Company Report Hong Kong Equity Research

Monday, May 30, 2016 China Merchants Securities (HK) Co., Ltd. Hong Kong Equity Research Company Report Anna YU Sinopec Kantons (934 HK) Oil & gas logistics platform to thrive on volume growth +852 6226 8956 <a href="mailto:[email protected]" target="_blank">[email protected] </a>■ Key beneficiary of robust China crude oil imports given its more than 50% market share in domestic crude oil jetty services market Initiation ■ Newly acquired natural gas pipeline to leverage on robust China natural gas consumption in the long run BUY ■ Valuation attractive. Initiate with BUY and TP of HK$5.14 Leverage on robust China crude oil imports <ul style="display: flex;"><li style="flex:1">Price </li><li style="flex:1">HK$3.72 </li></ul>12-month Target Price (Potential up/downside) We expect China crude oil imports to grow at solid 7% CAGR in 2015- 20E underpinned by lower domestic production, inventory build-up and higher non-state crude oil import quota. Thanks to robust China crude oil imports, we expect the throughput volume in Sinopec Kantons’ 7 domestic crude oil terminals to increase from 187mt in 2015 to 244mt in 2018E, representing a CAGR of 9% during the period with overall utilization up from 69% in 2015 to 83% in 2018E. HK$5.14 (+38%) Price Performance (%) 934 10 HSI Index 0 -10 -20 -30 -40 -50 -60 Gas transmission volume to recover from low base The newly acquired Yu-Ji Pipeline reported a 7.8% YoY decline in transmission volume to 3.0bcm in 2015, mainly due to 37% YoY plunge in volume to Shandong given increased LNG imports in the area upon the operation of Qingdao LNG terminal as at the end of 2014. We expect the transmission volume to rebound by a moderate 12% YoY to 3.3bcm in 2016E underpinned by increased natural gas demand upon the cut in city-gate gas price on November 2015. We expect overall transmission volume to grow at 9% CAGR in 2015-18E and reach 3.9bcm in 2018E. <ul style="display: flex;"><li style="flex:1">May/15 </li><li style="flex:1">Sep/15 </li><li style="flex:1">Jan/16 </li><li style="flex:1">Apr/16 </li></ul>Source: Bigdata %934 HK HSI 1m (13.1) (4.7) 6m (12.9) (9.3) 12m (47.9) (27.8) Solid 12% earnings CAGR in 2015-18E driven by pipeline We expect net profit to grow at 12% CAGR in 2015-18E underpinned by 9% earnings CAGR on crude oil jetty services business and 20% earnings CAGR on natural gas pipeline transmission business. These core busiensses are expected to account for 72% and 31% of total profit in 2018E versus 78% and 25% in 2015. Meanwhile, we expect improved overseas logsitics business to be offset by increased interest expenses upon the completion of pipeline acuqisition. Our 2016E-17E earnings projection is 4-5% higher than market consensus. Oil and Gas Hang Seng Index HSCEI 20577 8526 Key Data 52-week range (HK$) Market cap (HK$ mn) Avg. daily volume (mn) BVPS (HK$) 3.38-7.04 9249 3.33 3.77 P/E at significant discount to its peers Shareholding Structure Sinopec National Council for Social Security Fund ICBC Credit Suisse Asset Management No. of shares outstanding (mn) Free float 60.33% 5.99% 5.9% We derive our target price of HK$5.14 based on sector P/B-ROE, which implies 2016E P/E of 10.4x or P/B of 1.2x. Sinopec Kantons is trading at 2016E P/E of 7.6x or P/B of 0.9x, both 53-62% discount to its gloal peers which we believe is attractive given its solid earnings growth outlook. 2486 48.44 Financials <ul style="display: flex;"><li style="flex:1">RMB mn </li><li style="flex:1">2014 </li><li style="flex:1">2015 </li><li style="flex:1">2016E </li><li style="flex:1">2017E </li><li style="flex:1">2018E </li></ul>Revenue Growth (%) Net profit Growth (%) EPS (RMB) DPS (RMB) P/E (x) 20,670 -11.5% 1,018 107.2% 0.41 2,044 -90.1% 1,027 0.9% 0.41 2,246 9.9% 1,223 19.1% 0.49 2,350 4.6% 1,342 9.7% 0.54 2,463 4.8% 1,440 7.3% 0.58 <ul style="display: flex;"><li style="flex:1">0.05 </li><li style="flex:1">0.05 </li><li style="flex:1">0.15 </li><li style="flex:1">0.22 </li><li style="flex:1">0.29 </li></ul><ul style="display: flex;"><li style="flex:1">9.1 </li><li style="flex:1">9.0 </li><li style="flex:1">7.6 </li><li style="flex:1">6.9 </li><li style="flex:1">6.4 </li></ul><ul style="display: flex;"><li style="flex:1">P/B (x) </li><li style="flex:1">0.7 </li><li style="flex:1">1.0 </li><li style="flex:1">0.9 </li><li style="flex:1">0.8 </li><li style="flex:1">0.7 </li></ul><ul style="display: flex;"><li style="flex:1">ROE (%) </li><li style="flex:1">9.1% </li><li style="flex:1">9.4% </li><li style="flex:1">12.3% </li><li style="flex:1">12.2% </li><li style="flex:1">12.1% </li></ul>Sources: Company data, CMS (HK) estimates Please see penultimate page for additional important disclosures. China Merchants Securities (CMS) is a foreign broker-dealer unregistered in the USA. CMS research is prepared by research analysts who are not registered in the USA. CMS research is distributed in the USA pursuant to Rule <ul style="display: flex;"><li style="flex:1">15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer. </li><li style="flex:1">1</li></ul>Monday, May 30, 2016 Investment thesis Leading petrochemical storage and logistics company in China Sinopec Kantons is the largest crude oil terminal operator in China underpinned by the support of its parent company, Sinopec, which injected 50% interests in Zhanjiang Port in 2011 and 50-90% interests in five other crude oil terminals in 2012. Sinopec Kantons currently owns and operates 7 crude oil terminals located in China coastline with a total of 35 berths and combined annual throughput capacity of 272.5mt. The actual throughput volume came in at 186.8mt in 2015, up 15% YoY and accounting for 56% of China crude oil imports during the period. Sinopec Kantons entered the natural gas transmission business in 2015 by acquiring 100% interests in Yu-Ji Pipeline from Sinopec which helped diversify its transmission and distribution business and underpin future earnings growth. For the overseas market, Sinopec Kantons have developed two storage projects: Vesta in Europe and FOT in Middle East. It also engages in the LNG shipping business and chartered oil vessel business. Solid 12% earnings CAGR in 2015-18E driven by organic growth We expect Sinopec Kantons to be a key beneficiary of robust China crude oil imports and domestic natural gas consumption which are expected to grow at solid 7% CAGR and 14% CAGR in 2015-20E, respectively. We expect overall net profit to increase from HK$1,027mn in 2015 to HK$1,440mn in 2018E, representing a solid 12% CAGR during the period underpinned by capacity ramp-up. Our earnings projection does not include any possible further assets injections from Sinopec given the unceratinty for the timing of assets injections and limited financial information for unlisted assets. Meanwhile, we estimate the remaining four crude oil terminals owned by Sinopec would lift Sinopec Kantons’ domestic crude oil terminal capacity by 23% upon injection while the other key pipeline (Sichuan to East) operated and owned by Sinopec would help double Sinopec Kantons’ current transmission capacity upon injection. BUY on solid return versus attractive valuation We use P/B versus ROE to value Sinopec Kantons, as we believe that this methodology would capture the return profile of the company. We select domestic port and city-gas distributors as its peer group and find that the stock is trading significantly below the sector average 2016E P/B multiple based on its 2016E ROE. We derive our target price of HK$5.14 based on sector P/B-ROE, which implies 2016E of P/E of 10.4x or P/B of 1.2x. Catalysts and risks We believe that key catalysts include: 1) further injection of storage and logistics assets from Sinopec; 2) higher-than-expected crude oil imports; and 3) faster-than-expected recovery in domestic natural gas consumption. Meanwhile, we expect key risks to be 1) delay in capacity upgrade in Rizhao Port; 2) lower gas demand in Shandong due to increasing LNG imports; and 3) operation risks for overseas projects <ul style="display: flex;"><li style="flex:1">To access our research reports on the Bloomberg terminal, type CMHK <GO> </li><li style="flex:1">2</li></ul>Monday, May 30, 2016 Focus charts Figure 1: Throughput volume to reach 244mt in 2018E with capacity utilization up to 83% Figure 2: Natural gas transmission volume to recover from low base in 2015 <ul style="display: flex;"><li style="flex:1">mt </li><li style="flex:1">%</li></ul><ul style="display: flex;"><li style="flex:1">Throughput volume </li><li style="flex:1">Capacity utilization </li></ul><ul style="display: flex;"><li style="flex:1">Shaanxi </li><li style="flex:1">Shanxi </li><li style="flex:1">Henan/Hebei </li><li style="flex:1">Shandong </li></ul>bcm <ul style="display: flex;"><li style="flex:1">260 </li><li style="flex:1">100 </li></ul>4.0 240 220 200 180 160 140 120 80 60 40 20 - 3.0 2.0 1.0 0.0 <ul style="display: flex;"><li style="flex:1">2014 </li><li style="flex:1">2015 </li><li style="flex:1">2016E </li><li style="flex:1">2017E </li><li style="flex:1">2018E </li></ul><ul style="display: flex;"><li style="flex:1">2013 </li><li style="flex:1">2014 </li><li style="flex:1">2015 </li><li style="flex:1">2016E 2017E 2018E </li></ul><ul style="display: flex;"><li style="flex:1">Sources: Company, CMS (HK) estimates </li><li style="flex:1">Sources: Company, CMS (HK) estimates </li></ul>Figure 3: Net profit to grow at solid 12% CAGR in 2015-18E Figure 4: Robust gross cash underpins future increase in dividend Crude oil jetty services Overseas NG pipeline Others HK$ mn 3,000 <ul style="display: flex;"><li style="flex:1">Cash </li><li style="flex:1">Net profit </li><li style="flex:1">Dividend </li></ul>HK$ mn Total net profit 1,600 2,500 2,000 1,500 1,000 500 1,200 800 400 0 0<ul style="display: flex;"><li style="flex:1">2012 </li><li style="flex:1">2013 </li><li style="flex:1">2014 </li><li style="flex:1">2015 2016E 2017E 2018E </li></ul>(400) 2012 2013 2014 2015 2016E 2017E 2018E <ul style="display: flex;"><li style="flex:1">Sources: Company, CMS (HK) estimates </li><li style="flex:1">Sources: Company, CMS (HK) estimates </li></ul>Figure 5: Sinopec Kantons is attractive based on P/B vs. ROE framework Sources: Bloomberg, CMS (HK) estimates <ul style="display: flex;"><li style="flex:1">To access our research reports on the Bloomberg terminal, type CMHK <GO> </li><li style="flex:1">3</li></ul>Monday, May 30, 2016 Contents <a href="#3_0">Focus charts................................................................................................................................................................. 3 </a><a href="#3_1">Figure 1: Throughput volume to reach 244mt in 2018E with capacity utilization up to 83</a><a href="#3_1">%</a><a href="#3_1">.</a><a href="#3_1">.............................. 3 </a><a href="#3_2">Figure 2: Natural gas transmission volume to recover from low base in 2015..................................................... 3 </a><a href="#3_3">Figure 3: Net profit to grow at solid 12% CAGR in 2015-18</a><a href="#3_3">E</a><a href="#3_3">.</a><a href="#3_3">................................................................................. 3 </a><a href="#3_4">Figure 4: Robust gross cash underpins future increase in dividend..................................................................... 3 </a><a href="#3_5">Figure 5: Sinopec Kantons is attractive based on P/B vs. ROE framewor</a><a href="#3_5">k</a><a href="#3_5">.</a><a href="#3_5">......................................................... 3 </a><a href="#6_0">Leveraging on robust China crude oil imports......................................................................................................... 6 </a><a href="#6_1">Crude oil imports to grow at solid 7% CAGR in 2015-20E </a><a href="#10_0">Largest crude oil terminal operator in China to benefit from robust oil imports </a><a href="#13_0">Possible M&As support future expansion </a> <a href="#6_1">6</a> <a href="#10_0">10 </a><a href="#13_0">13 </a><a href="#14_0">Newly acquired pipeline assets to explore natural gas transmission business................................................. 14 </a><a href="#14_1">Acquisition completed in December 2015 with attractive valuation </a><a href="#15_0">Gas transmission volume to recover from low base in 2015 </a><a href="#17_0">Limited risk on transmisson tariff cut given reasonable return </a><a href="#17_1">Large size of pipeline assets held by Sinopec to underpin future M&As </a> <a href="#14_1">14 </a><a href="#15_0">15 </a><a href="#17_0">17 </a><a href="#17_1">17 </a><a href="#18_0">Ramp-up of overseas storage and logistics business .......................................................................................... 18 </a><a href="#19_0">Earnings to grow at solid 12% CAGR in 2015-18</a><a href="#19_0">E</a><a href="#19_0">.</a><a href="#19_0">................................................................................................ 19 </a><a href="#19_1">Solid growth underpinned by current capacity ramp-up even without M&As </a><a href="#19_2">Consolidated revenue and cost only reflects part of businesses </a><a href="#20_0">Possible increase in dividend payout given robust cash on hand </a> <a href="#19_1">19 </a><a href="#19_2">19 </a><a href="#20_0">20 </a><a href="#0_0">Initiate with BUY and TP of HK$5.1</a><a href="#0_0">4</a><a href="#0_0">.</a><a href="#0_0">....................................................................................................................... 22 </a><a href="#0_0">Appendix: Sinopec Kantons </a><a href="#0_0">– </a><a href="#0_0">Leading petrochemical storage and logistics company in Chin</a><a href="#0_0">a</a><a href="#0_0">.</a><a href="#0_0">................... 23 </a><a href="#0_0">Investment Ratings.................................................................................................................................................... 29 </a><a href="#0_1">Disclaimer................................................................................................................................................................... 29 </a><ul style="display: flex;"><li style="flex:1">To access our research reports on the Bloomberg terminal, type CMHK <GO> </li><li style="flex:1">4</li></ul>Monday, May 30, 2016 Figure 6: Valuation comparison <ul style="display: flex;"><li style="flex:1">Bloomberg </li><li style="flex:1">Mark. </li></ul>Cap <ul style="display: flex;"><li style="flex:1">P/E </li><li style="flex:1">P/B </li><li style="flex:1">ROE </li><li style="flex:1">Dividend Yield </li></ul><ul style="display: flex;"><li style="flex:1">Code </li><li style="flex:1">Price </li></ul>LC 2016E x 2017E x 2016E x 2017E x 2016E % 2017E % 2016E % 2017E USD mn 1,191 %Sinopec Kantons* China Ports (H share) China Merchants Dalian Port <ul style="display: flex;"><li style="flex:1">934 HK </li><li style="flex:1">3.72 </li><li style="flex:1">7.6 </li><li style="flex:1">6.9 </li><li style="flex:1">0.9 </li><li style="flex:1">0.8 </li><li style="flex:1">12.3 </li><li style="flex:1">12.2 </li><li style="flex:1">4.0 </li><li style="flex:1">5.8 </li></ul>144 HK 2880 HK 1199 HK 3382 HK 3378 HK 21.60 3.19 7.84 1.09 1.45 7,230 3,685 2,995 864 12.8 27.2 10.1 7.3 11.9 29.0 10.0 6.8 0.9 0.9 0.6 0.5 0.6 0.7 0.8 0.9 0.6 0.5 0.6 0.7 7.2 3.2 6.0 7.6 6.6 6.1 7.5 3.1 5.9 7.7 6.7 6.2 3.7 1.1 3.9 1.5 4.0 5.5 4.1 3.8 COSCO Pacific Tianjin Port 14.6 5.5 Xiamen Port Average <ul style="display: flex;"><li style="flex:1">509 </li><li style="flex:1">9.8 </li><li style="flex:1">9.1 </li><li style="flex:1">4.1 </li></ul><ul style="display: flex;"><li style="flex:1">3,057 </li><li style="flex:1">13.4 </li><li style="flex:1">13.4 </li><li style="flex:1">5.8 </li></ul>China city-gas Beijing Enterprises China Gas 392 HK 384 HK 39.45 10.84 6.26 6,454 6,856 6,508 6,173 5,227 1,411 5,438 7.9 14.8 12.9 14.0 11.8 8.6 7.5 12.4 10.1 12.6 10.5 8.2 0.8 2.6 0.9 2.4 2.1 0.8 1.6 0.7 2.2 0.9 2.1 1.9 0.7 1.4 10.4 18.5 8.0 10.1 19.6 8.6 2.9 1.6 1.8 1.7 2.5 2.9 2.2 3.2 2.1 2.4 2.0 2.8 3.1 2.6 Kulun Energy CR Gas 135 HK 1193 HK 2688 HK 1083 HK 21.55 37.50 4.11 17.8 19.5 8.6 17.3 18.8 8.6 ENN Energy Towngas China <ul style="display: flex;"><li style="flex:1">Average </li><li style="flex:1">11.7 </li><li style="flex:1">10.2 </li><li style="flex:1">13.8 </li><li style="flex:1">13.8 </li></ul>China Ports (A share) Shanghai Port Ningbo Port 600018 CH 601018 CH 601880 CH 600717 CH 600017 CH 5.07 5.41 5.39 8.68 4.13 17,907 10,554 3,685 2,216 1,936 7,260 17.0 25.4 59.9 N/A 16.4 25.0 53.9 N/A 1.9 2.0 1.9 0.9 1.2 1.6 1.7 1.9 1.9 0.9 1.2 1.5 10.8 7.8 3.3 8.8 2.8 6.7 10.8 7.5 3.4 8.9 3.2 6.8 3.1 1.2 0.4 2.8 N/A 1.9 3.3 1.2 0.4 2.9 N/A 1.9 Dalian Port Tianjin Port <ul style="display: flex;"><li style="flex:1">Rizhao Port </li><li style="flex:1">31.5 </li></ul>33.4 27.0 <ul style="display: flex;"><li style="flex:1">30.6 </li><li style="flex:1">Average </li></ul>Global ports <ul style="display: flex;"><li style="flex:1">DP World </li><li style="flex:1">DPW DU </li></ul>ADSEZ IN HPHT SP ICT PM 18.10 192.45 0.44 15,023 5,952 3,833 2,551 1,774 1,217 355 16.1 15.7 17.9 18.7 33.9 19.9 10.8 19.0 13.8 14.2 19.1 16.7 30.1 16.4 8.8 1.6 3.0 0.7 1.9 3.0 2.0 0.9 1.9 1.4 2.5 0.7 1.9 2.9 1.9 1.0 1.8 10.3 20.9 3.8 10.8 19.0 3.6 1.8 0.8 9.2 1.5 2.6 3.8 11.8 4.5 2.0 0.9 8.4 1.6 2.8 4.1 5.4 3.6 Adani Port Hutchison Port Intl Container Term Services Port of Tauranga Hamberger Hafen Piraeus Port Average 58.50 19.35 14.97 12.69 10.9 8.7 11.7 <ul style="display: flex;"><li style="flex:1">9.7 </li><li style="flex:1">POT NZ </li></ul>HHFA GR PZE GR 10.3 N/A 10.8 12.5 N/A <ul style="display: flex;"><li style="flex:1">11.2 </li><li style="flex:1">4,386 </li><li style="flex:1">17.0 </li></ul>Global oil storage and logistics Kinder Morgan Magellan Mistream Buckeye KMI US MMP US BPL US SXL US VPK NA NS US 17.92 70.08 72.81 28.09 47.25 48.66 30.90 1.66 39,989 15,963 9,487 8,306 6,750 3,790 317 26.9 20.2 17.8 31.8 17.4 21.3 4.1 23.0 18.5 16.9 19.0 17.4 19.7 3.4 1.1 7.6 2.6 1.0 2.5 2.6 0.4 0.7 2.3 1.1 7.5 2.6 1.0 2.3 2.9 0.4 0.7 2.3 4.2 38.7 14.8 3.3 5.1 39.4 N/A 2.8 4.7 6.7 7.1 2.3 9.0 - 2.8 5.1 7.0 7.7 2.4 9.0 -<ul style="display: flex;"><li style="flex:1">Sunoco </li><li style="flex:1">5.2 </li></ul><ul style="display: flex;"><li style="flex:1">Vopak </li><li style="flex:1">17.4 </li></ul>11.3 11.2 (3.2) 12.2 13.5 <ul style="display: flex;"><li style="flex:1">N/A </li><li style="flex:1">NuStar </li></ul><ul style="display: flex;"><li style="flex:1">Odfjell </li><li style="flex:1">ODF NO </li></ul>HNL CN 11.7 (1.1) 12.3 <ul style="display: flex;"><li style="flex:1">Horizon </li><li style="flex:1">169 </li><li style="flex:1">N/A </li><li style="flex:1">N/A </li><li style="flex:1">4.8 </li></ul>4.7 4.8 <ul style="display: flex;"><li style="flex:1">4.9 </li><li style="flex:1">Average </li><li style="flex:1">10,597 </li><li style="flex:1">19.9 </li><li style="flex:1">16.9 </li></ul>*CMS (HK) estimates Sources: Bloomberg, CMS (HK) estimates <ul style="display: flex;"><li style="flex:1">To access our research reports on the Bloomberg terminal, type CMHK <GO> </li><li style="flex:1">5</li></ul>

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