20131010-美银美林-Potential_break-up_value_estimated_at_HK_16_share_12页_627kb

Summary of PetroChina Break-Up Value Analysis

Core Content

This document outlines a hypothetical break-up value analysis for PetroChina, conducted by Bank of America Merrill Lynch (BofAML), in the context of potential government restructuring of the company. The analysis is based on the assumption that the company may be broken up into its various business segments, such as Exploration and Production (E&P), Refining, Chemicals, and Marketing, to unlock additional value.

Main Points

• Potential Break-Up Value Estimate: The break-up value is estimated to be HK$16/share, based on regional peer multiples using the EV/EBITDA method.
• Reason for Analysis: The report mentions that the Chinese government may consider breaking up PetroChina by division, with a special working team sent to each subsidiary to collect data.
• Valuation Methodology: The analysis uses 2013E P/B and 2013E EV/EBITDA to estimate the break-up value.
• Current Valuation: PetroChina is currently trading at a P/B of 1.1x, significantly lower than the regional peer multiples for E&P (1.6x), Pipeline (2.9x), Refining (1.2x), Chemicals (1.8x), and Marketing (1.2x).
• Stock Performance: The current share price is HK$8.89, and the price objective is HK$11.00, suggesting a potential upside.
• Investment Opinion: The report recommends a Buy rating for PetroChina, citing the potential for unlocking asset value through government reforms and the expectation of strong core earnings growth in 2014–2015.
• Risks: The report highlights high volatility risk and the impact of corruption investigations on the company's valuation.

Key Information

Break-Up Value Analysis

• P/B Method: Based on regional peer multiples, the break-up value is estimated at HK$15.8/share.

  • E&P: 1.6x, Book Value: RMB 681,018 million → HK$7.5/share
  • Pipeline: 2.9x, Book Value: RMB 249,185 million → HK$5.0/share
  • Refining: 1.2x, Book Value: RMB 146,132 million → HK$1.2/share
  • Chemicals: 1.8x, Book Value: RMB 97,422 million → HK$1.2/share
  • Marketing: 1.2x, Book Value: RMB 168,435 million → HK$1.4/share
  • Head Office: 0.25x, Book Value: RMB -354,043 million → HK$-0.6/share
  • Total Break-Up Value (P/B): HK$15.8/share

• EV/EBITDA Method: Based on regional peer multiples, the break-up value is estimated at HK$16/share.

  • E&P: 5.8x, EBITDA: RMB 357,293 million → HK$14.3/share
  • Pipeline: 14.6x, EBITDA: RMB 37,253 million → HK$3.8/share
  • Refining: 7.0x, EBITDA: RMB 3,229 million → HK$0.2/share
  • Chemicals: 12.0x, EBITDA: RMB -348 million → HK$-0.0/share
  • Marketing: 7.0x, EBITDA: RMB 20,999 million → HK$1.0/share
  • Total Break-Up Value (EV/EBITDA): HK$16/share

Current Valuation Metrics

• Market Cap: HK$1,627,057 million
• Share Price: HK$8.89
• P/B: 1.1x
• EV/EBITDA: 5.5x
• ROE (2013E): 12.2%
• Net Debt to Equity (Dec-2012A): 33.8%

Investment Thesis

• Buy Rating: The analysts believe PetroChina stands to benefit significantly from China's energy reforms.
• Earnings Growth: Strong core earnings growth is expected at 14% / 10% for 2014–2015.
• Graft Probe Impact: The ongoing corruption probe is seen as a potential positive catalyst for re-rating and improved capital management.
• Stock Catalyst: The upcoming 3Q13 results are expected to be a catalyst for the stock to align with other China oil companies.

Summary Table

Segment	P/B Multiple	Book Value (RMB mn)	Break-Up Value (RMB mn)	HK$ Value/share
E&P	1.6x	681,018	1,089,629	7.5
Pipeline	2.9x	249,185	722,637	5.0
Refining	1.2x	146,132	175,359	1.2
Chemicals	1.8x	97,422	175,359	1.2
Marketing	1.2x	168,435	202,122	1.4
Head Office	0.25x	-354,043	-88,511	-0.6
Total		988,149	2,276,594	15.8

Segment	EV/EBITDA Multiple	EBITDA (RMB mn)	Break-Up Value (RMB mn)	HK$ Value/share
E&P	5.8x	357,293	2,072,297	14.3
Pipeline	14.6x	37,253	543,897	3.8
Refining	7.0x	3,229	22,606	0.2
Chemicals	12.0x	-348	-4,178	-0.0
Marketing	7.0x	20,999	146,990	1.0
Total		357,293	2,781,612	16.0

Analysts

• Sonia Song, CFA: +852 2536 3974 | sonia.song@baml.com
• Hanzhi Ding: +852 2536 3943 | hanzhi.ding@bami.com
• Vitus Leung: +852 2536 3421 | vitus.leung@baml.com
• Imyoung Do: +852 2161 7796 | imyoung.do@baml.com

Disclaimer

• BofA Merrill Lynch may have a conflict of interest due to its business relationships with companies covered in the report.
• The report should be considered as only a single factor in making investment decisions.
• Full definitions of iQmethodSM measures are available on page 8.
• Important disclosures can be found on pages 9 to 12.

Conclusion

The analysis suggests that PetroChina is currently trading at a discounted valuation, primarily due to its E&P reserve value and underutilized mid/downstream assets. A break-up could potentially unlock significant value, with an estimated HK$16/share based on EV/EBITDA. The analysts maintain a Buy rating, believing that the government's graft probe and upcoming 3Q13 results could serve as catalysts for value realization.