20180525-招商证券_香港_-Gas_sector_Positive_outlook_10页_1mb

Gas Sector Industry Report Summary

Core Content

This report from China Merchants Securities (HK) Co., Ltd. provides an analysis of the gas sector in Hong Kong, focusing on the positive outlook and key developments affecting the industry. It outlines the impact of new policies from the National Development and Reform Commission (NDRC), financial performance, and investment outlook for major gas companies such as China Gas, CR Gas, and ENN Energy.

Main Points

• Positive Outlook: The gas sector is expected to have a more positive mid-to-long term outlook due to mid-term gas demand growth and the alleviation of winter supply shortages.
• Policy Support: The NDRC issued a policy to accelerate the construction of gas storage facilities and improve the market mechanism for ancillary services. This is expected to help stabilize gas costs during the winter season.
• Gas Storage Targets: By 2020, upstream gas suppliers and city gas operators are required to have storage facilities equivalent to more than 10% of their annual contracted sales volume and 5% of their annual gas usage volume, respectively. City governments are also expected to maintain 3 days of inventory.
• Return Mechanism: For self-use storage facilities, city gas operators can include them in their distribution projects and benefit from a maximum ROA of 7%. For leased facilities, service fees are market-driven.
• Government Support: The government is providing tax and financing incentives, including subsidies for LNG storage and tax rebates for imports. It is also promoting innovative financial tools to support gas storage construction.
• Policy Risk: The report indicates that policy risk is limited in the near term as 14 provinces have issued guidelines capping ROA at 7% for gas distribution projects, except Sichuan and Shaanxi.
• Investment Outlook: The report upgrades the target prices (TP) for gas companies based on a more positive outlook. China Gas is highlighted as the top pick due to its aggressive rural expansion and strong growth in high-margin value-added services.

Key Information

Policy Highlights

• NDRC's New Policy: Released on April 26, 2018, to accelerate the construction of gas storage facilities and improve market mechanisms.
• Gas Storage Targets:
  • Upstream suppliers: >10% of annual contracted sales volume.
  • City gas operators: >5% of annual gas usage volume.
  • City governments: 3 days of inventory.
• Facility Construction: City gas operators can construct, jointly construct, lease, or purchase facilities to meet targets.
• ROA Caps:
  • 14 provinces have set ROA caps at 7% for gas distribution projects.
  • Sichuan and Shaanxi are exceptions with 6% ROA.

Financial Performance and Target Prices

Key Risks

• Downside Risks:

  • Higher-than-expected execution risk for rural connection.
  • Lower-than-expected gas demand.
  • Inability to pass through increased gas costs to end-users during winter.

• Upside Risks:

  • Stronger gas demand.
  • Less-than-expected gas dollar margin squeeze.
  • Value accretive M&As.

Financial Summary for China Gas

• Balance Sheet:

  • Fixed assets are projected to increase from HK$22,850m in 2016 to HK$44,738m in 2020E.
  • Total assets are expected to grow from HK$53,533m in 2016 to HK$91,707m in 2020E.
  • Total liabilities are projected to increase from HK$32,569m in 2016 to HK$45,998m in 2020E.
  • Total net assets are expected to rise from HK$20,964m in 2016 to HK$45,709m in 2020E.
  • BVPS is projected to increase from HK$3.67 in 2016 to HK$6.40 in 2020E.

• Cashflow Statement:

  • Net cash from operations is expected to increase from HK$5,862m in 2016 to HK$9,560m in 2020E.
  • Net cash from investments is projected to decrease from HK$-4,001m in 2016 to HK$-6,697m in 2020E.
  • Net change in cash is expected to be positive, increasing from HK$533m in 2016 to HK$320m in 2020E.

• Profit & Loss Statement:

  • Turnover is projected to grow from HK$29,497m in 2016 to HK$69,724m in 2020E.
  • Gross profit is expected to increase from HK$7,214m in 2016 to HK$17,435m in 2020E.
  • Operating profit is projected to rise from HK$4,685m in 2016 to HK$11,332m in 2020E.
  • Profit after tax is expected to increase from HK$2,273m in 2016 to HK$9,386m in 2020E.
  • Basic EPS is projected to grow from HK$0.46 in 2016 to HK$1.77 in 2020E.
  • Fully diluted core EPS is expected to rise from HK$0.75 in 2016 to HK$1.76 in 2020E.
  • DPS is projected to increase from HK$0.19 in 2016 to HK$0.53 in 2020E.

• Financial Ratios:

  • EBITDA margin is expected to increase from 19.0% in 2016 to 18.7% in 2020E.
  • ROE is projected to rise from 12.5% in 2016 to 25.2% in 2020E.
  • ROIC is expected to increase from 8.5% in 2016 to 17.8% in 2020E.
  • Net debt/equity is projected to decrease from 80.3% in 2016 to 47.0% in 2020E.
  • Net debt/total cap is expected to decrease from 44.5% in 2016 to 32.0% in 2020E.

Financial Summary for CR Gas

• Balance Sheet:

  • Fixed assets are projected to increase from HK$24,059m in 2016 to HK$41,469m in 2020E.
  • Total assets are expected to grow from HK$59,675m in 2016 to HK$90,403m in 2020E.
  • Total liabilities are projected to increase from HK$35,970m in 2016 to HK$49,478m in 2020E.
  • Total net assets are expected to rise from HK$23,705m in 2016 to HK$40,925m in 2020E.
  • BVPS is projected to increase from HK$7.99 in 2016 to HK$13.87 in 2020E.

• Cashflow Statement:

  • Net cash from operations is expected to increase from HK$7,365m in 2016 to HK$9,380m in 2020E.
  • Net cash from investments is projected to decrease from HK$-2,877m in 2016 to HK$-5,285m in 2020E.
  • Net change in cash is expected to be positive, increasing from HK$-744m in 2016 to HK$1,283m in 2020E.

• Profit & Loss Statement:

  • Turnover is projected to grow from HK$32,916m in 2016 to HK$62,066m in 2020E.
  • Gross profit is expected to increase from HK$11,184m in 2016 to HK$16,421m in 2020E.
  • Operating profit is projected to rise from HK$5,307m in 2016 to HK$8,038m in 2020E.
  • Profit after tax is expected to increase from HK$2,273m in 2016 to HK$9,386m in 2020E.
  • Basic EPS is projected to grow from HK$0.46 in 2016 to HK$1.77 in 2020E.
  • Fully diluted core EPS is expected to rise from HK$0.75 in 2016 to HK$1.76 in 2020E.
  • DPS is projected to increase from HK$0.19 in 2016 to HK$0.53 in 2020E.

• Financial Ratios:

  • EBITDA margin is expected to increase from 19.0% in 2016 to 18.7% in 2020E.
  • ROE is projected to rise from 12.5% in 2016 to 25.2% in 2020E.
  • ROIC is expected to increase from 8.5% in 2016 to 17.8% in 2020E.
  • Net debt/equity is projected to decrease from 80.3% in 2016 to 47.0% in 2020E.
  • Net debt/total cap is expected to decrease from 44.5% in 2016 to 32.0% in 2020E.

Conclusion

The gas sector is showing a positive outlook due to policy support and expected growth in demand. The NDRC's new policy on gas storage facilities is expected to help stabilize gas costs in winter and benefit city gas operators. The report highlights China Gas as the top pick due to its strong growth potential and high-margin services. Financial performance of both China Gas and CR Gas is projected to improve, with increasing turnover, gross profit, and operating profit. The report also notes the importance of monitoring key risks such as execution risks, gas demand, and cost pass-through capabilities.