China Gas Utilities Sector

Asian Insights SparX China Gas Utilities Sector

Refer to important disclosures at the end of this report

DBS Group Research . Equity 27 July 2018 Integrated energy market: Vast HSI: 28,663 potential for gas distributors ANALYST Patricia YEUNG +852 2863 8908;  Integrated energy market driven by higher energy [email protected] Tony WU CFA +852 2971 1708; efficiency, more cost savings, and lower emissions [email protected]  A new income stream for gas distributors from sale of steam and electricity Stock picks  Geographical exposure and supportive Company Price Mk t T arget Upside/ Recom 18F government policy are critical factors Cap Price(dow nside) PE  ENN (2688 HK) and China Gas (384 HK) in the best HK$ US$m HK$ % x position to be winners Enn Energy Holdings* ^ 83.85 11,596 105.00 25% BUY 17.6 New income stream from sale of steam and electricity. (2688 HK) Mirroring the success in the Western world, China is adopting China Gas the integrated energy systems due to its distributive nature, Holdings*# 33.45 21,180 40.00 20% BUY 19.8 energy efficiency, cost savings, and low emissions. Natural gas is (384 HK) the preferred fuel, and gas distributors will be the major China Resources beneficiaries. We estimate the integrated energy market can Gas Gp.* 35.70 10,118 32.50 -9% HOLD 18.9 bring in revenue of Rmb133-160bn to gas distributors from the (1193 HK) sale of steam and electricity, which will be equivalent to 30- Towngas 40% of revenue from sales of gas by 2020, as well as lift dollar China* 7.91 2,833 9.00 14% BUY 14.2 margins of gas distributors. (1083 HK) China Tian Lun ENN is the major beneficiary. We reckon gas distributors with Gas Hdg.* 10.00 1,261 10.50 5% BUY 13.2 market presence in regions with favourable policies and larger (1600 HK) gap between electricity price and gas fuel price are well Vpower Group positioned to have a larger market share in the integrated Intl. 3.77 1,231 n.a. n.a. NR 26.2 energy market. Players with the most industrial parks within the (1608 HK) Source: Thomson Reuters, *DBS Bank Hong Kong Limited (“DBS project concession will enjoy higher growth. Also, supportive HK”) local government policies and a larger gap between electricity #FY18:FY19F’ ^Core EPS price and gas fuel cost will attract more installations within the Based on closing prices as at 24 Jul 18 integrated energy system. Among the listed gas distributors, ENN (2688 HK) and China Gas (384 HK) are best positioned to ride on the big wave in the integrated energy market.

ASIAN INSIGHTS DBS HK's discussion of the issuer (Vpower Group, 1608 HK) in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect additional reports relating to this issuer, unless so decided by DBS HK

ed- JS / sa- CS/DL

Asian Insights SparX China Gas Utilities Sector

The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination. Table of Contents

Investment summary 3 What is an integrated energy system? Why is it needed? 4 Successful cases in overseas markets 5 Huge market potential in China 7 Attractiveness of integrated energy projects 9 How much revenue are we talking about? 10 Case studies in China 12 Critical factors of integrated energy market in China 14 Stock picks 17 Stock profile 20 Enn Energy Holdings 21 China Gas Holdings 29 China Resources Gas 37 Towngas China 44 China Tian Lun Gas 52 Vpower Group 60

Note: Prices used as of 24 July 2018

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Asian Insights SparX China Gas Utilities Sector

Investment summary

Energy cost savings, enhanced energy efficiency, and capable of reaching above 15-20%, while city gas projects are tightening environmental requirement s underpin the huge usually at c.12%. Also, other than selling electricity, CCHP potential in the integrated energy industry in China, as it projects can enjoy extra revenue from selling steam for transitions towards increasing the proportion of clean energy heating/cooling services. The dollar margin for integrated consumption. Integrated energy system combines various clean energy projects is estimated at c.Rmb2.16/m3, which is energy systems into one to provide energy to customers. It is substantially higher than typical city gas projects at an on-site distributive system highly customized to suit c.Rmb0.6/m3. different customer needs. We expect natural gas to be the major fuel used in an integrated energy system led by the A dvantages of using natural gas as fuel. We believe natural gas stability in energy supply and supportive government policies in has its special place and plays an essential role in the energy distributive gas power. Such a trend has been echoed by the mix. Firstly, compared to renewable energy which has large success of integrated energy systems overseas, including the fluctuations in energy output in different timeframes, natural US, Germany, Denmark, the UK, etc. The downstream gas gas is a reliable fuel source as it can provide stable energy utilities players in China will be the main beneficiaries as they levels throughout the day as long as there is fuel supply. will enjoy higher volumes from rising gas consumption and Secondly, distributive gas power is encouraged by the additional revenue from other energy sales. government and it is an important tool to boost gas consumption in China. While the growth in distributive solar Huge market potential. We project the total revenue from power has been robust in recent years, the government has integrated energy systems could reach Rmb133-160bn for gas restricted the installation to 10GW per year as it seeks to utility players by 2020 through the provision of around 195m control the exploding growth in solar power installation. China tons of steam and 130bn kilowatt hour (kWh) of electricity. already installed >10GW of solar power during the first six The amount of revenue from selling electricity and steam is months of this year. Thirdly, we see low risk of downward estimated to be equivalent to 30-40% of total gas sales by gas revision of on-grid tariffs for distributive gas power as it is utilities players in 2020. pegged to gas prices. Solar power on the other hand is subject to high uncertainty from on-grid tariffs and subsidies. In our top down approach based on our market size estimates, we project the generation of steam and electricity by Who is the main beneficiary in the gas utilities sector? The two Combined Cooling Heating and Power/Combined Heat and critical factors for gas utility players to excel in the market Power (CCHP/CHP) systems will boost gas demand by 32.5bn depend on geographic exposure and government policy. Due cubic metres (m3) during 2017-2020. This is based on the to concession rights for gas projects, having the right government’s target to install 50 Gigawatt (GW) of distributive geographic exposure will guarantee that local gas distributors gas power by 2020. We conservatively assume 36GW of will enjoy higher gas volume sales from the development of distributive gas power will be installed by 2020. integrated energy projects. Since industrial parks has the largest share of demand for integrated energy projects, gas We also used a bottom up approach to cross check the market utility players with higher number of industrial parks will have size by analysing the largest user groups, namely industrial an advantage. Also, the attractiveness of integrated energy in a parks, data centres, commercial buildings, and hospitals. We region also depends on the local government policies such as estimate gas demand of c.36bn m3 will be generated from tariff system, activeness in promotion of direct trading of these users during 2017-2020. Industrial park is the largest power with nearby customers, relevant subsidy schemes, and customer group requiring 33.5bn m3 of gas, assuming 15% of supporting regulations for gas power installation. We reckon small-scale coal boilers are converted into gas boilers by 2020. ENN Energy (2688 HK) is the main beneficiary due to its In addition, we also assume a small percentage of just 15% of advantage of having a higher proportion of projects in the newly constructed data centres and 5% of newly constructed right regions, as well as possessing strong technical know-how hospitals / commercial buildings will use gas in their integrated in the market. We believe the development of the integrated energy systems. We reckon this percentage is very energy market will help ENN Energy boost its earnings growth, conservative, given that government is increasingly aggressive and this segment is expected to account for about 15% of its in pushing for a “blue sky” in China. earnings by 2020 from less than 1% currently. China Gas (384 HK) is also in a good position to garner more market share A ttractive project returns for gas utilities players. Our analysis with the higher number of industrial parks within its project on the returns for integrated energy projects shows that these concession. have similar or higher internal rates of returns (IRRs) compared to city gas projects. If high efficiency can fully materialize, the equity IRR on integrated energy projects is at least 12% and

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Asian Insights SparX China Gas Utilities Sector

What is an integrated energy system? Why is it needed? Comparison of conventional energy system and integrated energy system T otal solution for energy Integrated Traditional sy stem sy stem In a conventional energy system, the various kinds of energy Efficiency 80% 35-50% that users require are supplied by different service providers and there is no synergy among the separate systems. As shown Energy bill 20% savings - in the picture below, solar power is used for water heating Emission lower higher while a coal-fired heating system is used for the provision of Energy security higher lower heat. Meanwhile, electricity is provided by the State Grid’s Operation mode distributive centralised centralised power network. Capital investment small large

This contrasts with an integrated energy system, which is a smart system providing various kinds of energy integrated into Source: DBS HK one system. The system is an on-site distributive system i.e. decentralised at the premises and is highly customised to suit the different needs of different users. The example shown in Improvement in energy efficiency also means a reduction in the the picture below uses natural gas as the major fuel with solar energy bill of at least 20% for customers. Depending on the energy as the complementary energy. In fact, the type of design of the system and government policies, excess electricity energy to be integrated is wide, such as natural gas, industrial can also be sold back to the national grid to further increase waste heat, solar energy, geothermal energy and wind power. the return on investment in some cases. It also provides broad energy solutions, including gas, electricity, cooling, heating and steam. Another major advantage is emissions reduction. As renewable energy or clean energy is usually used as a major fuel for the Higher efficiency with a smaller energy bill system, the use of coal or consumption of electricity from the grid will be less. In addition, due to the higher energy One of the main advantages of an integrated energy system is efficiency, less fuel is being consumed to generate the same higher efficiency. The traditional method of generation and amount of energy. Thus, it is more environmentally friendly transmission of electricity wastes a lot of heat and is only 35- than a conventional energy system. 50% efficient, according to data from Digest of UK energy statistics 2017. However, an on-site integrated energy system can achieve efficiency as high as 80%. This is because the excess heat energy during the production of electricity, which is usually wasted in a conventional system, is also captured for the production of energy that can be used in cooling or heating systems.

Conventional energy system vs integrated energy system

C o nventional energy system I n tegrated energy system

Source: DBS HK

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Asian Insights SparX China Gas Utilities Sector

Cumulative installed capacity of CHP market (2016) In addition, an integrated energy system can increase the reliability of the energy supply network for users. The traditional energy supply mode of a large centralised power plant is subject to high risk in energy security. Any malfunction of the centralised system will affect a large area Americas, of users. But with a decentralised integrated energy system, 15.4% though this can still malfunction, is equipped with a small- APAC , scale energy source and higher degree of energy 45.9% independency, hence resulting in controlled repercussions and faster recovery. EMEA, 38.8% Who are the target customers?

Generally speaking, integrated energy system can be applied in both residential, industrial and commercial markets as the system is highly customised. However, we reckon those markets with relatively higher demand for energy will have Source: GlobalData Power Database stronger tendency to adopt an integrated energy system. These include industrial parks, hotels, hospitals, commercial buildings, data centers, etc. Western world: a sustainable energy solution

The major motivation for the initial adoption of CHP in the Successful cases in overseas markets 1970s in developed countries, we believe, was energy security. Following the oil crisis in 1973, many governments The development of integrated energy systems in overseas realised the need to reduce fuel consumption through markets started in the form of large-scale combined heating higher energy efficiency. Hence, supportive government and power (CHP) plants. According to Absolute Reports, the policies were launched to accelerate the application of utility total CHP capacity increased from 437GW in 2006 to scale CHP systems. Natural gas was the major fuel for CHP 755.2GW in 2016. APAC (mainly China, India and Japan) installed capacity. The blackout incidents in North America and EMEA (Europe, the Middle East and Africa) accounted triggered the promotion of distributive CHP / CCHP systems. for 46% and 39% of cumulative installed capacity in 2015 In 2000, there were 980 sets of distributed energy systems respectively. Global installation of CHP capacity is projected in commercial / public buildings with total capacity of to reach 972GW by 2025. Transparency Market Research 4.9GW, and 1,016 sets in industrial areas with total capacity estimates that the global market for CHP installations is of 45.5GW in the US. The US government has set a target anticipated to rise at a compound annual growth rate that distributed energy systems must be installed in 50% of (CAGR) of 4.4% between 2014 and 2024 to US$812.8bn. new office / commercial buildings, and 15% of the old Although large-scale CHP plants currently hold the majority systems to be upgraded as distributed system. As a result, market share of >85%, such a percentage is expected to distributed energy will account for 29% of total decline with the rising use of small-scale / micro-scale CHP installations. plants, as well as combined cooling, heating and power (CCHP) systems, in commercial and residential sectors due to the heavy investment in the large-scale system. We have seen many successful cases of smaller-scale CHP / CCHP systems not just in developed countries, but also developing countries, although the driving factors are different.

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US CHP installed capacity by fuel mix (2016) EU CHP installed capacity by fuel mix (2016)

Wood, Oil, 1.5% Others, Biomass, 2.1% 0.4% 3.2% Others, 10.8% Solid fossil Waste, fuels, 10.2% 16.8% Oil, Renewable 6.5% energy, Coal, 21.0% 13.1% Natural gas, 69.5% Natural gas, 44.8%

Source: Energy Information Administration Source: Eurostat

In the EU, many important regulations were also launched Denmark : from centralised to distributed energy to promote CHP systems, such as Cogeneration Directive, Emissions Trading Directive, and the New Electricity and Gas According to data from European Cogeneration Review, Directives. These have also resulted in growth in installed Denmark had the most extensive CHP market in EU in 2014 capacity of CHP systems. as about half of Danish electricity was co-generated with heat in 2014. This was on the back of the government’s Nowadays, energy security remains one of the major determination to be less dependent on coal and oil supply reasons that governments are pushing for the development and it has moved from centralised power stations to of CHP systems but we also see an additional driving force, distributed local CHP plants (mainly fuelled by biomass) and and that is environmental considerations. With the strong distributed wind power systems. In fact, it was one of the commitment to reduce carbon emissions, the use of first to implement a green energy transition strategy across renewable energy has been widely adopted, particularly in all sectors and is aiming for 100% renewables by 2050. the EU. In the course of decarbonisation, more users are looking for a sustainable solutions to improve energy UK: latest energy solution in the oldest hospital reliability, boost energy efficiency and lower energy costs. St Bartholomew’s Hospital in the UK is a typical example of Thus, an integrated energy system or distributed CCHP a trend towards utilising a more decentralised CCHP system. system is an obvious solution. St Bartholomew’s Hospital was founded in 1123 and is In 2016, around 12% of European electricity production managed by Barts Health NHS Trust, the largest National and 15% of heat production came from CHP / CCHP Health Service Trust in England. The Trust aims to be systems. The CODE2 project (Cogeneration Observatory and financially, environmentally and socially sustainable and to Dissemination Europe), which aims to assist EU members in achieve the carbon reductions required by the Climate pushing forward their CHP / CCHP plans, estimated that Change Act. After installing the CCHP system, which is CHP systems could generate 20% of the EU’s electricity fuelled by natural gas with an on-site power generator, the requirements and 25% of heat in 2030. According to data ageing energy and heating supply system of the hospital from Eurostat, natural gas has the highest share in the fuel was modernised with a more improved and resilient power mix of CHP / CCHP systems at 45% in the EU. Nevertheless, generation system. This saved the Trust EUR675,000 or with advancements in technology and increasing popularity 25% in energy costs, EUR54,000 per annum in carbon tax of renewable energy, there is a wider variety of energy and removed 2,500 tons of carbon dioxide or CO2 (17% of choices being used in integrated energy systems. In the site’s overall emissions). addition, we are seeing a growing number of small capacity Dev eloping countries: a baseload power supply from CHP / CCHP systems in the EU as the transition in energy biomass and solar power markets towards more decentralised generation and electricity self-consumption takes place. The driving forces of integrated energy in developing countries are slightly different from that in developed countries. This is because power shortage and improvement in accessibility to electricity have higher priority in

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Asian Insights SparX China Gas Utilities Sector

developing countries. The distributive nature of integrated demonstrates government’s intention to create a more energy system is a perfect solution to increase electrification, efficient energy network. particularly in those areas which are off the central grid. In addition, lower initial capital cost than a traditional 13th Five Year Plan targets centralised system is a big advantage. The type of fuel used in the system will depend on the availability of energy 2015 2020 CA GR Gas power installed resources. Nevertheless, the use of biomass and solar power capacity 57GW 110GW 14.1% is more common as a baseload power supply than in the Cumulative proven reserves western countries. For example, the cogeneration plants in (m m3) 13,000,000 16,000,000 4.2% Mauritius (a country in East Africa), which burns bagasse Production (m m3 / year) 135,000 207,000 8.9% into power, is such a success that it has prompted the Proportion of energy United Nations Environment to spread this method to other consumption (%) 5.9% 10.0% sugar cane producing countries in Africa, including Kenya, Total population using gas Ethiopia, Sudan, Tanzania, etc. Not only can this help (m) 330 470 7.3% increase access to electricity in rural and remote areas, it Proportion of population 42.8% 57.0% also increases income for farmers. above town level using gas Pipeline length ('000 km) 64 104 10.2% Pipeline transmission capacity (m m3) 280,000 400,000 7.4% Huge market potential in China Underground storage capcaity (m m3) 5,500 14,800 21.9% China: fighting air pollution Source: NEA

Similar to the Western world, the development of integrated systems in China started in the form of CHP plants. In fact, the adoption of CHP systems has been quite popular in In the 13th Five Year Plan (FYP) for natural gas development, China due to its energy efficiency and cost savings. The gas consumption used for electricity generation is an major difference from the Western world lies in the fuel important growth driver. The guideline clearly states its used. While natural gas is the major fuel for CHP / CCHP intention to increase the proportion of gas used in electricity systems in the EU, the US and Japan, CHP systems in China generation. Due to the higher efficiency and flexibility, the are mainly run in coal-fired power facilities. By 2014, around proportion of distributive gas power plants is expected to 30% of coal-fired power facilities had CHP systems. increase. The installation capacity for gas power plants is However, the serious air pollution from carbon emissions, targeted to reach 110GW by the end of 2020, from 57GW particularly in the northern part of China, prompted the in 2015, implying a CAGR of 14%. By the end of 2015, the government to increase the proportion of cleaner fuel, not installed capacity for distributive gas power only reached just for power generation but also for distributive CCHP c.10GW. However, the government targeted the installed systems. capacity for distributive gas power plants to reach 50GW by 2020. In addition, during the course of restructuring the electricity market, not only has the electricity generation market been opened up to more competition but also the electricity Natural gas as the preferred fuel retailing market. This has accelerated the development of distributed energy services and more value added services at Based on the experience of Western countries, although the the retail end. Value added services include energy efficiency percentage of renewable energy, such as solar and biogas, management, enhancement in energy security, electricity bill used in integrated energy systems is increasing, natural gas savings etc; hence, the emergence of the integrated energy remains the major fuel. We reckon natural gas has several market. advantages over other forms of clean energy as a major fuel According to the “Implementation Opinions on the in the integrated energy system. And given the distributive Integration and Optimisation of Demonstrative Project nature of integrated energy systems, natural gas integrated Construction” (关于推进多能互补集成优化示范工程建设的 energy systems can also enjoy supportive policies for distributive gas power. 实施意见) by National Development and Reform Commission (NDRC) and National Energy Administration Firstly, natural gas is a reliable base load energy source (NEA), the primary composition of the integrated energy which can provide steady power supply to end-users network consists of gas CCHP systems and distributive throughout the day. This is because supply of gas fuel is renewable energy. By 2020, the proportion of integrated secured and reliable. However, other forms of renewable energy systems will reach 30% in existing industrial parks, energy has restriction in this regard. For instance, without and the share of integrated energy systems in newly - storage facilities, solar power can only be used for a limited established industrial parks will reach 50%. This

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Asian Insights SparX China Gas Utilities Sector

number of hours during the day time. Wind power has 发电市场化交易试点的通知”. We believe the allowance for restrictions on the development landscape. Use of biogas is distributed energy projects to sell extra electricity generated constrained by the availability of biomaterials. to nearby users will further improve the attractiveness of distributive gas projects and reduce the financial burden on Secondly, installation of distributive solar energy is restricted local governments. to only 10GW per year and is estimated to already hit above 10GW in 1H2018. Thus, there is limited capacity of distributive solar power available for the rest of this year. Related policy on distributive gas power However, higher distributive gas capacity is key in increasing Release gas consumption. The NDRC issued the “Opinions on Policy T ime Key points Guiding opinion on Nov-11 1) Encourage the development of CHP accelerating the use of natural gas” in the middle of 2017, development of systems in regions with high energy in which the government is encouraging the construction of natural gas distributed loads (i) gas power plants in city areas, (ii) integrated energy energy 2) Construct 1000 natural gas projects with other renewable power sources, and (iii) "关于发展天然气 distributive energy systems with total industrial parks with gas power plants. Furthermore, the 分布式能源指导意 installed capacity of 50GW 见" document has also stated an intention to establish a more Natural gas Oct-14 1) Natural gas distributive energy comprehensive gas power pricing mechanism and provide distributive energy systems are mainly CHP systems with financial support. demonstration project >70% energy efficiency implementation detail 2) Reduce the application procedures for "天然气分布式能 new projects 源示范项目实施细 3) Provide discounts to help to manage 则“ gas supply costs Opinions on accelerating the use of natural gas 4) Provide financing and tax subsidies Notice to regulate gas Dec-14 1) Encourage direct price negotiation Focus - C&I and residential replacement of coal with gas power on-grid price between users and distributive gas - Distributive gas power "关于规范天然气 energy providers - Peak shaving gas power 发电上网电价管理 2) Establish pricing system to correlate - Natural gas vehicles and ships 有关问题的通知" electricity price and gas price Target - Proportion of energy consumption to reach 10% by 2020 and 15% by 2025 Guiding opinion on Feb-16 1) Encourage the construction of CCHP - Underground storage to reach 14.8bn m3 by 2020 accelerating the systems with other distributive and 35bn by 2030 development of renewable energy providers Gas power - Accelerate the development of distributive gas internet + smart grid 2) Establish smart grid systems and power in industrial parks, logistics centers, commercial energy leverage on technological advancements buildings, traffic hubs, hospitals, schools, etc "关于推进“互联网 to improve energy efficiency +”智慧能源发展的 3) Encourage market-oriented grid - Develop gas CHP systems in Pan Beijing-Tianjin-Hebei, 指导意见" systems Yangtze River Delta, Pearl River Delta, and north eastern China 13th FYP on natural Jan-17 1) Encourage the development of gas development distributive gas energy and high Improve gas - Increase financial subsidies to compensate for the "天然气发展十三 efficiency projects power tariff flaws in the current gas power tariff system 五规划" 2) Installation capacity for gas power is mechanism - Accelerate the progress of market-oriented reforms targeted to reach 110GW by 2020 for gas power Source: NEA, NDRC Source: NEA Distributive gas-power on-grid tariff

Gas DG on-grid Gas DG on-grid Thirdly, we see higher downside risk on the return of solar volume price (Rmb capacity price (Rmb / energy projects because government is revising down the / k wh) kw per year) subsidy for distributive solar power. After the central Zhejiang 0.567 470 government lowered the subsidy for those projects which sell excess electricity to the grid from Rmb0.42 to Rmb0.37 Shanghai 0.7655 na per kWh in Jan 2018, this was cut further to Rmb0.32 per Guangdong 0.715 na kWh in June 2018. On the other hand, we expect steady Jiangsu 0.784 na spread between on-grid price and gas fuel price because the Beijing 0.65 na pricing mechanism of gas power projects is pegged to the gas fuel price. In addition, the power industry is gradually Tianjin 0.73 na moving to direct negotiation between distributive power Source: Provincial Price Bureau producers and nearby users. In 2H2017, the NDRC issued the Notification on pilot projects for market-oriented reforms for distributed power generation “关于开展分布式

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Attractiveness of integrated energy Electricity and steam ASP sensitivity projects Equity IRR Throughout our analysis on the investment return on typical 20% integrated energy projects, such as CCHP projects in China, 18% we found that they have similar IRRs compared to city gas 16% projects, if not higher. In addition, the dollar margin on 14% CCHP projects is higher than city gas projects on the sales of 12% both electricity and steam, if higher efficiency of the system 10% can fully materialize. Thus, CCHP projects are attractive to 8% gas distributors as it provides additional income with decent 6% investment returns. 4% 2%

0.6 0.7 0.8

0.62 0.64 0.66 0.68 0.72 0.74 0.78 0.76 CCHP project base case IRR assumption Rmb / kWh

Construction cost (Rmb / w) 10 Steam price (Rmb / ton) 250 Equity IRR Electricity price (Rmb / kWh) 0.7 25% Fuel costs (Rmb / kWh) 0.61 Utilisation hour 6,100 20% Electricity generated (m kWh / yr) 31 Steam generated (ton /yr) 45,934 15% Equity IRR 12.14% 10% Source: DBS HK

Utilisation hour sensitivity 0%

150 170 190 210 230 250 270 290 310 330 350 Equity IRR Rmb / ton 16% Source: DBS HK 14% 12% 10% The equity IRR of a CCHP project can reach above 12%, 8% which is similar or better than city gas projects. Due to the distributive nature of CCHP, the utilisation can easily reach 6% above 6,000 hours as energy generated can be absorbed by 4% nearby customers, compared to <3,000 hours for normal 2% gas power plants. Also, other than selling electricity, CCHP 0% projects can enjoy extra revenue from selling steam for

heating/cooling services. On top of the 3.5-4 kWh of

5000 5200 5400 5600 5800 6000 6200 6400 6600 6800 7000 Hours electricity generated for each cubic metre of natural gas, CCHP can utilise the excess heat to generate 2.2 to 4 kWh Source: DBS HK equivalent of steam for heating/cooling services.

Customers can obtain 10-20% energy cost savings with a CCHP system compared to a traditional energy system. The tariff on electricity sold to customers is usually at a 5-10% discount to the local industrial/commercial electricity tariff, and the average selling price (ASP) for steam is at a 20% discount at c.Rmb250/ton due to the lower gas fuel cost from gas distributors. This incentivises customers to adopt the system.

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CCHP project IRR calculation Natural gas power - installed capacity

CCHP GW (Rmb /m3) 90 Revenue - Steam 1.51 80 Revenue - Electricity 2.80 Fuel cost (2.15) 70 Dollar margin 2.16 60 Equity IRR >12% 50 40 Gas distribution 30 Revenue 2.68 20 Dollar margin 0.60 10 Equity IRR 12%

0 Source: NDRC, DBS HK 2011 2012 2013 2014 2015 2016 2017

Source: DBS HK

In addition to the gas volume growth, china gas distributors would be able to earn a higher dollar margin for CCHP. Assuming the steam ASP and electricity tariff at Rmb250/ton Based on the 13th FYP issued at the provincial level, Jiangsu, and Rmb0.7/kwh respectively, the dollar margin for CCHP Guangdong, Shanxi, Shandong, and Shanghai have the projects could reach Rmb2.16 / m3, compared to the city most ambitious plans to install gas power, which in gas project’s c.Rmb0.6 / m3. aggregate account for >60% of the installations during 2015-2020. Chinese gas distributors with most projects in these regions should benefit.

How much revenue are we talking about? Gas power new installation target 2015-2020 The integrated energy market has extended the business MW scope of gas distributors to the provision of steam and electricity. We have used both top-down and bottom-up approaches to estimate the revenue gas distributors can earn from the new business line, and we projected this to be c.Rmb133-160bn by 2020 through provision of around 195m tons of steam and 130bn kWh of electricity. This new business line is equivalent to 30-40% of recurring gas sales revenue of gas distributors by 2020.

T he top-down approach. We project that the generation of steam and electricity within CHP/CCHP systems can boost gas demand by at least 32.5bn m3 during 2017-2020. This implies an annual gas consumption growth of 3%. Our calculations are based on additional installation of distributed gas power plants of just 25GW and reach 36GW by 2020. Such assumption is conservative compared with Source: NDRC, DBS HK the government’s “Guiding opinions of the development for natural gas distributed energy” (关于发展天然气分布式能源的指导意见), where the installed capacity for distributed gas A bottom-up analysis based on major user group. According power plants is targeted to reach 50GW by 2020. The to the China Gas Association, there were 288 distributive installed capacity of natural gas power plants reached gas power projects as of the end of 2015, of which 37.2%, 66GW by 2015, of which distributed gas power plants 29.2%, 11.1% and 5.6% were industrial parks, commercial accounted for only c.11GW. buildings, hospitals and data centres respectively. We have estimated the potential market size of these major user

groups, and project c.36bn m3 of gas demand would be

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generated from them by 2020. This figure is similar to that In particular, industrial park is the largest gas consumer in derived from a top-down approach. integrated energy system. There were approximately 500k of industrial coal-boilers installed in China in 2015, and

more than 80% are small boilers with a capacity of below Installed capacity by customer type – distributive gas 10 tons/hr. The government is enforcing small boilers to undergo a clean emissions conversion, especially in core Total 288 projects regions of the Pan Beijing-Tianjin-Hebei area. Assuming Hotel Others 15% of the small-scale boilers are converted to gas boilers 4% 5% with average capacity of 3 tons/hr by 2020, we estimate this Hospital can boost gas demand by c.33.5bn m3 by 2020 with 200m 11% Industrial tons of steam and 1,338m kwh of electricity generated. 37% Transportation Hub In addition, we also assume a small percentage of just 15% 3% of data centers and 5% of hospitals / commercial buildings School that will convert to use gas integrated energy systems. We 5% reckon the conversion percentage is very conservative, given Data that government is increasingly aggressive in pushing for a Centre 6% “blue sky” in China. There will be upside in the amount of Commerical gas consumed or additional revenue if more conversions to 29% integrated energy systems are realised. Total 11GW installed capacity Data Others, FY17-20 gas demand Centre, 4.5% 3.5% Commerical, A nnual 4.5% # new energy Gas sites per Conversion demand (m demand 17- y ear ratio k wh) 20 (m m3) 500k Data center cabinets 15% 6,000 900 Commercial 166.7m m2 5% 25,005 1,250 Industrial, 87.6% Hospitals 1,082 5% 8,764 438 Source: Wind, MIIT, National Health Commission, DBS HK

Source: China Gas Association, DBS HK

Average installed capacity by customer type

MW Industrial 91.1

Data Centre 24.2

Transportation Hub 17.6

School 13.1

Commerical 5.9

Hospital 1.5

Office 1.1

Hotel 0.9

0 20 40 60 80 100

Source: China Gas Association, DBS HK

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Asian Insights SparX China Gas Utilities Sector

Case studies in China Towngas China will be able to supply at the local city gate price of Rmb2.09/m3 plus Rmb0.07 /m3 transmission fee. Yuhang Economic and Technological Development Zone The YECDZ negotiates electricity tariff to nearby users, and is at c.5% discount to normal Commercial & Industrial (C&I) The Yuhang Economic and Technological Development electricity price of Rmb0.66-0.70 / kWh. The steam price is Zone (YETDZ) is a large industrial park with over 200 c.Rmb250/ton. The equity IRR is expected to reach >12%. companies in the equipment manufacturing, textile and This is a good example showing that a local gas distributor is pharmaceutical industries. The industrial park originally used able to enjoy growth in gas consumption even though the coal-fired boilers, but this was converted into gas fuelled project is operated by other parties. CHP plants due to environmental regulations. Multiple companies such as ENN, Towngas, Datang Power, and Huaneng Power tried to bid for the project. Eventually ENN, Towngas (local gas distributor) and Hanzhou Gas (local Project info government) co-invested in the project with 51%, 24% and Yuhang project (#3 station) 25% stakes respectively. Location Hangzhou, Zhejiang Owner ENN (51%) , Towngas (24%),

Hangzhou Gas (25%) Yuhang Economic and Technological Development Capex (Rmb m) 140 Zone Gas power ASP (Rmb / kwh) 5% discount to end user price Steam ASP (Rmb / ton) 250 Gas boiler and site under construction for gas power Gas supply costs (Rmb / m3) 2.16 Equity IRR 12% Source: Company, DBS HK

Dongguan Haofeng integrated energy project

The Haofeng project at Dongguan is located in the western part of Dongguan. The industrial park has a planned total area of 1,500 Mu. The main customers within the industrial park are mainly in the textile and electroplating industry. The industrial park is still in the expansion phase with >100 customers. The customers are expected to enjoy cost savings of 10-15% in their electricity bills.

The project will be constructed in 2 phases. The first phase consists of a 6.53MW gas turbine, a 13.4tons/hr waste heat boiler, and two gas boilers (10tons/hr each). In addition, a solar plant with 1.2MW will be installed. The second phase will consist of a 6.53 MW gas turbine, a 13.4 tons/hr waste heat boiler and two gas boilers each with a capacity of 15tons/hr. A total capex of Rmb150m is required for the two phases.

The project can generate 300k tons of steam and 75m kWh of electricity per annum. The steam is expected to be sold at Rmb260/ton while the electricity will be sold to the grid Source: DBS HK company at Rmb0.715/kWh since direct negotiation with customers is not allowed. The gas supply cost will be at local city-gate price plus a transmission fee as it is under ENN’s project concession. Nevertheless, the equity IRR could reach The customers are able to obtain 10-20% energy cost 10-12%. savings by utilising the integrated energy network. The YETDZ is currently constructing the first power/steam station, which has six gas boiler (40tons/hr each), gas turbine (7.9MW) and waste heat boiler (16.5tons/hr). The station is expected to generate 42m kWh of electricity and 900k tons of steam per annum. In terms of gas supply cost,

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Asian Insights SparX China Gas Utilities Sector

Project data Haofeng project - Gas power engine

Dongguan Haofeng project (phase 1 & 2) Location Dongguan, Guangdong Owner ENN(100%) Capex (Rmb m) 150 Gas power ASP (Rmb / kwh) 0.715 Steam ASP (Rmb / ton) 260 Gas supply costs (Rmb / m3) >2.08 Equity IRR 10-12% Source: Company, DBS HK

Haofeng project - Gas boiler

Source: Company, DBS HK

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Asian Insights SparX China Gas Utilities Sector

Critical factors of integrated energy these provinces will be able to maximize the energy market in China efficiency with higher return. In addition, the NDRC released a notice on “Proactive promotion of marketisation of The table on the following page highlights Porter’s Five electricity market” (关于积极推进电力市场化交易进一步 Forces analysis for the integrated energy market in China. 完善交易机制的通知) in July 2018, with the aim to As the electricity retailing market opens up, the number of accelerate cross-regional power trading and marketisation players in the integrated energy market will inevitably of electricity price. Central government is encouraging direct increase with more intense competition. However, we electricity trading between users and all types of power reckon that those gas distributors with the right generators, including distributive power producers. Thus, we geographical exposure will be able to benefit more from the expect more supportive policies will be launched from expanding integrated energy market. provincial governments, increasing business opportunities for integrated energy service providers. Geographical exposure and government policy are important winning factors Meanwhile, regions with schemes such as timely adjustment of tariff price with the fluctuation in gas price, and We reckon that having the operation concession for gas installation/tax subsidies are favourable for the development supply in the “right region” is an important winning factor of CCHP systems. Zhejiang, Shandong, Shanghai, in the integrated energy market. This is because gas supply Guangdong, and Jiangsu are the provinces with the most in the integrated energy system will be eventually supplied comprehensive subsidy schemes. by the local gas distributor, and this does not matter who the integrated energy system operator is. The YETDZ project Regions with higher installation target implies stronger that we mention in our case studies in China is a good policy support and more demand. Jiangsu, Guangdong, example where the local gas supplier is able to take a share Shanxi, Shandong, and Shanghai have the most ambitious in the integrated energy project even though the project is plans to install gas power, and would account for >60% of operated by a third party. The local gas distributor, thus, can the installation during 2015-2020. Therefore, we believe gas enjoy higher gas sales volume. distributors with the most projects in these key regions would benefit the most. We analyse the attractiveness of integrated energy in a region in terms of the tariff-setting system, direct trading of The electricity price and the gas supply costs are important power with nearby customers, subsidies scheme, and variables affecting the return on CCHP projects. The larger supportive policies for gas power installation. the gap between the electricity price and gas supply costs, the higher the project return which gives end users strong The local governments are rolling out the relevant policies incentive to install an integrated energy system. Therefore, and submitting projects for pilot programs on direct trading we have factored this to determine the regions which are of distributive generation (DG) projects to nearby customers. relatively more attractive. The most active provinces are Guangdong, Zhejiang, Shandong, Jiangsu, and Zhejiang. We reckon projects in

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Asian Insights SparX China Gas Utilities Sector

Perspective from Porter’s Five Forces for gas utilities players

Bargaining power of customer - moderate Large number of target customers - Industrial park, hospital, data center, school, commercial building

Customers are price sensitive - Energy and cost savings of 20% offer incentives and additional room for price negotiation

Strict government regulation force customers to use clean energy - Implementation of coal-free zones to prevent users from coal consumption - Penalties may arise from inability to shut down coal power - Carbon policy increase competitiveness of gas generation

Threat of new entrants - Threat of substitutes - low low / moderate Solar power is unstable: Moderate entry barrier: - Largely depend on exposure to - Limitation on gas supply due to Competitive rivalry - radiation concession right moderate - Storage capacity is required - No limitation if renewable Growing number of competitors: - Restriction on installation by energy or other fuel is used - Distributed energy encouraged government - Solid technical-know-how and by government - Has a similar LCOE at the sound experience of design team - Other service providers include moment, but it is declining at a are required to achieve high renewable energy operator or IPP fast pace efficiency Quality difference depends on Wind power has its limit for Require solid financial strength: system design: distributive use: - Large amount of capex is - Similar service offered by - Limitation on construction required to have meaningful different operators with major landscape project development. difference in system design and - Wind speed is the major factor efficiency for energy output, subject to big fluctuation - Lower LCOE

Bargaining power of supplier - high Gas distributors' edge on gas supply: - Local gas distributor is the only source of gas fuel due to concession right

Limited choice in equipment sourcing: - Core and leading technologies for gas turbine are possessed by oversea manufacturers while domestic manufactured equipment has less efficiency - Supply of solar panal or equipment for reneable energy is abundant

Source: DBS HK

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Asian Insights SparX China Gas Utilities Sector

Market potential of different provinces

Expect trial direct Favourable negotiation with nearby High installation High electricity subsidies customers for DG target price vs fuel price Ov erall Hunan     4 Jiangsu    3 Henan    3 Guangdong    3 Shandong    3 Shanghai    3 Sichuan    3 Zhejiang   2 Shaanxi   2 Jiangxi  1 Hainan  1 Hebei  1 Jilin  1 Gansu  1 Heilongjiang  1 Inner Mongolia  1 Hubei  1 Qinghai  1 Guangxi  1 Liaoning  1 Shanxi  1 Guizhou Tianjin Xinjiang Yunnan Anhui Fujian Source: NDRC, NEA, Provincial Price Bureau, DBS HK

A bility to enhance project return energy reduction, provide reliable decision-making basis for energy systems planning, designing and operation, Although project return will vary from province to province effectively integrating energy facilities and network, etc. due to difference in government policies, we reckon These factors will determine how effective the integration operators’ vast experiences and solid technical-know-how energy system is, how much cost savings can be achieved are also important in project evaluation and maximizing and the “profitability” of the system. Among the gas project return. These include the ability to make accurate utilities players, ENN and China Gas has the most number of forecast on energy demand at different times and locations, integrated energy projects on hand and they have evaluate users’ energy usage characteristics, compare the accumulated rich experiences in the industry. value of various technologies in terms of economics or

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Asian Insights SparX China Gas Utilities Sector

Stock picks Estimated number of Industrial park

Under our theme of a fast growing integrated energy No. of Project market in China, the gas distributors will be the main 350 beneficiaries as they can provide stable gas supply, lower 300 fuel costs, and have solid financials. We believe the key route to gain market share will depend on the government 250 policy and regional distribution of projects of integrated 200 energy operators. Based on our investigation on local government policies and spread between electricity price 150 and fuel price, ENN (63%) and CR Gas (51%) has the 100 highest proportion of projects located in our favoured regions. 50

0 ENN Energy China Gas CR Gas Towngas Number of projects in our favoured regions China Source: Company, DBS HK No. of Project 140 120 ENN Energy (2688 HK) is our top pick in the sector. It is the 100 major beneficiary of the growing popularity of integrated energy network in China. ENN gained first mover advantage 80 by shifting its development focus from downstream gas 60 distribution to the integrated energy market. The acquisition of ENN Ubiquitous Energy Network, one of the leading 40 integrated services providers in China with top notch 20 technology, together with highest exposure to our favoured region for integrated energy development, will help the 0 company to grab additional market share. ENN targets to CR Gas ENN Energy China Gas Towngas increase the revenue contribution of integrated energy from China Rmb294m in FY18 to Rmb10bn in FY20. Also, the operation Source: Company, DBS HK of Zhoushan LNG receiving terminal in 3Q18 would enhance gas supply and support dollar margin during the upcoming winter. We maintain our BUY rating with TP lifted to HK$105 on higher assumption of profit contribution from In addition, since one of the main demand source for integrated energy business. integrated energy projects come from industrial parks, gas distributors with higher number of industrial parks under China Gas Holdings (384 HK) is also one of our sector top the project concession is more likely to have higher growth picks. The company is willing to take a more active role in rate. ENN and China Gas has the highest number of developing integrated energy projects when the market industrial parks in this regards. Also, the industrial becomes more attractive. Though it is not the company’s production hub in China is gradually shifting from core cities main focus, we are positive on its strong execution ability into lower tier cities, and companies such as China Gas with and favourable project distribution. The company is the first more exposure in lower tier city will benefit. mover in penetrating the rural coal-to-gas conversion market. It signed a contract to convert 3.1m rural Overall, we believe ENN Energy and China Gas will be the households by the end of FY18, and the number reached major beneficiary among the gas distributors in China as 4.3m by mid June18. We expect new connections in rural they have high exposure to our favoured regions and regions to reach 2.1m and 2.9m in FY19 and FY20 industrial parks. respectively. We expect dollar margin to drop to Rmb0.6/m3 and Rmb0.59/m3 in FY19 and FY20 due to the delay in pass through of residential city-gate price hikes, increasing proportion of lower dollar margin (Rmb0.45/m3) rural users, and discounts offered to attract additional coal-to-gas customers. Nevertheless, gas sales volume growth of 35% and 30% in FY19 and FY20 can more than offset the drop in dollar margins. We have a BUY rating with TP lifted to

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Asian Insights SparX China Gas Utilities Sector

HK$40 on higher growth assumption in coal-to-gas the clean energy market. Towngas China has priority access conversion. to HKCG’s Jintan underground storage, which can help alleviate margin pressure during the winter period. We China T ian Lun Gas (1600 HK) does not have the intention believe dollar margin will remain stable in FY18 on gas sales to develop integrated energy projects. Rather, it is focusing volume growth of 16%. We currently have a BUY rating its resources to expand market share in rural coal-to-gas with TP at HK$9. market in Henan. It has setup a Rmb10bn fund with the Henan government for rural coal-to-gas projects. By V Power (1608 HK) is also one of the beneficiaries of the leveraging its strong relationship with the Henan rising integrated energy market in China. Approximately government and largely unpenetrated market size of c.15m 30% of its system integration (SI) revenue was generated in households in the area, we estimate total new connections China during 2017. With rising demand for integrated will increase from 226k in FY17 to 509k in FY18 and 811k energy projects and distributive gas power generation in FY19. With the high proportion of city gas projects in Tier systems, we expect SI revenue to achieve strong growth in 3/4 cities, its dollar margin is expected to remain stable. the next few years. VPower is constructing the first With strong city gas volume growth of c.33% in FY19, we Investment, Building and Operating (IBO) project in China expect earnings growth to reach 61% in FY18. Its current and is looking to tap into the growing market. Furthermore, valuation of 9x FY19F PE is undemanding. We maintain our VPower intends to capture opportunities arising from BUY rating with TP at HK$10.50. China’s Belt and Road Initiative (BRI) in developing countries.

China Resources Gas (1193 HK) is the largest SOE gas distributor in China with a relatively high exposure to our favoured regions for integrated energy projects. However, it PE vs EPS growth will continue to focus on city gas project development. We think its development strategy is rather conservative PE compared to others, which hinders its ability to tab into new 25 growth opportunities. In view of its high exposure to high China Gas dollar margin regions, the dollar margin is expected to 20 remain under pressure and we expect the dollar margin to CR Gas drop from Rmb0.58/m3 in FY17 to Rmb0.56/m3 by FY19. ENN Riding on the coal-to-gas conversion initiative in China, the 15 Towngas volume growth may increase 20-22% during 1H18, which is above our expectation. We revise up our volume growth 10 China Tian estimate by 3% in FY18 and FY19. We upgrade to HOLD Kunlun Lun Gas rating with TP lifted to HK$32.50. 5 BEH T ow ngas China (1083 HK) had set up an integrated energy investment platform in 2016 and is seeking opportunities in 0 the market. The company targets to boost related gas 0% 10% 20% 30% 40% consumption to 3.5bn m³ by 2022, which is 42% of the FY18-20 earnings growth company's total gas sales volume in FY17. The Hong Kong and China Gas Company (HKCG) is aiming to increase new Source: Company, DBS HK energy business to 15-20% of earnings by 2019/2020, demonstrating its determination to aggressively develop in

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Asian Insights SparX China Gas Utilities Sector

Peers comparison

Mk t PE PE Yield Yield P/Bk P/Bk EV/EBITDA ROE ROE Price Cap F iscal 18F 19F 18F 19F 18F 19F 18F 19F 18F 19F Company Name Code Local$ US$m Yr x x % % x x x x % % China Gas Holdings*# 384 HK 33.45 21,180 Mar 19.8 15.6 1.4 1.8 4.8 3.9 13.7 11.3 26.6 27.9 Enn Energy Holdings*^ 2688 HK 83.85 11,596 Dec 17.6 15.3 2.5 2.8 4.1 3.6 9.9 8.4 21.3 23.2 China Resources Gas Group* 1193 HK 35.7 10,118 Dec 18.9 17.4 2.0 2.3 3.2 2.9 9.3 8.5 17.7 17.6 Towngas China* 1083 HK 7.91 2,833 Dec 14.2 12.7 2.3 2.5 1.3 1.2 10.2 9.4 9.3 9.8 China Tian Lun Gas Hdg.* 1600 HK 10 1,261 Dec 13.2 9.5 2.0 3.2 2.6 2.2 9.9 7.3 21.5 25.4 Vpower Group Intl. 1608 HK 3.77 1,231 Dec 26.2 17.1 1.0 1.5 3.5 3.0 13.2 9.1 14.8 18.9 Source: Company, DBS HK # FY18: FY19; FY19: FY20 ^ Core EPS

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STOCK PROFILES

Note: Prices used as of 24 July 2018

China / Hong Kong Company Guide ENN Energy Holdings Ltd Version 2 | Bloomberg: 2688 HK Equity | Reuters: 2688.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 27 Jul 2018

BUY Powering ahead with integrated Last Traded Price ( 24 Jul 2018):HK$83.85(HSI : 28,781) energy Price Target 12-mth:HK$105 (25.2% upside) (Prev HK$95.00)

Analyst Undervalued gem. We like ENN’s rapid development in the Tony WU CFA+852 2971 1708, [email protected] integrated energy business as an additional earnings growth Patricia YEUNG+852 28638908, [email protected] driver, as well as access to the LNG receiving terminal to

broaden gas supply and support dollar margin. We revised up What’s New our long-term earnings growth estimate to reflect its strong  Major beneficiary of the integrated energy market ability to secure integrated energy projects. We believe the in China current valuation of 15x FY19F PE looks attractive amid strong

 ENN has the most number of projects in high earnings CAGR of 17% from FY17-FY20. As one of the leading growth potential regions and industrial parks non state-owned enterprise (SOE) gas distributor, we reckon the stock is poised to re-rate further.  Turning more optimistic on its long term growth outlook and revise up earnings growth estimate Where we differ. We are optimistic on the outlook of integrated

 Maintain BUY rating with TP revised up to HK$105 energy projects in China, which is expected to boost earnings growth and stimulate sales volume. Our assumption for

Price Relative earnings from integrated energy and gas sales volume growth is higher than market projections. Our earnings estimate is 7% above the market.

Potential catalysts. Higher-than-expected earnings contribution from integrated energy projects would also be a boost. Strong implementation of coal-to-gas conversion could drive up sales volume.

Forecasts and Valuation Valuation: FY Dec (RMBm) 2017A 2018F 2019F 2020F We maintain our BUY rating with TP lifted to HK$105, based on Turnover 48,269 61,564 76,144 92,675 EBITDA 7,703 9,517 11,192 13,038 DCF valuation. We revised up our earnings estimate to take into Pre-tax Profit 5,190 7,151 8,847 10,911 consideration of its strong ability to secure more integrated Net Profit 2,802 3,846 4,758 5,894 energy projects in the next 10 years. For our DCF assumptions, Net Pft (Pre Ex) (core profit) 3,697 4,461 5,139 5,894 we have assumed a beta of 1.2 with WACC of 7.5% (equity risk Net Profit Gth (Pre-ex) (%) 15.1 20.7 15.2 14.7 premium of 7%; risk free rate of 3%; after tax cost of debt of EPS (RMB) 2.59 3.55 4.40 5.45 EPS (HK$) 2.99 4.11 5.08 6.29 3.1%), and 1% terminal growth. Core EPS (HK$) 3.95 4.76 5.49 6.29 Core EPS (RMB) 3.42 4.12 4.75 5.45 EPS Gth (%) 30.3 37.3 23.7 23.9 Key Risks to Our View: Core EPS Gth (%) 15.1 20.7 15.2 14.7 Diluted EPS (HK$) 2.79 4.10 5.08 6.29 Poor execution of government policies may negatively affect DPS (HK$) 1.25 2.08 2.34 2.90 demand for gas. BV Per Share (HK$) 18.09 20.40 23.44 27.21 PE (X) 28.0 20.4 16.5 13.3 At A Glance CorePE (X) 21.2 17.6 15.3 13.3 P/Cash Flow (X) 12.9 16.4 12.4 10.4 Issued Capital (m shrs) 1,085 P/Free CF (X) 50.2 nm 228.4 31.0 Mkt Cap (HK$m/US$m) 90,994 / 11,596 EV/EBITDA (X) 11.9 9.9 8.4 7.1 Major Shareholders (%) Net Div Yield (%) 1.5 2.5 2.8 3.5 ENN Group International Investment Ltd. 30.3 P/Book Value (X) 4.6 4.1 3.6 3.1 Capital Research Global Investors 13.0 Net Debt/Equity (X) 0.5 0.5 0.3 0.2 ROAE(%) 17.6 21.3 23.2 24.9 First State Investments (HK) Ltd. 6.7 Free Float (%) 50.0 Earnings Rev (%): Nil 2 5 3m Avg. Daily Val. (US$m) 31.0 Consensus EPS (RMB) 3.82 4.55 5.26 Other Broker Recs: B:20 S:2 H:3 ICB Industry: Utilities / Gas, Water & Multiutilities

Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters, HKEX

sa- CS /AH

Company Guide

ENN Energy Holdings Ltd

CRITICAL FACTORS TO WATCH Total gas sales volume (m m3)

Critical Factors Successful growth in integrated energy business. ENN is looking to transform from a natural gas distributor into an integrated energy supplier. It is targeting to increase profit contribution from this segment to over 50% in five years. Although this target may be ambitious, we agree that there is ample growth potential in the integrated energy market. Compared to peers, ENN has the most number of projects in high growth potential regions and industrial parks, therefore it New Residential connections (m households) is in a solid position to capture the integrated energy market.

ENN will be investing mainly in gas-fired distributed power projects which are usually under 25-30 years contracts to ensure continuity. The equity IRR requirement for each project is >12%, which we believe is reasonable given its similarity to other renewable energy projects in China.

Positive government policies. The government intends to focus on coal-to-gas conversions and increasing the competitiveness of retail gas prices, which would be positive for ENN’s gas Blended dollar margin (Rmb/m3) demand growth. Following the conversion/closure of coal-fired boilers with steam capacity of below 10 t/h in cities above prefecture-level, we are expecting the restrictions to be extended to more regions and more boilers (such as those between 10 t/h to 35 t/h) to be converted.

The gradual roll-out of policies to restrict returns on intra- provincial pipeline transmissions may help reduce retail prices to end users. In fact, some provinces such as Shandong and

Zhejiang have lowered their intra-provincial tariffs by 7%-34%, Source: Company, DBS HK and more provinces are expected to follow.

LNG terminal to lower gas costs. The Zhoushan LNG terminal (Phase 1) held under its parent company in Zhejiang is expected to commence operations in 3Q18, which will enable ENN to procure cheap LNG supplies during winter. Assuming oil price of US$65 per barrel, LNG cost is expected to be at a 5% discount to the city-gate price in Zhejiang. The company expects 700m m3 of LNG to be supplied through the terminal. Assuming an average LNG spot price of c.Rmb7000/m3 during Nov-Dec implies c.56% cost savings during the peak period.

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Company Guide ENN Energy Holdings Ltd

Share price vs HSI

ENN Energy rel to HSI (Rebased Jan 10 = 100) Acceleration of coal- 450 to-gas conversion and removal of ROA 400 overhang

350

300

250

200

150

100

Jul-12 Jul-13 Jul-18 Jul-10 Jul-11 Jul-14 Jul-15 Jul-16 Jul-17

Jan-13 Jan-14 Jan-11 Jan-12 Jan-15 Jan-16 Jan-17 Jan-18 Jan-10 Source: Thomson Reuters, DBS HK

Page 23

Company Guide

ENN Energy Holdings Ltd

Balance Sheet: Healthy financials. Capital expenditure is expected to reach Leverage & Asset Turnover (x) Rmb6bn in FY18F. Amid strong cash inflow, we expect net gearing to continue to decline from 50% in FY17 to 20% in FY20, and ENN may boost dividend payout.

Share Price Drivers: Integrated energy projects. The investments in integrated energy projects may help boost gas sales volume and earnings growth. The company targets to increase the earnings contribution from this segment to 50% in five years from less than 1% in FY17. Capital Expenditure

More coal-to-gas conversions. Regulations to convert coal-fired boilers with capacity of 10 – 35 t/h and the implementation of additional coal-free zones will help generate demand for gas.

Key Risks: Poor government policy execution. The Chinese government has rolled out multiple supportive policies for the industry, such as regulating transmission tariffs and accelerating coal- to-gas progress. Gas demand could be negatively affected by slow execution of these policies. ROE

Company Background Established in 1993, ENN is one of the first privately owned gas distributors in China. The company is mainly involved in the distribution of natural gas through city gas operations, wholesale distribution and CNG/LNG refuelling stations. It is also involved in integrated energy supply (cooling, heating and steam and electricity), gas appliances, and materials.

Forward PE Band

PB Band

Source: Company, DBS HK

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Company Guide ENN Energy Holdings Ltd

Key Assumptions FY Dec 2016A 2017A 2018F 2019F 2020F Total gas sales volume (m 14,385.9 19,616.0 24,952.9 30,275.5 35,466.2 m3) New Residential connections (m 1.8 2.1 2.3 2.4 2.6 households) Blended dollar margin 0.73 0.63 0.62 0.61 0.6 (Rmb/m3) Source: Company, DBS HK

Segmental Breakdown (RMB m)

FY Dec 2016A 2017A 2018F 2019F 2020F Revenues (RMB m) Piped gas 17,900 23,948 30,021 36,120 41,844 Gas connection fees 5,611 5,954 6,336 6,571 6,963 Vehicle gas refuelling 3,169 3,102 2,954 2,994 3,063 stations Wholesale of gas 6,153 11,878 16,035 20,044 24,053 Sales of integrated energy 153 294 1,636 4,467 9,614 Sales of gas appliances 238 320 422 541 649 Total 34,103 48,269 61,564 76,144 92,675 GPM (RMB m) Piped gas 3,240 4,038 5,133 6,174 7,119 Gas connection fees 3,591 3,735 3,928 4,009 4,178 Vehicle gas refuelling 274 177 163 159 160 stations Wholesale of gas 97 217 289 361 433 Sales of integrated energy 17 15 131 447 1,250 Sales of gas appliances 100 122 161 205 247 Total 7,219 8,182 9,644 11,149 13,140 GPM Margins (%) Piped gas 18.1 16.9 17.1 17.1 17.0 Gas connection fees 64.0 62.7 62.0 61.0 60.0 Vehicle gas refuelling 8.6 5.7 5.5 5.3 5.2 stations Wholesale of gas 1.6 1.8 1.8 1.8 1.8 Sales of integrated energy 11.1 5.1 8.0 10.0 13.0 Sales of gas appliances 42.0 38.1 38.0 38.0 38.0 Total 21.2 17.0 15.7 14.6 14.2 Source: Company, DBS HK

Page 25

Company Guide

ENN Energy Holdings Ltd

Income Statement (RMB m) FY Dec 2016A 2017A 2018F 2019F 2020F Revenue 34,103 48,269 61,564 76,144 92,675 Cost of Goods Sold (26,753) (39,930) (51,739) (64,763) (79,257) Gross Profit 7,350 8,339 9,825 11,381 13,419 Other Opng (Exp)/Inc (1,046) (1,441) (1,638) (2,141) (3,118) Operating Profit 6,304 6,898 8,188 9,241 10,300 Other Non Opg (Exp)/Inc (1,010) (895) (616) (381) 0 Associates & JV Inc 571 634 809 1,000 1,217 Net Interest (Exp)/Inc (609) (552) (614) (632) (606) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) (1,061) (895) (616) (381) 0 Pre-tax Profit 4,195 5,190 7,151 8,847 10,911 Tax (1,307) (1,517) (2,074) (2,566) (3,164) Minority Interest (737) (871) (1,231) (1,523) (1,854) Preference Dividend 0 0 0 0 0 Net Profit 2,151 2,802 3,846 4,758 5,894 Net Profit before Except. 3,212 3,697 4,461 5,139 5,894 EBITDA 6,929 7,703 9,517 11,192 13,038 Growth Revenue Gth (%) 6.4 41.5 27.5 23.7 21.7 EBITDA Gth (%) 10.0 11.2 23.5 17.6 16.5 Opg Profit Gth (%) 19.8 9.4 18.7 12.9 11.5 Net Profit Gth (%) 5.6 30.3 37.2 23.7 23.9 Margins & Ratio Gross Margins (%) 21.6 17.3 16.0 14.9 14.5 Opg Profit Margin (%) 18.5 14.3 13.3 12.1 11.1 Net Profit Margin (%) 6.3 5.8 6.2 6.2 6.4 ROAE (%) 15.1 17.6 21.3 23.2 24.9 ROA (%) 4.4 5.1 6.2 6.8 7.4 ROCE (%) 12.1 12.3 13.3 13.8 14.2 Div Payout Ratio (%) 41.7 41.7 50.8 46.1 46.1 Net Interest Cover (x) 10.4 12.5 13.3 14.6 17.0 Source: Company, DBS HK

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Company Guide ENN Energy Holdings Ltd

Balance Sheet (RMB m) FY Dec 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 22,297 25,490 30,455 35,219 38,789 Invts in Associates & JVs 5,054 5,434 5,493 5,565 5,654 Other LT Assets 10,190 10,665 11,464 12,355 13,384 Cash & ST Invts 7,179 7,976 7,224 8,296 10,162 Inventory 515 744 803 993 1,209 Debtors 4,423 6,068 6,690 8,275 10,071 Other Current Assets 1,723 2,838 3,620 4,477 5,449 Total Assets 51,381 59,215 65,748 75,180 84,717

ST Debt 4,644 8,368 8,368 8,368 7,868 Creditors 10,472 13,351 15,434 19,319 23,643 Other Current Liab 3,225 3,886 4,956 6,130 7,461 LT Debt 12,147 9,699 9,699 9,699 8,699 Other LT Liabilities 3,039 3,694 3,694 3,694 3,694 Shareholder’s Equity 14,966 16,952 19,100 21,950 25,479 Minority Interests 2,888 3,265 4,496 6,019 7,873 Total Cap. & Liab. 51,381 59,215 65,748 75,180 84,717

Non-Cash Wkg. Capital (7,036) (7,587) (9,278) (11,705) (14,375) Net Cash/(Debt) (9,612) (10,091) (10,843) (9,771) (6,405) Debtors Turn (avg days) 40.0 39.7 37.8 35.9 36.1 Creditors Turn (avg days) 141.0 111.9 103.8 100.0 100.9 Inventory Turn (avg days) 6.5 5.9 5.6 5.2 5.2 Asset Turnover (x) 0.7 0.9 1.0 1.1 1.2 Current Ratio (x) 0.8 0.7 0.6 0.7 0.7 Quick Ratio (x) 0.6 0.5 0.5 0.5 0.5 Net Debt/Equity (X) 0.5 0.5 0.5 0.3 0.2 Net Debt/Equity ex MI (X) 0.6 0.6 0.6 0.4 0.3 Capex to Debt (%) 18.2 25.1 33.2 33.2 30.2 Z-Score (X) NA NA NA NA NA Source: Company, DBS HK

Cash Flow Statement (RMB m) FY Dec 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 4,195 5,190 7,151 8,847 10,911 Dep. & Amort. 1,064 1,118 1,136 1,332 1,520 Tax Paid (1,452) (1,471) (2,074) (2,566) (3,164) Assoc. & JV Inc/(loss) (571) (634) (809) (1,000) (1,217) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 751 767 1,402 2,111 2,312 Other Operating CF 1,379 1,123 (2,013) (2,380) (2,825) Net Operating CF 5,366 6,093 4,794 6,344 7,536 Capital Exp.(net) (3,049) (4,527) (6,000) (6,000) (5,000) Other Invts.(net) (1,304) (2) 0 0 0 Invts in Assoc. & JV (324) (354) 0 0 0 Div from Assoc & JV 802 588 750 928 1,129 Other Investing CF 35 (237) (900) (987) (1,119) Net Investing CF (3,840) (4,532) (6,150) (6,060) (4,990) Div Paid (705) (775) (1,700) (1,909) (2,364) Chg in Gross Debt 493 2,147 0 0 (1,500) Capital Issues 3 38 0 0 0 Other Financing CF (1,527) (2,118) 2,302 2,697 3,184 Net Financing CF (1,736) (708) 601 788 (680) Currency Adjustments 18 (41) 0 0 0 Chg in Cash (192) 812 (755) 1,072 1,866 Opg CFPS (RMB) 4.26 4.92 3.13 3.91 4.83 Free CFPS (RMB) 2.14 1.45 (1.12) 0.32 2.34

Source: Company, DBS HK

Page 27

Company Guide

ENN Energy Holdings Ltd

Target Price & Ratings History

HK$ S.No. Date Closing 12-mth Rating 97.0 5 Price T arget 4 92.0 Price 3 87.0 2 1: 29-Sep-17 HK$53.45 HK$66.00 Buy 82.0 1 2: 16-Mar-18 HK$62.20 HK$66.00 Buy 77.0 3: 23-Mar-18 HK$64.15 HK$76.00 Buy 72.0 4: 21-Jun-18 HK$75.45 HK$95.00 Buy 67.0 5: 26-Jun-18 HK$82.65 HK$95.00 Buy 62.0 57.0 52.0

47.0

Jul-18 Jul-17

Jan-18

Jun-18

Oct-17 Feb-18

Sep-17 Apr-18 Apr-18

Dec-17

Nov-17

Mar-18

Aug-17 May-18

Source: DBS HK Analyst: Tony WU CFA Patricia YEUNG

Page 28

China / Hong Kong Company Guide China Gas Holdings Version 2 | Bloomberg: 384 HK Equity | Reuters: 0384.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 27 Jul 2018

BUY Leading the village invasion Last Traded Price ( 24 Jul 2018):HK$33.45(HSI : 28,663) Price Target 12-mth:HK$40.00 (19.6% upside) (Prev HK$37.00) Growth leader in gas distribution. China Gas Holdings (CGH) is the first mover and major beneficiary of the strong growth of Analyst rural coal-to-gas conversions. We are confident in the Tony WU CFA+852 2971 1708, [email protected] Patricia YEUNG+852 28638908, [email protected] company’s execution ability to grab the largest market share and drive up connection revenue, recurring gas sales, as well as What’s New revenue from value-added services. According to the “Three  Core regions for pollution prevention extended to year action plans fighting for blue sky” released in July 18, Fenwei Plain and Yangtze River Delta Yangtze River Delta and Fen Wei Plain were added as the core regions for rural coal-to-gas conversion in addition to 2+26  More financial support for rural coal-to-gas cities, and financial supports were also extended. Thus we are conversion revising up our estimate to reflect higher growth in coal-to-gas  Signed 1.1m households in less than two months, conversion. CGH is expected to achieve higher than peers revising up earnings to reflect better outlook for earnings CAGR of 23% in FY18-21. Trading at 20x FY19 PE and rural coal-to-gas conversion PEG of 0.9x, the stock looks attractive in our view.

 Maintain BUY rating with TP lifted to HK$40. Where we differ. We are more bullish than the market on CGH as we are optimistic on the prospects of rural coal-to-gas Price Relative conversion, which is the key driver in gas sales volume and HK$ Relative Index 221 connection fees. Our earnings estimate is 10% above the 38.5 201 33.5 market. 181 28.5 161 23.5 141 Potential catalyst. Strong execution in rural coal-to-gas 121 18.5 101 conversion project development to drive up connection revenue 13.5 81 8.5 61 and sales volume growth. Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 China Gas Holdings (LHS) Relative HSI (RHS) Valuation: We maintain our BUY rating with TP lifted to HK$40.0 based on Forecasts and Valuation FY Mar (HK$m) 2018A 2019F 2020F 2021F DCF valuation. We have assumed beta of 1.1, 7.2% WACC Turnover 52,832 68,365 83,564 95,796 (equity risk premium of 7%, risk free rate of 3%, and 3.6% EBITDA 10,759 14,270 17,420 19,466 after tax cost of debt) and 2.5% terminal growth. Pre-tax Profit 8,600 11,856 15,069 16,948 Net Profit 6,095 8,374 10,683 11,993 Net Pft (Pre Ex) (core profit) 6,362 8,674 10,683 11,993 Key Risks to Our View: Net Profit Gth (Pre-ex) (%) 42.2 36.3 23.2 12.3 Slowdown in rural coal-to-gas projects from increasing EPS (HK$) 1.23 1.69 2.15 2.41 competition or lack of government support. Core EPS (HK$) 1.28 1.75 2.15 2.41 EPS Gth (%) 45.2 37.4 27.6 12.3 At A Glance Core EPS Gth (%) 40.5 36.3 23.2 12.3 Diluted EPS (HK$) 1.20 1.65 2.10 2.36 Issued Capital (m shrs) 4,969 DPS (HK$) 0.34 0.47 0.60 0.67 Mkt Cap (HK$m/US$m) 166,197 / 21,180 BV Per Share (HK$) 5.73 6.94 8.49 10.23 Major Shareholders (%) PE (X) 27.3 19.8 15.6 13.9 Beijing Enterprises Holdings Ltd 24.9 CorePE (X) 26.1 19.2 15.6 13.9 P/Cash Flow (X) 29.3 17.3 14.2 12.3 China Gas Group Ltd. 15.2 P/Free CF (X) nm 275.4 61.2 25.3 SK E&S Company Ltd 14.2 EV/EBITDA (X) 18.1 13.7 11.3 9.9 Capital World Investors 8.0 Net Div Yield (%) 1.0 1.4 1.8 2.0 Liu (Ming Hui) 5.7 P/Book Value (X) 5.8 4.8 3.9 3.3 Net Debt/Equity (X) 0.7 0.6 0.5 0.3 Free Float (%) 32.0 ROAE(%) 24.9 26.6 27.9 25.8 3m Avg. Daily Val. (US$m) 23.4 ICB Industry: Oil & Gas / Oil Equipment, Services & Distribution Earnings Rev (%): 0 0 0 Consensus EPS (HK$) 1.55 1.85 2.20 Other Broker Recs: B:12 S:4 H:8

Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters, HKEX

sa- CS /AH

Company Guide

China Gas Holdings

CRITICAL FACTORS TO WATCH Average connection fee - residential (HK$) 3401 3401 3401 3,435 3336 2938 Critical Factors 2,944 First mover into rural coal-to-gas. We believe the company’s 2,454 main earnings driver is rural coal-to-gas conversion. 1,963 The market has not fully appreciated its growth potential in 1,472 these areas. The government continues to roll out supportive 981 policies for coal-to-gas conversion such as the “Clean Winter 491 Heating Plan for Northern China” (“北方地区冬季清洁取暖规 0 划”). We believe the potential market size exceeds 60m 2017A 2018A 2019F 2020F 2021F households. CGH gained early mover advantage for being the New connections - residential (m households) first aggressive player to tap into the market. 6.56 6.4 5.9

The number of township coal-to-gas replacements only 5.25 5.0 reached 34,432 by the end of FY17. By the end of March 3.9 3.94 2018, CGH has completed 1.1m rural coal-to-gas conversion 2.6 projects, with a project backlog of 2.1m households. The 2.63 project backlog grew to 3.16m by mid-June 2018. We believe 1.31 that new connections from township conversion projects will reach 2.1m in FY19, which may boost new residential 0.00 2017A 2018A 2019F 2020F 2021F connections. Our forecast for new connections of residential users amount to 5m, 5.9m, and 6.4m in FY19, FY20, and FY21 Gas sales volume (m m3) respectively. 38,843 38,081.0 31,674.9 31,074 Lower transmission tariffs, higher demand. We believe that 24,846.4 intra-provincial tariffs could be cut further amid the 23,306 18,659.3 government’s intensifying regulations for the midstream. The 15,537 potential merger of pipeline companies could further reduce 12,224.3 transmission tariffs by the midstream. This could lower end 7,769 selling price without affecting distribution dollar margin and 0 may boost gas demand growth and share price. 2017A 2018A 2019F 2020F 2021F Dollar margin (Rmb/m3)

1 0.68 1 1 1 1 0.55

0.41

0.27

0.14

0.00 2017A 2018A 2019F 2020F 2021F

Source: Company, DBS HK

Page 30

Company Guide China Gas Holdings

Share price vs HSI

China Gas rel to HSI (Rebased Jan 10 = 100) 900

800 Acceleration of rural coal-to- gas conversion 700

600

500

400

300

200

100

Jul-11 Jul-12 Jul-15 Jul-16 Jul-10 Jul-13 Jul-14 Jul-17 Jul-18

Jan-11 Jan-12 Jan-16 Jan-17 Jan-10 Jan-13 Jan-14 Jan-15 Jan-18

Source: Thomson Reuters, DBS HK

Page 31

Company Guide

China Gas Holdings

Balance Sheet: Strong balance sheet. Strong earnings growth in the next few Leverage & Asset Turnover (x) 1.0 years is expected to support the higher capital expenditure 1.00 1.0 (capex) needed for gas storage and rural coal-to-gas conversion 0.9 0.80 projects. The company plans to spend capex of HK$9bn in 0.9 0.8 FY19, which consists of HK$3.5bn for city gas projects, 0.60 0.8 HK$3.5bn for rural coal-to-gas projects, HK$1bn for LPG & 0.40 0.7 integrated energy projects and HK$1bn for storage facilities. 0.7 0.20 0.6 Share Price Drivers: 0.6 0.00 0.5 Coal-to-gas conversion. The coal-to-gas conversion progress in 2017A 2018A 2019F 2020F 2021F China will determine the ramp up of gas consumption. Market Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure share gain in rural coal-to-gas conversions may help to drive up HK$m share price. 10,000.0 9,000.0 8,000.0 Lower gas selling price. The midstream reform may drive down 7,000.0 6,000.0 transmission tariffs and result in a lowering of end selling price 5,000.0 and boost gas consumption. 4,000.0 3,000.0 2,000.0 Key Risks: 1,000.0 0.0 Sluggish economic growth in China. Natural gas sales volume 2017A 2018A 2019F 2020F 2021F is sensitive to China’s underlying economic growth. A Capital Expenditure (-) slowdown in economic growth would have a negative impact ROE on demand for gas. 25.0%

Lack of government policy enforcement. Poor execution 20.0% despite supportive government policies may negatively affect 15.0% sentiment and performance for the gas sector. For instance, a prolonged subsidy payment delay for rural customers could 10.0% discourage new customers from entering the market. 5.0%

0.0% Company Background 2017A 2018A 2019F 2020F 2021F

CGH is mainly involved in the construction and operation of Forward PE Band city gas pipelines as well as the sale of natural gas and (x) 24.7 liquefied petroleum gas (LPG) in China. The company also 22.7 invests in gas terminals, storage, transportation, logistics 20.7 +2sd: 20.5x systems and vehicle refilling stations. CGH was listed in 2001 18.7 +1sd: 17.3x on the Hong Kong Stock Exchange. 16.7 14.7 Avg: 14x 12.7

10.7 -1sd: 10.7x

8.7 -2sd: 7.5x 6.7 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

PB Band (x) 6.8 6.3 5.8 5.3 +2sd: 5.11x 4.8 4.3 +1sd: 4.36x 3.8 Avg: 3.61x 3.3 2.8 -1sd: 2.85x 2.3 -2sd: 2.1x 1.8 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Source: Company, DBS HK

Page 32

Company Guide China Gas Holdings

Key Assumptions FY Mar 2017A 2018A 2019F 2020F 2021F Average connection fee - 2,937.6 3,336.2 3,401.2 3,401.2 3,401.2 residential (HK$) New connections - 2.6 3.9 5.0 5.9 6.4 residential (m households) Gas sales volume (m m3) 12,224.3 18,659.3 24,846.4 31,674.9 38,081.0 Dollar margin (Rmb/m3) 0.68 0.62 0.6 0.59 0.58 Source: Company, DBS HK

Segmental Breakdown (HK$ m)

FY Mar 2017A 2018A 2019F 2020F 2021F Revenues (HK$ m) Piped gas 13,779 22,613 31,390 40,256 48,714 Connection fee 5,748 11,303 13,781 16,421 17,848 LPG 11,655 15,970 17,831 18,623 19,368 Value added services 812 2,947 5,363 8,265 9,866 Total 31,993 52,832 68,365 83,564 95,796 GPM (HK$ m) Piped gas 2,463 3,075 4,140 5,280 6,366 Connection fee 4,225 6,179 7,572 8,821 9,246 LPG 1,313 1,521 1,699 1,774 1,845 Value added services 376 1,002 1,690 2,497 2,977 Total 8,377 11,778 15,100 18,372 20,434 GPM Margins (%) Piped gas 17.9 13.6 13.2 13.1 13.1 Connection fee 73.5 54.7 54.9 53.7 51.8 LPG 11.3 9.5 9.5 9.5 9.5 Value added services N/A N/A N/A N/A N/A Total 26.2 22.3 22.1 22.0 21.3 Source: Company, DBS HK

Page 33

Company Guide

China Gas Holdings

Income Statement (HK$ m) FY Mar 2017A 2018A 2019F 2020F 2021F Revenue 31,993 52,832 68,365 83,564 95,796 Cost of Goods Sold (23,616) (41,161) (53,265) (65,192) (75,362) Gross Profit 8,377 11,671 15,100 18,372 20,434 Other Opng (Exp)/Inc (2,905) (3,604) (4,375) (5,097) (5,652) Operating Profit 5,472 8,068 10,725 13,274 14,782 Other Non Opg (Exp)/Inc 488 262 827 930 970 Associates & JV Inc 904 1,255 1,395 1,621 1,859 Net Interest (Exp)/Inc (636) (718) (791) (757) (663) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) (327) (267) (300) 0 0 Pre-tax Profit 5,902 8,600 11,856 15,069 16,948 Tax (1,208) (1,931) (2,662) (3,383) (3,805) Minority Interest (547) (574) (820) (1,003) (1,150) Preference Dividend 0 0 0 0 0 Net Profit 4,148 6,095 8,374 10,683 11,993 Net Profit before Except. 4,475 6,362 8,674 10,683 11,993 EBITDA 7,825 10,759 14,270 17,420 19,466 Growth Revenue Gth (%) 8.5 65.1 29.4 22.2 14.6 EBITDA Gth (%) 13.6 37.5 32.6 22.1 11.7 Opg Profit Gth (%) 19.9 47.4 32.9 23.8 11.4 Net Profit Gth (%) 82.5 47.0 37.4 27.6 12.3 Margins & Ratio Gross Margins (%) 26.2 22.1 22.1 22.0 21.3 Opg Profit Margin (%) 17.1 15.3 15.7 15.9 15.4 Net Profit Margin (%) 13.0 11.5 12.2 12.8 12.5 ROAE (%) 21.6 24.9 26.6 27.9 25.8 ROA (%) 7.3 8.6 9.8 11.3 11.5 ROCE (%) 9.4 10.9 12.2 14.0 14.4 Div Payout Ratio (%) N/A N/A N/A N/A N/A Net Interest Cover (x) 8.6 11.2 13.6 17.5 22.3 Source: Company, DBS HK

Page 34

Company Guide China Gas Holdings

Balance Sheet (HK$ m) FY Mar 2017A 2018A 2019F 2020F 2021F

Net Fixed Assets 25,879 34,088 41,895 49,428 54,697 Invts in Associates & JVs 9,578 12,348 12,348 12,348 12,348 Other LT Assets 9,402 10,744 11,574 12,386 13,017 Cash & ST Invts 4,752 8,294 5,362 3,419 3,637 Inventory 1,679 3,069 3,072 3,755 4,305 Debtors 6,067 9,019 9,761 11,931 13,677 Other Current Assets 2,865 4,494 5,127 6,267 7,185 Total Assets 60,222 82,058 89,140 99,534 108,866

ST Debt 10,873 11,079 11,079 8,579 7,079 Creditors 9,650 14,045 15,331 18,764 21,691 Other Current Liab 2,056 1,977 3,418 4,178 4,790 LT Debt 12,745 21,293 18,793 18,793 16,293 Other LT Liabilities 951 933 933 933 933 Shareholder’s Equity 20,550 28,456 34,491 42,189 50,833 Minority Interests 3,396 4,274 5,094 6,097 7,247 Total Cap. & Liab. 60,222 82,058 89,140 99,535 108,866

Non-Cash Wkg. Capital (1,095) 561 (789) (989) (1,315) Net Cash/(Debt) (18,866) (24,078) (24,510) (23,954) (19,736) Debtors Turn (avg days) 63.7 52.1 50.1 47.4 48.8 Creditors Turn (avg days) 146.6 108.1 103.2 97.8 100.4 Inventory Turn (avg days) 23.3 21.7 21.6 19.6 20.0 Asset Turnover (x) 0.6 0.7 0.8 0.9 0.9 Current Ratio (x) 0.7 0.9 0.8 0.8 0.9 Quick Ratio (x) 0.5 0.6 0.5 0.5 0.5 Net Debt/Equity (X) 0.8 0.7 0.6 0.5 0.3 Net Debt/Equity ex MI (X) 0.9 0.8 0.7 0.6 0.4 Capex to Debt (%) 12.5 19.8 30.1 32.9 29.9 Z-Score (X) NA NA NA NA NA Source: Company, DBS HK

Cash Flow Statement (HK$ m) FY Mar 2017A 2018A 2019F 2020F 2021F

Pre-Tax Profit 5,902 8,600 11,856 15,069 16,948 Dep. & Amort. 960 1,179 1,321 1,592 1,853 Tax Paid (1,102) (1,931) (2,662) (3,383) (3,805) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (1,473) 53 542 580 631 Other Operating CF (170) (2,221) (1,453) (2,143) (2,067) Net Operating CF 4,116 5,680 9,603 11,715 13,560 Capital Exp.(net) (2,959) (6,409) (9,000) (9,000) (7,000) Other Invts.(net) (442) (74) 0 0 0 Invts in Assoc. & JV (351) (2,771) 0 0 0 Div from Assoc & JV 50 0 0 0 0 Other Investing CF (411) (750) (960) (939) (756) Net Investing CF (4,112) (10,004) (9,960) (9,939) (7,756) Div Paid (954) (1,703) (2,339) (2,984) (3,350) Chg in Gross Debt 1,430 8,754 (2,500) (2,500) (4,000) Capital Issues (539) 0 0 0 0 Other Financing CF (458) 799 2,261 1,763 1,761 Net Financing CF (520) 7,850 (2,578) (3,722) (5,589) Currency Adjustments (256) 0 0 0 0 Chg in Cash (772) 3,526 (2,934) (1,946) 215 Opg CFPS (HK$) 1.14 1.13 1.82 2.24 2.60 Free CFPS (HK$) 0.24 (0.15) 0.12 0.55 1.32

Source: Company, DBS HK

Page 35

Company Guide

China Gas Holdings

Target Price & Ratings History

HK$ S.No. Date Closing 12-mth Rating Price T arget 37.0 6 Price 1: 29-Sep-17 HK$22.90 HK$27.10 Buy 5 32.0 3 1 4 2: 25-Oct-17 HK$23.75 HK$27.10 Buy 3: 15-Nov-17 HK$23.50 HK$28.20 Buy 4: 28-Nov-17 HK$23.05 HK$28.20 Buy 27.0 2 5: 25-Jun-18 HK$32.60 HK$37.00 Buy 6: 20-Jul-18 HK$33.95 HK$37.00 Buy 22.0

17.0

Jul-18 Jul-17

Jan-18

Jun-18

Oct-17 Feb-18

Sep-17 Apr-18 Apr-18

Dec-17

Nov-17

Mar-18

Aug-17 May-18

Source: DBS HK Analyst: Tony WU CFA Patricia YEUNG

Page 36

China / Hong Kong Company Guide China Resources Gas Version 2 | Bloomberg: 1193 HK EQUITY | Reuters: 1193.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 27 Jul 2018

HOLD (Upgrade from FULLY VALUED) Good volume seen in 1H18 Last Traded Price ( 24 Jul 2018):HK$35.70 (HSI : 28,781) Price Target 12-mth:HK$32.50 (9.0% downside) (Prev Performing well in 1H18. The replacement of coal with gas in HK$25.00) China has exceeded the market expectation during 5M18. CR Gas’ volume growth from C&I customers is also expected to be Analyst Tony WU CFA+852 2971 1708, [email protected] strong at 25-30% during 1H18. Thus, we are revising up our Patricia YEUNG+852 28638908, [email protected] volume growth estimate from 17% to 20% in FY18. Despite gas shortage in the near term, we slightly lift our dollar margin What’s New assumption as we see the acceleration in gas storage and  1H18 volume growth is expected to be strong at potential reform in midstream will help to resolve gas shortage 20-22% over the medium term. Thus, we expect earnings growth to accelerate to 14% in FY18 and we upgrade to HOLD with TP  We lift dollar margin assumption on acceleration lifted to HK$32.50. However, the dollar margin for CR Gas may in gas storage and potential midstream pipeline remain suppressed in the next few years as it has high exposure reform to regions with pressure on dollar margin coming from  We upgrade our rating to HOLD, TP is revised up government’s regulation on distribution margin. to HK$32.50

Where we differ. We are more conservative on the outlook on Price Relative the dollar margin of CR Gas. The market is too optimistic on the recovery of dollar margin. Thus, our earnings forecast is 4% lower than the market.

Potential catalyst. Continued gas shortage during winter and the full implementation of the distribution return requirement by local governments may trigger pressure on dollar margin and negative sentiment on the stock.

Valuation: Forecasts and Valuation We upgrade our rating to HOLD and target price is lifted to FY Dec (HK$m) 2017A 2018F 2019F 2020F HK$32.50, based on DCF valuation. We have assumed a beta of Turnover 39,838 47,430 54,674 60,026 EBITDA 8,509 9,499 10,665 11,962 1 with WACC of 8.5% and 1% terminal growth. Pre-tax Profit 6,613 7,552 8,481 9,459 Net Profit 3,654 4,112 4,573 5,130 Key Risks to Our View: Net Pft (Pre Ex) (core profit) 3,654 4,112 4,573 5,130 Upside risk on dollar margin. A less severe winter gas shortage Net Profit Gth (Pre-ex) (%) 11.1 12.5 11.2 12.2 EPS (HK$) 1.68 1.89 2.06 2.31 or lower than expected dollar margin pressure on project Core EPS (HK$) 1.68 1.89 2.06 2.31 return investigation from government will be positive to EPS Gth (%) 11.0 12.4 8.9 12.2 Core EPS Gth (%) 11.0 12.4 8.9 12.2 earnings growth Diluted EPS (HK$) 1.68 1.89 2.06 2.31 DPS (HK$) 0.56 0.70 0.82 0.92 At A Glance

BV Per Share (HK$) 10.11 11.29 12.29 13.67 Issued Capital (m shrs) 2,224 PE (X) 21.3 18.9 17.4 15.5 Mkt Cap (HK$m/US$m) 79,397 / 10,118 CorePE (X) 21.3 18.9 17.4 15.5 P/Cash Flow (X) 10.0 11.8 9.5 9.4 Major Shareholders (%) P/Free CF (X) 23.0 nm 89.3 55.6 China Resources National Co Ltd 64.0 EV/EBITDA (X) 10.1 9.3 8.5 7.5 Capital World Investors 7.9 Net Div Yield (%) 1.6 2.0 2.3 2.6 Capital Research Global Investors 6.0 P/Book Value (X) 3.5 3.2 2.9 2.6 Free Float (%) 22.2 Net Debt/Equity (X) 0.0 0.1 0.0 CASH ROAE(%) 18.4 17.7 17.6 17.8 3m Avg. Daily Val. (US$m) 14.7 ICB Industry: Utilities / Gas, Water & Multiutilities Earnings Rev (%): 7 11 Consensus EPS (HK$) 1.92 2.14 Other Broker Recs: B:16 S:3 H:7

Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters, HKEX

sa- CS /AH

Company Guide

China Resources Gas

CRITICAL FACTORS TO WATCH Total gas sales volume (m m3)

Critical Factors Dollar margin under pressure. CR Gas may face pressure on dollar margin and market expectation on dollar margin is too optimistic. The supply for natural gas is expected to remain tight in the next two years and downstream distributors may continue to face pressure during winter peak season. According to our channel checks, downstream distributors have different opinions on gas storage and some of them lacks motivation to construct storage facilities until detailed return New Residential connections (m) - consolidated policy is issued. Unlike ENN and Towngas, which will have LNG receiving terminals access and underground gas storage in 2018, CR Gas currently lacks midstream facilities. Therefore, CR Gas is less equipped to mitigate dollar margin pressure during winter peak season if severe gas shortage occurs again.

We also identified regions with higher pressure on dollar margin in the next few years and CR Gas’ exposure in these regions is also high. The provincial governments will finalise the gas distribution return regulatory documents before end of June and return analysis on local level will be conducted Blended dollar margin (Rmb/m3) throughout the year. CR Gas has the most number of projects located in provincial capitals, which usually are more mature and have higher return. And regions with higher dollar margin level will face more pressure on dollar margin as volume expands.

Conservative development strategy. The company will be focusing in city gas project development. Our perception is that its development strategy is rather conservative, which hinders its ability to tab into new opportunities and miss out the New connection - residential ASP earnings growth potential. China Gas has started to aggressively expand into rural coal-to-gas conversion projects early and achieved strong growth in earnings. ENN and Towngas China on the other hand, has aggressive target in the development of integrated energy projects. We believe investors would favor companies that can leverage on its existing business to seek new growth drivers.

Volume growth remained strong. The acceleration of coal-to- gas conversion, speed up of the construction of natural gas Source: Company, DBS HK infrastructure and cut in the short distance pipeline transmission fee will boost the sales volume growth for gas distributors. Since CR Gas’ projects are located in eastern region with strong economic growth, its volume growth will outperform industry average. Its volume growth is expected to reach 20-22% during 1H18 amid strong coal-to-gas conversion in China.

Page 38

Company Guide China Resources Gas

Share price vs HIS

China Resources Gas Group rel to HSI 350

300 Strong growth in gas consumption 250

200

150

100 Collapse of oil prices pick up of gas leads to lower price volume growth from 50 competitiveness for coal-to-gas natural gas conversion

Jul-10 Jul-11 Jul-13 Jul-14 Jul-16 Jul-17 Jul-12 Jul-15 Jul-18

Jan-12 Jan-15 Jan-16 Jan-18 Jan-10 Jan-11 Jan-13 Jan-14 Jan-17

Source: Thomson Reuters, DBS HK

Page 39

Company Guide

China Resources Gas

Balance Sheet: Close to net cash by end of FY20. The company has a solid Leverage & Asset Turnover (x) balance sheet from steady cash inflows each year. We factor in capital expenditure of HK$8bn in our model for FY18, of which 75% will be used for organic expansion and maintenance while the rest is used for M&A. We expect CR Gas to be close to net cash position by FY20.

Share Price Drivers: Winter gas shortage. The supply for natural gas will remain tight during peak season in winter due to insufficient gas storage and pipeline network in the country in the near term. Capital Expenditure Gas distributors with lack of storage facilities and access to LNG receiving terminals will be prone to dollar margin squeeze.

Government implementation of ROA requirement. The document for return restriction for gas distributors will be issued by all provinces before end of June, and investigation on project returns will be conducted throughout the year. CR Gas has the most number of projects located in provincial capitals, which usually are more mature and have higher return. And regions with higher dollar margin level will face more pressure on dollar margin as volume improves. ROE

Key Risks: Upside risk on dollar margin. A less severe winter gas shortage or lower than expected dollar margin cut on project return investigation from government will be positive to earnings growth

Company Background CR Gas is the largest downstream gas distributor in China in terms of gas sales volume. Its principal businesses are in piped Forward PE Band gas distribution, natural gas filling station operations and sale of gas appliances. By the end of FY17, its gas sales volume had grown 21% y-o-y to 19.7bn m³.

PB Band

Source: Company, DBS HK

Page 40

Company Guide China Resources Gas

Key Assumptions FY Dec 2016A 2017A 2018F 2019F 2020F Total gas sales volume (m 16,272.0 19,667.0 23,590.4 28,060.0 31,448.7 m3) New Residential connections (m) - 1.8 2.1 2.3 2.6 2.8 consolidated Blended dollar margin 0.71 0.58 0.57 0.56 0.55 (Rmb/m3) New connection - 2,970.0 2,940.0 2,940.0 2,940.0 2,940.0 residential ASP Source: Company, DBS HK

Segmental Breakdown (HK$ m)

FY Dec 2016A 2017A 2018F 2019F 2020F Revenues (HK$ m) Sale & distribution of gas 23,872 29,082 35,838 42,337 46,952 fuel & related products Gas connection 7,439 8,927 9,664 10,335 11,016 Others 1,606 1,829 1,927 2,001 2,058 Total 32,916 39,838 47,430 54,674 60,026 GPM (HK$ m) Sale & distribution of gas 6,493 6,427 7,576 8,854 9,746 fuel & related products Gas connection 4,448 5,169 5,605 5,994 6,389 Others 243 320 337 350 360 Total 11,184 11,916 13,518 15,198 16,495 GPM Margins (%) Sale & distribution of gas 27.2 22.1 21.1 20.9 20.8 fuel & related products Gas connection 59.8 57.9 58.0 58.0 58.0 Others 15.1 17.5 17.5 17.5 17.5 Total 34.0 29.9 28.5 27.8 27.5 Source: Company, DBS HK

Page 41

Company Guide

China Resources Gas

Income Statement (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F Revenue 32,916 39,838 47,430 54,674 60,026 Cost of Goods Sold (21,732) (27,922) (33,911) (39,476) (43,531) Gross Profit 11,184 11,916 13,518 15,198 16,495 Other Opng (Exp)/Inc (5,877) (6,301) (7,257) (8,201) (8,764) Operating Profit 5,307 5,614 6,262 6,997 7,731 Other Non Opg (Exp)/Inc 424 464 605 534 682 Associates & JV Inc 772 787 854 984 1,080 Net Interest (Exp)/Inc (315) (253) (168) (35) (35) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 6,189 6,613 7,552 8,481 9,459 Tax (1,751) (1,703) (1,944) (2,183) (2,435) Minority Interest (1,148) (1,257) (1,496) (1,725) (1,894) Preference Dividend 0 0 0 0 0 Net Profit 3,289 3,654 4,112 4,573 5,130 Net Profit before Except. 3,289 3,654 4,112 4,573 5,130 EBITDA 7,788 8,509 9,499 10,665 11,962 Growth Revenue Gth (%) 0.3 21.0 19.1 15.3 9.8 EBITDA Gth (%) 17.9 9.2 11.6 12.3 12.2 Opg Profit Gth (%) 26.1 5.8 11.5 11.7 10.5 Net Profit Gth (%) 15.9 11.1 12.5 11.2 12.2 Margins & Ratio Gross Margins (%) 34.0 29.9 28.5 27.8 27.5 Opg Profit Margin (%) 16.1 14.1 13.2 12.8 12.9 Net Profit Margin (%) 10.0 9.2 8.7 8.4 8.5 ROAE (%) 18.9 18.4 17.7 17.6 17.8 ROA (%) 5.5 5.7 5.7 5.8 6.0 ROCE (%) 10.0 10.5 10.7 11.2 11.7 Div Payout Ratio (%) 30.4 33.5 37.0 40.0 40.0 Net Interest Cover (x) 16.9 22.2 37.3 201.9 223.9 Source: Company, DBS HK

Page 42

Company Guide China Resources Gas

Balance Sheet (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 24,059 28,608 34,910 40,338 44,943 Invts in Associates & JVs 10,892 13,046 13,156 13,284 13,424 Other LT Assets 4,754 4,337 4,647 4,942 5,143 Cash & ST Invts 9,525 10,356 7,910 8,295 7,317 Inventory 413 595 600 692 760 Debtors 8,021 9,463 10,408 11,997 13,171 Other Current Assets 2,011 2,359 2,809 3,238 3,555 Total Assets 59,675 68,764 74,440 82,786 88,312

ST Debt 3,139 5,328 4,828 3,828 2,828 Creditors 21,737 26,050 29,019 33,780 37,250 Other Current Liab 540 634 754 870 955 LT Debt 9,028 6,039 5,039 5,039 3,039 Other LT Liabilities 1,526 1,544 1,544 1,544 1,544 Shareholder’s Equity 17,768 21,993 24,583 27,326 30,405 Minority Interests 5,937 7,177 8,673 10,398 12,292 Total Cap. & Liab. 59,675 68,764 74,440 82,786 88,312

Non-Cash Wkg. Capital (11,831) (14,266) (15,956) (18,723) (20,719) Net Cash/(Debt) (2,642) (1,011) (1,956) (571) 1,450 Debtors Turn (avg days) 85.3 80.1 76.5 74.8 76.5 Creditors Turn (avg days) 378.0 331.9 312.8 307.0 315.7 Inventory Turn (avg days) 8.8 7.0 6.8 6.3 6.5 Asset Turnover (x) 0.6 0.6 0.7 0.7 0.7 Current Ratio (x) 0.8 0.7 0.6 0.6 0.6 Quick Ratio (x) 0.7 0.6 0.5 0.5 0.5 Net Debt/Equity (X) 0.1 0.0 0.1 0.0 CASH Net Debt/Equity ex MI (X) 0.1 0.0 0.1 0.0 CASH Capex to Debt (%) 27.2 38.8 81.1 84.6 119.3 Z-Score (X) NA NA NA NA NA Source: Company, DBS HK

Cash Flow Statement (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 6,189 6,613 7,552 8,481 9,459 Dep. & Amort. 1,285 1,643 1,779 2,149 2,469 Tax Paid (1,654) (1,700) (1,944) (2,183) (2,435) Assoc. & JV Inc/(loss) (772) (787) (854) (984) (1,080) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 1,941 1,764 2,019 3,081 2,228 Other Operating CF 373 260 (1,946) (2,154) (2,211) Net Operating CF 7,362 7,793 6,605 8,389 8,429 Capital Exp.(net) (3,314) (4,411) (8,000) (7,500) (7,000) Other Invts.(net) (9) (5) 0 0 0 Invts in Assoc. & JV (1) (529) 0 0 0 Div from Assoc & JV 582 685 743 857 940 Other Investing CF (4,206) 4,050 (390) (372) (275) Net Investing CF (6,948) (209) (7,647) (7,016) (6,335) Div Paid (827) (980) (1,521) (1,829) (2,052) Chg in Gross Debt (2,671) (923) (1,500) (1,000) (3,000) Capital Issues 0 0 0 0 0 Other Financing CF (1,733) (1,254) 1,617 1,840 1,979 Net Financing CF (5,232) (3,157) (1,404) (989) (3,073) Currency Adjustments (435) 425 0 0 0 Chg in Cash (5,253) 4,852 (2,446) 385 (979) Opg CFPS (HK$) 2.49 2.77 2.11 2.39 2.79 Free CFPS (HK$) 1.86 1.55 (0.64) 0.40 0.64

Source: Company, DBS HK

Page 43

China / Hong Kong Company Guide Towngas China Co Ltd Version 1 | Bloomberg: 1083 HK Equity | Reuters: 1083.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 27 Jul 2018

BUY Storing up for growth Last Traded Price ( 24 Jul 2018):HK$7.91(HSI : 28,663) Price Target 12-mth:HK$9.00 (13.8% upside) More re-rating to go. Towngas China differs from other gas distributors in its determination to invest in midstream assets. By Analyst leveraging on the vast experience and resources of the parent Tony WU CFA+852 2971 1708, [email protected] Patricia YEUNG+852 28638908, [email protected] company such as underground storage facility and LNG receiving terminal, it will allow the company to mitigate the

dollar margin pressure and we believe the dollar margin will Price Relative

HK$ Relative Index remain stable in FY18. Also, its gas sales volume growth is expected to reach a CAGR of 14% in FY17-20, which will help 9.0 203 8.0 183 to drive up the adjusted earnings growth to 14% in FY17-20. 163 7.0 143 This is expected to help the stock re-rate back to the 15-23x PE 6.0 123 range before the oil price collapsed in 2014 and when volume 5.0 103 83 4.0 growth was at double digit. 63 3.0 43 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Where we differ. The market underestimated the benefit of the Towngas China Co Ltd (LHS) Relative HSI (RHS) gas storage facilities and LNG receiving terminal on the dollar Forecasts and Valuation margin. Our earnings estimate is 8% above the consensus. The FY Dec (HK$m) 2017A 2018F 2019F 2020F Turnover 8,760 10,120 11,223 12,260 market remain cautious on margin and has not priced in the EBITDA 2,619 3,034 3,361 3,663 stable dollar margin outlook. Pre-tax Profit 1,918 2,172 2,447 2,697 Net Profit 1,365 1,524 1,720 1,898 Net Pft (Pre Ex) (core profit) 1,284 1,524 1,720 1,898 Potential catalyst. Better than expected dollar margin supported Net Profit Gth (Pre-ex) (%) 24.1 18.7 12.8 10.4 by access to underground storage facility and a less severe EPS (HK$) 0.51 0.56 0.62 0.69 Core EPS (HK$) 0.48 0.56 0.62 0.69 winter gas shortage. Potential privatisation by HKCG may drive EPS Gth (%) 38.3 9.5 11.6 10.4 up the valuation closer to its parent as Towngas China is trading Core EPS Gth (%) 22.4 16.5 11.6 10.4 at 50% discount to HKCG. Diluted EPS (HK$) 0.25 0.28 0.31 0.34 DPS (HK$) 0.15 0.18 0.20 0.22 BV Per Share (HK$) 5.90 6.17 6.52 6.99 Valuation: PE (X) 15.6 14.2 12.7 11.5 We have a BUY rating with TP HK$9.00 based on DCF valuation CorePE (X) 16.6 14.2 12.7 11.5 method. We assumed a beta of 1.0 with WACC of 7.4% and P/Cash Flow (X) 14.0 14.8 11.8 10.9 P/Free CF (X) nm nm nm 39087. 1% terminal growth. EV/EBITDA (X) 11.4 10.2 9.4 8.62 Net Div Yield (%) 2.0 2.3 2.5 2.8 Key Risks to Our View: P/Book Value (X) 1.3 1.3 1.2 1.1 Lower-than-expected dollar margin. A more severe winter gas Net Debt/Equity (X) 0.4 0.4 0.4 0.4 ROAE(%) 9.3 9.3 9.8 10.2 shortage and dollar margin compression from government regulation will be negative to earnings growth. Earnings Rev (%): Nil Nil Nil Consensus EPS (HK$) 0.51 0.57 0.64 At A Glance Other Broker Recs: B:6 S:1 H:3 Issued Capital (m shrs) 2,810 Source of all data on this page: Company, DBS Bank (Hong Kong) Mkt Cap (HK$m/US$m) 22,227 / 2,833 Limited (“DBS HK”), Thomson Reuters, HKEX Major Shareholders (%) Hong Kong and China Gas Co Ltd 67.4 First State Investments (HK) Ltd. 6.9 Free Float (%) 25.7 3m Avg. Daily Val. (US$m) 4.8 ICB Industry: Utilities / Gas, Water & Multiutilities

sa- CS /AH

Company Guide

Towngas China Co Ltd

CRITICAL FACTORS TO WATCH Blended dollar margin (Rmb / m3) 0.69 0.70 0.63 0.63 0.62 0.61 Critical Factors 0.60 Gas supply facilities to support dollar margin. We expect its 0.50 dollar margin to remain relatively stable as it can utilise HKCG’s 0.40 gas storage and LNG receiving terminal as early as FY18. We 0.30 forecast the dollar margin to be flat at Rmb0.63/m3 in FY18. 0.20 HKCG is constructing a storage facility in Jiangsu with a 0.10 capacity of 440m m³. Construction of phase 1 of the storage 0.00 facility, with a capacity of 140m m³, was completed in January 2016A 2017A 2018F 2019F 2020F

2018. In addition, HKCG invested in a LNG receiving terminal Gas sales volume (m m3) in Cangzhou city of Hebei in early 2018. The terminal has a 12,689 12,440.4 designed receiving capacity of 2.6m tons per year, and half of 11,099.5 it is expected to be operational by 2021. This would imply a 10,151 9,747.7 total of c.1.8bn m³ of additional gas supply for winter usage in 8,417.0 7,614 7,120.0 the Hebei-Tianjin-Beijing area. We believe the improvement of storage infrastructure and access to LNG terminal will help 5,076 Towngas to ease winter gas shortage and dollar margin 2,538 pressure in the medium term. 0 2016A 2017A 2018F 2019F 2020F Increasing demand for natural gas. Amid the government’s push and initiatives to increase natural gas usage, we believe Consolidated new connection # 441,504 424,360.0 432,847.2 Towngas China will be one of the major beneficiaries. 400,000.0 400,000.0 412,000.0 According to the 13th FYP for natural gas, the government 353,203 targets to increase the proportion of natural gas consumption from 6.4% in 2016 to 10% in 2020. We expect the total gas 264,902 consumption to exceed 340bn m³ in 2020, implying a CAGR of 176,602 14%. Towngas China’s sales volume outperformed the industry average at 18% during FY17 and our channel check 88,301 shows that the company continued to achieve decent volume 0 growth of c.17% y-o-y during 1QFY18 while the natural gas 2016A 2017A 2018F 2019F 2020F consumption growth reached c.12% in China. We expect the Source: Company, DBS HK company to achieve 18% gas sales growth in FY18.

Privatisation by parent company. We believe it is possible for HKCG to privatise Towngas China. HKCG has been a strong backup for Towngas China with integrated natural gas business in HK/China, and the parent company still has 34 city gas projects in China. Also, Towngas China has been trading at a significant discount of >50% to HKCG.

Page 45

Company Guide Towngas China Co Ltd

Share price vs HSI

Towngas rel to HSI (Rebased Jan 10 = 100) 360 Accelerated sales volume 310 growth from Strong growth in gas coal-to-gas consumption conversion 260

210

160

Oil price collapse lowered price 110 competitiveness for natural gas

Jul-12 Jul-13 Jul-14 Jul-18 Jul-10 Jul-11 Jul-15 Jul-16 Jul-17

Jan-10 Jan-11 Jan-16 Jan-17 Jan-12 Jan-13 Jan-14 Jan-15 Jan-18

Source: Thomson Reuters, DBS HK

Page 46

Company Guide

Towngas China Co Ltd

Balance Sheet: Solid balance sheet. The net gearing level will gradually Leverage & Asset Turnover (x) decline as FCF increases on higher gas sales volume. This will 0.4 0.60 0.4 support the increase in dividend payout in the future. The 0.4 0.50 capital expenditure is expected to reach HK$2bn in FY18, of 0.3 which c.HK$1.5bn will be utilised for maintenance while the 0.40 0.3 0.3 0.30 rest will be used to acquire new projects. We expect the net 0.3 gearing ratio to drop from 45% in FY17 to 40% in FY20. 0.20 0.3 0.2 0.10 Share Price Drivers: 0.2 0.00 0.2 Narrowing of dollar margin decline. The operation of Jintan 2016A 2017A 2018F 2019F 2020F underground storage and the construction of LNG receiving Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure terminal will allow Towngas China to have additional low HK$m cost gas supply during peak season in the winter, supporting 2,050.0 the dollar margin pressure going forward. 2,000.0 1,950.0 Sales volume increase from coal-to-gas conversion. Towngas 1,900.0 China will be one of the beneficiaries of China’s increasing 1,850.0 demand for natural gas. The strong momentum in coal-to- 1,800.0 gas conversion and strong growth potential from integrated 1,750.0 1,700.0 energy business will help to drive up the gas sales volume. 2016A 2017A 2018F 2019F 2020F Capital Expenditure (-) Key Risks: ROE Lower-than-expected gas sales volume. A downturn in 10.0% economic activities, sharp drop in oil price, and sluggish 8.0% coal-to-gas conversion could negatively affect demand for natural gas. 6.0%

4.0% Company Background

Towngas China is one of the major gas distributors in 2.0% China. It is mainly engaged in the sales and distribution of 0.0% piped gas in China, including the provision of piped gas, 2016A 2017A 2018F 2019F 2020F construction of pipelines, operation of city gas networks Forward PE Band and gas refilling stations as well as the sales of household (x) gas appliances. By the end of FY17, it had a total of 105 gas 20.7 +2sd: 19.3x projects while its total gas sales volume had reached 8.4bn 18.7 16.7 m³. +1sd: 15.8x 14.7 12.7 Avg: 12.3x 10.7

8.7 -1sd: 8.8x

6.7

4.7 -2sd: 5.3x Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

PB Band (x)

1.7

1.5 +2sd: 1.45x

1.3 +1sd: 1.23x 1.1 Avg: 1x 0.9 -1sd: 0.78x 0.7 -2sd: 0.56x 0.5 Dec-14 Dec-15 Dec-16 Dec-17

Source: Company, DBS HK

Page 47

Company Guide Towngas China Co Ltd

Key Assumptions FY Dec 2016A 2017A 2018F 2019F 2020F Blended dollar margin 0.69 0.63 0.63 0.62 0.61 (Rmb / m3) Gas sales volume (m m3) 7,120.0 8,417.0 9,747.7 11,099.5 12,440.4 Consolidated new 400,000.0 400,000.0 412,000.0 424,360.0 432,847.2 connection # Source: Company, DBS HK

Segmental Breakdown (HK$ m)

FY Dec 2016A 2017A 2018F 2019F 2020F Revenues (HK$ m) Gas sales 5,518 6,996 8,243 9,290 10,288 Connection fee 1,663 1,764 1,877 1,933 1,972 Total 7,181 8,760 10,120 11,223 12,260 EBIT margin (HK$ m) Gas sales 301 482 704 854 1,007 Connection fee 722 807 858 884 902 Total 1,023 1,289 1,563 1,739 1,909 EBIT margin Margins (%) Gas sales 5.5 6.9 8.5 9.2 9.8 Connection fee 43.4 45.7 45.7 45.7 45.7 Total 14.2 14.7 15.4 15.5 15.6 Source: Company, DBS HK

Page 48

Company Guide

Towngas China Co Ltd

Income Statement (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F Revenue 7,181 8,760 10,120 11,223 12,260 Cost of Goods Sold 0 0 0 0 0 Gross Profit 7,181 8,760 10,120 11,223 12,260 Other Opng (Exp)/Inc (6,098) (7,552) (8,557) (9,485) (10,351) Operating Profit 1,084 1,208 1,563 1,739 1,909 Other Non Opg (Exp)/Inc 65 257 209 232 253 Associates & JV Inc 618 633 698 774 834 Net Interest (Exp)/Inc (251) (262) (299) (299) (299) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) (60) 82 0 0 0 Pre-tax Profit 1,455 1,918 2,172 2,447 2,697 Tax (362) (405) (478) (538) (593) Minority Interest (119) (147) (170) (188) (206) Preference Dividend 0 0 0 0 0 Net Profit 974 1,365 1,524 1,720 1,898 Net Profit before Except. 1,034 1,284 1,524 1,720 1,898 EBITDA 2,246 2,619 3,034 3,361 3,663 Growth Revenue Gth (%) (7.0) 22.0 15.5 10.9 9.2 EBITDA Gth (%) 2.8 16.6 15.8 10.8 9.0 Opg Profit Gth (%) (17.0) 11.4 29.4 11.2 9.8 Net Profit Gth (%) 20.7 40.2 11.6 12.8 10.4 Margins & Ratio Gross Margins (%) 100.0 100.0 100.0 100.0 100.0 Opg Profit Margin (%) 15.1 13.8 15.4 15.5 15.6 Net Profit Margin (%) 13.6 15.6 15.1 15.3 15.5 ROAE (%) 7.2 9.3 9.3 9.8 10.2 ROA (%) 3.4 4.5 4.5 4.9 5.1 ROCE (%) 3.5 3.9 4.5 4.8 5.0 Div Payout Ratio (%) N/A N/A N/A N/A N/A Net Interest Cover (x) 4.3 4.6 5.2 5.8 6.4 Source: Company, DBS HK

Page 49

Company Guide Towngas China Co Ltd

Balance Sheet (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 12,692 15,060 16,515 17,918 19,270 Invts in Associates & JVs 5,056 6,342 6,761 7,226 7,726 Other LT Assets 6,738 7,210 7,290 7,351 7,408 Cash & ST Invts 1,439 1,605 1,093 944 924 Inventory 493 637 652 724 790 Debtors 1,190 1,393 1,492 1,655 1,808 Other Current Assets 420 528 609 676 738 Total Assets 28,027 32,775 34,414 36,493 38,664

ST Debt 2,653 3,708 3,708 3,708 3,708 Creditors 4,333 5,173 5,444 6,034 6,586 Other Current Liab 785 1,041 1,203 1,334 1,457 LT Debt 5,184 5,072 5,072 5,072 5,072 Other LT Liabilities 409 583 583 583 583 Shareholder’s Equity 13,499 15,845 16,882 18,052 19,343 Minority Interests 1,165 1,353 1,522 1,711 1,916 Total Cap. & Liab. 28,027 32,775 34,414 36,493 38,664

Non-Cash Wkg. Capital (3,014) (3,657) (3,893) (4,314) (4,706) Net Cash/(Debt) (6,398) (7,174) (7,686) (7,836) (7,856) Debtors Turn (avg days) 68.5 53.8 52.0 51.2 51.6 Creditors Turn (avg days) (3,229.0) (3,332.8) (3,438.3) (3,400.1) (3,454.1) Inventory Turn (avg days) (399.7) (396.0) (417.4) (407.6) (414.4) Asset Turnover (x) 0.3 0.3 0.3 0.3 0.3 Current Ratio (x) 0.5 0.4 0.4 0.4 0.4 Quick Ratio (x) 0.3 0.3 0.2 0.2 0.2 Net Debt/Equity (X) 0.4 0.4 0.4 0.4 0.4 Net Debt/Equity ex MI (X) 0.5 0.5 0.5 0.4 0.4 Capex to Debt (%) 24.2 20.8 22.8 22.8 22.8 Z-Score (X) NA NA NA NA NA Source: Company, DBS HK

Cash Flow Statement (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 1,455 1,918 2,172 2,447 2,697 Dep. & Amort. 480 521 564 616 667 Tax Paid (294) (319) (478) (538) (593) Assoc. & JV Inc/(loss) (618) (633) (698) (774) (834) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 656 229 156 356 332 Other Operating CF (13) (200) (252) (255) (268) Net Operating CF 1,667 1,515 1,464 1,852 2,001 Capital Exp.(net) (1,900) (1,824) (2,000) (2,000) (2,000) Other Invts.(net) (139) (65) 0 0 0 Invts in Assoc. & JV (156) (345) 0 0 0 Div from Assoc & JV 419 247 279 310 333 Other Investing CF 179 106 (99) (80) (75) Net Investing CF (1,596) (1,880) (1,820) (1,770) (1,742) Div Paid (63) (49) (488) (550) (607) Chg in Gross Debt (608) 562 0 0 0 Capital Issues 0 0 0 0 0 Other Financing CF (89) 7 331 319 329 Net Financing CF (759) 520 (156) (231) (278) Currency Adjustments (99) 100 0 0 0 Chg in Cash (787) 254 (512) (150) (20) Opg CFPS (HK$) 0.38 0.48 0.48 0.54 0.60 Free CFPS (HK$) (0.09) (0.12) (0.20) (0.05) 0.00

Source: Company, DBS HK

Page 50

Company Guide

Towngas China Co Ltd

Target Price & Ratings History

HK$ S.No. Date Closing 12-mth Rating 9.0 Price T arget 1 8.5 2 Price 8.0 1: 21-May-18 HK$7.90 HK$9.00 Buy 7.5 2: 6-Jul-18 HK$7.51 HK$9.00 Buy 7.0 6.5 6.0 5.5 5.0 4.5

4.0

Jul-17 Jul-18

Jan-18

Jun-18

Oct-17 Feb-18

Sep-17 Apr-18 Apr-18

Dec-17

Nov-17

Mar-18

Aug-17 May-18

Source: DBS HK Analyst: Tony WU CFA Patricia YEUNG

Page 51

China / Hong Kong Company Guide China Tian Lun Gas Holdings Version 1 | Bloomberg: 1600 HK Equity | Reuters: 1600.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 27 Jul 2018

BUY Time to gas up Last Traded Price ( 24 Jul 2018):HK$10.00(HSI : 28,663) Price Target 12-mth:HK$10.50 (5.0% upside) Promising growth story. China Tian Lun Gas (TL Gas) has developed a strong M&A track record, and we believe it will Analyst continue to prudently expand. It shifted its development focus Tony WU CFA+852 2971 1708, [email protected] Patricia YEUNG+852 28638908, [email protected] to rural coal-to-gas conversion by setting up Rmb10bn fund with Henan provincial government. We expect the new Price Relative

HK$ Relative Index connection to increase from 226k in FY17, to 0.51m and 0.8m

10.5 215 in FY18 and FY19. This will drive its earnings growth to reach 195 9.5 175 CAGR of 50% over FY17-19. Also, the company has lower risk 8.5 155 to major industry overhangs on declining dollar margin and 7.5 135 6.5 115 tight gas supply. It has a strong presence in 3rd / 4th tier cities 95 5.5 75 in Central and Western parts of China, which are rich in gas 4.5 55 3.5 35 supply and have lower base in dollar margin. Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

China Tian Lun Gas Holdings (LHS) Relative HSI (RHS) Where we differ. We are optimistic on the outlook of rural coal- Forecasts and Valuation to-gas conversion. Early penetration into the segment will boost FY Dec (RMBm) 2016A 2017A 2018F 2019F Turnover 2,693 3,109 4,648 6,315 short-term earnings growth and enhance long- term gas volume EBITDA 796 843 1,313 1,828 growth. Pre-tax Profit 445 576 928 1,293 Net Profit 313 404 650 906 Net Pft (Pre Ex) (core profit) 313 404 650 906 Potential catalyst. The successful penetration into rural coal-to- Net Profit Gth (Pre-ex) (%) 10.3 29.0 60.7 39.4 gas conversion during 2018 will serve as a re-rating catalyst for EPS (RMB) 0.33 0.40 0.66 0.92 EPS (HK$) 0.38 0.47 0.76 1.06 the company as it can significantly boost its earnings growth. Core EPS (HK$) 0.38 0.47 0.76 1.06 Core EPS (RMB) 0.33 0.40 0.66 0.92 Valuation: EPS Gth (%) (4.4) 23.0 62.6 39.4 We have a BUY rating with a TP of HK$10.50, based on DCF Core EPS Gth (%) (4.4) 23.0 62.6 39.4 valuation method. We have assumed a beta of 1.15 with Diluted EPS (HK$) N/A N/A 0.76 1.06 DPS (HK$) 0.09 0.12 0.20 0.32 WACC of 7.6% and terminal growth of 1%. BV Per Share (HK$) 2.94 3.21 3.80 4.54 PE (X) 26.4 21.4 13.2 9.5 Key Risks to Our View: CorePE (X) 26.4 21.4 13.2 9.5 Sluggish new project acquisition. Our call depends on the P/Cash Flow (X) 19.0 14.6 16.1 11.1 P/Free CF (X) 14635. nm nm 115.0 company’s ability to obtain new projects from the government EV/EBITDA (X) 13.92 14.1 9.9 7.3 and acquire projects from other players. Slow acquisition Net Div Yield (%) 0.9 1.2 2.0 3.2 P/Book Value (X) 3.4 3.1 2.6 2.2 progress or value-destructive M&A will be negative for the Net Debt/Equity (X) 0.9 0.9 1.1 1.0 share price. ROAE(%) 13.1 15.5 21.5 25.4

At A Glance Earnings Rev (%): Nil Nil Consensus EPS (RMB) 0.60 0.87 Issued Capital (m shrs) 990 Other Broker Recs: B:11 S:0 H:0 Mkt Cap (HK$m/US$m) 9,896 / 1,261

Source of all data on this page: Company, DBS Bank (Hong Kong) Major Shareholders (%) Limited (“DBS HK”), Thomson Reuters, HKEX Gold Shine Development Ltd. 47.6 IFC Asset Management Company 9.2 Koo (Yuen Kim) 6.6 Zhang (Yingcen) 6.4 Free Float (%) 30.2 3m Avg. Daily Val. (US$m) 1.6 ICB Industry: Utilities / Gas, Water & Multiutilities

sa- CS /AH

Company Guide

China Tian Lun Gas Holdings

CRITICAL FACTORS TO WATCH Total gas sales volume (m m3) 2710 2,737

Critical Factors 2,346 2281 M&A to accelerate. TL Gas has been growing its gas project 1927 1,955 portfolio through M&A in the past years and developed a solid 1698 1,564 track record. The gas sales volume grew from 57m m3 in 2010 1235 1,173 to 1,927m m3 in 2017. TL Gas made only one acquisition for 782 the project in Sichuan Jintang in May 2017. Despite the fact 391 that M&A activities slowed down during 2017, we see a pick- 0 up in momentum this year, which can help to drive up the 2015A 2016A 2017A 2018F 2019F share price. It is currently in the process of negotiating with New Residential connections (k) - consolidated governments and companies for potential deals in the pipeline. 811.4 In fact, it successfully secured a new project concession in Ye 828

County of Henan province in January 2018 and acquired new 662 projects in Shaanxi in February 2018. 509.3 497

Strategic expansion into rural coal-to-gas conversion. The 331 Chinese government is currently pushing for clean heating, 202.3 206.4 226.2 166 especially for rural regions to curb the use of scattered coal. TL Gas will focus in obtaining rural coal-to-gas conversion projects 0 2015A 2016A 2017A 2018F 2019F in Henan province. It has setup a Rmb10bn fund with Henan provincial government for the development of rural coal-to-gas Blended dollar margin (Rmb/m3) 0.47 0.5 conversion projects. The rural regions in Henan province are 0.4 largely untouched with >16m of rural households in the area. 0.4 0.4 0.4 0.37 We conservatively assume 300k and 600k of new connections from rural coal-to-gas conversion in FY18 and FY19, 0.28 respectively. 0.19

Stable dollar margin. Since the dollar margin for the gas 0.09 distributors are expected to trend down, the outperformance 0.00 of TL Gas’s dollar margin will be positive to the company. The 2015A 2016A 2017A 2018F 2019F outlook for TL Gas’s overall dollar margin is stable due to its Average residential connection fee (Rmb/ household)

2,546 2,551 2,550 geographic mix and high discount to peers. We expect the 2,577 2,499 2,474 overall dollar margin to remain steady at around Rmb0.4/m3 from FY17 to FY19. 2,061

1,546 Increase in gas sales volume growth. The acceleration in gas sales volume growth can help to boost the profitability of TL 1,031 Gas. Besides M&A, we estimate the organic volume growth for 515 city gas projects (excluding wholesale) to increase at a CAGR of 0 31% from FY17-FY19. The volume growth is expected to be 2015A 2016A 2017A 2018F 2019F driven by the increase in residential penetration rate, shift of Source: Company, DBS HK industrial production base in lower level cities and government’s push in coal-to-gas conversion.

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Company Guide China Tian Lun Gas Holdings

Share price vs HSI

China Tian Lun Gas Hdg. rel to HSI

500 Announcement of rural coal-to-gas 450 conversion in Henan 400 Strong growth in gas consumption 350 300 250 200 150

100 Oil price collapse lowered price competitiveness for natural gas 50

Jul-11 Jul-13 Jul-18 Jul-12 Jul-14 Jul-15 Jul-16 Jul-17

Nov-14 Nov-16 Nov-10 Nov-11 Nov-12 Nov-13 Nov-15 Nov-17

Mar-14 Mar-16 Mar-11 Mar-12 Mar-13 Mar-15 Mar-17 Mar-18

Source: Thomson Reuters, DBS HK

Page 54

Company Guide

China Tian Lun Gas Holdings

Balance Sheet: Higher debt from M&A needs. The net gearing level reached Leverage & Asset Turnover (x) 0.6 93% in FY17, which is higher than its peers. We factor in 1.40 capital expenditure of HK$1.2bn in our model for FY18, of 1.20 0.6 which 60% will be used for organic expansion and M&A, while 1.00 0.5 the rest will be used for rural coal-to-gas conversion projects 0.80 0.5 0.60 0.4 Share Price Drivers: 0.40 Rural coal-to-gas conversion. The successful negotiation with 0.4 0.20 Henan government to secure rural coal-to-gas conversion 0.00 0.3 projects will confirm our view that it has a strong earnings 2015A 2016A 2017A 2018F 2019F growth outlook. Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure RMBm Qualify for southbound trading. The company may qualify for 1,600.0 Southbound trading in August 2018, which can trigger fund 1,400.0 inflow and speed up the re-rating process. 1,200.0 1,000.0 800.0 Key Risks: 600.0 Sluggish new project acquisition. Our call depends on the 400.0 company’s ability to obtain new projects from the government 200.0 0.0 and acquire projects from other players. Slow acquisition 2015A 2016A 2017A 2018F 2019F progress or value-destructive M&A will be negative for the Capital Expenditure (-) share price. ROE 25.0%

20.0% Company Background TL Gas was founded in 2002 by Mr. Zhang Yingcen. The 15.0% company is involved in the development and operation of city 10.0% gas projects, vehicle gas refilling stations, and long-haul pipelines. By the end of FY16, the company holds 53 city gas 5.0% projects, 50 gas stations, two LNG plants and six long distance 0.0% pipelines. 2015A 2016A 2017A 2018F 2019F

Forward PE Band (x)

+2sd: 24.1x 23.2

18.2 +1sd: 19x

13.2 Avg: 13.9x

8.2 -1sd: 8.8x

3.2 -2sd: 3.7x Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

PB Band (x) 5.1

4.6

4.1

3.6 +2sd: 3.64x

3.1 +1sd: 2.92x 2.6

2.1 Avg: 2.2x

1.6 -1sd: 1.48x 1.1

0.6 -2sd: 0.75x Dec-14 Dec-15 Dec-16 Dec-17

Source: Company, DBS HK

Page 55

Company Guide China Tian Lun Gas Holdings

Key Assumptions FY Dec 2015A 2016A 2017A 2018F 2019F Total gas sales volume (m 1,235.4 1,698.0 1,927.4 2,281.4 2,709.5 m3) New Residential connections (k) - 202.3 206.4 226.2 509.3 811.4 consolidated Blended dollar margin 0.46 0.42 0.39 0.39 0.39 (Rmb/m3) Average residential connection fee (Rmb/ 2,546.0 2,551.0 2,550.0 2,499.0 2,474.0 household) Source: Company, DBS HK

Segmental Breakdown (RMB m)

FY Dec 2015A 2016A 2017A 2018F 2019F Revenues (RMB m) Transportation and sales of 1,651 2,063 2,428 3,037 3,768 gas (city gas sales) Gas pipeline connections 571 589 620 1,532 2,448 Others 30 41 61 79 99 Total 2,252 2,693 3,109 4,648 6,315 GPM (RMB m) Transportation and sales of 236 304 361 460 577 gas (city gas sales) Gas pipeline connections 358 372 380 747 1,117 Others 15 17 27 35 43 Total 609 692 768 1,242 1,738 GPM Margins (%) Transportation and sales of 14.3 14.7 14.9 15.2 15.3 gas (city gas sales) Gas pipeline connections 62.7 63.1 61.3 48.8 45.6 Others 49.2 40.9 43.7 43.7 43.7 Total 27.0 25.7 24.7 26.7 27.5 Source: Company, DBS HK

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Company Guide

China Tian Lun Gas Holdings

Income Statement (RMB m) FY Dec 2015A 2016A 2017A 2018F 2019F Revenue 2,252 2,693 3,109 4,648 6,315 Cost of Goods Sold (1,643) (2,001) (2,341) (3,406) (4,577) Gross Profit 609 692 768 1,242 1,738 Other Opng (Exp)/Inc (133) (141) (164) (225) (287) Operating Profit 476 552 604 1,017 1,450 Other Non Opg (Exp)/Inc 50 56 32 50 57 Associates & JV Inc 0 21 23 54 78 Net Interest (Exp)/Inc (97) (184) (84) (192) (292) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 429 445 576 928 1,293 Tax (111) (110) (147) (241) (336) Minority Interest (34) (21) (25) (37) (51) Preference Dividend 0 0 0 0 0 Net Profit 284 313 404 650 906 Net Profit before Except. 284 313 404 650 906 EBITDA 663 796 843 1,313 1,828 Growth Revenue Gth (%) 67.6 19.6 15.4 49.5 35.9 EBITDA Gth (%) 49.6 20.1 5.9 55.8 39.3 Opg Profit Gth (%) 31.8 15.9 9.6 68.3 42.6 Net Profit Gth (%) 29.1 10.3 29.0 60.7 39.4 Margins & Ratio Gross Margins (%) 27.0 25.7 24.7 26.7 27.5 Opg Profit Margin (%) 21.1 20.5 19.4 21.9 23.0 Net Profit Margin (%) 12.6 11.6 13.0 14.0 14.3 ROAE (%) 16.3 13.1 15.5 21.5 25.4 ROA (%) 5.5 4.4 5.0 6.8 8.0 ROCE (%) 7.7 6.5 6.3 9.0 11.0 Div Payout Ratio (%) 0.0 22.4 24.9 27.0 30.0 Net Interest Cover (x) 4.9 3.0 7.2 5.3 5.0 Source: Company, DBS HK

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Company Guide China Tian Lun Gas Holdings

Balance Sheet (RMB m) FY Dec 2015A 2016A 2017A 2018F 2019F

Net Fixed Assets 1,944 2,124 2,354 3,439 3,971 Invts in Associates & JVs 0 0 1 401 649 Other LT Assets 3,119 3,696 4,403 4,511 4,635 Cash & ST Invts 931 1,093 978 1,038 1,036 Inventory 61 42 47 66 90 Debtors 593 603 667 1,135 1,662 Other Current Assets 31 76 23 34 46 Total Assets 6,678 7,633 8,472 10,625 12,089

ST Debt 850 848 969 1,169 1,169 Creditors 506 530 528 770 1,034 Other Current Liab 202 254 402 600 816 LT Debt 1,887 2,740 2,898 3,898 4,198 Other LT Liabilities 451 508 558 558 558 Shareholder’s Equity 2,348 2,431 2,778 3,253 3,887 Minority Interests 434 321 339 377 427 Total Cap. & Liab. 6,678 7,633 8,472 10,625 12,089

Non-Cash Wkg. Capital (24) (64) (193) (135) (52) Net Cash/(Debt) (1,805) (2,496) (2,889) (4,029) (4,331) Debtors Turn (avg days) 87.0 81.1 74.5 70.7 80.8 Creditors Turn (avg days) 104.2 103.1 89.5 73.7 76.0 Inventory Turn (avg days) 16.6 10.2 7.5 6.4 6.6 Asset Turnover (x) 0.4 0.4 0.4 0.5 0.6 Current Ratio (x) 1.0 1.1 0.9 0.9 0.9 Quick Ratio (x) 1.0 1.0 0.9 0.9 0.9 Net Debt/Equity (X) 0.6 0.9 0.9 1.1 1.0 Net Debt/Equity ex MI (X) 0.8 1.0 1.0 1.2 1.1 Capex to Debt (%) 51.7 12.1 19.3 23.7 13.0 Z-Score (X) NA NA NA NA NA Source: Company, DBS HK

Cash Flow Statement (RMB m) FY Dec 2015A 2016A 2017A 2018F 2019F

Pre-Tax Profit 429 445 576 928 1,293 Dep. & Amort. 142 173 182 193 244 Tax Paid (108) (110) (147) (241) (336) Assoc. & JV Inc/(loss) 0 (21) (23) (54) (78) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (109) 9 (71) (246) (285) Other Operating CF (119) (61) 78 (48) (63) Net Operating CF 234 434 595 531 775 Capital Exp.(net) (1,414) (434) (745) (1,200) (700) Other Invts.(net) 1 1 (207) 0 0 Invts in Assoc. & JV 0 (200) 0 (400) (248) Div from Assoc & JV 5 0 0 54 78 Other Investing CF (96) (18) (55) (185) (201) Net Investing CF (1,503) (651) (1,007) (1,732) (1,071) Div Paid 0 (73) (101) (175) (272) Chg in Gross Debt 770 715 279 1,200 300 Capital Issues 916 (103) 0 0 0 Other Financing CF (90) (213) 166 236 266 Net Financing CF 1,597 326 344 1,261 294 Currency Adjustments 18 36 (9) 0 0 Chg in Cash 346 146 (77) 60 (2) Opg CFPS (RMB) 0.41 0.45 0.67 0.79 1.07 Free CFPS (RMB) (1.42) 0.00 (0.15) (0.68) 0.08

Source: Company, DBS HK

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Company Guide

China Tian Lun Gas Holdings

Target Price & Ratings History

HK$ S.No. Date Closing 12-mth Rating 11.0 4 Price T arget Price 10.0 1 2 3 1: 13-Feb-18 HK$5.35 HK$7.90 Buy 9.0 2: 27-Mar-18 HK$5.56 HK$7.60 Buy 3: 29-Mar-18 HK$5.49 HK$7.60 Buy 8.0 4: 28-Jun-18 HK$6.93 HK$10.50 Buy 7.0 6.0 5.0

4.0

Jul-18 Jul-17

Jan-18

Jun-18

Oct-17 Feb-18

Sep-17 Apr-18 Apr-18

Dec-17

Nov-17

Mar-18

Aug-17 May-18

Source: DBS HK Analyst: Tony WU CFA Patricia YEUNG

Page 59

China Gas Utilities Sector VPower

Bloomberg: 1608 HK | Reuters: 1608.HK Refer to important disclosures at the end of this report

NOT RATED Niche play in DPG Last Traded Price (24 Jul 2018):HK$3.77 (HSI : 28,663)  A leader in a niche market for distributive power system Potential Catalyst: Earnings accretion from OCBC-WHB  SI revenue to grow >10% in FY18 while IBO business Where we differ: Earnings are more bullish than consensus with differential likely from low sustained credit costs targets to add 1.2GW in the next three years  Fair valuation at 25x FY18PE with strong earnings CAGR of Analyst Tony WU CFA+852 2971 1708, [email protected] 26% in FY17-20 Patricia YEUNG+852 28638908, [email protected] Leader of its kind. As one of the world’s leading large gen-set SI Price Relative provider and one of Southeast Asia’s largest gas-fired engine-based DG station owner and operator, Vpower secured a solid position in HK$ Relative Index 6.0 200 the niche market of distributive power generation (DPG) industry. It 180 has a strong relationship with leading engine manufacturers such as 5.0 160 MTU and Komatsu, which enables it to purchase top notch engines in 4.0 140 120 a timely manner. It also signed cooperation agreement with MTU for 3.0 100 80 SI and IBO business. In addition, it has good relationship with SOEs 2.0 60 such as CRRC and CNTIC and signed agreements for project 1.0 40 20 development in countries covered by BRI. 0.0 0 Nov-16 Jul-17 Mar-18 Steady growth in SI and IBO to ramp up. Vpower has an order book Vpower Group Intl. (LHS) of HK$500m to 600m for the SI business. With more adoption of Relative HSI (RHS) distributed energy system globally, we estimate SI revenue to

maintain >10% growth in FY18 and beyond with stable gross FY Dec (HK$m) 2014A 2015A 2016A 2017A margin. Also, by leveraging on its vast experiences in SI business, we Turnover 930 1,213 1,531 1,746 EBITDA 141 256 400 578 believe the company has an edge to improve the efficiency and win Pre-tax Profit 141 164 253 357 project tenders for IBO business. It has 581.4MW of IBO projects in Net Profit 121 141 222 332 operation by the end of FY17. It seeks to deepen the penetration of Net Pft (Pre Ex.) 121 141 222 332 EPS (HK$) n.a. n.a. 0.11 0.13 existing markets and tap into new regions such as China, U.K and EPS Gth (%) n.a. n.a. n.a. 20.4 Brazil. It has a target to increase the capacity by 1.2GW during 2018- Diluted EPS (HK$) n.a. n.a. 0.11 0.13 2020. By 1Q18, the company signed contracts and MOU for 459MW DPS (HK$) 0.03 0.02 BV Per Share (HK$) n.a. n.a. 0.88 0.96 of projects, and have another 8 potential projects with 550MW under PE (X) n.a. n.a. 34.9 29.0 advanced negotiation or tender submission stage. P/Cash Flow (X) n.a. n.a. 92.6 16.0 P/Free CF (X) n.a. n.a. n.m. n.m. Fair valuation. The share price of the company has fallen >30% since EV/EBITDA (X) n.a. n.a. 17.8 17.0 its peak due to disappointment in FY17 earnings. With earnings Net Div Yield (%) - - 0.7 0.5 CAGR of 26% in FY17-20, the stock is currently trading at 25x P/Book Value (X) n.a. n.a. 4.3 3.9 Net Debt/Equity (X) 1.8 1.0 Cash 0.1 FY18PE, which looks fair, given its closest peer, Aggreko, is trading at ROAE (%) 70.9 36.7 15.8 14.1 14x FY18PE with low single digit earnings growth. However, we

Source of all data on this page: Company, DBS Bank (Hong Kong) reckon Vpower could be re-rated if it could regain market confidence Limited (“DBS HK”), Thomson Reuters, HKEX in delivering a stronger earnings growth of >30% in FY19 and FY20.

At A Glance Issued Capital (m shrs) 2,562 Mkt Cap (HK$m/US$m) 9,658 / 1,231 Major Shareholders (%) Konwell Developments Ltd. 70.5 CITIC Ltd 8.0 Free Float (%) 21.5 3m Avg. Daily Val. (US$m) 0.4 ICB Industry: Industrials / Industrial Engineering

Page 60

DBS HK's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect additional reports relating to this issuer, unless so decided by DBS HK.

sa- CS / AH

China Gas Utilities Sector VPower

Income Statement (HK$ m) Balance Sheet (HK$ m) F Y Dec 2014A 2015A 2016A 2017A F Y Dec 2014A 2015A 2016A 2017A Revenue 930 1,213 1,531 1,746 Net Fixed Assets 606 911 1,931 2,189 Cost of Goods Sold (681) (869) (1,033) (1,169) Invts in Assocs & JVs Gross Profit 248 344 498 577 Other LT Assets 145 79 36 614 Other Opg (Exp)/Inc (134) (159) (213) (167) Cash & ST Invts 216 418 1,683 1,199 Operating Profit 114 185 285 409 Inventory 298 563 546 712 Other Non Opg (Exp)/Inc 38 8 32 Debtors 266 715 708 781 Associates & JV Inc Other Current Assets 65 70 121 431 Net Interest (Exp)/Inc (11) (29) (64) (52) Total Assets 1,596 2,756 5,025 5,927 Exceptional Gain/(Loss) - - - - Pre-tax Profit 141 164 253 357 ST Debt 520 556 717 532 Tax (20) (23) (31) (26) Creditors Minority Interest 1 Other Current Liab 605 1,039 992 1,758 Preference Dividend - - - - LT Debt 117 410 322 857 Net Profit 121 141 222 332 Other LT Liabilities 125 212 732 319 Net Profit before Except. 121 141 222 332 Shareholder's Equity 230 539 2,262 2,461 EBITDA 141 256 400 578 Minority Interests (1) Revenue Gth (%) 61.5 30.4 26.2 14.0 Total Cap. & Liab. 1,596 2,756 5,025 5,927 EBITDA Gth (%) 278.4 81.5 56.3 44 Opg Profit Gth (%) 291.9 61.9 54.3 43.7 Non-Cash Wkg. Cap 24 309 383 167 Effective Tax Rate (%) 14.4 14.1 12.3 7.3 Net Cash/(Debt) (421) (548) 644 (190) Cash Flow Statement (HK$ m) Rates & Ratio F Y Dec 2014A 2015A 2016A 2017A F Y Dec 2014A 2015A 2016A 2017A Pre-Tax Profit 141 164 253 357 Gross Margin (%) 26.7 28.4 32.5 33.0 Dep. & Amort. 27 71 115 168 Opg Profit Margin (%) 12.3 15.2 18.6 23.4 Net Profit Margin (%) 13.0 11.6 14.5 19.0 Tax Paid (17) (29) (21) (46) ROAE (%) 70.9 36.7 15.8 14.1 Assoc. & JV Inc/(loss) - - - - ROA (%) 10.6 6.5 5.7 6.1 (Pft)/ Loss on disposal of FAs 0 - 0 0 ROCE (%) 13.8 11.7 8.7 9.3 Non-Cash Wkg. Cap. (106) (212) (284) 224 Div Payout Ratio (%) 2.1 89.2 22.5 31.1 Other Operating CF 18 3 20 (103) Interest Cover (x) 10.3 6.5 4.4 7.9 Net Operating CF 63 (2) 84 601 Asset Turnover (x) 0.8 0.6 0.4 0.3 Capital Exp. (net) (294) (148) (337) (628) Debtors Turn (days) 87.6 147.6 169.6 155.6 Other Invts. (net) (105) (12) (161) 126 Creditors Turn (days) n.a. n.a. n.a. n.a. Inventory Turn (days) 139.3 180.9 195.9 196.4 Invts. in Assoc. & JV - - - - Current Ratio (x) 0.8 1.1 1.8 1.4 Div from Assoc. & JV - - - - Quick Ratio (x) 0.5 0.8 1.5 1.1 Other Investing CF (104) (5) (55) (662) Net Debt/Equity (X) 1.8 1.0 Cash 0.1 Net Investing CF (504) (165) (553) (1,164) Capex to Debt (%) 46.2 15.3 32.5 45.2 Div Paid (3) (126) (50) (103) N. Cash/(Debt)PS (HK$) n.a. n.a. 0.25 (0.07) Chg in Gross Debt 346 344 71 352 Opg CFPS (HK$) n.a. n.a. 0.04 0.24 Capital Issues - 313 1,561 3 Free CFPS (HK$) n.a. n.a. (0.15) (0.05) Other Financing CF 174 (160) (8) (48) Net Financing CF 517 371 1,574 204 Chg in Cash 77 203 1,105 (359) Interim Income Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions F Y Dec 1H16 2H16 1H17 2H17 F Y Dec 2014A 2015A 2016A 2017A

Revenue 694 837 936 810 Rev enues Cost of Goods Sold (486) (547) (607) (562) System Integration 785 966 1,063 1,183 Gross Profit 208 290 329 248 Investment, Building and Operating 144 247 468 563 Other Oper. (Exp)/Inc (117) (96) (202) 35 Operating Profit 91 194 127 283 Other Non Opg (Exp)/Inc - - 60 (60) Associates & JV Inc Net Interest (Exp)/Inc - - (29) (23) Exceptional Gain/(Loss) - - - - Pre-tax Profit 68 185 158 199 Tax (14) (17) (8) (18)

Minority Interest - 1

Net Profit 54 168 - 182

Net profit bef Except. 54 168 - 182 Grow th Revenue Gth (%) - - 34.8 (3.2) Opg Profit Gth (%) - - 38.9 45.9 Net Profit Gth (%) - - - 8.4 Margins & Ratio Gross Margins (%) 30.0 34.6 35.1 30.6 Opg Profit Margins (%) 13.2 23.1 13.6 34.9 Net Profit Margins (%) 7.8 20.0 - 22.4 Source: Company, DBS HK

Page 61

Asian Insights SparX China Gas Utilities Sector

DBS HK recommendations are based an Absolute Total Return* Rating system, defined as follows: S TRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) B U Y (>15% total return over the next 12 months for small caps, >10% for large caps) H O LD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FU LLY VALUED (negative total return i.e. > -10% over the next 12 months) S ELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 27 Jul 2018 13:29:38 (HKT) Dissemination Date: 27 Jul 2018 14:36:57 (HKT)

Sources for all charts and tables are DBS HK unless otherwise specified.

GEN ERAL DISCLOSURE/DISCLAIMER

Th is report is prepared by DBS Bank (Hong Kong) Limited (“DBS HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS HK, DBS Vickers (Hong Kong) Limited (“DBSV HK”), and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS HK.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given i n relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any secu rities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mention ed in this document. The DBS Group, may have positions in, and may effect transactions in securities m entioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is un der no obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary sign ificantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.

DBS Vickers Securities (USA) Inc (“DBSVUSA”), a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.

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A N ALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that th e views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment ba nking function of the DBS Group.

C O MPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have proprietary positions in Enn Energy Holdings Limited (2688 HK), China Gas Holdings Limited (384 HK), Beijing Enterprises Holdings Li mited (392 HK) and Kunlun Energy Company Limited (135 HK) recommended in this report as of 25 Jul 2018.

2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. C o mpensation for investment banking services:

DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the pas t 12 months for investment banking services from Beijing Enterprises Holdings Limited (392 HK) as of 30 Jun 2018.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

4. D isclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBS HK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during th e preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendation s published by DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in th e securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or i nvestments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new lis ting applicant.

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R ESTRICTIONS ON DISTRIBUTION Ge neral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. A ustralia This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DBS Bank Ltd holds Australian Financial Services Licence no. 475946. DBSVS and DBSV HK are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS Bank Ltd and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSV HK is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

H o ng Kong This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited, all of which are registered with or licensed by the Hong Kong Securities and Futures C ommission to carry out the regulated activity of advising on securities.

I ndonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia. Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR S ingapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report. Th ailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. U nited This report is produced by DBS HK which is regulated by the Hong Kong Monetary Authority

Ki ngdom This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd (“DBSVUK”). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. D u bai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its offi ce at PO Box 506538, 3 rd Floor, I n ternational Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Fi nancial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for C entre professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

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U nited Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Em irates in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent. U nited States This report was prepared by DBS HK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein shou ld contact DBSVUSA directly and not its affiliate. O ther In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, j urisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. D BS Bank (Hong Kong) Limited 18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2521-1812

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D BS Regional Research Offices

H O NG KONG MA LAYSIA S INGAPORE D BS Bank (Hong Kong) Ltd A llianceDBS Research Sdn Bhd D BS Bank Ltd C o ntact: Carol Wu C o ntact: Wong Ming Tek (128540 U) C o ntact: Janice Chua 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 68 Des Voeux Road Central Capital Square, Marina Bay Financial Centre Tower 3 Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 2820 4888 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2521 1812 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] e-mail: [email protected] Company Regn. No. 196800306E

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At a Glance

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