an alternative to sinopec in china s natural gas distribution industry

‘Invert the thinking’

Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report

1

June 25, 2012

Kunlun Energy (0135.HK)

An alternative to Sinopec in China’s natural gas distribution industry

Target Price

Bull Case: HK$18.5 (+49%)

Base Case: HK$15.3 (+23%)

Summary:

Kunlun Energy is the most well positioned in China’s natural gas distribution industry

to capitalise on the growth opportunities from rising natural gas imports and new

applications such as LNG-fueled vehicles.

Fundamentals & drivers (base case)

Through abundant natural gas supply from PetroChina, unique national-wide gas

pipelines and early entry into the LNG market, Kunlun is well placed to grow with the

expanding market for natural gas in China.

We expect Kunlun’s natural gas sales volume to grow faster than the industry

average, due to lower penetration rates in regions where it operates and the increase

in LNG vehicles.

The LNG market is still at the nascent stage but it will grow rapidly. Kunlun will

become the largest LNG producer, which will be a major driver in the next five years.

We forecast sales volume of the Beijing natural gas pipeline will grow by about 20%

y-o-y in 2012, driven by strong demand from areas surrounding the capital city.

Valuation – screening (base case)

We used P/E as our primary method for valuing Kunlun.

The stock is trading at 14.6x forward P/E (2012), below the industry average of

17.2x. The stock has not priced in its better-than-industry growth prospects.

Key assumptions & risks (base case)

We expect China’s GDP to slow, which will reduce the growth of natural gas demand.

Retail-price controls stemming from the natural gas pricing reform will be more tightly

regulated than what the market currently expects.

Financial summary (base case)

Year to Dec 2010A 2011A 2012E 2013E 2014E

Turnover (HK$ mn) 17,336 25,398 35,624 49,691 70,978

Chg (%) 181 47 40 39 43

Net profit (HK$ mn) 4,194 5,609 7,226 9,360 12,636

Chg (%) 240 34 29 30 35

EPS (HK$) 0.522 0.699 0.900 1.166 1.574

CFO per share (HK$) 0.212 1.375 1.745 1.875 2.063

P/E (x) 24.5 18.3 14.2 11.0 8.1

P/B (x) 3.9 3.4 2.0 1.8 1.6

Dividend per share (HK$) 0.138 0.220 0.252 0.326 0.441

Source: Guosen Securities (HK), Bloomberg

Company overview

Background

Kunlun Energy is a subsidiary of PetroChina

(0857.HK) and it focuses on city natural gas

distribution. Leveraging its unique advantage in

natural gas supply, Kunlun is expanding rapidly in the

downstream sectors (pipelines, city gas and LNG).

Key data

Market cap (HK$ mn) 105,167

Shares outstanding (mn) 8,028

Major shareholders (%) PetroChina(65.7)

Free-float (%) 50

Price performance vs HSCI

Source: Bloomberg, data as at June 22, 2012

Price performance (%)

1M 3M 12M

Kunlun Energy -1.4 -3.4 -5.9

HSCI -0.8 -9.8 -16.1

Guosen vs Consensus

Slightly bearish

(HK$) Base Bull Bear Consensus

EPS-2012 0.900 0.972 0.689 0.906

EPS-2013 1.166 1.390 0.778 1.071

EPS-2014 1.574 2.093 0.847 1.250

Why?

Our forecast for 2012 is slightly bearish compared to

consensus, as we are more cautious on gas sales

volume growth due to the economic slowdown in

2012. We are bullish for 2013-14E as we are

confident on the development of the LNG business

and expect more pipeline injections by PetroChina.

2,000

2,300

2,600

2,900

3,200

3,500

9

11

13

15

Jun/2011 Dec/2011 Jun/2012

HK

$

135.HK (HK$, LHS) HSCI (RHS)

Analyst

Steven Lu (Oil & Gas)

Tel: (852) 2899 8327 [email protected]

SFC CE No.:AUP546

Sales contact

Dan Weil

Tel: (852) 2248 3588 [email protected]

Global Head of Institutional Sales and Trading, Managing Director

Bear Case:

HK$11.0 (-11%) Current Price: HK$12.4

OIL & GAS

Kunlun Energy (0135.HK) June 25, 2012 | HK & China


2

Exhibit 1: Target prices & assumptions – (135.HK) (HK$, LHS)

Source: Guosen Securities (HK)

9

10

11

12

13

14

15

Sep/11 Nov/11 Jan/12 Mar/12 May/12 Jul/12 Sep/12 Nov/12 Jan/13 Mar/13

HK

$

PT: HK$18.5 (Bull case) Oil prices are $120/110/100 for 2012/13/14 Revenue grows at ~55% annually LPG processing grows at ~100% annually

PT: HK$15.3 (Base case) Oil prices are $115/105/95 for 2012/13/14 Revenue grows at ~40% annually LPG processing grows at ~50% annually

PT: HK$11.0 (Bear case) Oil prices are $100/95/90 for 2012/13/14 Revenue grows at ~5% annually LPG processing grows at ~30% annually

Investment highlights

Kunlun Energy – a platform for PetroChina’s natural gas operations

After the restructuring in 2008, PetroChina became the controlling shareholder of Kunlun. PetroChina injected a considerable

number of downstream natural gas operations into Kunlun Energy, whose business scope now covers natural gas pipeline

transportation, distribution and LNG processing. (Refer to pg 9)

Pipeline transportation

Kunlun’s natural gas transportation volume is growing in line with the pick-up in China’s natural gas consumption. Pipeline

transportation rates, which are regulated and set by the NDRC, are expected to be gradually raised. PetroChina has seven trunk

pipelines and many branch pipelines, which, if injected into Kunlun, would significantly scale up Kunlun’s pipeline transportation

business. (Refer to pg 13)

City gas distribution

As natural gas penetration rates in areas where Kunlun operates are less than 20%, this implies substantial potential for organic

growth. Growth will be further driven by leveraging its position as a SOE with a strong parent company to secure more natural gas

projects and LNG filling stations. The share of natural gas sold as a transportation fuel will continue to grow and boost the profit

margin of its distribution business. (Refer to pg 15)

LNG processing, transportation and storage

Compared with diesel, LNG is more cost-effective and environment-friendly, and is a viable alternative energy to power diesel

vehicles and vessels. As more LNG filling stations are set up making natural gas more readily available, and as LNG vehicle

technology improves, China’s LNG market is likely to boom. Kunlun operates two of the five LNG receiving terminals and four of

the 20 or so LNG processing plants in China, putting it on track to become the largest LNG supplier in China. (Refer to pg 20)

3 numbers to watch

US$5/b Oil price 1% Pre-tax profit margin 50% Utilisation of LNG facilities

Oil E&P contributed to more than 40% of

Kunlun’s 2011 net profit.

For every US$5/b movement in oil price would

impact net profit by about 4.8%.

Profit margin of the gas distribution business will

be impacted by the pricing reform

For every 1% change in the pre-tax profit of the

natural gas distribution business, this will impact

net profit by 0.8%.

Utilisation of LNG terminals is about 20.9% in 2012

(1.36m tonnes)

Utilisation of LNG terminals is expected to surge to

50% (3.25m tonnes) or above in 2012.



3

Summary Financials – Base Case +49% +23% -11%

Income statement Unit: HK$ mn 2010A 2011A 2012E 2013E 2014E Comment

Revenue 17,336 25,398 35,624 49,691 70,978 Gas will contribute 90% in 2014

Other gains, net 203 175 175 175 175

Interest income 78 177 177 177 177

Purchase, service and other costs -5,745 -8,848 -12,468 -17,392 -24,842 As about 35% of revenue

Employee compensation -907 -1,505 -2,494 -3,975 -6,388 Increase from 7% to 9% of revenue

Exploration expense -53 -247 -296 -356 -427 Increase at ab.20% annually

Depreciation and amortisation -2,777 -4,088 -5,192 -6,594 -8,374

Selling, general and administrative expenses -993 -1,592 -2,137 -2,981 -4,259 Decrease from 9% to 7% of revenue

Taxes other than income tax -631 -1,193 -2,137 -2,981 -4,259 As about 6% of revenue

Other expenses -15 -1 - -390 -1,212

Interest expense -409 -403 -484 -580 -696

Share in profits of associates 2,031 2,255 2,322 2,255 2,255

Share in profits of jointly controlled entities 226 322 322 322 322

Profit before income tax 8,344 10,450 13,411 17,370 23,450

Income tax expense -2,009 -2,281 -2,924 -3,786 -5,111 With tax rate at 21.8%

Profit for the year 6,335 8,169 10,487 13,584 18,339

Profit attributable to shareholders of the company 4,194 5,609 7,226 9,360 12,636

Minority interest 2,141 2,560 3,262 4,225 5,704

Earnings per share (HK$) 0.522 0.699 0.900 1.166 1.574 With 8.2b outstanding shares

Dividend per share (HK$) 0.138 0.220 0.252 0.326 0.441 As about 28% of EPS


Balance sheet

Unit: HK$ mn 2010A 2011A 2012E 2013E 2014E Comment

Property, plant and equipment 42,968 56,613 63,421 68,827 72,453 NPP+CAPEX-DEPRECIATION

Advanced operating lease payments 827 1,218 1,218 1,218 1,218

Investments in associates 5,635 6,158 6,774 7,451 8,196 Grows at 10% annually as in 2011

Investments in jointly controlled entities 1,500 1,732 1,905 2,096 2,305 Grows at 10% annually as in 2012

Available-for-sale financial assets 129 130 130 130 130

Intangibles and other non-current assets 1,165 1,545 1,545 1,545 1,545

Deferred tax assets 41 125 125 125 125

Non-current assets 52,265 67,521 75,118 81,392 85,973

Inventories 383 563 790 1,102 1,573 Grows as fast as revenue

Accounts receivable 520 724 1,016 1,417 2,023 Grows as fast as revenue

Prepaid expenses and other current assets 2,057 3,572 3,572 3,572 3,572

Cash and cash equivalents 8,168 11,689 18,730 23,709 32,826

Current assets 11,128 16,548 24,107 29,799 39,995

Total assets 63,393 84,069 99,225 111,191 125,967

Accounts payable and accrued liabilities 6,483 8,853 12,417 17,321 24,741 Grows as fast as revenue

Income tax payable 261 456 456 456 456

Other tax payable 245 589 589 589 589

Short-term borrowings 4,911 2,611 2,611 2,611 2,611

Current liabilities 11,900 12,509 16,073 20,977 28,397

Long-term borrowings 12,023 24,964 24,964 29,964 29,964 Capex financed by equity +debt

Deferred tax liabilities 1,034 985 985 985 985

Other long-term obligations 9 24 24 24 24

Non-current liabilities 13,066 25,973 25,973 30,973 30,973

Total liabilities 24,966 38,482 42,046 51,950 59,370

Total equity 38,427 45,587 57,179 59,241 66,597


Net assets value per share (HK$) 3.4 3.8 5.2 5.5 6.4


BULL BASE BEAR



4

HOW TO MODEL IT

Kunlun Energy – pipeline transportation business

Key assumptions

Sales volume of the Beijing gas pipeline grows by 18% pa between 2012 and 2014.

No pipelines will be injected into Kunlun by PetroChina in 2012.

PetroChina will inject another pipeline into Kunlun between 2013 and 2014.

Risks to our assumptions

Sales volume of the Beijing gas pipeline grows at a slower rate than expected as demand for natural gas in Beijing and the

surrounding regions is weaker than anticipated as economic growth eases.

PetroChina injects another pipeline into Kunlun in 2012 to accelerate the consolidation process.

No additional pipeline is injected in 2013-14, if the approval process encounters any resistance.

Probability analysis

No pipelines are injected between 2012-14 25%

Another pipeline is injected in 2012 75%

There will be pipelines injected before 2014 100%



5

HOW TO MODEL IT

Kunlun Energy – city gas distribution business

Key assumptions

Gas sales volume grows by 35% pa on average.

Pre-tax profit margin of the gas distribution business remains at 16-17% during 2012-14.


Gas sales volume grows by less than 35% pa on average during 2012-14.

The pre-tax profit margin of the gas distribution business falls to below 15% due to the pricing reform in 2012.


The pre-tax profit margin of the gas distribution business slips to below 15%. 25%

Gas sales volume grows by more than 30% pa on average during 2012-14. 75%

Natural gas pricing reform occurs in 2012, and gas prices at city gates increase by more than 20% on average. 100%



6

HOW TO MODEL IT

Kunlun Energy – LNG business

Key assumptions

The number of LNG vehicles in China grows from about 6,000 in 2010 to 60,000 in 2014.

The number of LNG filling stations in China grows from about 100 in 2010 to 3,000 in 2015.

Utilisation of Kunlun’s LNG terminals (two terminals with a total capacity of 6.5m tonnes per year) and Kunlun’s LNG plants (16

plants with a total capacity of 20 m m^3 per day) reaches 80% and 50% respectively in 2013.


The number of LNG vehicles grows slower than expected due to inadequate gas supply.

The number of LNG filling stations in China grows slower than expected due to reduction in investment by Kunlun, CNOOC,

Guanghui, etc.

Utilisation of Kunlun’s LNG terminals & LNG plants is lower than expected due to weaker demand or inadequate gas supply.


The number of LNG vehicles and LNG filling stations in China grows very slowly due to inadequate gas supply. 25%

Kunlun’s LNG terminals & LNG plants achieves the targeted utilisation rates in 2013. 75%

Kunlun becomes the No.1 LNG producer in China in 2012. 100%



7

Contents

Overview I ........................................................................................................................................................... 8

1 Kunlun Energy emerges as PetroChina’s platform to consolidate its natural gas operations ........................................ 9

1.1 After a shareholding restructuring in 2008, Kunlun Energy has become the only listed subsidiary to consolidate

PetroChina’s downstream and mid-stream natural gas operations ................................................................................. 9

1.2 Backed by China’s largest natural gas producer and supplier, Kunlun Energy is taking major strides to become “China’s

largest natural gas distributor in the end-user market”. ................................................................................................. 10

Stock-price drivers ........................................................................................................................................... 12

1 Natural Gas Pipeline Business --- one of the new growth pillars, driven by rising transmission volume and more

pipeline injections ............................................................................................................................................................... 13

1.1 We expect its pipeline business to grow steady on the strength of rising transmission volumes. Pipeline transportation

rates are set by the government, but are expected to be raised gradually. ................................................................... 13

1.2 PetroChina still has seven national pipelines and other local pipelines that are likely to be injected into Kunlun Energy

14

2 Natural Gas Sales --- growing faster than the industry, driven by organic and inorganic growth ................................ 15

2.1 Despite growing at an annual rate of 16%, China’s natural gas consumption has a penetration rate of less than 20% on

average ........................................................................................................................................................................ 15

2.2 Kunlun Energy’s operations are focused in areas where penetration rates are low and access to natural gas supply is

easy. Its natural gas sales shot up on organic growth. .................................................................................................. 16

2.3 Industry concentration is low in China’s natural gas distribution sector. Kunlun Energy is expanding rapidly by

leveraging its resource-rich parent company and its SOE status .................................................................................. 17

2.4 Contribution from the sales of high value-added products like CNG & LNG are rising and the profit margin of the gas

sales business will gradually accelerate ....................................................................................................................... 18

3 LNG business – a market in rapid growth where Kunlun will become the largest producer and one of the biggest

importers .............................................................................................................................................................................. 20

3.1 Similar to diesel in terms of calorific value per unit, LNG is cheaper and more environmental friendly. The growth

potential for LNG vehicles is also enormous. ................................................................................................................ 20

3.2 A potential leader, leveraging on its parent company’s natural gas resources .............................................................. 21

Base | Bull | Bear analysis............................................................................................................................... 23

1 Base analysis ....................................................................................................................................................................... 25

2 Bull analysis ......................................................................................................................................................................... 27

3 Bear analysis ....................................................................................................................................................................... 29

Bringing it together .......................................................................................................................................... 31

1 Profit forecasts .................................................................................................................................................................... 32

1.1 Base-case forecasts ..................................................................................................................................................... 32

1.2 Sensitivity analysis........................................................................................................................................................ 32

1.3 Valuation screening ...................................................................................................................................................... 33

2 Risks ..................................................................................................................................................................................... 34

Closing notes to the buy-side analyst ....................................................................................................................................... 35


Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report Overview 8

Overview I PetroChina is the largest natural gas producer (76% market share) and the

biggest pipeline operator (70% market share) in China. Kunlun Energy is the

only listed subsidiary of PetroChina and it is positioned to consolidate the

downstream natural gas businesses of PetroChina. We believe Kunlun will

become the largest natural gas distributor in China by 2015.



1 Kunlun Energy emerges as PetroChina’s platform

to consolidate its natural gas operations

1.1 After a shareholding restructuring in 2008, Kunlun Energy has

become the only listed subsidiary to consolidate PetroChina’s

downstream and mid-stream natural gas operations

At the end of 2008, CNPC, the original controlling shareholder, sold its 56.66% stake in

Kunlun Energy through its HK-based subsidiary to PetroChina, making PetroChina the

new controlling shareholder.

PetroChina is the largest producer, transporter and distributor of natural gas in China.

Many of PetroChina’s subsidiaries operated natural gas businesses, making resources

unfocused and positioning unclear. As such, PetroChina has embarked on consolidating

its natural gas operations since 2007. Following the restructuring, Kunlun Energy

became the only listed natural gas company owned by PetroChina and is on course to

consolidate PetroChina’s natural gas business in the end-user market. PetroChina

defines Kunlun Energy’s positioning as follows:

“Kunlun Energy will take advantage of PetroChina’s natural gas resources and supplies,

and its own independent and flexible management as a listed company to capture the

opportunities in the fast-growing end-user market for natural gas. Kunlun Energy will

deliver strong growth in the end-user market for natural gas and facilitate the

development of PetroChina’s upstream and mid-stream operations, creating a win-win

situation for both companies.”

After the restructuring, Kunlun Energy renewed its mission statement and now aims to

become “China’s largest natural gas distributor in the end-user market”. Meanwhile,

PetroChina is stepping up consolidation by injecting mid-stream and downstream

operations into Kunlun Energy.

Kunlun aims to become China’s

largest natural gas distributor in the

end-user market by leveraging

PetroChina’s vast resources and

assets.

We estimate there is 75% chance that

Kunlun Energy will become the

largest distributor.



Exhibit 2: Major asset injections into Kunlun Energy after PetroChina became its controlling shareholder

Time Asset injection Stake acquired (%) Business scope

2008.12 Shennan Oil Technology Development 50.98% Supplying CNG and operating CNG filling stations in Hainan

2009.1 Xinjiang Xinjie 97.26% Marketing city gas in Xinjiang and operating around 40 natural gas filling stations

2009.2 China Natural Gas Corporation 51.01% Operating around 60 natural gas filling stations in Sichuan, Shandong, Shaanxi, Inner Mongolia, Hebei etc

2009.5 Formed JV (Xi’an Qinggang Clean Energy Technology) with PCOC, a subsidiary of PetroChina

Producing and marketing CNG and LNG in Shaanxi province

2009.5 Formed JV (Hebei Huagang Gas Group) with PetroChina Huabei Oilfield

Providing and marketing pipelined natural gas, CNG and LNG in Hebei province

2009.9 China City Natural Gas Investment Group 49% Designing, constructing and operating natural gas pipeline networks

2009.9 Shennan Oil Technology Development 29.41% Following this deal, Kunlun Energy’s stake in Shennan Oil Technology Development reached 80.39%.

2009.12 China Natural Gas Corporation 26.58% The deal increased Kunlun Energy’s stake in China Natural Gas Corporation to 77.59%.

2010.5 Jiangsu LNG 55% Operating the LNG receiving port in Jiangsu province

2010.8 Dalian LNG 75% Operating the LNG receiving port in Dalian

2010.6 Sichuan Shizhong Petroleum Gas 51% Marketing city gas and CNG in 8 cities in Sichuan province

2010.11 Sichuan Chuangang Gas 51% Marketing natural gas in end-user markets in Sichuan province and Chongqing city

2011.12 Beijing Natural Gas Pipeline 60% Operating the Shaanxi-Beijing natural gas pipeline


Kunlun Energy will be more focused on natural gas operations. As a result, it is expected

to sell assets related to oil exploration and production to its parent company. And before

this, Kunlun Energy will not devote additional resources to its oil exploration and

production businesses.

Exhibit 3: Kunlun Energy’s sale of oil-exploration assets to PetroChina

Time Asset injection Business scope

2009.12 Sold storage facilities and pipelines for product oil to Xinjiang Xinjie

Assets relating to storage and transit of product oil

2009.1 Sold its 32% stake in Beijing Zhongyou Kunlun Lubricant to PetroChina

Exploring for oil and gas and conducting R&D of production technology and oil and gas products

2011.12 Sold its subsidiary Commonwealth Gobustan (CGL) to PetroChina

Exploring for and producing crude oil


1.2 Backed by China’s largest natural gas producer and supplier, Kunlun

Energy is taking major strides to become “China’s largest natural

gas distributor in the end-user market”.

Kunlun Energy’s parent company, PetroChina, is the largest producer, supplier and seller

of natural gas in China. PetroChina had 90% share of the newly discovered proven

geological reserve of natural gas in China in 2010, a 76% share of China’s natural gas

output and 70% of the total length of the country’s natural gas pipelines. PetroChina

monopolises the upstream natural gas market in China and it plans to use Kunlun Energy

to further integrate its mid-stream and downstream operations (i.e. all operations except

for exploration, production and import of natural gas). Kunlun Energy is expected to

become China’s largest natural gas distributor in the end-user market, making it an

alternative to Sinopec, which is currently the leader in China’s petrochemical industry.



Exhibit 4: PetroChina’s market share in China’s natural gas industry in 2010


Backed by PetroChina, Kunlun Energy’s natural gas operations have grown significantly.

In 2011, Kunlun Energy sold 3.628 billion cubic metres of natural gas and pipelined over

22 billion cubic meters (vs 2.220 billion cubic metres and 18 billion cubic metres in 2010

respectively). It also became capable of receiving 6.5 million tonnes of LNG each year

and processing 1.38 million cubic metres per day (LNG business started in 2011). In

short, its three major natural gas businesses have taken shape: 1) natural gas pipeline

transportation; 2) natural gas distribution; and 3) LNG processing.

Exhibit 5: Revenue breakdown and a more focused business strategy


90%

10%

Newly discovered proven geological reserve of natural gas in

2010

PetroChina Others

76%

13%

11% 0%

Natural gas output in 2010

PetroChina Sinopec CNOOC Others

70%

30%

Total length of natural gas pipelines in 2010 (kilometres)

PetroChina Others

100%

60%

47%

24%

0%

20%

40%

60%

80%

100%

120%

0

5,000

10,000

15,000

20,000

25,000

30,000

2008 2009 2010 2011

HK

$ m

illi

on

Oil & gas exploration and production (HK$ m,LHS)

Natural gas sales (HK$ m,LHS)

LNG processing, storage and transportation (HK$ m,LHS)

National gas pipeline transportaion (HK$ m,LHS)

Income from exploration & production as % (RHS)



Stock-price drivers 12

Stock-price drivers (1) PetroChina gradually injects its nation-wide pipelines into Kunlun.

(2) Natural gas sales volume grows faster than the industry average, and

margins continue to rise due to higher proportion of CNG & LNG.

(3) The group becomes the largest producer of LNG and one of the

biggest suppliers of offshore LNG in China.

(4) China gas consumption grows at higher than 20% CAGR in 2011-15.

Becomes the largest

LNG producer

Natural gas sales

volume

LNG-fuelled cars Natural gas

transportation

Growth in China’s gas

consumption >20%

CAGR

Pipeline injections

by PetroChina




1 Natural Gas Pipeline Business --- one of the new

growth pillars, driven by rising transmission

volume and more pipeline injections

1.1 We expect its pipeline business to grow steady on the strength of

rising transmission volumes. Pipeline transportation rates are set by

the government, but are expected to be raised gradually.

With the establishment of PetroChina Tianjin Natural Gas Pipeline in 2010 and the

boosting investment in natural gas pipelines. So far, Kunlun Energy has invested in three

nationwide pipelines (Shanjing Natural Gas Pipeline I, II and III running from Shaanxi

province to Beijing) and three local pipelines (the Bazhou-Baoding Pipeline in Hebei

province, the Dagang-Mapengkou Pipeline in Tianjin, and the Mapengkou-Huanghua

Pipeline from Tianjin city to Hebei province). Another local line, the Wuhai-Yinchuan

Pipeline running from Inner Mongolia to Ningxia, will be put into operation in 2012.

Exhibit 6: Natural gas volume pipelined by Kunlun Energy and income from

pipeline transportation


In 2011, Kunlun Energy pipelined over 22 billion cubic metres of natural gas,

implying a 25.4% y-o-y increase. This was higher than the 20.6% growth in China’s

natural gas consumption in the same year. The designed capacity of its main

pipelines, the Shanjing Natural Gas Pipeline I, II and III, is 35 billion cubic metres

per year. Kunlun Energy has started to invite tenders for the construction of the

Shanjing Natural Gas Pipeline IV, while the construction of planned branch lines is

progressing smoothly. We estimate the volume transported by Kunlun Energy will

grow at an annual rate of around 22% to reach almost 40 billion cubic metres in

2014.

Pipeline transportation rates are set by the National Development and Reform

Commission (NDRC) and are applied by pipeline operators uniformly. Given the

rapid growth in natural gas consumption in China, pipelines (state-level ones in

particular) will become increasingly scarce. We expect the pipeline transportation

rates to be raised gradually. The NDRC approved an RMB0.08/cubic metre hike in

2010 and similar increases are likely to follow.

17.608

22.074

40

-

5

10

15

20

25

0

5

10

15

20

25

30

35

40

45

2010 2011 2015E

HK

$ b

illio

n

bil

lio

n c

ub

ic m

ete

rs

Volume of natural gas transported (billion cubic meters,LHS)

Income from pipeline transportation (HK$ billion,RHS)

Rising pipeline gas

transmission volume

Asset injections by

PetroChina to boost

Kunlun’s business growth

In 2011, Kunlun Energy’s pipeline

transmission volume grew by 25.4%

y-o-y, surpassing the industry’s

average growth of 20.6% for the same

period.

FORECASTS & ASSUMPTIONS

(Natural gas pipeline volume sales)

2012 25.0 billion cubic metres






Exhibit 7: A natural gas pipeline tariff is implemented uniformly across China

(RMB/cubic metre)

Distance (km) Rates before the hike on April 25, 2010.4.25 Going rates

Less than 50 0.036 0.116

51—100 0.041 0.121

101—200 0.047 0.127

201—250 0.058 0.138

251—300 0.063 0.143

301—350 0.068 0.148

351—400 0.074 0.154

401—450 0.079 0.159

451—500 0.085 0.165


1.2 PetroChina still has seven national pipelines and other local

pipelines that are likely to be injected into Kunlun Energy

In 2011, Kunlun Energy acquired from its parent company PetroChina a 60% stake in

PetroChina Beijing Natural Gas Pipeline, which primarily operates the Shanjing Natural

Gas Pipelines. Shanjing Natural Gas Pipeline 1, 2 and 3 were put into operation in 1997,

2005 and 2010 respectively, delivering a combined design transportation capacity of 35

billion cubic metres per year. And as mentioned, Kunlun Energy has started to invite

tenders for the construction of Shanjing Natural Gas Pipeline IV.

We estimate PetroChina will inject a large number of its state-level trunk pipelines into

Kunlun Energy, its only listed subsidiary marketing natural gas to urban dwellers.

PetroChina still owns seven trunk pipelines with a combined designed transportation

capacity of 80.3 billion cubic metres per year. If all of these pipelines are injected into

Kunlun Energy, the revenue and pre-tax profit of Kunlun Energy’s pipeline business

would increase by HK$40 billion and HK$20 billion respectively (we believe the

probability of injecting one pipeline a year is as high as 75%).

We believe the probability of

PetroChina injecting one pipeline into

Kunlun Energy a year is as high as

75%.




Exhibit 8: PetroChina’s main natural gas pipelines

Pipeline Length (km) Transportation capacity (billion cubic metres/year)

The Sebei-Xining-Lanzhou Pipeline 953 6.8

The Zhongwu Pipeline (Zhong county, Sichuan province-Wuhan) 719 10.5

The West–East Gas Pipeline 1 (Xinjiang-Shanghai) 4,200 17

The West–East Gas Pipeline 2 (Xinjiang-Shanghai) 9,102 30

The Huaiwu Pipeline 475 1.5

The Jining Pipeline (Nanjing-Anping, Hebei province) 890 11

The Lanyin Pipeline (Lanzhou-Yinchuan) 413 3.5

Total 80.3


2 Natural Gas Sales --- growing faster than the

industry, driven by organic and inorganic growth

2.1 Despite growing at an annual rate of 16%, China’s natural gas

consumption has a penetration rate of less than 20% on average

China’s natural gas consumption has been accelerating at an annual growth rate of 16%

in the past decade. In 2010, the volume consumed topped 100 billion cubic metres to

reach 107 billion cubic metres. In 2011, the volume increased 20.6% y-o-y to 129 billion

cubic metres.

China’s natural gas output has been growing at an annual rate of 14% in the past 10

years. In 2010, China produced 94.5 billion cubic metres of natural gas and in 2011 the

output grew by 6.9% y-o-y to 101 billion cubic metres. China imported around 30 billion

cubic metres of natural gas in 2011.

Exhibit 9: China’s natural gas consumption and the penetration rate in major cities in 2010


The penetration rate of natural gas in China is less than 20% on average at present,

implying enormous growth potential.

-5%

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

140

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

bil

lio

n c

ub

ic m

ete

rs

Natual gas consumption volume (billion cubic meters,LHS)

Y-o-y growth rate (RHS)

GDP growth (RHS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

Beiji

ng

Tia

njin

C

hongqin

g

Shanghai

Xin

jiang

Qin

ghai

Sic

huan

Lia

onin

g

Shaanxi

Nin

gxia

S

handong

Jia

ngsu

Hebei

Hubei

Shanxi

Gansu

Anhui

Henan

Heilo

ngjia

ng

Hain

an

Inner

Mongolia

Jili

n

Zhejia

ng

Guangdong

Hunan

Jia

ngxi

Guangxi

Fujia

n

Guiz

hou

Yunnan

Tib

et

Penetrations rate of natural gas across China in 2010

Growth in natural gas

penetration rate in

China will drive sales




As China’s natural gas production lags consumption growth, natural gas shortage

has been a persistent issue.

Considerable effort is being made to construct cross-border natural gas pipelines

and coastal LNG receiving terminals in China. With such projects coming into

operation, China’s natural gas import has been surging since 2010 and shortages

are expected to be slightly relieved.

We estimate China’s natural gas consumption will grow at an annual rate of 17%

over the 12th Five-Year Plan period (2011-2015) and China will consume 230 billion

cubic metres of natural gas per year by 2015, as growth potential for natural gas

use in China remains enormous and imported natural gas will plug the shortages.

Economically developed areas or natural gas production areas in China consume

large amounts of natural gas, pushing up penetration rates in these areas to high

levels. In contrast, natural gas consumption growth is the highest in areas where

the penetration rate is low and in places close to areas with new natural gas supply

like Liaoning province and Jiangsu province etc.

2.2 Kunlun Energy’s operations are focused in areas where penetration

rates are low and access to natural gas supply is easy. Its natural

gas sales shot up on organic growth.

By the end of 2011, Kunlun Energy distributed natural gas in 22 provinces, providing gas

in 15 cities in nine provinces and operating 190 CNG filling stations and 47 LNG filling

stations. Its market presence is mainly concentrated in Xinjiang, Shandong, Hainan,

Hebei, Sichuan, Inner Mongolia, Guangdong, Qinghai and Shaanxi. These markets have

a natural gas penetration rate of around 20% on average.

As the penetration rate is relatively low in these areas and Kunlun Energy is well-placed

to secure natural gas supply from its parent company PetroChina, Kunlun Energy’s

natural gas sales volume has been growing at a faster pace than its competitors. In 2011,

its natural gas sales volume increased 63.4% y-o-y to 3.6 billion cubic metres.

Kunlun Energy’s natural gas sales

volume has been growing at a faster

pace than its competitors.


(China’s natural gas consumption)

2012 - 149.6 billion cubic metres






Exhibit 10: Kunlun Energy’s market presence in China


Exhibit 11: A comparison of growth rates of natural gas suppliers in 2011


2.3 Industry concentration is low in China’s natural gas distribution

sector. Kunlun Energy is expanding rapidly by leveraging its

resource-rich parent company and its SOE status

City gas distribution in China is characterised by low industry concentration, as major

suppliers have less than 10% market share in China. As each area is served by local city

gas suppliers, dominant suppliers turn to acquisitions and mergers to expand.

Xinjiang

Tibet

CNG stations

LNG stations and plants

LNG receiving terminals

Qinghai

Qinghai

Inner Mongolia

Shanxi

Shanxi

Liaoning

Beijing

Shandong

Hebei

Henan

HubeiSichuan

Chongqing

Guizhou

Hunan

Guangdong

Zhejiang

Jiangsu

Anhui

Xinjiang

63.40%

29% 31.60%

15.90%

0% 0%

10%

20%

30%

40%

50%

60%

70%

Kunlun Energy China Resources Gas

ENN Group Towngas Beijing Enterprises Holdings Ltd

Y-o-y growth rates of sales volume in 2011

In terms of in-organic growth,

Kunlun Energy will probably expand

the quickest among the listed

suppliers, as its parent company

has a significant number of asset

injections and as PetroChina

ensures Kunlun Energy has easier

access to natural gas supplies.




Exhibit 12: Sales volume and market share at a glance (2011)

Company Sales volume in 2011 (billion cubic metres)

Market share

China Resources Gas 7.22 5.6%

Beijing Enterprises Holdings Ltd 6.47 5.0%

ENN Group 5.01 3.9%

Towngas 4.67 3.6%

Kunlun Energy 3.63 2.8%


Among listed natural gas distributors, China Resources Gas had the largest sales

volume and market share, selling 7.22 cubic metres and securing a 5.6% market

share in 2011. In the same year, Kunlun Energy sold 3.36 billion cubic metres.

China Resources Gas and Kunlun Energy have been expanding at the fastest pace,

leveraging two advantages to facilitate their expansion. One is that their parent

companies continued to inject city gas projects and the other is their status as an

SOE makes it easy for them to obtain new projects. We estimate both companies

will expand rapidly in the coming years. In terms of in-organic growth, Kunlun

Energy will probably expand the quickest among the listed suppliers, as its parent

company has a significant number of natural gas projects available for injection and

as it ensures Kunlun Energy has easier access to natural gas supplies.

On one hand, Kunlun Energy has been aggressively consolidating the city gas

operations acquired from PetroChina in the end-user market and it expanded its city gas

coverage to 25 cities. On the other hand, it is focusing on the transportation market for

future growth by setting up a great number of CNG and LNG filling stations. Kunlun

Energy operates 190 and 47 CNG and LNG filling stations respectively.

Exhibit 13: Impressive growth of Kunlun Energy’s natural gas distribution

business between 2009 and 2011


2.4 Contribution from the sales of high value-added products like CNG &

LNG are rising and the profit margin of the gas sales business will

gradually accelerate

The natural gas price structure consists of three parts: wellhead prices, pipeline

transportation rates and distributor mark-ups. End-user price of natural gas is the

6

109

1 12

141

10

25

190

47

0

20

40

60

80

100

120

140

160

180

200

No.of city gas projects CNG filling stations LNG filling stations

2009 2010 2011




aggregate of wellhead prices, pipeline transportation rates and distributors’ costs and

profit. Wellhead prices and pipeline transportation rates are regulated and set by the

NDRC, while end-user prices of natural gas in China are subject to the approval of pricing

bureaus of local governments. As such, profit margins of natural gas distributors are

basically under the influence of government pricing. The government adopts a

differentiated pricing strategy based on the types of end users. Typically, prices for

natural gas for powering vehicles are the highest, while it’s the cheapest for residential

use, with industrial and commercial use priced in between. The difference in profit

margins of major natural gas suppliers in China stem from their different customer mix.

In anticipation of a bigger shift from oil to natural gas as fuel for powering vehicles and

vessels, Kunlun Energy has set up a considerable number of CNG and LNG filling

stations to tap into the growing market. After adding 86 filling stations in 2011, it now has

up to 237 filling stations in operation. We estimate that the sales volume of natural gas as

fuel for vehicles as a share of Kunlun Energy’s total sales volume has risen sharply to

above 60% and the profit margin of its distribution business will keep climbing to a level

higher than those of China Resources Gas and ENN Group.

Exhibit 14: The number of filling stations of natural gas distributors in 2011

Company Sales volume of natural gas

in 2011 (bn cubic metres) No. of filling stations in

operation Additions in

2011

China Resources Gas 7.22 93 24

ENN Group 5.01 238 46

Kunlun Energy 3.63 237 86


Exhibit 15: A comparison of pre-tax profit margins of the distribution business of

major natural gas suppliers


12.7%

14.1%

16.4% 15.9%

15.4% 15.6%

10%

11%

12%

13%

14%

15%

16%

17%

18%

Kunlun Energy(2009)

Kunlun Energy(2010)

Kunlun Energy(2011)

China Resources Gas(2011)

ENN Group(2011)

Beijing Enterprises

Holdings Ltd(2011)

Kunlun Rest of market

Pre-tax profit margins of natural gas distribution

Increase in the sales of higher

margin LNG fuel for vehicles

will drive profit margin growth.




3 LNG business – a market in rapid growth where

Kunlun will become the largest producer and one

of the biggest importers

3.1 Similar to diesel in terms of calorific value per unit, LNG is cheaper

and more environmental friendly. The growth potential for LNG

vehicles is also enormous.

Among alternative energy sources to oil, LNG provides calorific values similar to those of

diesel and petrol. LNG is also regarded as one of the cleanest types of energy, because it

emits less noxious gases than diesel. LNG is only 55% of the price of diesel for the same

amount of calorific value. It costs RMB225 to fuel a LNG-powered vehicle 100 km versus

RMB400 needed for a diesel-powered vehicle over the same distance. Converting a

diesel vehicle to LNG normally costs RMB20,000-30,000, which could be recouped after

15,000 km.

Exhibit 16: A comparison of fuel efficiency

Calorific value for unit volume

(kilocalorie /cubic metre)

Unit Consumption for 100 kilometers

Costs for 100 kilometers

(RMB)

Carbon monoxide emission (g/kw.h)

Exhaust smoke CO2

Heavy-duty trucks or coaches

0# diesel 125 RMB8.2/litre 45 litres 369 0.84 0.321

LNG (liquefied natural gas) 115 RMB4.5/cubic metre

50 cubic metres 225 0.007 0

LPG (liquefied petroleum gas) 108 RMB4.8/cubic metre

65 litres 312

Taxis/ Family cars

93# petrol 135 RMB8.2/litre 8 litres 65.6

CNG(compressed natural gas) 40 RMB3.5/cubic metre

8.2 cubic metres 28.7


China’s LNG market for powering vehicles is still rudimentary. At the end of 2010, there

were only 5,629 LNG-powered vehicles on the road in China and the slow development

is largely due to three key reasons.

1. LNG supply is unstable. China’s natural gas is inadequate and mainly transported

through pipeline. And also, the inadequate natural gas is foremost used to meet the

demand of residential, industrial and commercial use and CNG users. While the

number of LNG terminals (receiving offshore LNG) and processing plants in China

is limited, making LNG supply unstable.

2. Accessibility to LNG filling stations limited. There were only 100 LNG filling

stations in China in 2010. The lack of a dense network of LNG filling stations crimps,

to a certain extent, the use of LNG-powered vehicles.

3. LNG vehicles, and their engines in particular, are technically inadequate.

Manufacturers of heavy trucks, coaches and engine developers in China were late

in their R&D of LNG vehicles.

We think the use of LNG vehicles will increase as a cost-effective and environmental

choice as the three aforementioned obstacles will be gradually reduced. We estimate

over 60,000 LNG vehicles will be on the road in 2013 in China.


(Number of LNG filling stations)

2012 300

2013 800

2014 1,500


(Number of LNG vehicles)

2012 12,000 units

2013 25,000 units

2014 40,000 units




1. At present, five LNG receiving terminals are in operation in China and LNG imports

exceeded 10 million tonnes in 2011. Nine LNG receiving terminals are expected to

be put in to operation by China’s three oil majors over the 12th Five-Year Plan

period (2011-15), during which over 40 million tonnes of LNG will be imported

annually.

2. China’s National Energy Administration approved technical standards for LNG

filling stations in 2011. CNOOC, Xinjiang Guanghui Industry and Kunlun Energy

have since been stepping up construction of LNG filling stations. The total number

of LNG filling stations in China is expected to top 3,000 by the end of 12th Five-Year

Plan period. During this period, Kunlun Energy plans to construct 1,000-2,000 LNG

filling stations and CNOOC 1,000. Xinjiang Guanghui Industry plans to increase the

number of its LNG filling stations to 300 in the next 3-5 years.

3. Automakers, engine developers and cryogenic equipment manufacturers in China

have been focusing R&D efforts on LNG-related technology and application in

recent years and have rolled out products that are technically well-developed. The

number of LNG-powered vehicles is close to 6,000.

Exhibit 17: LNG receiving terminals in China

Location Status Start date

Capacity (mtpa)

Operator Maket Value

Dapeng, Guangdong in operation 2006 6.8 CNOOC -

Putian, Fujian in operation 2009 2.6 CNOOC -

Yangshan Deepwater Port, Shanghai in operation 2009 3.0 CNOOC -

Rudong, jiangsu in operation 2011 3.5 PetroChina/Kunlun Energy -

Dalian, Liaoning in operation 2011 3.0 PetroChina /Kunlun Energy -

Ningbo, Zhejiang under construction 2012 3.0 CNOOC -

Zhuhai, Guangdong under construction 2013 3.5 CNOOC -


3.2 A potential leader, leveraging on its parent company’s natural gas

resources

China’s LNG supply mainly comes from two sources: 1) imports through coastal LNG

receiving terminals; and 2) production by domestic LNG processing plants. Kunlun

Energy owns two LNG receiving terminals with annual imports of 6.5 million tonnes and

34% market share, and four LNG processing plants with daily capacity of 1.38 million

cubic metres (equivalent to 0.37 mtpa) and 14% market share.

PetroChina has two LNG terminals under construction, which are scheduled to

commence production in 2013 and 2014 respectively, with a combined processing

capacity of 6.50 mtpa. As this two LNG terminals are also very likely to be injected into

Kunlun Energy, we expect the company’s LNG processing capacity to reach 13.0 mtpaby

2014.

Furthermore, Kunlun Energy is in the process of setting up another 12 LNG processing

plants, all of which will be put into operation by 2014. Therefore, the company’s daily

LNG production capacity is expected to surge to 200 million cubic metres and thus

become China’s largest onshore LNG producer and supplier.




Exhibit 18: LNG imports (as at end-2011) Exhibit 19: Domestic LNG production (as at end-2011)

Source: Guosen Securities (HK) Source: Guosen Securities (HK)

6.5

12.4

Kunlun Energy (10,000 tonnes per annum)

CNOOC (10,000 tonnes per annum)

138

105

60

150

506

Kunlun Energy (10,000 cu m per day)

Xinao Gas (10,000 cu m per day)

CNOOC (10,000 cu m per day)

Guanghui Industry (10,000 cu m per day)

Others (10,000 cu m per day)



Base |Bull | Bear analysis 23

Base | Bull | Bear analysis We forecast Kunlun Energy’s EPS for 2012E will be HK$0.900, HK$0.972 and

HK$0.689 respectively under our base case, bull case and bear case analysis.

9

10

11

12

13

14

15

16

17

Sep/11 Dec/11 Mar/12 Jun/12 Sep/12 Dec/12 Mar/13

HK

$

Target Prices - 135 HK (HK$,LHS)

135 HK(HK$,LHS)

PT: HK$15.3 (Base case)

PT: HK$11.0 (Bear case)

PT: HK$18.5 (Bull case)





Future development of China’s natural gas transmission and distribution industry and

Kunlun Energy is highly dependent on the following factors:

1. Whether the 17% annual growth in natural gas sales in China can be sustained;

2. Whether the construction of natural gas import pipelines and LNG receiving

terminals can be completed on schedule

3. When and how China will launch the reform of the natural gas pricing mechanism

4. Whether Kunlun Energy’s construction of LNG processing plants, fueling stations

and LNG vehicle projects can progress in line with expectations

5. Whether there will be any further pipeline or asset injections

Besides, as Kunlun Energy generates parts of its revenue and profits from crude oil

production, the following two factors can also materially affect the company’s future

performance:

1. Whether the company’s crude oil output can remain stable;

2. Whether there will be any material changes in global oil prices.

We have built the following three scenarios based on whether, when and how the above

factors occur:




1 Base analysis

Exhibit 20: Base case – 75% chance

Incident Premise Impact on the company

1. Natural gas consumption in China will grow steadily by

17% per annum during the 12th Five-Year Plan period

(2011-2015), reaching 234.5 bcm by 2015

1. The programmes of social security housing and

renovating dilapidated houses will plug the supply

gap in the residential property market

2. The economic slowdown won’t worsen

unexpectedly or put many companies out of

business

Kunlun Energy’s natural gas sales will

continue to grow by 30-40% annually

2. Construction of LNG import pipelines and receiving

terminals will proceed as planned, securing national gas

supply

1. China’s gas import contracts will be executed

accordingly, and the reform of natural gas pricing

will proceed smoothly to help set the city-gate prices

of imported gas

The company’s access to abundant

gas resources will be secured

3. China may lower natural gas prices by 15% to 25% in

2012 before officially launching the pricing mechanism

reform, which is currently being tested in Guangdong and

Guangxi

1. The pilot reforms on natural gas pricing in

Guangdong and Guangxi may fail due to

unsuccessful implementation

The company could pass most of the

cost increases onto its downstream

clients

4. Development of Kunlun Energy’s LNG receiving

terminals, processing plants, fueling stations, and the

development of LNG cars and vessels in China will

proceed smoothly as planned

1. Increase in CPI won’t pressure the mark-up of

natural gas prices

Revenue growth of its LNG business

will be maintained at around 40%,

while profits before tax will increase by

20% annually

5. Its parent will inject more assets into Kunlun Energy 1. The government will continue to support the

popularisation of LNG vehicles

The company’s production capacity

will expand further

6. Brent crude oil price will remain at US$115/bbl in 2012 1. The company secures relevant approvals from

the government

2. The Iran nuclear issue does not worsen

3. No material changes in the global economy

Both revenue and profits from its oil

exploration business will grow steadily


Exhibit 21: Base-case assumptions

2012E PROB 2013E PROB 2014E PROB Comment

Oil exploration business

Brent oil price (US$/bbl) 115 50% 105 50% 95 50% Uncertainty is very high

Crude oil sales (mn bbl) 16.50 90% 16.50 90% 16.50 90% Production has been stable

Natural gas business

Sales (bcm) 4.86 60% 6.56 75% 8.87 75% An uncertainty is the economy slowing down

% chg 35 35 35

Transmission volume (bcm) 25.0 75% 30.25 75% 39.06 75% An uncertainty is when there is another pipeline injection % chg 18 18 25

LNG processing and storage volume (bcm) 2.25 75% 3.38 75% 5.06 75% An uncertainty is the development progress of downstream LNG vehicles % chg 50 50 50


Exhibit 22: Base-case profit forecasts

HK$ mn 2012E 2013E 2014E

Revenue 35.624 49.691 70.978

% chg 40 39 43

Profit before tax 13.411 17.370 23.450

% chg 28 30 35

Profit attributable to shareholders 7.226 9.360 12.636

% chg 29 30 35

EPS (HK$) 0.900 1,166 1.574





Summary Financials – Base Case +49% +23% -11%



Other gains, net 203 175 175 175 175






Selling, general and administrative expenses -993 -1,592 -2,137 -2,981 -4,259 Decrease from 9% to 7% of revenue


Other expenses -15 -1 - -390 -1,212

Interest expense -409 -403 -484 -580 -696








Earnings per share (HK$) 0.522 0.699 0.900 1.166 1.574 With 8.2bn outstanding shares



Balance sheet














Current assets 11,128 16,548 24,107 29,799 39,995

Total assets 63,393 84,069 99,225 111,191 125,967






Long-term borrowings 12,023 24,964 24,964 29,964 29,964 Capex to be financed by equity +debt





Total equity 38,427 45,587 57,179 59,241 66,597



Source: Guosen Securities(HK)

BULL BASE BEAR




2 Bull analysis

Exhibit 23: Bull case – 50% chance


1. Natural gas consumption in China will soar by 20% annually over 2011-15

1. China begins to relax control on the property market 2. Economic growth will be maintained at above 8%

The natural gas distribution business contributes 30% of its total revenue. Therefore, if natural gas sales grow by 10%, the company’s total revenue will increase by 3%

2. Better-than-expected domestic production or imports of natural gas guarantee adequate gas supply

1. New gas fields are discovered 2. New contracts for natural gas imports are signed

The company’s business expansion will be accelerated

3. China postpones the reform on natural gas pricing in 2012

1. China’s inflation worsens Profit before tax of the company’s urban gas distribution business will grow by over 16% annually

4.Development of Kunlun Energy’s LNG receiving terminals, processing plants, fueling stations, and the market development of LNG cars and vessels will be completed ahead of schedule

1. Oil prices continue to increase, opening up more opportunities for LNG 2. The government tightens control on environment protection 3. China exerts more effects to support the popularisation of LNG vehicles (such as granting subsidies for modifying diesel-fueled cars)

Average revenue growth of its LNG business will surpass 100% per annum

5.Asset injections by the parent company will be accelerated

1. The company receives relevant approvals from the government 2. PetroChina accelerates consolidation of its downstream gas assets

The company’s new operations achieve better-than-expected growth

6.Brent crude oil price will jump to US$120/bbl in 2012 1. The Iran nuclear issue worsens 2. The global economy rebounds unexpectedly

Both revenue and profits from its oil exploration business increase further


Exhibit 24: Bull-case assumptions



Brent oil price (US$/bbl) 120 25% 110 20% 100 20% An uncertainty is whether Iran or Syria break out in a war

Crude oil sales (mn bbl) 16.50 90% 16.50 90% 16.50 90% -


Sales (bcm) 5.22 25% 7.57 25% 10.98 25% An uncertainty is how fast China’s economy slows down- %chg 45 - 45 - 45 -

* Transmission volume (bcm) 27.50 50% 35.75 50% 48.26 50% An uncertainty is when the pipelines are injected

%chg 25 - 30 - 35 -

LNG processing and storage volume (bcm) 3.00 50% 6.00 50% 12.00 50% An uncertainty is how strong the government supports LNG vehicles %chg 100 - 100 - 100 -


Note: We assume PetroChina will inject one pipeline project P.a with annual transmission capacity of over 5bcm into the company over

2012-2014

Exhibit 25: Bull-case profit forecasts

HK$ mn 2012E 2013E 2014E

Revenue 38,802 59,076 92,762

% chg 53 52 57

Profit before tax 14,485 20,707 31,180

% chg 39 43 51

Profit attributable to shareholders 7,804 11,157 16,800

% chg 39 43 51

EPS (HK$) 0.972 1,390 2,093





Summary Financials – Bull Case +49% +23% -11%



Other gains, net 203 175 175 175 175




Exploration expense -53 -247 -296 -356 -427 Increases at ~20% annually


Selling, general and administrative expenses -993 -1,592 -2,716 -4,431 -7,421 Decreases from 7% to 8% of revenue


Other expenses -15 -1 0 -390 -1212

Interest expense -409 -403 -483.6 -580.32 -696.384








Earnings per share (HK$) 0.522 0.699 0.972 1.390 2.093 With 8.2B outstanding shares



Balance sheet














Current assets 11,128 16,548 21,684 30,984 46,806

Total assets 63,393 84,069 99,802 118,376 141,778






Long-term borrowings 12,023 24,964 24,964 34,964 34,964 Capex to be financed by equity + debt





Total equity 38,427 45,587 56,648 58,155 69,815




BULL BASE BEAR




3 Bear analysis

Exhibit 26: Bear case – 25% chance


1. Growth of natural gas consumption in China will fall below 15% over 2011-15

1. Stringent property control may last for quite a long time 2. Economic growth may slow to 7%

Annual growth of Kunlun Energy’s natural gas sales will slow to 20%

2.Construction of LNG import pipelines and receiving terminals will be hindered by natural gas shortage

1. Gas import contracts may not be successfully implemented 2. China may suffer huge losses from gas imports as the pricing reform falls behind schedule

The company may have to slow down its business expansion

3. China may expansion the coverage of the pilot reforms on natural gas pricing to nationwide in 2012

1. The pilot reforms on natural gas pricing in Guangdong and Guangxi are proven to be successful 2. China intensifies the national reform on natural gas pricing

Profit margin of its natural gas distribution business will fall below 15%

4.Development of Kunlun Energy’s LNG receiving terminals, processing plants and fueling stations, and the market development in LNG cars and vessels may fall behind schedule

1. Slump in oil prices reduce the competitive edge of LNG 2. The government reduces its support to the popularisation of LNG vehicles

Revenue from its LNG business may be slower than expected

5.No further asset injections from its parent company 1. The company fails to secure approvals from the government

No asset injection from its parent company

6.Brent crude oil price may slump to US$100/bbl in 2012

1. Resolution of the conflict in Iran boosts oil production and exports 2. Global oil demand falls due to further economic slowdown

Both revenue and profits from its oil exploration business will decline


Exhibit 27: Bear-case assumptions



Brent oil price (US$/bbl) 100 25% 95 25% 90 25% An uncertainty is how bad the global economy is turning

Crude oil sales (mn bbl) 16.50 - 16.50 - 16.50 - -


Sales (bcm) 4.14 25% 4.76 25% 5.48 25% An uncertainty is how fast China economy slows down

% chg 15 - 15 - 15 -

Transmission volume (bcm) 25.30 25% 29.10 25% 33.46 25% An uncertainty is whether PetroChina will inject more pipelines % chg 15 - 15 - 15 -

LNG processing and storage volume (bcm) 1.95 25% 2.54 25% 3.30 25% An uncertainty is how strong the government supports LNG vehicles % chg 30 - 30 - 30 -


Note: We assume there will be no piprline injections into Kunlun Energy over 2012-2014

Exhibit 28: Bear case profit forecasts

HK$ mn 2012E 2013E 2014E

Revenue 28,726 33,053 38,316

% chg 13 15 16

Profit before tax 10,263 11,593 12,625

% chg -2 13 9

Profit attributable to shareholders 5,530 6,246 6,803

% chg -1 13 9

EPS (HK$) 0.689 0.778 0.847





Summary Financials – Bear Case +49% +23% -11%



Other gains, net 203 175 175 175 175


Purchase, service and other costs -5,745 -8,848 -10,341 -11,238 -12,261 Decrease from36% to 32% of revenue




Selling, general and administrative expenses -993 -1,592 -1,436 -992 -766 As about 8% of revenue


Other expenses -15 -1 0 -390 -1212

Interest expense -409 -403 -483.6 -580.32 -696.384








Earnings per share (HK$) 0.522 0.699 0.689 0.778 0.847 With 8.2b outstanding shares



Balance sheet




Investments in associates 5,635 6,158 6,158 6,158 6,158

Investments in jointly controlled entities 1,500 1,732 1,732 1,732 1,732





Inventories 383 563 637 733 849 Grows as fast as revenue

Accounts receivable 520 724 819 942 1,092 Grows as fast as revenue



Current assets 11,128 16,548 24,536 34,493 46,677

Total assets 63,393 84,069 96,865 105,228 114,038






Long-term borrowings 12,023 24,964 24,964 29,964 34,964





Total equity 38,427 45,587 57,223 59,077 61,054




BULL BASE BEAR



Bringing it together 31

Bringing it together Kunlun Energy is trading at about 14.2x historic P/E and 11.0x forward

P/E, while the gas distribution sector in HK is trading at about 20.0x

historic P/E and 17.2x forward P/E. We think Kunlun Energy is mispriced

because the market is overly concerned about the uncertainties of its

business development and neglects the scale of its natural gas

business, which is already comparable with CR Gas and ENN’s.




1 Profit forecasts

1.1 Base-case forecasts

Our profit forecasts are based on the base-case assumptions outlined in Exhibit 26. We

estimate Kunlun Energy’s operating revenue to reach HK$35.6 billion, HK$49.7 billion

and HK$71.0 billion respectively over 2012-14. We forecast pre-tax profit to be HK$13.41

billion, HK$17.37 billion and HK23.45 billion, and a net profit of HK$7.22 billion, HK$9.36

billion and HK$12.64 billion respectively over 2012-14.

Exhibit 29: Earnings forecasts – base case

Item 2012E 2013E 2014E

Revenue (HK$ bn) 35.624 49.691 70.978

y-o-y chg (%) 40 39 43

Pre-tax profit (HK$ bn) 13.411 17.370 23.450

y-o-y chg (%) 28 30 35

Profit attributable to shareholders (HK$ bn) 7.226 9.360 12.636

y-o-y chg (%) 29 30 35

EPS (HK$) 0.900 1.166 1.574


1.2 Sensitivity analysis

While most of Kunlun’s revenue comes from oil exploration & extraction, its natural gas

pipeline transportation, gas sales, and LNG processing, storage & transport businesses

are expected to become major drivers of the company’s growth going forward. Given the

stable pipeline transportation cost and transport volume growth, factors leading to

uncertainties in Kunlun’s profits mainly include:

1. Crude oil prices

2. Natural gas sales volume

3. Profit margin of natural gas sales business

4. Capacity ultilisation of LNG processing plants

Among the aforementioned four factors, we believe crude oil prices and the profit margin

of the natural gas sales business are the two dominating factors. Assuming Kunlun

Energy’s profit attributable to shareholders reaches RMB7.226 billion in 2012E, we

conducted a sensitivity analysis of crude oil prices and the profit margin of the natural gas

sales business (Exhibit 28).

Exhibit 30: Sensitivity analysis on crude oil prices and the profit margin of the

natural gas sales business (HK$ bn)

Changes in the profit margin of natural gas sales business (Assuming the benchmark is 16.4% )

-2% -1% 0% 1% 2%

Changes in crude oil price (US$/barrel)

10.0 7.823 7.882 7.941 8.000 8.059

5.0 7.458 7.517 7.576 7.635 7.694

0.0 7.108 7.167 7.226 7.285 7.344

-5.0 6.758 6.817 6.876 6.935 6.994

-10.0 6.393 6.452 6.511 6.570 6.629





Exhibit 31: Sensitivity analysis on crude oil prices and the profit margin of the

natural gas sales business (%)

Changes in the profit margin of natural gas sales business (Assuming the benchmark is 16.4% )

-2% -1% 0% 1% 2%

Changes in crude oil price (US$/barrel)

10.0 8.3% 9.1% 9.9% 10.7% 11.5%

5.0 3.2% 4.0% 4.8% 5.7% 6.5%

0.0 -1.6% -0.8% 0.0% 0.8% 1.6%

-5.0 -6.5% -5.7% -4.8% -4.0% -3.2%

-10.0 -11.5% -10.7% -9.9% -9.1% -8.3%


Based on our sensitivity analysis, Kunlun’s 2012E results are most sensitive to crude oil

prices, and every US$5 /barrel movement in crude oil price will have a 4.8% (HK$350

million) impact on the company’s profit attributable to shareholders for 2012E, while

every 1% change in the pre-tax profit margin of the natural gas sales business would

impact our 2012E profit attributable to shareholders by 0.8%.

1.3 Valuation screening

Kunlun Energy is trading at a prospective P/E of 14.2x and 11.0x respectively for 2012-13

respectively, implying a relatively low valuation compared with peers (Exhibit 30). As the

company enjoys abundant gas resources to support the expansion of its distribution

business and given its early entrance into the fast-growing LNG vehicle market, we

believe the company is undervalued and we forecast its net profit to expand at a CAGR

of 30% over 2011-14.

We use P/E as our primary method of valuing Kunlun Energy. In the base case, we

assume a 17x 2012 P/E, which is the average multiple for leading gas distributors (CR

Gas & ENN) in the Hong Kong market. In the bull case, we assume a 19x 2012 P/E,

enjoying a little premium due to its better growth outlook. In the bear case, we assume a

16x 2012 P/E, discounted moderately to take into account less-than-expected support

from PetroChina.




1.4 Peer Group Comparisons

Exhibit 32: Valuation comparison (base case)

PE (x) 2011A 2012E 2013E 2014E

135 HK KUNLUN ENERGY 18.3 14.2 11.0 8.1

1193 HK CHINA RESOURCES GAS 22.2 18.9 15.4 12.5

2688 HK ENN ENERGY 20.1 16.3 14.0 12.2

384 HK CHINA GAS 17.8 15.5 13.4 11.8

Average 19.6 16.2 13.4 11.1

PB (x)

135 HK KUNLUN ENERGY 3.4 2.4 2.3 2.0


2688 HK ENN ENERGY 3.5 2.9 2.5 2.2

384 HK CHINA GAS 1.7 1.5 1.4 1.3

Average 3.0 2.5 2.2 2.0

EV/EBIT(x)

135 HK KUNLUN ENERGY 17.9 12.7 9.6 6.8


2688 HK ENN ENERGY 14.6 11.8 10.0 8.5

384 HK CHINA GAS 13.2 11.1 9.7 7.1

Average 15.5 12.2 9.9 7.7

EV/EBITDA(x)

135 HK KUNLUN ENERGY 11.9 8.7 6.7 4.9


2688 HK ENN ENERGY 11.9 9.7 8.3 7.2

384 HK CHINA GAS 9.8 8.3 7.2 5.4

Average 11.6 9.2 7.6 6.0


2 Risks

The annual growth rate of demand for natural gas in China may slow to below 15% in

the next few years due to property tightening or economic slowdown, leading to a

decline in natural gas sales.

An unexpected surge in natural gas city-gate prices will raise production costs, and

the company may fail to fully pass the added costs onto its downstream customers

and thus hurt the profit margin of its natural gas distribution business.

Development of the company’s LNG vehicle business may be hindered by

unsuccessful marketing campaigns or weaker-than-expected support from the

government.

PetroChina may not inject any other pipeline into Kunlun Energy due to the changing

of its strategy to let Kunlun Energy consolidate its downstream natural gas business

only.

A sharp decline in global crude oil prices will squeeze the earnings of Kunlun

Energy’s oil exploration and production businesses.




Closing notes to the buy-side analyst

Investors should consider Kunlun Energy’s current business scale. We argue that

Kunlun Energy can grow at least as fast as its peers in the industry, even without

further asset injections from PetroChina.

It’s notable that PetroChina’s city gas business covers more than 100 cities in

China (which is currently under Kunlun Gas) and it’s possible that these operations

are injected into Kunlun Energy in the future.

We caution against the outcome of the natural gas pricing reform, which we expect

will be released in 2012. We believe the final version of the pricing reform rolled out

nationwide will not be the same as the trial policy in Guangdong. We also do not

expect a price hike similar to that in 2010. Instead, we believe it is very likely to be a

mix of these two.

In addition, we are cautious about the growth rate of China’s natural gas

consumption, which may drop to around 15% in 2012 due to the slowing down of

China’s economy.

More than 80% of Kunlun’s gas sales are to industrial and LNG vehicle users.

Hence, price hikes would be quickly approved and reflected. This is versus, for

instance, residential users whose natural price hikes would be delayed due to the

need to obtain local government approvals.

Depreciation, to write off the cost of each asset (other than oil & gas properties), to

their residual values over their estimated useful lives is calculated using the

straight-line method (pipelines: 10-14 years, equipment and machinery: 4-30 years,

etc.).

For the oil/gas E&P business, all costs for development of wells, facilities and

proven mineral interests in oil & gas properties are capitalised, under the successful

efforts method of accounting.

About 76% of the inventory in 2011 was materials for natural gas pipelines. We

assume this percentage will remain the same for the next three years.

The group’s sales of crude oil are generally collectable within 30 to 90 days, while

the sales of natural gas are made in cash or on credit terms no more than 90 days.




Appendix: Income statement

Year-end Dec (HK$ mn) 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E Comment

Revenue 3,843 6,788 6,164 17,336 25,398 35,624 49,691 70,978 Gas will contribute 90% in 2014

Other net income 214 206 40 203 175 175 175 175

Interest income 112 115 40 78 177 177 177 177

Purchase, service and other costs -940 -2,019 -3,075 -5,745 -8,848 -12,468 -17,392 -24,842 As about 35% of revenue

Employee benefits -253 -336 -387 -907 -1,505 -2,494 -3,975 -6,388 Increase from 7% to 9% of revenue

Exploration expenses -491 -44 -32 -53 -247 -296 -356 -427 Increase at ab.20% annually

Depreciation and amortization -653 -797 -565 -2,777 -4,088 -5,192 -6,594 -8,374

Selling, general and administrative expenses

-536 -832 -525 -993 -1,592 -2,137 -2,981 -4,259 Decrease from 8.6% to 6.7% of revenue

Taxes (income tax excluded) -82 -425 -137 -631 -1,193 -2,137 -2,981 -4,259 As about 6% of revenue

Other expenses -33 -113 64 -15 -1 0 -390 -1,212

Interest expenses -77 -165 -135 -409 -403 -484 -580 -696

Share of profits less losses of associates

2,021 3,236 256 2,031 2,255 2,322 2,255 2,255

Share of profits less losses of jointly controlled entities

186 162 252 226 322 322 322 322

Profit before income tax expense 3,311 5,774 1,960 8,344 10,450 13,412 17,371 23,450

Income tax expense -631 -1,094 -420 -2,009 -2,281 -2,924 -3,786 -5,111 With tax rate at 21.8%

Profit for the year 2,680 4,681 1,540 6,335 8,169 10,488 13,585 18,339

Profit attributable to shareholders 1,963 3,385 1,234 4,194 5,609 7,226 9,360 12,635

Equity attributable to minority shareholders

717 1,295 306 2,141 2,560 3,262 4,225 5,704

EPS (HKD) 0.245 0.422 0.154 0.522 0.699 0.900 1.166 1.574 With 8.2b outstanding shares

DPS (HKD) 0.120 0.150 0.070 0.138 0.220 0.252 0.326 0.441 As about 28% of EPS

Issued Shares (mn) 8028 8028 8028 8028 8028 8028 8028 8028

Revenue growth rate 76.6% -9.2% 181.2% 46.5% 40.3% 39.5% 42.8%

Net int. income/(exp.) 35 -50 -95 -331 -226 -307 -403 -519

EBIT 1,069 2,427 1,547 6,418 8,099 11,075 15,197 21,392

EBITDA 1,722 3,224 2,112 9,195 12,187 16,267 21,791 29,766

EV 106,849 104,436 102,585 130,925 144,662 141,186 146,110 144,413


Appendix: Balance Sheet

2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E Comment

Property, plant and equipment 2,970 4,657 5,778 42,968 56,613 63,421 68,827 72,453 NPP+CAPEX-DEPRECIATION

Advanced operating lease payments 4 74 107 827 1,218 1,218 1,218 1,218

Investments in associates 675 935 1,113 5,635 6,158 6,774 7,451 8,196 Grow at 10% annually as in 2011

Investment in jointly controlled entities 13,960 5,164 5,231 1,500 1,732 1,905 2,096 2,305 Grow at 10% annually as in 2012

Available-for-sale financial assets 62 56 105 129 130 130 130 130

Intangibles and other non-current assets 49 53 217 1,165 1,545 1,545 1,545 1,545

Deferred tax assets 2 90 79 41 125 125 125 125

Non-current assets 17,722 11,029 12,630 52,265 67,521 75,118 81,392 85,973

Inventories 30 36 44 383 563 790 1,102 1,573 Grow as fast as revenue

Accounts receivable 376 157 243 520 724 1,016 1,417 2,023 Grow as fast as revenue

Prepaid expenses and other current assets 9 252 449 2,057 3,572 3,572 3,572 3,572

Cash and cash equivalents 3,343 4,751 7,377 8,168 11,689 18,729 23,709 32,826

Current assets 3,758 5,196 8,113 11,128 16,548 24,107 29,799 39,995

Total assets 21,480 16,225 20,743 63,393 84,069 99,225 111,191 125,967

Accounts payable and accrued liabilities 727 901 1,901 6,483 8,853 12,417 17,321 24,741 Grow as fast as revenue

Income tax payable 1 43 83 261 456 456 456 456

Other tax payable 49 24 128 245 589 589 589 589

Short-term borrowings 93 1,248 163 4,911 2,611 2,611 2,611 2,611

Current liability 870 2,216 2,275 11,900 12,509 16,073 20,977 28,397

Long-term borrowings 833 1,022 1,793 12,023 24,964 24,964 29,964 29,964 Capex is assumed to be paid by equity

Deferred tax liabilities 545 852 964 1,034 985 985 985 985

Other long-term obligations - - 7 9 24 24 24 24

Non-current liabilities 1,378 1,874 2,764 13,066 25,973 25,973 30,973 30,973

Total liabilities 2,248 4,090 5,039 24,966 38,482 42,046 51,950 59,370

Total equity 20,260 12,609 15,732 38,427 45,587 57,178 59,241 66,597

Equity attributable to minority shareholders 5,186 2,339 2,165 11,369 15,111 15,111 15,111 15,111

NAVPS(HKD) 1.9 1.3 1.7 3.4 3.8 5.2 5.5 6.4

Issued shares (mn) 8028 8028 8028 8028 8028 8028 8028 8028

Capital employed 21,186 14,879 17,688 55,361 73,162 84,753 91,816 99,172

Net (debt)/cash 2,417 2,481 5,421 -8,766 -15,886 -8,846 -8,866 251

Source: Company data, Guosen Securities (HK)




Appendix: Cash Flow

2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E Comment

+ Net Income 1,963 3,385 1,234 4,194 5,609 7,226 9,360 12,635

+ Depreciation & Amortization 653 797 565 2,777 4,088 5,192 6,594 8,374

+ Other Non-Cash Adjustments 431 -391 4 2,173 2,447 2,447 2,447 2,447

+ Changes in Non-Cash Capital 117 204 904 364 -1,520 -1,520 -1,520 -1,520

Cash From Operating Activities 3,165 3,996 2,707 9,508 10,624 13,345 16,881 21,936

+ Disposal of Fixed Assets 0 68 167 108 247 247 247 247

+ Capital Expenditures -648 -1,232 -4,314 -10,930 -13,492 -12,000 -12,000 -12,000 About 12B HKD a year

+ Increase in Investments -4 -8 -13 -6 -8 -8 -8 -8

+ Decrease in Investments 0 0 17 0 0 0 0 0

+ Other Investing Activities -348 81 -371 -1,468 -3,323 -3,323 -3,323 -3,323

Cash From Investing Activities -1,000 -1,090 -4,514 -12,296 -16,576 -15,084 -15,084 -15,084

+ Dividends Paid -484 -619 -669 -4,791 -1,096 -2,023 -2,621 -3,538

+ Change in Short-Term Borrowings N/A N/A N/A N/A N/A N/A N/A N/A

+ Increase in Long-Term Borrowings 0 868 3,219 10,406 17,565 0 5,000 0 Increase about 5B HKD LT Borrowing

+ Decrease in Long-term Borrowings 0 -595 -2,133 -5,292 -7,895 0 0 0

+ Increase in Capital Stocks 6 14 3,694 22 96 10,000 0 5,000 Raise 10B/5B from equity in 2012/2014

+ Decrease in Capital Stocks 0 -1,125 N/A 0 0 0 0 0

+ Other Financing Activities -471 -489 542 2,984 803 803 803 803

Cash from Financing Activities -949 -1,946 4,653 3,329 9,473 8,780 3,182 2,265

Net Changes in Cash 1,216 960 2,846 541 3,521 7,040 4,979 9,117

Free Cash Flow (CFO-CAPEX) 2,517 2,765 -1,607 -1,422 -2,868 1,345 4,881 9,936

Free Cash Flow (CFO-CAPEX)/shares 0.314 0.344 -0.200 -0.177 -0.357 0.167 0.608 1.238

Issued shares (mn) 8028 8028 8028 8028 8028 8028 8028 8028

Spot price (April.24,2012) 12.8 12.8 12.8 12.8 12.8 12.8 12.8 12.8

Mkt. Cap (HK$ mn) 102,758 102,758 102,758 102,758 102,758 102,758 102,758 102,758


Appendix: Ratio analysis

Valuation ratios 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E

Price Earnings 52.3 30.4 83.3 24.5 18.3 14.2 11.0 8.1

EV to EBIT 99.9 43.0 66.3 20.4 17.9 12.7 9.6 6.8

EV to EBITDA 62.0 32.4 48.6 14.2 11.9 8.7 6.7 4.9

Price to Sales 26.7 15.1 16.7 5.9 4.0 2.9 2.1 1.4

Price to Book 6.8 10.0 7.6 3.8 3.4 2.4 2.3 2.0

Dividend Yield 0.9% 1.2% 0.5% 1.1% 1.7% 2.0% 2.6% 3.4%

Profitability ratios 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E

Gross Margin 75.6% 70.3% 50.1% 66.9% 65.2% 65.0% 65.0% 65.0%

EBITDA Margin 44.8% 47.5% 34.3% 53.0% 48.0% 45.7% 43.9% 41.9%

Operating Margin 27.8% 35.7% 25.1% 37.0% 31.9% 31.1% 30.6% 30.1%

Profit Margin 69.7% 69.0% 25.0% 36.5% 32.2% 29.4% 27.3% 25.8%

Return on Assets 12.5% 28.8% 7.4% 10.0% 9.7% 10.6% 12.2% 14.6%

Return on Equity 17.8% 45.6% 11.4% 23.4% 26.8% 24.9% 30.8% 35.6%

Leverage & coverage ratios 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E

Current Ratio 4.3 2.3 3.6 0.9 1.3 1.5 1.4 1.4

Quick Ratio 4.3 2.3 3.5 0.9 1.3 1.5 1.4 1.4

Interest Coverage Ratio (EBIT/I) 13.9 14.7 11.5 15.7 20.1 22.9 26.2 30.7

Tot Debt/Capital 0.8 0.9 0.9 0.6 0.7 0.7 0.8 0.8

Tot Debt/Equity 0.1 0.3 0.3 0.6 0.8 0.7 0.9 0.9

Others 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E

Asset Turnover 0.2 0.4 0.3 0.3 0.3 0.4 0.4 0.6

Accounts Receivable Turnover 10.2 43.2 25.4 33.3 35.1 35.1 35.1 35.1

Accounts Payable Turnover 1.3 2.2 1.6 0.9 1.0 1.0 1.0 1.0

Inventory Turnover 128.1 188.6 140.1 45.3 45.1 45.1 45.1 45.1

Effective Tax Rate 19.0% 18.9% 21.4% 24.1% 21.8% 21.8% 21.8% 21.8%




38

Information Disclosures

The analyst is licensed by the Hong Kong Securities and Futures Commission. Neither the analyst nor his/her associates serves as an

officer of the listed companies covered in this report and has no financial interests in the companies.

Guosen Securities (HK) Brokerage Co., Ltd. and its associated companies (herein after collectively referred to as “Guosen Securities

(HK)”) have no disclosable financial interests (including securities holding) or make a market in the securities in respect o f the listed

companies. Guosen Securities (HK) has no investment banking relationship within the past 12 months, to the listed companies. Guosen

Securities (HK) has no individual employed by the listed companies.

Disclaimers

The prices of securities may fluctuate up or down. It may become valueless. It is as likely that losses will be incurred rather than profit

made as a result of buying and selling securities.

The content of this report does not represent a recommendation of Guosen Securities (HK) and does not constitute any buying/selling or

dealing agreement in relation to the securities mentioned. Guosen Securities (HK) may be seeking or will seek investment banking or

other business (such as placing agent, lead manager, sponsor, underwriter or proprietary trading in such securities) with the listed

companies. Employees of Guosen Securities (HK) may have personal investment interests in the listed companies.

This report is based on information available to the public that we consider reliable, however, Guosen Securities (HK) has not verified

such information and does not guarantee its authenticity, accuracy or completeness. This report has been prepared for informational

purposes only without regard to any particular investment objective, financial situation or need of individual clients and does not

constitute a personal investment recommendation to anyone. Clients are wholly responsible for any investment decision based on this

report. Clients are advised to consider whether any advice or recommendation contained in this report is suitable for their particular

circumstances. This report is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned.

This report is for distribution only to clients of Guosen Securities (HK). Without Guosen Securities (HK)’s written authorization, any form

of quotation, reproduction or transmission to third parties is prohibited, or may be subject to legal action. Such information and opinions

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distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution,

publication, availability or use would be contrary to applicable law or regulation or which would subject Guosen Securities (HK) and its

group companies to any registration or licensing requirement within such jurisdiction.



39

Research Coverage (H-Shares)

Analyst Sector Desk line E-mail

Michael Wu Responsible Officer 0086-755-28995338 [email protected]

Rock Chen Macro & Banking 0086-755-61865350 [email protected]

Albert Xu Quantitative Analysis & Market Strategy 00852-28996158 [email protected]

Peter Cao Property, Hospitality & Gaming 0086-755-61865385 [email protected]

Helena Qiu Healthcare 00852-28998328 [email protected]

Stephy Wong Consumer & Retail 00852-28993141 [email protected]

Todd Yang Food & Beverage 0086-755-61865350 [email protected]

Bill Fan Electronics & Home Appliances 00852-28998331 [email protected]

Eric Qiu Media, Software & Internet 00852-28993120 [email protected]

Steven Lu Oil & Gas 00852-28998327 [email protected]

Ethane Cheng Construction & Building Materials 00852-28998329 [email protected]

Maggie Zheng Furniture & Office Supplies 0086-755-61865397 [email protected]

John Lu Machinery & Transport Equipment 0086-755-61865359 [email protected]

David Lam Coal & Steel 00852-28993130 [email protected]

Richard Gao Non-Ferrous Metals & Futures 00852-28993141 [email protected]

Thomas Zhang Futures & Non-ferrous Metal 00852-28996756 [email protected]

Vivian Fu Power & New Energy 00852-28993143 [email protected]

Helen Tang Education & Entertainment 0086-755-61865351 [email protected]

Sales Contact

Dan Weil

Global Head of Institutional Sales and

Trading

Managing Director

+852 2248 3588

[email protected]

Andrew Collier Director +852 2248 3528 [email protected]

Chris Berney

Managing Director

+852 2248 3568

[email protected]

Cancy Kong

Vice President

+852 2248 3538

[email protected]

Roger Chiman

Managing Director

+852 2248 3598

[email protected]

Gary Wong

Associate

+852 2248 3548

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Joe Chan

Director

+852 2248 3578

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