20181220-东英亚洲证券-天伦燃气-01600.HK-A_different_coal-to-gas_tale_from_Henan_27页_3mb

Equity Research: Tian Lun Gas (1600 HK)

Core Content

China Tian Lun Gas Holdings Ltd. is an investment holding company primarily engaged in the transportation and sale of gas, including gas pipeline connections and production and sales of liquefied natural gas (LNG). The company is currently benefiting from the coal-to-gas conversion (CGC) initiative in Henan Province, which is expected to drive significant revenue growth over the next few years.

The research initiates a BUY recommendation with a target price of HK$11.18, representing a 79% potential upside from the current closing price of HK$6.25 as of 19 December 2018. The recommendation is based on a 10x FY19E P/E multiple, which is 24% discount to industry peers.

Key Data

Main Points

1. Sustainable and Deliverable Henan Coal-to-Gas Story

• TLG has an exclusive partnership with the Henan provincial government to ensure direct and timely settlement of connection fees from a government-backed fund.
• The fund has a total committed capital of RMB10bn, with Henan Tian Lun (a subsidiary of TLG) holding 40% of the stake.
• The fund plans to secure an additional RMB40bn long-term loan from policy banks, bringing total capital to RMB50bn.
• This should be sufficient to cover the conversion of ~10mn households in Henan, with RMB3,273mn of revenue expected from CGC projects by FY20E, representing 36.5% of total revenue.

2. Well-Paced Regional Expansion

• TLG is actively acquiring gas projects in tier 3-5 cities, where urbanization and gas consumption penetration are growing.
• These acquisitions are expected to contribute ~10% of FY18E earnings.
• The company has completed 4 M&A deals in recent years, including the Mizhi Project, Wubu Project, Jinming Gas Project, and Xiping Kaida Gas.
• These acquisitions are expected to continue as the company aims for scale-driven growth and synergy benefits.

3. Gas Price Liberalization and Long-Term Positives

• Starting from 10 June 2018, residential gas prices in China are being aligned with non-residential prices, with a 20% upward adjustment allowed in the long-term.
• This reform is expected to stimulate demand and increase supply over time, as it encourages upstream investment in gas production, processing, and storage.
• TLG is expected to have limited exposure to margin pressure from this price alignment due to its low residential user mix (only 17% of total gas sales volume in FY17).

4. Gas Supply and Affordability

• Gas supply shortages were a major issue in previous years, particularly in the 2017/18 winter, but the situation is expected to improve due to better gas supply arrangements, improved storage, and normal weather.
• Government subsidies are a key factor in making natural gas more affordable for users, especially in rural areas.
• TLG has secured additional gas supply from Kunlun Energy's Guangyuan LNG plant, which is expected to provide ~10% of its FY17 city gas sales volume by FY19E.

5. Investment Risks

• Policy and regulation risks related to CGC projects.
• Execution risks of the coal-to-gas fund.
• Lower than expected gas consumption from industrial and commercial users (I&C users).

Key Information

• The company is benefitting from the Henan coal-to-gas conversion initiative, which is expected to significantly boost its revenue and net profit.
• The exclusive partnership with the Henan provincial government ensures direct cash settlements from a government-backed fund, improving the deliverability of the CGC revenue stream.
• LNG supply from Kunlun Energy's Guangyuan plant and potential LNG import qualifications in the Shanghai Free Trade Zone are expected to secure gas supply for the company.
• Market consolidation is shifting to lower-tier cities, where TLG has a comparative advantage due to its low-tier city focus and synergy potential.
• The liberalization of gas prices is expected to stimulate long-term demand and increase supply, but it may have short-term margin pressures for gas distributors.

Financial Summary

• Earnings CAGR for FY17 to FY20E is forecasted at 45.2%.
• Revenue is expected to grow from RMB4,885.3mn in FY18E to RMB8,974.7mn in FY20E.
• Net Profit is expected to increase from RMB597.7mn in FY18E to RMB1,237.1mn in FY20E.
• Diluted EPS is projected to rise from HK$0.721 in FY18E to HK$1.493 in FY20E.
• The target price of HK$11.18 is based on a 10x FY19E P/E multiple, indicating a 79% potential upside.

Appendix Highlights

• Appendix I includes the shareholding structure and management profile of TLG.
• Appendix II provides FY17 project operation information for Tian Lun Gas.
• Appendix III offers a China natural gas consumption fact sheet, including historical data and future projections.