20140521-招商证券_香港_-Short-term_trading_idea__Shelter_from__Sell_in_May__sell-off_15页_1mb

Investment Thesis Summary

Core Content

The document presents an investment thesis for Hong Kong-listed gas distribution companies, particularly during the months of May and June, when market volatility is expected. It argues that these companies serve as safe havens due to their stable earnings and government support, especially in the context of China's plan to increase natural gas consumption to 10% of total energy use by 2020.

Main Points

• Market Volatility: The strategy team anticipates turbulence in May and June, which may hinder share price rebounds in both traditional and emerging sectors.
• Safe Haven Hypothesis: Gas distribution companies are considered safe havens because:
  • Natural gas demand is less volatile and tied to economic growth.
  • Government support for natural gas over coal reduces macroeconomic risks.
  • China's energy policy is expected to drive long-term growth in natural gas usage.
• Historical Performance: During six major market downturns between 2011 and 2013, all gas distributors except China Gas outperformed the Hang Seng Index (HSI), supporting the safe haven hypothesis.

Key Investment Ideas

• Buy ENN Energy (2688.HK) and CR Gas (1193.HK).
• Sell China Gas (384.HK).
• Long ENN Energy:Short China Gas and Long CR Gas:Short China Gas.

Reasons for Preferences

• ENN Energy: Highest percentage of operating profit from recurring gas sales (55%), and highest expected earnings growth (74% YoY).
• CR Gas: Relatively undervalued with a forward P/E of 18x, but subject to anti-graft investigations.
• China Gas: Overpriced, highest gearing (124% in FY13), and most sensitive to interest rate hikes.
• Towngas China (1083.HK): Cheapest in terms of P/E, but at the top of its historical trading range and may need a rerating.

Key Risk: Solvency

• High Gearing: Some companies, particularly China Gas, have high debt-to-equity ratios, increasing solvency risk.
• China Gas: Most heavily leveraged, with a debt-to-equity ratio of 124% in FY13.
• Towngas China: Has the lowest gearing ratio, but still faces liquidity issues due to a low quick ratio (0.6x).

Interest Rate Sensitivity

• China Gas is the most sensitive to interest rate increases, with a 6% drop in net profit for a 1% increase in interest rates.
• Other gas distributors experience a 3-4% drop in net profit for the same interest rate increase.

Valuation and Liquidity

• Industry Average P/E: ~20x for FY14 earnings.
• China Gas & Towngas China: Trading above historical P/E mean and have low quick ratios, indicating liquidity risk.
• ENN Energy & CR Gas: Trading near their respective forward P/E means.

Earnings Growth

• ENN Energy: Expected to have the highest earnings growth in FY14 (74% YoY), driven by a strong vehicle gas refuelling business.
• China Gas: Highest net profit growth due to lower tax rates.
• Industry Growth: Expected stable GPM and NPM (22%-31% and 8%-17% respectively).

Profitability

• Towngas China: Highest net profit margin (17%) and lowest gearing ratio.
• China Gas: Highest ROAE due to stretching balance sheet.
• ENN Energy: Highest ROE (20%) among the group.

Operational Performance

• Gas Sales vs. Gas Connections: Gas connections are the key earnings driver, not gas sales.
• CR Gas: Highest gas sales volume (12.1 billion cu.m) and strongest presence in western China.
• China Gas: Highest CAGR growth (30.8%) in FY09–FY13.
• ENN Energy: Most diversified business with expansion in vehicle gas refuelling.

Company Profiles

• ENN Energy (2688.HK): Operates in 134 cities, has a strong vehicle gas refuelling business.
• CR Gas (1193.HK): Subsidiary of China Resources Holdings, operates in 21 provinces.
• China Gas (384.HK): Largest LPG retailer in China, operates in 184 cities.
• Towngas China (1083.HK): Smallest footprint, operates in 93 projects with a focus on commercial and industrial gas.

Investment Ratings

• OVERWEIGHT: Expected to outperform the market index by >10%.
• NEUTRAL: Expected to outperform or underperform the market index by 10% or less.
• UNDERWEIGHT: Expected to underperform the market index by >10%.

Disclaimer

• The document is prepared by China Merchants Securities (HK) Co., Ltd. and is for informational purposes only.
• It is not investment advice, and investors are advised to seek independent financial and tax advice before making any investment decisions.
• The document is subject to legal restrictions and may not be distributed to certain jurisdictions, including the US, Japan, and Canada.