20171215-交银国际证券-天伦燃气-01600.HK-A_gas_utilities_laggard_to_unleash_M_A-driven_growth_potential_17页_1mb

Tian Lun Gas (1600 HK) Summary

Core Content

Tian Lun Gas (TLG) is a gas utilities company that has experienced significant growth since its founding in 2002. The company has focused on expanding its operations through a series of acquisitions, which have played a key role in its development. TLG's management continues to emphasize M&A as the primary strategy for growth, targeting small- to mid-sized privately-owned gas distribution companies with limited financial resources or insufficient scale for listing.

Main Points

• Growth History: From 2002 to 2007, TLG laid the foundation by acquiring three key projects in Henan Province. After its listing in 2010, it accelerated expansion through acquisitions, acquiring 24 targets with capex of ~RMB3.8bn by 2011.

• Performance Metrics:

  • Revenue surged 14x from 2010 to 2016.
  • Net profit increased 6x over the same period.
  • Retail gas sales volume grew 20x, translating into 48%, 27%, and 43% CAGRs in revenue, net profit, and retail gas sales, respectively.

• Footprint Expansion: By 1H17, TLG had expanded into 13 provinces, operating 54 gas projects, 59 refilling stations, two LNG processing plants, and three long-haul pipelines.

• M&A Strategy:

  • TLG continues to pursue a highly-selective M&A strategy, focusing on mature projects with good operational efficiency.
  • It prefers projects with lower historical P/E compared to its own to ensure value-accretive acquisitions.
  • Acquisitions are expected to focus on the SW and NW regions due to better gas supply and coal-to-gas conversion potential.
  • Management is also interested in projects in Jiangsu and Zhejiang provinces due to their strong economic outlook.

• Financial Forecast:

  • Net profit is expected to grow at a 22.0% CAGR from 2016 to 2019.
  • Free cash flow is projected to turn positive in 2019E.
  • Net gearing is expected to decline from 105% in 2017E to 90% in 2019E.
  • Capex is forecasted at RMB950m, RMB750m, and RMB750m for 2017-19E, respectively.

• Valuation:

  • The target price (TP) of HK$8.00 is derived from the DCF model with a WACC of 8.6% and a terminal growth rate of 2.0%.
  • The TP corresponds to a 14.0x P/E ratio based on 2018E earnings.
  • TLG's current valuation at 10x 2018E P/E is at least ~30% lower than that of major gas utilities names (ENN, CGH, and CRG).
  • The company is expected to close the valuation gap by accelerating its acquisition strategy.

• Earnings and Sales Growth:

  • Retail gas sales volume is projected to grow at 28.8% YoY in 1H17.
  • C&I gas sales are expected to grow at 36%, 32%, and 28% YoY for 2017-19, while residential connections will grow at a slower pace (5-6% YoY).
  • Gas sales from gas stations are expected to grow at a 21.8% CAGR, outperforming peers.

• Dollar Margin:

  • The average retail gas dollar margin is expected to improve gradually from RMB0.40/m³ to RMB0.41/m³.
  • Newly-acquired projects are anticipated to have better margins than TLG's current level, contributing to overall margin improvement.

• Stock Performance:

  • TLG's YTD share performance has underperformed its peers.
  • The stock has a low liquidity profile with an average daily turnover of ~HK$7m or ~1.5m shares.

Key Information

• Target Price: HK$8.00 (based on DCF model).
• Valuation Discount: At least ~30% lower than major gas utilities names.
• Growth Drivers: Continued M&A activity, C&I gas sales, and gas station sales.
• Risk Factors:
  • M&A progress may be slower than expected.
  • Dollar margin and new connections may not meet expectations.
  • Relatively low liquidity of the stock.

Conclusion

Tian Lun Gas is positioned to benefit from the ongoing growth in the gas utilities sector, particularly through its M&A-driven strategy. The company's current valuation is considered undemanding, and it is recommended to initiate coverage with a Buy rating and a Target Price of HK$8.00. The key to unlocking its growth potential lies in accelerating its acquisition plan, which is expected to narrow the valuation gap and improve financial performance.