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Binhai Investment (2886 HK) Summary

Core Content

Binhai Investment (BHI) is a city-gas distributor operating in China's BTHS region, with a strong focus on Tianjin. The company has a significant presence in the region, operating 41 projects across 6 provinces and 2 municipalities. BHI is positioned to benefit from the "war on air pollution" and the expansion of the Binhai New Area (BNA), which is a key development area with substantial growth in natural gas demand.

Main Points

• Policy and Market Trends:

  • BHI is a key player in the BTHS region, particularly in Tianjin, where it accounts for over 70% of its gas sales.
  • The State Council has set a 25% reduction target for PM2.5 emissions in the BTHS region by 2017, which includes reducing coal consumption by 83 million tonnes (10%).
  • The BNA is expected to see a 5-fold increase in natural gas demand from 2010 to 2015, with the gas-fired cogeneration projects playing a major role.

• Project Development:

  • BHI has signed outline contracts for 6 gas-fired projects, 5 of which are in the BNA.
  • The HEZ (Harbour Economic Zone) is a key industrial area in the BNA, where BHI has obtained operating rights and secured several industrial customers.
  • BHI's gas transmission capacity in Tianjin is expected to increase to 7-8bcm with the connection to the Dagang-Yongqing 3rd line.

• Financial Performance:

  • In 1H14, BHI reported revenue of HKD1.3bn, up 27% YoY, with strong sales growth from existing users and expansion into new industrial zones.
  • Despite this, net profit only increased by 9% YoY, due to a contraction in piped gas gross margins from 12% in 1H13 to 3% in 1H14.
  • The company expects the 2015 gas price adjustment to alleviate margin pressure, particularly for BHI which has 70% of its gas sales subject to incremental-volume pricing.

• Share Structure and Overhang:

  • As of June 2014, BHI had 2,452m convertible preferred shares (CPS) and HKD279m of convertible bonds (CB) outstanding.
  • These outstanding CPS and CB could dilute the company's shareholding structure, potentially reducing the share price.
  • TEDA, the major shareholder with a 57% stake, does not plan to convert its CPS before 2018.

• Valuation and Performance:

  • BHI is trading at a 24x 2013 PER and a 23x 2014E PER.
  • The company's share price has shown a range of 0.38-0.55 over 12 months, with a market cap of USD0.48bn and an average daily turnover of USD0.12bn.

Key Information

• Market Position:

  • BHI is a major city-gas distributor in the BTHS region, with a strong presence in Tianjin.
  • The company's pipeline network spans 1,720km in Tianjin, with a transmission capacity of 7-8bcm after expansion.

• Projects and Contracts:

  • BHI has signed outline contracts for 6 gas-fired cogeneration projects, with 5 in the BNA and 1 outside.
  • The HEZ is a key industrial area where BHI has secured contracts with major industrial users.

• Growth Expectations:

  • BHI expects gas sales to double by 2018 from 2014 levels, with potential users contributing significantly to this growth.
  • The BNA's 12th Five-Year Plan (FYP) targets a 5-fold increase in gas consumption by 2015, though delays are expected, with full production anticipated by 2017.

• Financial Health:

  • BHI reported strong revenue growth in 1H14, but net profit growth was limited due to margin pressures.
  • The company has a HKD930m credit facility to support its capital expenditure (capex) of HKD200-300m per year for 2015-16.
  • The company's balance sheet shows a total asset value of HKD3,729.878m as of end-2014, with a total liability of HKD2,782.715m.

• Strategic Partnerships:

  • TEDA, the controlling shareholder, provides strategic and financial support to BHI, including communications with local government, strategic planning, and credit support.

Conclusion

BHI is well-positioned to benefit from the anti-pollution policies in the BTHS region, particularly in Tianjin and the BNA. The company's growth in gas sales and expansion of its pipeline network are promising, although its current margin pressures and share dilution from CPS and CB may impact its financial performance and stock price. With the expected gas price adjustments and continued support from TEDA, BHI is expected to see improved financial results in the coming years.