20140618-大和证券-Russia_gas_and_LNG_vessel_refuelling_are_long-term_catalysts_17页_856kb

China Gas 384 HK Summary

Core Content

China Gas (CGHL) is a leading city-gas distributor in China, with a focus on Heilongjiang, Shandong, and Inner Mongolia. The company is expected to benefit from two long-term catalysts: the 38bcm natural gas supply from Russia, scheduled to start in 2018, and the emerging LNG vessel refuelling market, where CGHL is a pioneer with an upcoming terminal in Chongqing.

Main Points

• Russia Gas Supply: CGHL is expected to be a major beneficiary of the 38bcm gas supply from Russia to China starting in 2018, though the impact is anticipated to be remote in the near term due to the pipeline commissioning timeline.
• LNG Vessel Refuelling: CGHL is pioneering the LNG vessel refuelling market. The Chongqing terminal is expected to generate CNY150m in revenue with an equity IRR of over 40% and a payback period of 3 years. This business is projected to contribute about 15% of net profit for FY18 and help maintain unit dollar margins.
• Earnings Targets: The company has issued 250m share options, tied to achieving CNY5.5bn net profit for FY17 and CNY6.0bn for FY18, which are more aggressive than the analysts' forecasts.
• Valuation: The target price was raised from HKD10.0 to HKD14.6, translating into a target FY15E PER of 27x, which is considered rich compared to peers. However, the analysts remain optimistic about long-term growth potential.
• Growth Outlook: The analysts forecast a 25% CAGR for gas sales volume from FY13 to FY16, including contributions from the Fortune Gas acquisition. They also expect continued growth post-2018 due to the Russia gas supply and LNG vessel refuelling.

Key Information

Financial Highlights

• Revenue (m HKD): 30,110 (FY14E), 39,850 (FY15E), 51,249 (FY16E)
• Net Profit (m HKD): 2,453 (FY14E), 2,761 (FY15E), 3,164 (FY16E)
• Core EPS (fully-diluted): 0.494 (FY14E), 0.550 (FY15E), 0.630 (FY16E)
• EPS Change (%): 34.0 (FY14E), 11.3 (FY15E), 14.6 (FY16E)
• PER (x): 27.4 (FY14E), 24.6 (FY15E), 21.5 (FY16E)
• Dividend Yield (%): 0.8 (FY14E), 1.0 (FY15E), 1.2 (FY16E)
• DPS (HKD): 0.112 (FY14E), 0.131 (FY15E), 0.158 (FY16E)
• PBR (x): 4.7 (FY14E), 4.1 (FY15E), 3.6 (FY16E)
• EV/EBITDA (x): 15.6 (FY14E), 14.0 (FY15E), 12.4 (FY16E)
• ROE (%): 19.7 (FY14E), 19.1 (FY15E), 19.0 (FY16E)

Shareholder and Market Information

• Major Shareholder: Mr. Liu Minghui (22.2%)
• Market Cap (USDbn): 8.18
• 3m Avg Daily Turnover (USDm): 10.14
• Shares Outstanding (m): 4,681
• Current Price (HKD): 13.54
• Upside to Target: 7.8%

Risks

• Lower-than-expected gas sales volume growth
• Higher-than-expected margin squeeze on gas sales to industrial customers

Recommendations

• Rating: Outperform
• Target Price: HKD14.60
• Valuation Justification: Strong support from major shareholders, long-term gas supply from Russia, and medium-term contribution from LNG vessel refuelling

Key Assumptions and Earnings Revisions

• The company is expected to have a strong growth outlook with a 25% CAGR in gas sales volume.
• The analysts believe the Bloomberg consensus has upgraded gas sales volume forecasts for FY15-16.
• The analysts assume CGHL will not be able to pass on a 5% natural gas cost hike in FY16 to industrial customers, which could impact earnings.

Strategic Considerations

• CGHL is exploring inorganic M&A opportunities for well-established city-gas projects to boost immediate profit.
• The company has 20 city-gas projects under its strategic shareholder Beijing Enterprises Holdings (392 HK, HKD72.30, Outperform [2]) ready for acquisition.

LNG Vessel Refuelling

• Market Potential: China has 160,000 vessels on major rivers, expected to grow to 200,000 by 2020. The LNG vessel refuelling market is expected to be significant with 10,000 LNG-diesel dual-fuelled vessels by 2017-20.
• Unit Dollar Margin: LNG-diesel dual-fuelled vessels can achieve a unit dollar margin of CNY1/cm, which is attractive.
• Environmental Benefits: LNG vessels can reduce fuel costs by over 15% and emit 20-80% less CO2, SO2, and NOx than diesel-only vessels.

Conclusion

CGHL is positioned to benefit from long-term growth in the natural gas sector, particularly from the Russia gas supply and LNG vessel refuelling. Despite current challenges and a rich valuation, the company's ambitious growth targets and strategic initiatives suggest a positive outlook. The analysts maintain an Outperform rating with a raised target price, acknowledging the potential of these long-term catalysts.