (teapot) refiners’ ramp-up of crude oil imports; 2) reacceleration of long-distance gas pipeline transmission growth; and 3) Kantons being a likely long-term beneficiary of China’s LNG import ramp-up with its eight LNG vessels. We expect Kantons’ net profit to register a 10% CAGR over 2015-18E, with a pick-up in oil jetty, gas pipeline volume growth, and in LNG vessels’ contributions. We expect Kantons’ ROIC to improve from 10.6% in 2015 to 13.0% in 2018E.

Valuation

We derive our TP for Kantons by adopting a sum-of-the-parts valuation, using DCF for the Huade oil jetty and Yuji gas pipeline with a WACC of 9.8% (CoE of 11.3%, after-tax CoD of 3.8%, and a debt-to-capital ratio of 20%) and 0% terminal growth for their capacity expansion constraints, NAV for LNG vessels, DDM for equity-accounting oil jetties and overseas oil storage, and 1x EV/EBITDA for vessel charter given the uncertainty of its charter renewal in 2017. Our TP implies 1.15x 2017E P/B. As compared to its ports and gas peers trading at 1.3x and 1.6x 2017E P/B, this represents a discount of 8% and 27% respectively, while Kantons could achieve ROIC of 12% (a premium to its port and gas peers at 5.5% and 9.0%).

Risks

 Lower-than-expected crude oil import volume; changes in government policy towards teapot refiners

 Change in China’s oil and gas reforms, including unexpected pipeline reform. Lower-than-expected growth in gas pipeline transmission and unanticipated LNG spot cargo imports

 Lower-than-expected oil storage occupancy

 Cancellation of the Batam project, which could lead to an asset write-down

Deutsche Bank AG/Hong Kong Page 3

16 June 2016 Oil & Gas Sinopec Kantons

44 44 4.3 2.7 2.5 3.5 2.5 1.9 6.2 4.7 4.0 3.0 9.5 5.5 2.9 0.6 7.5 5.5 3.6 6.8 3.9 8.8 0.9 0.1 0.1 2.7 2.8 6.9 2.6 -4.4 -1.5 -4.2 -3.4 -0.7 10.5 11.0 11.2 13.2 12.0 16.8 20.1 FY17E ROIC (%) 43 43 1.2 2.8 2.3 3.9 2.5 1.7 6.6 4.7 4.0 3.1 8.8 5.5 2.9 0.6 7.1 5.3 3.7 8.9 9.6 4.0 9.0 1.3 0.1 1.9 2.5 3.2 -6.5 -3.6 -4.0 -7.7 -1.3 -0.2 -0.5 10.5 11.8 13.1 11.3 16.6 20.8 FY16E 18 18 5.7 4.4 NA 5.8 7.1 NA NA 7.7 NA NA NA 9.8 2.7 6.1 8.7 6.7 7.1 5.3 8.1 9.6 6.7 3.8 4.9 6.9 2.6 NM 11.2 10.6 10.4 13.1 11.3 10.2 10.6 10.2 13.8 88.4 22.5 14.9 10.3 FY17E 17 17 8.3 4.9 9.9 NA 5.6 7.3 NA NA 8.0 NA NA NA 2.8 5.5 9.3 7.5 7.7 6.1 9.2 5.6 5.4 7.1 7.4 3.0 NM NM 12.4 10.9 13.9 12.0 10.3 12.4 11.2 11.5 28.2 41.7 13.7 11.1 10.1 EV/EBITDA (x) EV/EBITDA FY16E 38 38 3.3 3.9 2.6 7.6 1.5 3.3 5.3 5.7 4.0 4.0 3.3 1.3 NA NA NA 2.6 3.3 3.7 1.5 2.3 1.8 2.4 2.7 2.4 3.2 0.0 1.2 0.0 1.8 0.0 0.0 0.0 2.2 2.6 1.7 5.6 5.2 3.7 5.5 FY17E 37 37 1.5 1.0 3.3 5.2 3.5 5.4 2.3 3.8 2.4 9.2 1.1 3.9 5.4 5.7 4.0 4.2 3.1 1.3 NA NA NA 2.5 3.3 3.1 1.0 1.2 1.7 2.2 2.4 1.8 2.6 0.0 0.0 0.0 1.0 3.6 0.0 0.0 2.4 Dvd yield (%) Dvd yield FY16E 33 33 7.6 6.7 8.3 1.7 3.8 3.2 2.7 8.5 3.5 4.7 6.8 6.2 3.6 3.1 4.8 9.9 7.7 6.7 5.7 7.5 3.2 NA NA 9.2 -2.9 11.1 17.1 12.7 10.8 10.1 19.2 17.4 19.7 14.2 -50.5 -16.4 -10.7 -27.7 -11.0 FY17E ROE (%) 32 32 7.7 7.8 8.8 2.3 1.8 4.2 0.6 6.9 6.0 4.3 3.2 4.5 7.6 6.6 5.8 7.8 2.8 NA NA 9.3 -8.8 -1.5 -1.1 10.9 13.3 18.1 21.3 13.8 11.4 18.6 13.4 11.0 10.8 -46.4 -25.7 -11.0 -12.9 -34.8 -16.1 FY16E 1.3 0.8 0.9 2.3 2.2 1.9 0.7 1.6 0.4 2.5 0.5 1.2 0.4 0.7 0.9 1.4 1.0 0.8 0.7 0.8 1.0 1.3 0.9 0.8 0.7 0.7 0.8 0.9 0.6 0.9 0.5 0.6 0.7 1.7 1.8 1.2 NA NA 1.7 28.0 28.0 FY17E P/B (x) P/B 1.3 0.9 1.0 2.6 2.5 2.2 0.8 1.8 0.5 1.5 0.5 1.1 0.5 0.6 0.8 1.1 0.8 0.9 0.7 0.8 1.0 1.5 1.0 0.8 0.7 0.7 0.7 0.9 0.6 1.0 0.5 0.6 0.7 1.8 1.9 1.2 NA NA 1.8 27.0 27.0 FY16E NA 0% 8% 9% 3% 0% 1% 3% 6% 5% 3% 4% 6% 3% NM NM NM NM -2% -3% -6% -8% -2% -2% 11% 14% 11% 10% 27% 12% 13% -49% -47% -26% -43% -26% -14% -10% -15%

FY15-17E EPS CAGR CAGR EPS

23 23 8.2 9.1 7.7 9.2 8.2 7.3 9.0 6.6 8.9 NM NM NM NM NM 17.4 14.2 13.6 13.3 11.2 12.0 24.3 12.8 14.0 18.2 26.2 28.5 21.6 10.2 11.4 21.0 29.0 12.1 14.9 16.2 22.8 26.4 24.1 18.0 19.3 FY17E P/E (x) P/E 22 22 8.1 9.2 8.3 8.5 7.5 8.7 7.0 9.5 NM NM NM NM NM NM NM NM 17.9 12.8 22.6 14.6 12.0 14.0 28.8 24.9 27.5 19.2 17.9 10.5 13.0 17.1 27.2 13.5 14.6 17.0 23.8 30.8 26.1 18.9 20.4 FY16E rated (NR) companies. companies. (NR) rated - 9 9 0 549 833 513 6,855 6,483 7,310 6,388 5,307 1,419 4,383 3,447 3,331 2,502 2,192 2,063 1,123 1,205 8,000 3,947 6,607 4,755 3,963 3,707 2,724 1,802 9,609 1,884 1,847 1,313 17,713 85,950 54,113 191,329 (USD mn) Market Cap 9% 6% 5% 5% 2% -6% -9% -4% -8% -6% -9% Perf 13% 17% 18% YTD -20% -28% -25% -22% -37% -26% -28% -27% -11% -10% -12% -18% -20% -30% -14% -21% -24% -15% -23% -22% -38% -38% -27% -24% -11% 2.62 1.31 7.64 1.46 5.04 4.95 4.04 6.27 6.27 4.22 3.76 7.00 5.34 5.31 9.41 3.65 6.92 7.00 9.65 0.46 3.17 7.80 2.78 1.05 Price 27.20 11.90 14.75 41.90 11.36 22.30 38.05 19.74 187.00 222.00 231.00 14-Jun-16 . Note: Bloomberg consensus estimates fornon estimates consensus Bloomberg .Note: 5 5 JPY JPY JPY CNY CNY CNY CNY CNY HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD USD HKD HKD HKD HKD SGD Curr TWD TWD Trading NR NR NR NR NR NR NR NR NR NR DB Sell Sell Sell Sell Sell Sell Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Hold Hold Hold Hold Hold Hold Hold Rating 3 0316.HK 9107.T 2603.TW 2609.TW 600017.SS 000088.SZ 000022.SZ 0392.HK 0135.HK 0384.HK 1193.HK 2688.HK 1083.HK 9101.T 1919.HK 9104.T NEPS.SI 0386.HK 0883.HK 0338.HK 2386.HK 0144.HK 2039.HK HPHT.SI 2880.HK 1199.HK 3369.HK 3382.HK 3378.HK 600018.SS 601018.SS Reuters Ticker 0934.HK 0857.HK , Company data, Deutsche Bank estimates Bank Deutsche data, Company ,

: Comps for Chinese ports, China gas utility and utility container shippingregional gas and ports, :China forComps Chinese 1 Bloomberg Finance LP Finance Bloomberg Figure Figure OOIL Kisen Kawasaki Marine Evergreen Marine Ming Yang Weighted average Regionalcontainer shipping Yusen Nippon Cosco Hldgs China MOL Lines Orient Neptune CR Gas Energy ENN Towngas China Weighted average Weighted average -ports Chinese China utility gas BJ Enterprises Energy Kunlun Gas China Rizhao Port Rizhao Port Yantian Wharf Chiwan Shenzhen Weighted average Xiamen Port Weighted average portsChinese - A Port Int'L Shanghai Port Ningbo Dalian Port Dalian Cosco Pacific Port Qinhuangdao Tianjin Port China oil & gas portsChinese - H & SGX Merchants China Port Qingdao TrustHph Sinopec CNOOC Ltd - H SPC SEG Name Kantons Sinopec China oil gas & PetroChina

Source: Source: Comp sheet

Page 4 Deutsche Bank AG/Hong Kong

16 June 2016

Oil & Gas Sinopec Kantons

Proxy for China’s rising crude oil imports

We initiate coverage with a Buy on Sinopec Kantons (Kantons, 934 HK), and a target price of HK$5.25/share. Kantons is a subsidiary of China’s largest oil refiner, Sinopec, and its flagship logistic arm that handles crude oil imports. It has long distance gas pipeline assets, LNG vessels and oil storage, with assets spread across China, Europe and the Middle East. Kantons is a close proxy for the rise in crude oil imports in China, and the resurrection of gas demand growth.

Our investment thesis covers:  Fade in M&A; rise in organic growth

 Oil jetty: Key beneficiary of the liberalisation of the crude oil import quota

 Gas pipeline: Rejuvenation of pipeline gas transmission growth

 LNG vessels are its hidden gem With a pick-up in the utilisation rate at different segments, we estimate Kantons’ net profit should register a 10% CAGR over 2015-2018E, with a strong pick-up in oil jetties, gas pipeline volume growth and contribution from LNG vessels. We expect Kantons’ ROIC to improve from 10.6% in 2015 to 13.0% in 2018E.

Figure 2: Sinopec Kantons – M&A Roadmap

Announce Completion Asset type Location Asset acquired Stake Consideration P/B P/E Seller Other existing owners ment Date Data (HKD mn) Jul-06 Dec-06 Oil terminal China Huade Petrochemical +30% 571.0 1.3 12.9 Sinopec Corp NA May-11 Oct-11 Oil terminal China Zhan Jiang Port Petrochemical Terminal 50% 407.3 0.9 3.6 Zhan Jiang Port Group Zhan Jiang Port Group (Zhanjiang SASAC: 50%, China Merchants Int'l Terminals: 40.3%, Shanghai Baosteel: 8%, Shenzhen Yantian Port: 1.4%, Zhanjiang Ocean Shipping Agency & Guangdong Hengxing: 0.3% Dec-11 Oct-12 Oil terminal China Ningbo Shihua Curde Oil Terminal 50% 212.6 1.3 5.3 Sinopec Corp Ningbo Port Company Limited Dec-11 Oct-12 Oil terminal China Qingdao Shihua Curde Oil Terminal 50% 718.8 1.5 5.9 Sinopec Corp Qingdao Port (Group) Company Limited Dec-11 Oct-12 Oil terminal China Tianjin Port Shihua Curde Oil Terminal 50% 428.9 1.5 18.7 Sinopec Corp Tianjin Port (Group) Company Limited Dec-11 Oct-12 Oil terminal China Rizhao Shihua Curde Oil Terminal 50% 525.0 1.4 NM Sinopec Corp Rizhao Port Group Company Limited Dec-11 Oct-12 Oil terminal China Tangshan Caofeidian Shihua Curde Oil Terminal 90% 335.3 1.2 5.2 Sinopec Corp Tangshan Caofeidian Port Company Limited Jan-12 Jan-13 Oil storage UAE Fujairah Oil Terminal FZC 50% 194.9 NM NM Concord Energy Concord Energy Oct-12 Mar-13 Oil terminal Indonesia PT. West Point Terminal 95% 3,840.1 NM NM PT. Batam Sentralindo PT. Batam Sentralindo Oct-12 Apr-13 Oil storage Europe Vesta Terminals 50% 1,302.1 0.9 72.0 Mercuria Energy Mercuria Energy Dec-14 Dec-15 Gas pipeline China Yu-Ji Pipeline 100% 3,221.1 1.7 9.7 Sinopec Corp NA Total 11,757.2 1.5 9.5 Source: Company data, Deutsche Bank

Figure 3: Kantons’ share price performance vs. peers (since 2014)

Chinese ports - A HSI Index Chinese ports - H & SGX HSCEI Index China oil & gas China gas utility Sinopec Kantons

-60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Source: Bloomberg Finance LP, Company data, Deutsche Bank estimate. Data as of Jun 14, 2016

Deutsche Bank AG/Hong Kong Page 5

16 June 2016

Oil & Gas Sinopec Kantons

 M&A activity fades out; strong organic growth ahead: Kantons has a long track record in M&A, and the market has perceived it as a beneficiary of Sinopec’s assets reshuffle. However, its share price has de-rated since M&A activity stalled in 2014. The latest, also the largest, acquisition of Yuji Pipeline also played a large part in the de-rating, with ROE erosion due to a drop in transmission volume and ASP in 2015. However, we see that the tide has turned, and expect acquired assets’ profitability to kick in with ROIC improving from 10.6% in 2015 to 13.0% in 2018E.

 Key beneficiary of liberalisation of crude oil import quota: Kantons has 2 oil jetty terminals in Shandong with 5 VLCC (very large crude carrier) capacities to handle an increase in crude oil imports for independent (teapot) refiners. Moreover, Kantons’ Rizhao port plans to add another VLCC berth to accommodate demand growth. Sinopec is also set to lower domestic oil production while refining throughput remains stable. Hence, we expect Kantons, as a flagship crude importer for Sinopec, to benefit from higher utilisation of the terminals.

 Rejuvenation of pipeline gas transmission growth: Yuji gas pipeline volume disappointed in 2015 with a volume dip of 7.7% YoY. However, the government’s cutting of the city-gate tariff in Nov 2015 has rejuvenated demand. We expect Yuji Pipeline transmission volume to grow 10% p.a. in 2015-18E, from 2.98bcm to 3.92bcm. Moreover, we see Yuji Pipeline’s ROA improving from 4% in 2015 to 6% by 2018E. Besides, Yuji will potentially be better off if the NDRC changes its long distance tariff regulation with a change in benchmarking to ROA and utilisation, given that ROA is lower than the potential benchmark based on 8%.

 LNG vessels are its hidden gem. Kantons has 8 LNG vessels and 7 of these will come on stream in 2016-2018. We see a strong pick-up in its income stream with guaranteed occupancy. We expect the LNG vessels JV to contribute HK$94mn in 2018E vs. only HK$3mn in 2015. Management expects each LNG vessel to achieve levered IRR of 20+% while long term ROA would be c.5%.

Figure 4: Segmental net income contributed to Kantons Figure 5: Segment ROE 2013-2018E 1,800 25% 1,600 1,400 20% LNG vessel 2014 1,200 Oil storage 2015 1,000 15% 2016E Gas pipeline 800 2017E 600 Oil Jetty 10% 2018E 2019E 400 Others 2020E 200 5% 0 -200 0% Oil Jetty Gas pipeline Oil storage LNG vessel * 2014 2015 2016E 2017E 2018E 2019E 2020E Source: Company data, Deutsche Bank estimates Source: Company data, Deutsche Bank estimates. Note: *ROE calculation for LNG vessels included shareholder loans as part of equity.

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Oil & Gas Sinopec Kantons

Oil jetty business – key beneficiary of China’s market liberalisation

Unparalleled leader in China oil jetty sector Kantons has 11 VLCC berths in operation in China. It dominates the oil jetty VLCC market with c.40% of China’s capacity and has the best leverage with China’s recent liberalisation of import crude oil quota for independent refiners (teapot refiners). As of 2015, Kantons accounts for 39% of total China oil jetty throughput.

Figure 6: Oil jetty market share by Sinopec Kantons Figure 7: VLCC berths in China (2016)

Oil jetty market share (by throughput, 2015) VLCC berths in China

Sinopec Kantons Sinopec 39% Kantons: 11 berths Other oil Other oil jetties jetties: 61% 16 berths

Source: Company data, Ministry of Transportation, Deutsche Bank Source: Company data, Ministry of Transportation, Deutsche Bank

Strong operating leverage with oil jetty throughput surge We expect Kantons’ oil jetty throughput to increase in the next few years at an 7.2% CAGR in 2015-18E, driven by 1) a strong surge in teapot refiners’ crude oil imports; 2) Sinopec lifting its import volume to cut domestic high cost crude oil production; 3) strategic petroleum reserve build-up. With Kantons’ oil jetties operating above the breakeven utilisation rate (we estimate breakeven is c.40%, depending on which oil jetty), it has strong operating leverage. Meanwhile, we adopt conservative assumptions on Huade / Zhanjiang, where we project no growth on throughput and expect Rizhao phase II to commence only in 2H18E. Financially, we expect Rizhao/Caofeidian to start accounting taxation at 25% in 2017/18E.

Figure 8: Sinopec Kantons: oil jetty throughputs Figure 9: Kantons’ oil jetty ROE

250 mmtpa 20.0% 18.0% 200 16.0% 2014 14.0% 150 2015 12.0% 100 2016E 10.0% 2017E 50 8.0% 2018E 6.0% 0 2014 2015 2016E 2017E 2018E 4.0% Qingdao Port Rizhao Port Ningbo Port Zhanjiang Port Huade Zhanjiang Qingdao Rizhao Caofeidian Ningbo & Caofeidian Port Huade Port Tianjin Port Tianjin Source: Company data, Deutsche Bank estimates Source: Company data, Deutsche Bank estimates

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Oil & Gas Sinopec Kantons

Dominance of Shandong market – best leverage in teapot ramp-up Kantons has the undisputed advantage in Shandong, where it has 5 out of a total of 6 VLCC berths in operation in the region. Moreover, Rizhao port has received NDRC’s approval for a VLCC berth expansion. Teapot refiners are mainly located in Shandong, Shanxi and Shaanxi provinces. The closest crude oil import terminals for these teapot refiners would be Shandong.

Figure 10: VLCC berths in Shandong

Port Investor Tanker size (ton) Width (m) Annual capacity (mmtpa) Qingdao Port Sinopec Kantons 200,000 498 17.00 Qingdao Port Sinopec Kantons 300,000 520 18.00 Qingdao Port Sinopec Kantons 300,000 450 18.00 Rizhao Port Sinopec Kantons 300,000 486 20.00 Rizhao Port Sinopec Kantons 300,000 418 18.50 Yantai Port CNOOC 300,000 430 16.25 Total 107.75

Under construction Rizhao Port Phase II Sinopec Kantons 300,000 418 17.50 Source: Company data, NDRC, China Ports, Deutsche Bank

Guangdong has several teapot refiners, but their run rates have been close to zero, and they have not had any import quota approvals. Kantons owns two oil jetties (Huade Port and Zhanjiang Port) in Guangdong. Hence, it would benefit from any potential changes in import quota in Guangdong.

Figure 11: Oil jetties, crude oil pipelines and teapot refiners in Shandong

.Boyuan Petrochemical .Lihuayi Group (Lijin) .Dongying Dongming .Lijinshen Chemical Chemical .Longyuan Chemical .Fuhai Petrochemical .Mingyuan Chemical .Genlin Chemical .Qirun Chemical .Haike Chemical .Shenchi Chemical. .Hengrunde Petrochemical .Shida Shenghua Refinery Dongying Port .Hualian Petrochemical .Shitong Chemical .Hualong Chemical .Wanda Tianhong .Huasheng .Wantong Petrochemical .Huaxing Petrochemical .Yatong Petrochemical Dongying Port - Zhonghai .Keli Petrochemical .Zhenghe Group Asphalt (Binzhou) pipeline .Kenli Petrochemical. .Zhonghai Chemical Yantai Port .Lihai Chemical - 1 VLCC berth Longkou Port

.Binyang Fuel Chemical .Boxing Yongxin Petrochemical Laizhou Port .Chambroad Petrochemical .Jingbo Petrochemical .Wudi Yuexin Chemical Laizhou Port - Changyi Yantai Port - Zibo .Hengyuan Petrochemical Petrochemical pipeline crude oil pipeline

.Changyi Petrochemical .Luqing Petrochemical .Jinan Changcheng Refinery .Shandong Haihua .Shouguang Union Petrochemical .Shuntai Petrochemical .Youbang Chemical .Anbang Chemical .Desheng Petrochemical .Qingdao Guangyuanfa. .Gaoqing Petrochemical .Huaxiang Petrochemical .Jincheng Petrochemical .Qifeng Petrochemical .Qilu Petrochemical Huangdao, Qingdao Port - .Qingyuan Petrochemical Weifang Binhai Economic .Wonfull Petrochemical (Huifeng) Development Zone pipeline .Xintai Petrochemical Qingdao Port - 3 VLCC berths

.Chenxi Chemical .Landbridge Port Petrochemical .Shida Technology Petrochemical

Rizhao Port - Dongming Petrochemical pipeline Rizhao Port - 2 existing VLCC berths - 1 VLCC berth under construction

.Shandong Dongming .Yuhuang Chemical

Source: Company data, NDRC,, Deutsche Bank

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Figure 12: China teapot refiners and their imported oil processing quotas

Approval Original Capacity Capacity cut Remaining Capacity Imported crude processing quota (mmtpa) Non-SOE crude Date Refinery Province mmtpa mmtpa mmtpa Applied Approved oil import license Jul-15 Shanndong Dongming Shandong 11.00 3.50 7.50 7.50 7.50 Yes Aug-15 Panjin Beifang Asphalt Liaoning 10.50 3.50 7.00 7.00 7.00 Yes Sep-15 Sinochem Hongrun Shandong 6.70 1.00 5.70 5.30 5.30 No Sep-15 Shandong Lihuayi Shandong 6.00 2.50 3.50 3.50 3.50 Yes Sep-15 Shandong Kenli Shandong 5.10 2.10 3.00 2.52 2.52 Yes Sep-15 Dongying Yatong Shandong 5.20 1.70 3.50 3.36 2.76 Yes Sep-15 Baota Shihua Ningxia 8.70 1.20 7.50 6.16 6.16 Yes Dec-15 Wonfull Petrochemical (Huifeng)Shandong 7.60 1.80 5.80 4.16 4.16 Yes Dec-15 Shandong Tianhong Shandong 5.00 0.00 5.00 4.40 4.40 Yes Dec-15 Shandong Jingbo Shandong 5.80 2.30 3.50 3.31 3.31 Yes Dec-15 Shandong Shouguang Shandong 3.25 0.25 3.00 2.58 2.58 Yes Jan-16 Dongying Qirun Shandong 2.20 0.00 2.20 2.20 2.20 Yes Apr-16 Shandong Haiyou Shandong 6.10 2.60 3.50 3.20 3.20 No Pending Shaanxi Yanchang Shaanxi 20.40 3.00 17.40 3.60 CPCIF prelim approval No Pending Shandong Wudi Xinyue Shandong 3.20 0.80 2.40 2.40 CPCIF prelim approval No Pending Hengyuan Petrochemical Shandong 4.80 1.30 3.50 3.50 CPCIF prelim approval No Pending Hebei Xinhai Hebei 6.00 0.00 6.00 3.72 CPCIF prelim approval No Pending Shandong Qingyuan Shandong 5.20 2.50 2.70 4.62 Pending No Pending Henan Fengli Henan 3.40 0.40 3.00 2.93 Pending No Pending Shandong Jincheng Shandong 5.90 3.80 2.10 4.56 Pending No Pending Shandong Shenchi Shandong 2.60 2.10 0.50 2.52 Pending No Pending Landbridge Port Petrochemical Shandong 3.50 0.33 3.17 2.40 Pending No Pending Zhonghai Chemical Shandong 2.30 1.57 0.73 1.97 Pending No Pending Wantong Petrochemical Shandong NA NA NA Applied Pending No Pending Haike Chemical Shandong NA NA NA Planning Pending No Total 140.45 38.25 102.20 87.40 54.59

Source: NDRC, Deutsche Bank; Note: Without Non-SOE crude oil import licence would require import oil through oil traders

Teapot refiners’ appetite for imported crude is likely to remain strong in 2016E NDRC has approved teapot refiners’ 54.6mntons of crude oil import quota, and a further 32.8mntons of quota applications have been submitted (a +60% increase), of which 13.2mntons already have preliminary approval from China Petroleum and Chemical Industry Federation (CPCIF) (+24% increase). In the 6 months since Nov 2015, 10 major teapot refiners have imported crude of 11.7mnton in total, representing just 29% of total granted imported quota. Teapot refiners to continue to accelerate their pace of crude imports alongside a strong GRM in China in 2016, using up to c.70-80% of the import quota (c. 38-44mnton) representing an addition c.11-13% of total crude imports in 2015. However, we anticipate a bottleneck due to insufficient logistic facilities connecting teapot refiners to oil jetties and this could raise the overall cost.

Figure 13: Major teapot refiners’ crude oil imports Imported crude Crude imports since % of quota Refiner processing quota Nov 2015 used Dongming Petrochemical 7,500 2,863 38% Kenli Petrochemical 2,520 1,050 42% Lijin Petrochemical 3,500 1,052 30% Yatong Petrochemical 2,760 823 30% Wonfull Petrochemical 4,160 708 17% Baota Petrochemical 6,160 200 3% Chambroad Petrochemicals 3,310 367 11% Shouguang Luqing Petrochemical 2,580 1,508 58% Qirun Chemical 2,200 1,115 51% Sinochem Hongrun 5,300 1,985 37% Total 39,990 11,671 29%

Source: ICIS China, Deutsche Bank

Superior locations and connections in Shandong Teapot refiners have run at low margins historically. Although the import crude oil quota allows refiners to yield higher value added products for a better margin, logistic transportation cost is a large consideration if teapot refiners decide to import crude. Transportation by pipeline costs approximately RMB40-50/ton while railway and trucks cost RMB90/ton and RMB105-125/ton in Shandong. According to ICIS, Shandong teapot refiners using Russia M100 crude have an average GRM of RMB-282/ton; hence, teapot refiners are highly sensitive to cost.

Deutsche Bank AG/Hong Kong Page 9

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Oil & Gas Sinopec Kantons

Figure 14: Shandong crude oil transportation cost (RMB/ton)

Transportation by pipeline Transportation by train Transportation by car Cost: RMB40-50/ton Cost: RMB90/ton (including Cost: RMB105-125/ton short-distance car transfer cost of RMB30/ton)

Source: Oilchem, Deutsche Bank

Kantons’ oil jetties in Shandong are well connected by crude oil pipelines to major teapot refiners. Its Rizhao port has a pipeline to the largest teapot refiner in China, Dongming Petrochemical, with 7.5mnton refining capacity and import crude oil quota. Also, not only will Rizhao port build a new VLCC berth, but it will also construct another crude oil pipeline to teapot refiners.

Figure 15: Oil pipelines in Shandong & connected refineries

Oil pipeline Connected teapot refineries Length Capacity (km) (mmtpa) Huangdao, Qingdao Port - Weifang Binhai Hongrun Petrochemical, Luqing 176 20 Economic Development Zone Petrochemical, Wonfull Petrochemical Laizhou Port - Changyi Petrochemical Changyi Petrochemical 106 13 Rizhao Port - Dongming Petrochemical Dongming Petrochemical 462 10 Rizhao Port - Yizheng NA 379 20 Yantai Port - Zibo crude oil pipeline c.10 teapot refineries including Jingbo 540 15 Petrochemical, Wanda Yatong, Wonfull Petrochemical Dongying Port - Zhonghai Asphalt (Binzhou) Zhonghai Asphalt 123 5

Under construction Dongjiakou, Qingdao port - Weifang - Central Hongrun Petrochemical, Qilu 364 22-30 & Northern Shandong Petrochemical Rizhao Port - Puyang - Luoyang NA 782 18 Rizhao Port - Yizheng (Capacity expansion) NA 379 +20 (tot: 40) Source: Company data, NDRC,, Deutsche Bank

Major refiners’ run rates hit by teapots, yet margins are resilient Since the first teapot refiners were granted licences to process crude, teapot refiners have registered a big leap in run rates from low-40% in Jul 2015 to the current c.50% level, while major refiners’ run rates have fallen markedly from c.80% in Jul 2015 to the current mid-70%. Conversely, thanks to extensive marketing channels, major refiners have maintained a stable refining margin at c.RMB470/t during this period.

Figure 16: China GRM proxy (20 day inventory) vs. majors / teapots run rate

90% USD/bbl 25

80% 20

70% 15

60% 10

50% 5

40% 0

30% -5

15 14 15 15 16 16 16

14 14 14 15 15 15

14 15

14 15 15 16

15 16

14 15

15 16

- - - - -

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- -

- - - -

- -

- -

- -

Jul Jul

Oct Apr Oct Apr

Jun Jun Jan Jan Jun

Mar Mar

Feb Feb

Nov Dec Nov Dec

Aug Sep Aug Sep

May May Major Refiners' Run Rate Shandong Teapot Refiners' Run Rate China GRM Proxy (20 day inventory, RHS) Source: NDRC, Datastream, Deutsche Bank estimates

Page 10 Deutsche Bank AG/Hong Kong

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Beneficiary of SPR build-up

We see Kantons benefiting from the future build-up of strategic petroleum reserves (SPR) and commercial petroleum reserves. The Chinese government has pushed back SPR phase III, but the construction of SPR phase II continues. We expect 11.6mcm (9.3mn tons, equals to 6 days of inventory) of storage under construction will commence operations by 2020.

NDRC issued guidance in commercial crude oil storage operations on Jan 26, 2015, in which it suggested crude oil refiners should maintain minimum crude reserves of at least 15 days of inventory under a normal oil price environment, or no less than 10 inventory days if the oil price goes above US$130/bbl. Based on China’s crude throughput in the past 12 months, this could mean a minimum crude reserve of c.22mnton at the current oil price. Following the NDRC document, National Energy Administration (NEA) issued “The Rules of National Oil Storage – Draft for public consultation” on June 5, 2016, which for the first time laid down ground rules for both the government’s petroleum reserves and commercial reserves required for crude oil refiners, refined oil wholesalers and crude traders.

China’s SPR planning started in 2004 with the aim of mitigating the risk of oil supply disruptions. In 2007, NDRC established the National Oil Reserve Centre to enhance the construction and management of SPR. The construction of the first phase was completed in 2008 and fully filled by mid-2009. The government’s plan is to have enough SPR to cover 90 days of net imports (c. 85mnton) by 2020.

Figure 17: Strategic petroleum reserve plan

Expected Size Capacity Stockpile* Phase Status Completion Location mm cm mmton mmton Government strategic petroleum reserve Phase 1 Completed 2008 Zhoushan, Zhenhai, Dalian, Huangdao (Above ground) 16.4 12.4 12.5 Phase 2 Under By 2020 Completed: Dushanzi, Lanzhou, Tianjin, Huangdao (Underground), Qingdao 15.2 16.2 13.6 construction Under construction including Jinzhou, Huizhou, Jitan, Zhanjiang, Shanshan 11.6 9.3 NA Phase 3 Delayed; Preliminary planning to commence by 2020

Total 43.2 38.0 26.1

Corporate mandatory petroleum reserve - Corporates are obliged to maintain the minimum petroleum inventory for daily operations (NDRC Guidance: 10-15 day inventory) - Only 90% of the total inventory in petroleum storage tanks and refineries are qualified to fulfill the obligation. Petroeleum in pipelines/ transport are excluded

Source: Bloomberg Finance LP, NBS, NEA, NDRC, Deutsche Bank. Note: Stockpile statistics excl. commercial storage leased for SPR (as of Jun-2015)

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Figure 18: Government strategic petroleum reserve distribution

Phase Province City Size (mm cm) Owner Completed Phase 1 Zhejiang Zhoushan 5.0 Sinochem Phase 1 Zhejiang Zhenhai 5.2 Sinopec Phase 1 Liaoning Dalian 3.0 CNPC Phase 1 Shandong Huangdao (Aboveground) 3.2 Sinopec Phase 2 Shandong Huangdao (Underground) 3.0 Sinopec Phase 2 Xinjiang Dushanzi 3.0 CNPC Phase 2 Gansu Lanzhou 3.0 CNPC Phase 2 Tianjin Tianjin 3.2 Sinopec Phase 2 Shandong Qingdao 3.0 Sinopec Planning/ Under construction Xinjiang Shanshan 3.0 CNPC Guangdong Huizhou 5.0 CNOOC Guangdong Zhanjiang 5.0 Sinopec Liaoning Jinzhou 3.0 CNPC Zhejiang Zhoushan (Phase 2) 2.5 Sinochem Jiangsu Jitan 2.5 CNPC Source: Bloomberg Finance LP, NBS, NEA, NDRC, Deutsche Bank estimate

Sinopec cuts domestic supply = more crude oil imports

Kantons has been handling more than 70% of Sinopec’s import crude volume historically. With Sinopec expected to lower domestic crude oil production by 6% YoY while maintaining its refining throughput in 2016E, Kantons’ oil jetties will benefit. Sinopec requires to import 84% of its required crude oil.

As of 1Q16, Sinopec scaled back its domestic crude oil production by 10.3% YoY, more than its guided 6% cut for 2016E. As a sensitivity check, if Sinopec cuts 10% and keeps its refining throughput target of 238mntons and Kantons keeps its share, Kantons would need to import 4.3mntons more for Sinopec, which is equal to 2% of Kantons’ oil jetty occupancy rate.

Figure 19: Sinopec’s reliance on crude imports Figure 20: Kantons’ oil jetty throughput breakdown est.

240 mmton 85.0% 250 mmton 230 84.5% 84.0% 200 220 83.5% 210 83.0% 150 200 82.5% 100 190 82.0% 81.5% 180 81.0% 50 170 80.5% 160 80.0% 0 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E Import volume Refining throughputs Import reliance (RHS) Teapot demand Sinopec demand

Source: Company data, Deutsche Bank estimates Source: Company data, Deutsche Bank estimates

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Figure 21: China ‘s net crude import hovering at 5Y high Figure 22: China reliance on imported oil continues rising

60 70% (In mn ton) mmton Crude - Net Import 35.0 65% 50

33.0 60%

31.0 40 55% 29.0 27.0 30 50%

25.0 45% 20 23.0 40%

21.0 10 35% 19.0

17.0 0 30%

05 06 07 08 09 10 11 12 13 14 15 16

05 06 07 08 09 10 11 12 13 14 15

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -

Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul

Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan 5-yr range 2016 2015 2014 Average Crude - Production Crude - Net Import Net imports as % of crude oil consumption (RHS)

Source: CEIC, Deutsche Bank Source: CEIC, Deutsche Bank

Figure 23: Throughput of oil jetties in China Figure 24: Oil jetty throughput: Kantons vs. peers

500 mmton 474 500 mmton 40.0% 429 410 406 388 393 39.5% 400 400

287.2 39.0% 300 300 250.3 266.1 38.5% 200 200 38.0%

100 100 155.7 162.9 186.8 37.5%

0 0 37.0% 2010 2011 2012 2013 2014 2015 2013 2014 2015 Throughput of oil jetties above designated size Throughputs of oil jetties invested by Sinopec Kantons Throughput of oil jetties above designated size: External trades Throughputs of other oil jetties above designated size Total cude oil imports Market share of Sinopec Kantons

Source: Ministry of Transportation, Company data, Deutsche Bank. Note: Oil jetties above Source: Ministry of Transportation, Company data, Deutsche Bank. Note: Oil jetties above designated size refers to which has >RMB20mn annual revenue from principal business. designated size refers to which has >RMB20mn annual revenue from principal business.

Deutsche Bank AG/Hong Kong Page 13

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Oil & Gas Sinopec Kantons

Turnaround for Yuji Pipeline

Kantons completed the Yulin-Jinan (Yuji) Pipeline acquisition in 2015 and it is the largest asset in Kantons’ balance sheet, accounting for 37% of total assets in 2015. Yuji Pipeline achieved disappointing ROA of 4% in 2015 on volume and ASP decline. The lower than expected return led to Kantons’ sluggish share price performance. However, the tide has turned for Yuji Pipeline with strong CAGR growth ahead.

After the NDRC lowered the city-gas price in Nov 2015, natural gas demand growth recovered in 1Q16 and grew 15% YoY. We believe Kantons’ Yuji Pipeline will resume gas transmission volume growth and achieve 10% CAGR in 2015-18E after an 8% drop in 2015. However, we expect the key growth areas for Yuji Pipeline to be Henan and Shanxi provinces for 2016E and 2017E. This means shorter transmission distances, so we expect Yuji Pipeline’s overall ASP for 2016E/17E to lower 2.1% / 1.1% YoY. We expect ROE to bottom in 2016E at 10%, then recover to 18% by 2018E.

Figure 25: Yuji Pipeline ASP & transmission volume Figure 26: Yuji Pipeline ROE vs. ROA

0.355 Rmb/cm bcm 4.50 20.0% 0.350 4.00 18.0% 0.345 3.50 16.0% 0.340 14.0% 0.335 3.00 12.0% 0.330 2.50 10.0% 0.325 2.00 8.0% 0.320 1.50 0.315 6.0% 1.00 0.310 4.0% 0.305 0.50 2.0% 0.300 0.00 0.0% 2014 2015 2016E 2017E 2018E 2014 2015 2016E 2017E 2018E Transmission volume (Bcm) RHS Yuji gas transmission ASP (RMB/cm) ROE ROA Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

Further capacity expansion and competitive threat Yuji Pipeline plans to increase capacity by 25% from 4bcm to 5bcm to cope with demand growth in the region. We expect this capex to be RMB400mn. Conversely, we see capacity expansion being completed only after 2018 because of intensifying competition – Sinopec’s LNG regasification terminals in Shandong started in 2014 and Shaanjing pipeline III / IV capacity is also coming on stream to serve the Shandong area.

Figure 27: Yuji Pipeline key assumptions

Tariff Transmission volume RMB/cm 2014 2015 2016E 2017E 2018E 2019E 2020E Total capacity bcm 3.00 4.00 4.00 4.00 4.00 5.00 5.00

Shaanxi 0.05 0.27 0.33 0.34 0.38 0.41 0.43 0.46 Shanxi 0.19 0.04 0.09 0.10 0.12 0.13 0.14 0.14 Henan 0.35 0.94 1.33 1.59 1.83 2.01 2.11 2.22 Shandong 0.46 1.98 1.24 1.24 1.24 1.37 1.43 1.51 Source: Company data, Deutsche Bank estimates

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Potential regulatory changes in transmission pipelines – less impactful for Yuji We expect potential regulatory changes in long distance pipeline tariffs in 2016E/2017E. One of these is the transmission tariff could be based on ROA and utilisation rate. Please see China Gas Utilities report – “Navigating through the clouds for sunshine” dated 9 June 2016 by Michael Tong for details. However, we think Yuji Pipeline will suffer less of a negative impact because it achieved ROA below 6% during our estimate periods even with utilisation above the 80% level. But if NDRC were to normalise the transmission return to 8% ROA, there would be upside potential for the pipeline. We have not factored any transmission tariff adjustment in our model.

Figure 28: Long distance pipeline returns comparison − 2015

30% 26% ROE ROA 25%

20% 19% 17%

15% 12% 10% 10% 9% 10% 10% 8% 7% 6% 5% 4% 2% 2%

0% SJ* PEP* PNP* PUP* PP* YuJi Shaanxi Pipeline Pipeline Provincial Pipeline

Source: Deutsche Bank * SJ Pipeline = Shaanjing Pipeline; PEP=PetroChina Eastern Pipeline; PNP=PetroChina Northwest United Pipelines; PUP=PetroChina United Pipeline; PEP,PNP,PUP were consolidated into PetroChina Pipelines (PP) in Dec 2015; returns of PEP, PNP,PUP, PP and Yuji are Deutsche Bank estimates.

Figure 29: Yulin-Jinan natural gas pipeline vs. Shaan-Jing pipeline Inner Liaoning Mongolia Beijing SJ Pipeline (Route 4, under construction) SJ Pipeline (Route 2) SJ Pipeline (Route 1) Hebei Shanxi Jining supplementary pipeline Ningxia Shandong Yulin-Jinan Pipeline Gansu SJ Pipeline (Route 3)

Shaanxi Henan Jiangsu

Source: Company data, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 15

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Oil & Gas Sinopec Kantons

LNG vessels

Kantons is exposed to the LNG vessel business, with 8 vessels to carry Sinopec’s LNG. These vessels are basically new and 7 will be delivered in 2016E-2018E. Sinopec signed take-or-pay contracts at a total of 9.65mnton of LNG p.a. exclusively with Kantons’ so the utilisation rate is guaranteed for contract periods.

Currently, two vessels are up and running, and the rest will be in operation by 2018E. We believe the LNG vessels business will generate a levered IRR of 20+% with a capital structure of 80% in debt, and 20% in equity (under shareholder loans); unlevered IRR would be c.9-10%. We believe each LNG vessel will be able to generate approximately HK$130mn of EBIT per year. We expect LNG vessels to achieve ROE of 8.3% by 2018E, up from 0.5% in 2015.

Figure 30: LNG project details: PNGLNG & APLNG (Export) PNGLNG Australia Pacific LNG (Export) Supply country Papua New Guinea Australia Supply project PNG LNG Australia Pacific LNG Initial reserves 8.3 tcf Gas 12.2 tcf Gas Gas field operator ExxonMobil (33.2%) ConocoPhillips (37.5%), Origin Energy (37.5%), Sinopec (25%) Total plant capacity 7.4 mmtpa 9.0 mmtpa LNG quality (loaded) 1140 Btu/scf 985-1010 Btu/scf Port Port Moresby Gladstone LNG project start-up 2015 2014 Contract with Sinopec Group Year signed 2009 Train 1: 2011/ Train: 2012 Contract type SPA SPA FOB/DES DES FOB First shipment to Sinopec Feb, 2015 2016 Supply period 20 years 20 years Annual delivery for Sinopec 2.05mmtpa 7.6 mmtpa Total contract volume 41.0 mmton 151.6 mmton Sales point DES FOB No. of LNG carriers invested by Kantons 2 6 - LNG carrier size 172,000 cubic metres 174,000 cubic metres Source: Woodmac, Company data, Deutsche Bank

Figure 31: PNG LNG vessel project Figure 32: Australia Pacific (AP) LNG vessel project

Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

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Figure 33: Kantons: LNG vessel segment NP vs. ROE

250 RMB mn 20% 18% 200 16% 14% 150 12% 10% 100 8% 6% 50 4% 2%

0 0%

2015

2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E LNG Vessel: Net profits LNG Vessel ROE (RHS) Source: Company data, Deutsche Bank estimates. ROE calculation incl. S/H loans as part of equity

Figure 34: IRR Analysis on PNGLNG & APLNG vessel projects PNGLNG APLNG HK$ mn 2015 2016E 2017E 2018E 2019E 2020E 2035E 2016E 2017E 2018E 2019E 2020E 2035E 2036E 2037E Kantons’ stake 9% 39% No. of vessels 1 2 2 2 2 2 1 2 4 6 6 6 6 4 2 Average utilisation 92% 79% 100% 100% 100% 100% 100% 67% 75% 75% 100% 100% 100% 100% 100% Annual EBIT/ vessel 131.4 131.4 131.4 131.4 131.4 131.4 131.4 131.4 131.4 131.4 131.4

Unlevered cash flow Capex -4,033 0 0 0 0 0 0 -12,098 0 0 0 0 0 0 0 EBITDA 221 410 464 464 464 464 232 377 798 1,196 1,393 1,393 1,393 929 464 Unlevered cash flow -3,811 410 464 464 464 464 232 -11,721 798 1196 1393 1393 1393 929 464

NPV 113 124 -338 - entitled by Kantons 10 11 -133 Unlevered IRR 10.2% 9.3%

Levered cash flow Shareholder loan -613 -194 0 0 0 0 807 -2,420 0 0 0 0 0 0 2,420

Principal repayment -124 -155 -155 -155 -155 -155 -155 -484 -460 -437 -437 -437 -437 -437 -437 Bank Interest cost -161 -155 -147 -140 -132 -124 -8 -484 -460 -437 -415 -393 -66 -44 -22 Bank Instalment -285 -310 -302 -295 -287 -279 -163 -968 -919 -873 -852 -830 -502 -480 -459

EBITDA 221 410 464 464 464 464 232 377 798 1,196 1,393 1,393 1,393 929 464 Levered cash flow -677 -94 162 170 178 185 876 -2,043 -122 323 542 564 891 449 2,425

NPV 877 963 2,783 - entitled by Kantons 79 87 1,091 Levered IRR 21.1% 21.8%

S/H loan interest rate LIBOR +3.7% LIBOR +2.2%

ROA 0.9% 1.6% 2.1% 2.3% 2.4% 2.6% 0.4% 1.1% 1.8% 2.6% 2.8% ROE 5.1% 6.9% 8.0% 8.8% 9.5% 10.3% 1.8% 4.3% 6.5% 8.6% 8.8% Source: Deutsche Bank estimates. Note: ROE calculation included shareholder loans as part of equity.

Deutsche Bank AG/Hong Kong Page 17

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Oil & Gas Sinopec Kantons

Valuation

We derive our TP for Kantons by adopting a sum-of-the-parts valuation, using DCF for the Huade oil jetty and Yuji gas pipeline with a WACC of 9.8% (CoE of 11.3%, after-tax CoD of 3.8%, and a debt-to-capital ratio of 20%) and 0% terminal growth for their capacity expansion constraints, NAV for LNG vessels, DDM for equity-accounting oil jetties and overseas oil storage, and 1x EV/EBITDA for vessel charter given the uncertainty of its charter renewal in 2017.

Our TP implies 1.15x 2017E P/B. Compared with its ports and gas peers, which are trading at 1.3x and 1.6x 2017E P/B, this represents a discount of 8% and 27% respectively, while Kantons could achieve ROIC of 12% (a premium to its port and gas peers at 5.5% and 9.0%).

Figure 35: Sinopec Kantons: Company valuation

Valuation 16E EBITDA Multiples 16E Dividend WACC LT growth Value Value Segments Methodology (HKD mn) (x) (HKD mn) (%) (%) (HKD mn) (HKD/sh) Domestic Oil Jetty - Huade DCF 376 1,484 0.60 Domestic Oil Jetties - Other associates & JV DDM 1,097 385 9.8% 2.6% 5,357 2.15 Domestic Oil Jetties 1,473 6,842 2.75 Vessel Charter EV/EBITDA 20 1.0 20 0.01 Natural Gas Pipeline DCF 843 8,501 3.42 Offshore Oil Storage Terminals - JV DDM 283 72 9.8% 3.8% 1,201 0.48 LNG Vessels - Associates & JV NAV 185 1,177 0.47 Enterprise value 17,742 7.14 Less: Net Debt 1x of book value -4,654 -1.87 Less: Minority interest 1x of book value -39 -0.02 Equity value\ Price target 13,049 5.25 Source, Deutsche Bank estimates

Valuation cross-check Our target price implies P/B is higher than Gordon Growth Model-derived target valuation multiple, since our model has captured long-term growth prospects from LNG vessel operations.

Figure 36: Sinopec Kantons: target price implied valuation TP Implied Valuation 2015 2016E 2017E 2018E P/E 12.8x 11.6x 10.8x 9.5x P/B 1.40 1.26 1.15 1.06 Adjusted ROIC 10.6% 11.3% 12.0% 13.0% ROE 9.4% 11.4% 11.1% 11.5% Source: Bloomberg Finance LP, Deutsche Bank estimates. Note: ROIC adjusted for share of profits from associates and JV.

Figure 37: Valuation cross-check on Gordon Growth Model target multiple P/B [ROE-g]/[COE-g] P/E [ROE-g]/[ROEx(COE-g)] 2016E 2017E 2018E ROE 11.4% 11.1% 11.5% Terminal growth 0.0% 0.0% 0.0% COE 11.3% 11.3% 11.3% P/E 8.9x 8.9x 8.9x P/B 1.0x 1.0x 1.0x Source: Deutsche Bank estimates

Page 18 Deutsche Bank AG/Hong Kong

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Oil & Gas Sinopec Kantons

Sensitivity

FX could have significant impact on earnings and target price As Kantons’ reporting currency (HK$) differs from its principal functional currency (RMB), FX movement could lead to a material change in earnings estimates/ target price. Based on our calculation, should RMB depreciate 10%, 2016E earnings would likely fall 13.8% along with a 13.5% decline in target price.

Meanwhile, every 10% increase in oil jetty throughput would raise 2016E earnings by 14.2% and target price by 10.3%. In gas pipelines, each 10% increase in transmission volume would raise 2016E earnings by 7.4% and target price by 8.6%. Nevertheless, a RMB0.05/cm (or +c.15%) hike in the average realised transmission tariff will likely lead to a 12.3% and 14.3% increase in 2016E earnings/ target price, respectively.

Figure 38: EPS & TP sensitivity to FX movement Figure 39: EPS & TP sensitivity to oil jetty throughput FX Sensivitiy Oil jetty throughput sensivitiy EPS (HKD) 2016F 2017F 2018F TP (HKD) EPS (HKD) 2016F 2017F 2018F TP (HKD) Base case USD:RMB 6.85 7.00 7.00 Base case oil jetty throughput (mmton) 211.5 221.3 230.4 -20% 0.627 0.666 0.742 7.20 -20% 0.325 0.358 0.418 4.17 -10% 0.531 0.567 0.636 6.12 -10% 0.390 0.423 0.484 4.71 Base Case 0.454 0.487 0.551 5.25 Base Case 0.454 0.487 0.551 5.25 +10% 0.392 0.423 0.481 4.54 +10% 0.519 0.552 0.617 5.79 +20% 0.339 0.369 0.423 3.95 +20% 0.584 0.617 0.683 6.33 Every +/- 10% -13.8% -13.3% -12.7% -13.5% Every +/- 10% 14.2% 13.3% 12.1% 10.3% Source: Deutsche Bank estimates Source: Deutsche Bank estimates

Figure 40: EPS & TP sensitivity to gas transmission tariff Figure 41: EPS & TP sensitivity to gas transmission vol Realized gas transmission tariff sensivitiy Gas transmission volume sensitivity EPS (HKD) 2016F 2017F 2018F TP (HKD) EPS (HKD) 2016F 2017F 2018F TP (HKD) Base case transmission tariff (RMB/cm) 0.323 0.320 0.320 Base case transmission volume (bcm) 3.28 3.56 3.92 -RMB0.1/cm 0.343 0.369 0.417 3.74 -20% 0.387 0.417 0.471 4.36 -RMB0.05/cm 0.398 0.428 0.484 4.49 -10% 0.421 0.452 0.511 4.80 Base Case 0.454 0.487 0.551 5.25 Base Case 0.454 0.487 0.551 5.25 -RMB0.05/cm 0.510 0.547 0.618 6.00 +10% 0.488 0.523 0.591 5.70 -RMB0.1/cm 0.566 0.606 0.685 6.76 +20% 0.522 0.558 0.631 6.14 Every +/- RMB0.05/cm 12.3% 12.2% 12.2% 14.3% Every +/- 10% 7.4% 7.2% 7.2% 8.6% Source: Deutsche Bank estimates Source: Deutsche Bank estimates

Target price sensitivity to WACC/ terminal growth Our Kantons target price is sensitive to our WACC and terminal growth assumptions. According to our calculation, every +1% and +1% change in WACC and terminal growth would result in -15.6% and +4.0% changes in target price, respectively.

Figure 42: Target price sensitivity to WACC/ terminal growth TP sensitivity Sinopec Kantons Holdings Limited WACC % TP sensitivity Base case 5.25 7.8% 8.8% 9.8% 10.8% 11.8% -2.0% 7.10 5.88 4.94 4.19 3.58 Terminal growth (%) -1.0% 7.35 6.06 5.08 4.30 3.67 Base case 0.0% 7.66 6.29 5.25 4.43 3.77 1.0% 8.07 6.58 5.46 4.58 3.88 2.0% 8.62 6.95 5.72 4.77 4.02 Source: Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 19

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Oil & Gas Sinopec Kantons

Consensus

Our EPS estimates in 2017/18E are mildly below consensus by 6%/4%, as we have factored in a discontinuation of the vessel chartered business in 2017E, given its low earnings visibility amid oil price recovery.

Figure 43: DB estimates vs. consensus estimates

2016E 2017E 2018E DB estimates HKD/share 0.45 0.49 0.55 Bloomberg Consensus HKD/share 0.47 0.52 0.57 Variance -3% -6% -4% Source: Bloomberg Finance LP, Deutsche Bank estimates

Figure 44: Consensus estimates movement vs. Sinopec Kantons

0.65 HKD/shr HKD/shr 10.0 9.0 0.60 8.0 0.55 7.0

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Page 20 Deutsche Bank AG/Hong Kong

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Oil & Gas Sinopec Kantons

Valuation charts

Sinopec Kantons vs peers

Figure 45: Sinopec Kantons P/B vs. China ports

140% 120% 100% 80% 60% 40% Average : 20% +31% 0% -20% Current: -40% -39% -60%

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Figure 46: Sinopec Kantons P/B vs. China gas companies

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Figure 47: Sinopec Kantons P/B vs. China oil & gas sector

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Kantons premium/ (discount) to China Oil&Gas Sector Average premium +1 SD -1 SD Source: Bloomberg Finance LP, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 21

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Oil & Gas Sinopec Kantons

12M forward valuation (P/B, P/E, EV/EBITDA)

Figure 48: 12-month forward P/E band Figure 49: 12-month forward P/E 12.0 35.0X

10.0 P/E 30.0X 8.0x 8.0 25.0X 6.0 Avera 20.0X ge 4.0 19.0x 15.0X 2.0 +1SD 25.2x 10.0X

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Source: Bloomberg Finance LP, Deutsche Bank estimates Source: vv Finance LP, Deutsche Bank estimates

Figure 50: 12-month forward P/B band Figure 51: 12-month forward P/B 10.0 2.0X 9.0 P/B 1.8X 8.0 0.86x 7.0 1.6X 6.0 5.0 Avera 1.4X 4.0 ge 1.35x 3.0 1.2X 2.0 +1SD 1.0 1.0X 1.61x

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Figure 52: 12-month forward EV/EBITDA band Figure 53: 12-month forward EV/EBITDA

25,000 HKD mn 40.0X EV/EB 35.0X ITDA 20,000 10.03 30.0X x

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Page 22 Deutsche Bank AG/Hong Kong

16 June 2016

Oil & Gas Sinopec Kantons

Key assumptions and financials

Income statement

Sinopec Kantons generates its earnings primarily from oil jetties, the Yuji gas Figure 54: Net profit breakdown pipeline, overseas (Europe & Middle East) oil storage and LNG vessel (2015) operations, which contribute 69%, 22%, 4% and 0% of Kantons’ net profit (excluding corporate expenses) as of 2015. As Kantons has started to ramp up LNG vessel Oil 0% its LNG vessel operations, we expect its segmental profit contributions to rise storageVessel to 7% by 2018E. We forecast Kantons’ ROIC (adjusted for share of profits from Gas 4% charter pipeline 5% Oil Jetty JV and associates) will improve from 10.6% in 2015 to 13.0% in 2018E. 22% Gas pipeline Oil storage  With increased crude import activity by teapot refiners, we expect oil jetty Vessel charter throughput to improve from 187mnton in 2015 to 230mnton in 2018E. LNG vessel Oil Jetty Assuming a flat ASP, we expect this to drive up unit EBIT from RMB7.52/t 69% in 2015 to RMB8.10/t in 2017E, before mildly retreating to RMB8.06/t in 2018E due to increased operating expenses from the new VLCC berth, which is expected to be launched during the year. Source: Company data, Deutsche Bank

 Due to softened gas demand growth and gas source competition in Shandong, we expect Kantons to delay its Yuji gas pipeline capacity Figure 55: Net profit breakdown expansion plan till 2018/19E. While we believe gas transmission volume (2018E) will continue to rise within existing capacity, as gas demand growth from Shandong (which offers the highest transmission tariff among the 4 Oil LNG provinces under Yuji Pipeline coverage) will likely lag behind the other 3 storagevessel provinces, we expect Kantons’ average realised transmission tariff to 6% 7% Gas Oil Jetty pipeline continue to decline from RMB0.33/cm in 2015 to RMB0.32/cm in Gas pipeline 25% 2017/18E. Offsetting the operational leverage of increasing transmission Oil storage volume, EBIT per gas transmitted is expected to recover to RMB0.149/cm LNG vessel Oil Jetty in 2018E from RMB0.127/cm in 2016E. 62%

 We expect the overseas oil storage facilities to be fully occupied by end- 2016 (from 81% in 2015), driving up segment EBIT per leased storage from HK$102/cm in 2015 to HK$112/cm in 2018E. Source: Deutsche Bank estimates

 We forecast the total 8 vessels under APLNG & PNGLNG projects will gradually commence operations through 2015-18E, with each of the vessels generating a stable EBIT per annum.

Deutsche Bank AG/Hong Kong Page 23

16 June 2016

Oil & Gas Sinopec Kantons

Figure 56: Earnings assumptions Unit 2014 2015 2016E 2017E 2018E Oil jetty Total capacity Mmton 272.5 272.5 272.5 272.5 290.0 Utilisation % 60% 69% 78% 81% 79% Throughputs Mmton 162.9 186.8 211.5 221.3 230.4 EBIT/t RMB/t 7.74 7.52 7.93 8.10 8.06 Earnings to Kantons HKD mn 700 773 823 833 845 ROE % 10.7% 11.5% 12.2% 11.8% 11.5% Natural gas pipeline Total capacity (year-end) bcm 3.00 4.00 4.00 4.00 4.00 Utilisation % 108% 75% 82% 89% 98% Average realised transmission tariff RMB/cm 0.350 0.330 0.323 0.320 0.320 EBIT/ gas transmitted RMB/cm 0.139 0.146 0.127 0.135 0.149 Earnings to Kantons HKD mn 318 254 225 275 361 ROE % 16.5% 11.2% 10.2% 13.5% 18.4% Oil storage Total capacity mm cm 1.62 2.78 2.78 2.78 2.78 Average occupancy % NA 81% 98% 100% 100% Storage rental per year HKD/cm NA 362 336 314 326 EBIT/ leased storage HKD/cm NA 102 108 104 112 Earnings to Kantons HKD mn 58 50 72 78 89 ROE % 3.6% 3.3% 4.9% 5.3% 6.1% LNG Vessel Total vessels in operation Unit NA 1 4 6 8 Utilisation % NA 92% 73% 83% 81% EBIT per vessel HKD mn NA 131.4 131.4 131.4 131.4 Earnings to Kantons HKD mn 0 3 27 60 94 ROE % 0.0% 0.5% 2.6% 5.4% 8.3% Vessel Chartered Total vessels in operation Unit 2 1 1 0 0 Average daily rate of rental US$/day NA 66,524 56,546 NA NA Earnings to Kantons HKD mn -38 50 22 0 0 Source: Company data, Deutsche Bank estimates

Figure 57: Key ratios 2014 2015 2016E 2017E 2018E Invested capital HKD mn 15,888 15,475 15,058 15,360 15,806 ROIC (adj for profits from asso/JV) % 13.7% 10.6% 11.3% 12.0% 13.0% Net Debt (adj for acquisition payables) HKD mn 3,417 6,063 4,654 3,986 3,405 Equity HKD mn 12,504 9,412 10,405 11,374 12,401 Net gearing (%) % 27.3% 64.4% 44.7% 35.0% 27.5% Source: Company data, Deutsche Bank estimates. Note: ROIC adjusted for share of profits from associates and JV. Net gearing ratio adjusted for acquisition payables.

Page 24 Deutsche Bank AG/Hong Kong

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Oil & Gas Sinopec Kantons

Figure 58: Income statement (HK$ mn) For the year ended Dec 31 2014 2015 2016E 2017E 2018E Revenue 20,670 2,044 1,952 1,811 1,937 Cost of Goods Sold -19,754 -1,205 -1,167 -1,039 -1,042 Gross Profit 916 839 785 772 895 GPM (%) 4% 41% 40% 43% 46% SG&A -176 -164 -157 -145 -156 Other operating income/ expenses 73 55 61 94 95 EBIT 813 730 689 721 835 Crude oil jetty services - Huade 235 232 198 190 190 Vessel charter services -33 43 19 0 0 Natural gas pipeline transmission services 424 536 472 531 645

EBITDA 1,365 1,284 1,259 1,293 1,410 Financial Costs -198 -183 -196 -191 -175

Share of profits from associates 104 118 124 134 143 Zhanjiang Port Petrochemical Jetty 104 115 118 127 135 East China LNG Shipping Investment (PNGLNG) 0 3 6 7 8

Share of profits from JV 490 554 682 728 777 Qingdao Shihua 197 204 259 280 295 Rizhao Shihua 98 121 141 122 123 Caofeidian Shihua 75 110 107 108 95 Ningbo Shihua 50 49 50 53 55 Tianjin Shihua 12 23 33 34 35 Vesta 58 50 51 48 59 Fujairah Oil Terminal (FOT) 0 -3 21 30 30 China Energy Shipping Investment (APLNG) 0 0 21 53 86 Profit before tax 1,208 1,219 1,299 1,393 1,579 Income tax -190 -192 -170 -181 -210 Effective tax rate (%) 16% 16% 13% 13% 13% Profit after tax 1,018 1,027 1,130 1,212 1,369 Minority interest 0 0 0 0 0 Net income 1,018 1,027 1,130 1,212 1,369 EPS (RMB/share) HKD/shr 0.409 0.413 0.454 0.487 0.551 Growth (%) % 45% 1% 10% 7% 13% DPS (RMB/share) HKD/shr 0.050 0.050 0.055 0.097 0.138 Payout (%) % 12% 12% 12% 20% 25% Weight No# of shares (mn) mn 2,486 2,486 2,486 2,486 2,486 Source: Company data, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 25

16 June 2016

Oil & Gas Sinopec Kantons

Balance sheet

To deleverage to 2014 level by 2018E  Following the HK$3.2bn acquisition of Yuji Pipeline which was completed at end-2015, Kantons’ net gearing ratio (adjusted for the non-interest bearing acquisition payables) has hiked to a 6-year high of 64.4%. In 2016- 18E, we expect Kantons will gradually pay off debt related to the acquisition, and reduce its gearing ratio to the restated 2014-level of c.27% by 2018E.

 As Kantons refinances its non-interest bearing payables for the Yuji acquisition with offshore debt, we expect interest expense to rise to RMB213mn during 2016E, partly offset by potential renegotiation on interest rates with its parent, Sinopec Corp. Benefiting from the ongoing deleveraging, we believe Kantons will gradually reduce its interest expenses to HK$191mn in 2018E.

Figure 59: Balance sheet (HK$ mn) For the year ended Dec 31 2014 2015 2016E 2017E 2018E Cash and cash equivalents 799 1,058 881 968 1,049 Inventories 24 21 22 0 0 Trade/bill/ other receivables 1,430 988 456 421 521 Other current assets 0 0 0 0 0 Total Current Assets 2,253 2,067 1,359 1,389 1,570 PP&E 8,302 7,576 7,402 7,225 7,245 Lease prepayment and other assets 747 709 695 681 667 Investment properties 29 68 63 58 53 Interests in associated companies 687 679 737 775 816 Interests in joint ventures 6,125 6,379 6,702 6,975 7,253 Other long term assets 109 137 130 118 147 Total long term assets 16,000 15,547 15,728 15,832 16,181 Total Assets 18,252 17,614 17,088 17,220 17,750

Short-term borrowings 0 0 0 0 0 Trade/bill/ other payable 1,451 4,140 1,025 769 773 Other payables 6 23 23 23 23 Total Current Liabilities 1,457 4,163 1,048 792 795 Long-term borrowings 4,183 3,939 5,535 4,954 4,454 Other long-term liabilities 108 100 100 100 100 Total long-term liabilities 4,291 4,039 5,635 5,054 4,554 Total Liabilities 5,748 8,202 6,683 5,846 5,349 Shareholder's Equity 12,465 9,373 10,366 11,336 12,363 Minority interests 39 39 39 39 38 Total equity 12,504 9,412 10,405 11,374 12,401 Total Liabilities and Equity 18,252 17,614 17,088 17,220 17,750 Source: Company data, Deutsche Bank estimates.

Page 26 Deutsche Bank AG/Hong Kong

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Oil & Gas Sinopec Kantons

Cash flow statement

Strong cash dividends from equity-accounted investment  On top of annual maintenance capex of HK$377mn across 2016-18E, we expect Kantons to spend an additional HK$400mn on Yuji Pipeline capacity expansion in 2018/19E.

 With Kantons ramping up its Europe & Middle East oil storage and LNG vessel operations, alongside the strong performance of oil jetties connected with teapot refiners, we expect it to generate a strong cash dividend stream of c.HK$600mn from its equity-accounted businesses in 2018E.

 After Kantons has paid off half of its Yuji acquisition consideration, we believe it will gradually lift its dividend payout ratio, from 12% in 2015-16E to 20% and 25% in 2017/18E, as a way to align its own payout ratio with that of parent, Sinopec Corp.

 As Kantons continues to deleverage and to gradually raise its dividend payout, we expect a net cash outflow of HK$192mn in 2016E, followed by a mild net cash inflow of HK$86mn/81mn in 2017/18E, respectively.

 We adjusted the operating cash flow in 2016E to net of M&A payable to reflect the genuine operating cash flow.

Figure 60: Cash flow statement (HK$ mn) For the year ended Dec 31 2014 2015 2016E 2017E 2018E Profit before tax 1,208 1,219 1,299 1,393 1,579 Adjustments: DD&A 552 554 570 572 575 Other non-cash items -587 -684 -823 -877 -935 Finance cost 219 198 213 205 191 Income tax paid -173 -176 -170 -181 -210 Change in working capital -107 364 606 -187 -125 Net operating cash flow 1,113 1,475 1,695 925 1,075 Capex -902 -313 -377 -377 -577 Investments in asso/ JV -96 8 0 0 0 Loans to subsidiaries/ asso/JV -94 -662 -33 58 0 Dividends from asso/JV 130 333 457 494 601 Other investing cash flow -455 6 17 14 15 Net cash used in investing activities -1,417 -628 64 190 40 Equity raised 29 0 0 0 0 Net proceeds from borrowings 0 0 -1,586 -581 -500 Interest paid -219 -198 -213 -205 -191 Dividend paid -428 -353 -137 -242 -342 Other financing cash flow 95 0 0 0 0 Net cash used in financing activities -523 -551 -1,935 -1,029 -1,033 Net cash inflow/ (outflow) -827 296 -176 86 81 FX & other adjustment 0 -38 0 0 0 Beginning cash balance 1,626 799 1,058 881 968 Ending cash balance 799 1,058 881 968 1,049 Source: Company data, Deutsche Bank estimates.

Deutsche Bank AG/Hong Kong Page 27

16 June 2016

Oil & Gas Sinopec Kantons

Company profile

Sinopec Kantons was established in 1998 and listed on HKEx in June 1999. It is a subsidiary of China oil major and largest oil refiner – Sinopec. It is the flagship logistics arm of Sinopec for oil imports, with a long-distance gas pipeline, LNG vessels and oil storage facilities. Moreover, Kantons is an energy logistics company with assets in China, Europe and the Middle East. Sinopec Kantons currently holds an interest in seven domestic oil terminals, three overseas oil terminal/ storage projects and eight LNG vessels.

Figure 61: Shareholder structure

39.66%

60.34%

Sinopec Public Shareholders

Source: Company data, Deutsche Bank

Figure 62: Corporate structure summary

SASAC 100% Sinopec Group 71.32% Sinopec Corp (0386.HK)

100% Unipec 100% Public Shareholders Sinopec Kantons International Limited 39.66% 60.34% Sinopec Kantons (0934.HK)

Sinomart KTS Development Limited Kantons International Investment Limited - Crude oil trading

Oil jetty/ storage - China Oil jetty/ storage - Outside China Natural gas pipeline Oil jetty/ storage Transportation/ Logistics transmission - Zhanjiang Port (50%, Associate) - PT. West (95%) - Huade Petrochemical - East China LNG Shipping (30%) - Ningbo Shihua (50%) - Fujairah Oil Terminal FZC (50%) - Yu Ji Pipeline (100%) (100%) - China Energy Shipping (49%) - Qingdao Shihua (50%) - Vesta Terminal BV (50%) - Rizhao Shihua (50%) - Tianjin Port Shihua (50%) - Tangshan Caofeidian Shihua (90%)

Source: Company data, Deutsche Bank

Page 28 Deutsche Bank AG/Hong Kong

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Oil & Gas Sinopec Kantons

Business overview

Domestic oil jetties After the asset injection of five oil jetties, completed in Oct 2012, Kantons has investments in seven oil jetties along China’s eastern and southern coast, with a total capacity of 273mmtpa. Among the existing 35 berths, 11 are capable of accommodating VLCC. An additional VLCC berth is expected to come on stream at Rizhao port in 2018E. In 2015, total throughput in the seven oil jetties amounted to 187mmton.

Figure 63: Overview of Kantons’ domestic oil jetties

Source: Company data, Deutsche Bank

Natural gas pipeline Kantons completed the acquisition of the Yulin-Jinan (Yuji) pipeline from Sinopec Corp at end-2015. Yuji Pipeline transmits natural gas from Sinopec’s Daniudi Gas Field in the Ordos Basin to Shandong province via Shaanxi, Shanxi and Henan provinces. It is one of the key energy projects under the 11th Five- Year plan. As of end-2015, it has annual capacity of 4bcm.

Oil storage Kantons currently holds interests in three international oil terminal projects, namely Fujairah Oil Terminal (FOT) in the Middle East, VESTA Terminals in Europe and the Batam Project in Indonesia. The FOT and Vesta projects have storage capacity of 1.16mm cubic meters in 34 tanks and 1.62mm cubic meters in 127 tanks, respectively; both projects commenced operations in 2015. Meanwhile, Batam project construction has been put on hold regarding a dispute with local stakeholder. If the problem remains unsolved, Kantons Kantons would need to write down on its prepaid land lease for a maximum loss of SGD102mn.

Deutsche Bank AG/Hong Kong Page 29

16 June 2016

Oil & Gas Sinopec Kantons

Figure 64: Overview of Kantons’ oil storage and logistics operations

Source: Company data, Deutsche Bank

LNG vessels Kantons has invested in two LNG vessel projects, including the PNGLNG and APLNG projects. Both of the projects are responsible of importing LNG cargos from the Pacific Basin to China for Sinopec. The two PNGLNG vessels have respectively started operations in Feb 2015 and May 2016, while the six APLNG vessels are expected to launch across 2016-18E.

Vessel chartering Against a backdrop of low earnings visibility, Kantons has operated only one chartered vessel since 2015. Should the crude price continue to recover in the coming years, we expect the profitability of vessel chartering to be further dragged down by rising fuel costs. Hence, we believe Kantons may forsake its renewal option on hiring the vessel at end-2016.

Figure 65: Sinopec Kantons’ share price, adjusted ROIC movement and key events

Apr-12: Set up China Energy Shipping Inv, a JV 10 HK$ 17% Jul-06: Acq. announcement with China Shipping Development 9 on additional Huade Port Dec-14: Acq. announcement 16% Feb-12: Raised HK$3.5bn from on Yuji Pipeline 8 right issue of 1,037 mn share 15% Dec-11: Acq. announcement 7 on 5 domestic oil jetties 14% 18E May-11: Acq. announcement 6 17E 13% on Zhanjiang Port 16E 5 12% Dec-07: New berth with May-13: Placed 300kdwt capacity in Huade shares for HK$2.7bn 4 Port started operation 11%

3 Oct-12: Acq. announcement on 10% Jan-12: Acq. PT West Terminal & Vesta announcement Terminal 2 on FOT 9%

1 Feb-11: Set up East China LNG Shipping 8% Inv, a JV with China Shipping Development

0 7%

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May May May May May May May May May May May May Adj ROIC - RHS Sinopec Kantons Share Price (HK$) Source: Bloomberg Finance LP, company data, Deutsche Bank estimates. Note: ROIC adjusted for share of profits from associates and JV.

Page 30 Deutsche Bank AG/Hong Kong

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Oil & Gas Sinopec Kantons

Figure 66: Management profile

Name Position Age Profile Chen Bo Chairman 53 Mr. Chen graduated from East China Institute of Chemical Technology, currently known as East China University of Science and Technology, majoring in oil refining engineering and obtained a Bachelor of Engineering in July 1986 and also has a professional qualification of engineer. Mr. Chen is currently the General Manager and Executive Director of UNIPEC. After graduation from university, Mr. Chen has been working in Sinopec Group. Since joining UNIPEC in 1993, he has successively held various positions including the Business Manager of Crude Oil Department of UNIPEC, Business Manager and Deputy Manager of UNIPEC Asia Company Limited, Deputy Manager and Manager of Crude Oil Department of UNIPEC and Assistant to General Manager and Deputy General Manager of UNIPEC. Mr. Chen has extensive working Xiang Xiwen Deputy Chairman 50 Mr. Xiang graduated from Liaoning University in July 1989 majoring in accounting. He has the professional qualification of professor accountant. Also, he obtained a Master of Economics and has extensive experience in financial management and accounting. From July 1989 to April 2000, Mr. Xiang was Deputy Section Chief and Section Chief of Henan Petroleum Exploration Administration of Sinopec Group; from May 2000 to May 2002, he was Chief Accountant of the First Oil Production Plant of Henan Oilfield Branch Company of Sinopec Group (“Henan Oilfield Company”); from June 2002 to April 2014, he was Deputy Chief Accountant and Chief Dai Liqi Executive Director 48 Mr. Dai graduated from China Textile University in July 1989 majoring in chemical fiber with a Bachelor of Engineering. He also has a professional qualification of senior engineer. From August 1989 to February 1994, Mr. Dai was Lead Technician and Engineer of the Post-combed Drawing Workshop of Polyester Factory of Sinopec Tianjin Petrochemical Corporation; from February 1994 to January 2002, he was Engineer and Senior Engineer of Planning & Development Department of Sinopec Corp.; from February 2002 to October 2005, he was Deputy Head of the Project Cooperation Office of Planning & Development Department of Sinopec Corp.; from October 2005 to October 2010, he was the Head of the Project Cooperation Office of Planning & Li Jianxin Executive Director 48 Mr. Li graduated from Hangzhou University in 1990 majoring in finance with a Bachelor’s Degree in Economics. In June 1998, he graduated from International Business College of Nanjiang University with a Master’s Degree in Business Administration. From August 1990 to August 1991, Mr. Li was a worker of air separation workshop of ethylene factory of Sinopec Yangzi Petrochemical Company Ltd. (“Yangzi Petrochemical Company”); from September 1991 to July 1996, he was the clerical officer in the Finance Department of Yangzi Petrochemical Company; from August 1997 to April 2000, he was the Section Chief of Costs in Finance Department of Yangzi Petrochemical Company; from May 2000 to April 2002, he was the Deputy Director of the Finance and Assets Department of Sinopec Guangdong Oil Products Branch Company; from May 2002 to September 2005, he was Wang Guotao, Executive Director 50 Mr. Wang graduated from Huazhong University of Science and Technology in July 1988 majoring in applied chemistry. From July 1988 to July 1995, he was an oil tanks technician of Shengli Oil Company of Pipeline Bureau; from July 1995 to November 1996, he was the Deputy Station Head of Shou Guang Station of Shengli Oil Company of Pipeline Bureau; from November 1996 to June 1998, he was the Station Head of Shou Guang Station of Shengli Oil Company of Pipeline Bureau; from June 1998 to June 2001, he was the Station Head of Shou Guang Station of Shengli Oil Company and the Station Head of Shou Guang Station of Weifang Pipeline Division of Pipeline Storage & Transportation Company; from June 2001 to August 2001, he was the Deputy Head and the Director of Huangdao Oil Tanks of Weifang Pipeline Division of Pipeline Storage & Ye Zhijun Managing Director 50 Mr. Ye has a bachelor degree in chemical engineering and Master of Business Administration and has professional qualification of senior economist. He worked in Sinopec Guangzhou Petroleum and Chemical Plant in August 1988. He was Deputy Officer and Officer of Marketing Department of Guangzhou Yinzhu Polypropylene Ltd of Guangzhou Petroleum and Chemical Plant from June 1995 to July 1997; Deputy General Manager of Guangzhou Yinzhu Polypropylene Ltd of Guangzhou Petroleum and Chemical Plant from July 1997 Chen Hong Chief Financial Officer 43 Mr. Chen graduated from Renmin University of China in July 1994 majoring in international accounting and has a Bachelor of Economics and professional qualification of senior accountant. He worked with the Finance Department of Sinopec International Co. Ltd, Sinopec International Products Trading Co, Sinopec (Singapore) Company, UNIPEC (Singapore) Company and other units successively. He was the Deputy Chief of Finance Li Wen Ping Secretary to the Board 52 Mr. Li Wen Ping, aged 52, Secretary to the Board of the Company. Mr. Li holds an Master of Business Administration (MBA) and has the professional qualification of senior economist. He joined the research institute of Sinopec Yangzi Petrochemical Co. Ltd. in August 1985. He was Deputy Head of Plastic Research and Development Centre of Yangxi Petrochemical Company from January 1994 to September 1994, and Project Manager of Joint Venture and Cooperation Division of Yangxi Petrochemical Company from January Source: Company data, Deutsche Bank

The author of this report would like to acknowledge the contribution made by Yvonne Lai.

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Appendix

Ramp-up of teapot refiners

China teapot refiners have started to import crude oil since 2015 as part of the deregulation in the China oil & gas industry, exacerbating the overcapacity in domestic China. As a result, the major refiners’ run rates dropped from 82% to 77% currently. Teapot refiners’ production ramp-up may cause overall major refiners’ run rates to drop further.

In addition, in order to apply for crude oil import quotas, teapot refiners are required to either retire old low-inefficient capacity or to upgrade to GBV standards (China National Standards V). This facilitates supply-side reforms on refining capacity. In our view, improving China’s utilisation rate would provide better refining margins in the long run. According to CNPC Research Institute of Economics and Technology, China’s independent refining capacity should drop by c.21m tons by end-2016.

Policy has become more supportive of teapot refiners since 2013 In a disguised attempt to encourage refinery capacity cuts, government officials have turned more supportive to teapot refiners since 2013, with the National Energy Administration (NEA) first starting to draft a new scheme to grant crude importing and processing quotas to local refineries. In February 2015, NDRC officially launched the new measures to grant an imported oil processing quota to teapot refiners that accepted capacity cuts, followed by MOFCOM which announced it was to allow teapot refines to apply for refined oil export quotas. Since then, 13 teapot refiners have obtained a quota to process total imported crude oil of 55.2mmtpa, and seven of them possess a total refined oil export quota of 490,000ton in 2Q16.

Figure 67: Timeline of policy changes for teapot refiners

First cleanup on small-scaled teapot refiners - Allocation on all crude oil supply have been centralized. Only 21 Shangdong teapot 1999 refiners were granted with Shengli grade crude oil quota of <2mmtpa in total. 2001 Further tightened control on refined oil distribution. Ministry of Railway stopped train services for any crude oil outside CNPC/ Sinopec's 2003 refining production plans.

NEA started drafting the new scheme to grant 2013 oil import/processing quota to the teapot Shandong Province Governor urged for Oct refiners who take capacity cuts. granting a total oil importing quota of 2014 20mmtpa to teapot refiners in Shandong. Jul Shandong Province Govnerment issued a proposal to optimize their teapot refining 2014 industry, which advocated for helping key Dec companies in obtaining oil import/ processing quota. By 2017, the Province targeted to eliminate/restructure >20 substandard refiners and cut/upgrade inefficient crude oil NDRC released new measures on granting processing capacity by 12mmtpa. the imported oil processing quota to the teapot 2015 refiners who scrap their inefficient capacity. Feb NDRC announced to grant the first imported oil processing quota to the teapot refiner Shandong Dongming. In Aug, MOFCOM 2015 further announced to grant the oil importing Jul license to Shandong Dongming, marking the first teapot refiner with both the oil import MOFCOM announced new measures to allow 2015 license and imported oil processing quota. the eligible teapot refineries to apply for the Nov 2016 refined oil exporting quota. Feb 16 local refineries founded the first petroleum purchasing association in China to centralize their purchase of imported crude oils.

Source: NDRC, NEA, Ministry of Commerce, Ministry of Railway, Shandong Province Government, Deutsche Bank

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History of independent (teapot) refiners policy

1999-2001: Policy to scrap oversupply capacity Back in 1999, the government announced the first clean-up of small-scale “teapot” refiners, wherein: (1) Refineries that were built without the approval of the State Council or excluded from the “1998 national crude oil allocation plan”. (2) Refineries included in the 1998 national crude oil allocation plan but non- compliant with the national emission or production quality standards would be shut down. (3) The oil quota for refineries included in the 1998 national crude oil allocation plan but possessing no refining units would be retracted. (4) Without State Council approval, it would be forbidden to establish new refining companies or to expand oil primary processing capacity; the current construction of any refineries without approval would be halted. (5) Ownership of the compliant teapot refiners would be restructured by CNPC & Sinopec via asset transfer, JV or M&A. (6) Going forward, allocation of all domestic and imported crude oils would be centralised.

As a result of the clean up, only 21 compliant Shandong teapot refiners were granted a Shengli grade crude oil supply quota of less than 2mmtpa in total. Other refiners had to either process crude oil under sub-contracts, operate as a JV with the state-owned oil companies, or process fuel oils of a lower grade (e.g. heavy oils).

2003-2013: Suppressed by majors In May 2003, the Ministry of Railways announced it was to stop train services for any crude oil outside CNPC/ Sinopec’s refining production plans.

2013 – Current: turning supportive with supply side reform angle In Oct 2013, the National Energy Administration (NEA) started drafting a new scheme which grants the quotas for importing crude oil and processing the imported oils to the teapot refiners who take capacity cuts.

At a State Council meeting held in July 2014, the Shandong Province Governor, Guo Shuqing, urged the granting of a total 20mntpa oil-importing quota to Shandong teapot refiners. Later, at end-2014, the Shandong Province issued a Proposal to optimise their teapot refining industry, which advocated supporting key refiners to apply for the license to import oil and process the imported oils. By 2017, the Province targets to eliminate/restructure over 20 substandard refiners, cut/upgrade inefficient crude oil processing capacity by 12mmtpa and limit the teapot refining capacity within 100mntpa.

In Feb 2015, the NDRC announced new measures on granting the imported oil processing quota to teapot refiners, in an effort to optimise the refining industry structure, scrap excessive inefficient capacity and encourage refining unit upgrade. In particular, the NDRC would follow the rules below to designate the quota in processing imported oil:

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Figure 68: Rules allocating imported oil processing quota Particulars Quota granted (Multiple of scraped/ reformed capacity 1) To scrap oil distillation units with capacity of ≤2mn ton/year 1.0x 2) To scrap oil distillation units with capacity of >2mn ton/year 1.2x 3) To scrap refining units compliant with the 1999/2000 clean- 2.0x up 4) To scrap any inefficient refining units across provinces, Additional 20% on Rule 1-3 autonomous regions or municipal cities 5) To fulfill fuel upgrades (China-V) by 2015 (except BTH, YRD & Additional 20% on Rule 1-4 PRD region) Particulars Quota granted 1) To build LNG, CNG storage capacity linking to the urban 1mn ton/year per 50mcm storage underground gas pipeline network, with ≥25mcm storage added capacity in any single city (exc storages connected to LNG manufactories/ terminals) 2) To build underground gas storage 1mn ton/year per 200mcm storage added 3) To co-build gas storage as a JV Allocated on pro-rata basis Source: NDRC, Deutsche Bank

Refiners who take the imported oil processing quota are prohibited from building any new refining units without State Council approval, and selling/ rebuilding the scraped refining units in other provinces.

In Jul 2015, the NDRC announced it was to grant the first imported oil processing quota to teapot refiner, Shandong Dongming. One month later, MOFCOM further announced it was to grant the oil importing license to Shandong Dongming, marking the first teapot refiner to possess both the rights to import oil and to process the imported oil.

In Nov 2015, MOFCOM further announced it was to allow the eligible teapot refineries to apply for the refined oil exporting quota. To qualify, the refinery would need to (1) possess imported oil processing quota, (2) be qualified for and possess crude oil processing quota, and (3) guarantee supply to the domestic market.

In late Feb, 16 local refineries (six of whom possessed both the license to import oil and process the imported oil) have founded the first petroleum purchasing association in China to centralise their purchase of imported crude oils.

As of today, 12 independent refiners have obtained the quota to process imported crude oil of 51.39mn ton/year in total. Among them, 10 of the refiners also have the license to import crude oil of an aggregate of 42.39mn ton. Meanwhile, another 11 independent refiners are pending approval for processing imported oil of 38.11mn ton/year in total. Among the total 23 teapot refiners who have applied for imported oil processing, 18 are located in Shandong.

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Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure Sinopec Kantons 0934.HK 3.79 (HKD) 15 Jun 16 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=0934.HK

Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Vitus Leung

Historical recommendations and target price: Sinopec Kantons (0934.HK) (as of 6/15/2016)

8.00 Previous Recommendations

Strong Buy 7.00 Buy Market Perform 6.00 Underperform Not Rated 5.00 Suspended Rating Current Recommendations 4.00 Buy Hold

Security PriceSecurity 3.00 Sell Not Rated 2.00 Suspended Rating

*New Recommendation Structure 1.00 as of September 9,2002

**Analyst is no longer at Deutsche 0.00 Bank

Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Date

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Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 500 share-holder return (TSR = percentage change in 450 54 % share price from current price to projected target price 400 350 plus pro-jected dividend yield ) , we recommend that 300 35 % investors buy the stock. 250 200 Sell: Based on a current 12-month view of total share- 150 16 % 11 % 100 15 % 21 % holder return, we recommend that investors sell the 50 stock 0 Buy Hold Sell Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not Companies Covered Cos. w/ Banking Relationship recommend either a Buy or Sell. Asia-Pacific Universe Newly issued research recommendations and target

prices supersede previously published research. Regulatory Disclosures 1.Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2.Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

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