sinopec gas co - 雪球doc.xueqiu.com/147303bc5bb29a3fe7727bb9.pdf · 2014. 7. 13. · sinopec gas...

Sinopec KantonsHK$5.77 - BUY

FinancialsYear to 31 December 12A 13A 14CL 15CL 16CLRevenue (HK$m) 22,042 23,356 24,058 25,983 26,582Net profit (HK$m) 292 491 701 1,212 1,405EPS (HK$) 0.15 0.21 0.28 0.41 0.48CL/consensus (1) (EPS%) - - 88 81 95EPS growth (% YoY) (11.2) 35.6 34.4 46.6 15.9PE (x) 37.3 27.5 20.5 13.9 12.0FCF yield (%) (14.2) (15.6) (0.4) (21.5) 11.4PB (x) 1.7 1.4 1.4 1.0 0.9ROE (%) 6.3 6.0 6.9 9.0 8.1Net debt/equity (%) (37.0) (16.5) (11.1) 3.6 (4.7)Dividend yield (%) 0.6 0.6 0.6 0.6 0.6Source: CLSA

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Nelson [email protected]+852 2600 8589

Simon Powell+852 2600 8626

10 July 2014

ChinaPetro/Chems

Reuters 0934.HKBloomberg 934 HK

Priced on 10 July 2014HS CEI @ 10,368.1

12M hi/lo HK$9.57/5.72

12M price target HK$7.80±% potential +35%

Shares in issue 2,486.2mFree float (est.) 25.0%

Market cap US$1,925m

3M average daily volumeHK$45.2m (US$5.8m)

Major shareholdersChina International United Petroleum & Chemical 60.3%China Social Security Fund 6.0%

Stock performance (%)1M 3M 12M

Absolute (17.0) (27.9) (15.1)Relative (15.8) (27.5) (24.6)Abs (US$) (17.0) (27.8) (15.1)

0501001502002503003504004505005506006507007508008509009501000

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www.clsa.com

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Sinopec Gas Co Sinopec Kantons is a crude jetty operator that benefits from China’s everrising crude imports. The company is also expanding into the natural gas business by forming JVs in LNG vessels and acquiring gas pipelines from its parentco. Despite expectations for future asset injections, we believe the company could expand its earnings at a 30% Cagr for 2013-18CL with existing portfolio. With YTD share price weakness, we believe the execution and dilution risks have been fully priced in. We initiatecoverage with BUY and DCF-derived TP at HK$7.80, implying 35% upside.

A safe bet on China’s rising crude importsThe company is well positioned to benefit from China’s rising crude imports, as domestic crude demand outpaces domestic crude output. With more than 90% of the operating cost in its oil jetties being fixed cost, the operating leverage to volume increases is high and will safely translate into earnings growth. Being an operator of 7 out of the 8 biggest crude jetties in China, the company is a safe bet on China’s crude importation.

Moving into the LNG shipping and gas pipeline businessWith JVs formed in LNG vessels and the announced Yulin-Jinan gas pipeline injection, we expect ~45% of its recurring earnings to come from the natural gas business by 2015CL. We believe the company is an indirect play on Sinopec’s coal to gas/shale gas story. Also, we expect more Sinopec gas pipelines and even LNG terminals to be injected into the company in the future.

30% earnings Cagr for 13-18CL We believe the company is able to deliver 30% earnings Cagr for 13-18CLeven without future asset injections, underpinned by earnings contributions from Yulin-Jinan gas pipeline and LNG vessel phasing in from 2015CL, also exiting non-performing businesses like VLCC chartering. Added to that, positive catalysts include expansion in Qingdao jetty and capacity expansion from 3bcm to 5bcm in the Yulin-Jinan gas pipeline.

Stock oversold. Initiate coverage with BUYThe stock was a 10-bagger in the past five years but took a hit with share price down ~40% off its peak on concerns over execution risk and dilution risk. We believe the selloff is overdone with solid company fundamentalsintact and future asset injections offering the LT upside. Initiate coverage with a BUY rec, and DCF-derived TP of HK$7.80 p.s., implying 35% upside.

http://www.clsa.com/

http://www.clsa.com/

Sinopec Gas Co Sinopec Kantons - BUY

10 July 2014 [email protected] 2

China’s biggest crude importerSinopec Kantons was incorporated in Bermuda in March 1998 and listed the following year on the HKEx. As Sinopec’s only red chip subsidiary, the company manages Sinopec’s crude oil trading, storage and logistics business, and currently sits in China International United Petroleum & Chemicals Co (UNIPEC), Sinopec’s crude importation arm.

Figure 1

Sinopec Kantons company structure

Source: Company

Historically, the business of the company mainly focused on crude trading, storage, jetty service and VLCC (Very Large Crude Vessel) chartering, but it’s evolving into more natural gas related business with Yulin-Jinan gas pipeline injected from parent Sinopec and 2 LNG Vessel JVs in place. Even better, the company is exiting its loss making VLCC chartering business by this year end.

Major earnings contribution for the company comes from its associated companies or JVs which are equity accounted into its financial report, as shown in the table below.

A company controlled by UNIPEC

Business is evolving

Equity accounted earnings from JVs or

Associates

https://www.clsa.com/member/company/index.asp?clsa_id=2005720



Figure 2

Sinopec Kantons business overviewBusiness Unit Location Stake Accounting method StatusCrude trading China 100% Consolidated Making minor losses, not a core businessVLCC chartering China 100% Consolidated Loss making and will be exitedGas Pipeline China 100% Consolidated Already announced and expected the deal to close by 1Q15 endCrude Jetties- Huade Guangdong 100% Consolidated Operating- Zhanjiang Guangdong 50% Equity accounting Operating- Ningbo Zhejiang 50% Equity accounting Operating- Qingdao Shandong 50% Equity accounting Operating- Tianjin Tianjin 50% Equity accounting Operating- Rizhao Shandong 50% Equity accounting Operating- Caofeidian Hebei 90% Equity accounting Operating- PT West UAE 95% Equity accounting Under construction, expected to start operation by Mid 2017- Fujairah Indonesia 50% Equity accounting Under construction, expected to start operation by End 2014- Vesta Europe 50% Equity accounting OperatingLNG vessel- APLNG China 39.2% Equity accounting First ship delivered in Jan 2015, all delivered by Apr 2016- PNGLNG China 9.0% Equity accounting First ship delivered in Dec 2015, all delivered by Jul 2017

Source: CLSA, Company

As shown in the chart below, we expect the company to generate almost 45% of its pre-tax earnings from gas related business by 2015CL, essentially turning the company into a natural gas vehicle of Sinopec.

Figure 3

Sinopec Kantons pre-tax profits breakdown by business

Source: CLSA

Handles half of all China’s crude importsAccording to Poten & Partners, UNIPEC is the world’s biggest VLCC lease holder in 2013, surpassing international oil majors like Shell and commoditytraders like Vitol.

Leveraged to its parent UNIPEC, Sinopec Kantons became Asia’s biggest crude importer in terms of capacity and volume throughput. The company hasa total gross capacity of 225m tonnes (4.5 mbpd) and throughput volume in 2013 reached 156m tonnes (3.2 mbpd), accounting for more than half of China’s total crude imports.

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(HK$ mn)Gas pipelineLNG vesselCrude jetty - Equity Accounted (Overseas)Crude jetty - Equity Accounted (Domestic)Crude jetty - ConsolidatedVLCC vessel charteringCrude trading

Parent the biggest VLCC lease holder

Asia’s biggest crude importer in terms of capacity and volume

throughput

Switching into the right business and exiting the

loss making VLCC chartering

45% pre-tax earnings from gas related business

by 2015CL



Currently, Sinopec Kantons operates 7 crude oil jetties out of the top 8 in China, in the sense of total capacity, and it owns a 50-100% stake in the 7 jetties. Apart from Huizhou Huade which is a subsidiary, all the other 6 jetties are equity-accounted JVs or Associates which are not consolidated into the group financials. Therefore, for a better read into the financials, we focus on the pre-tax profits line rather than operating profits.

Figure 4

Chinese major crude oil ports

No. Crude port (Chinese) Crude port name (English) Storage capacity, '000 tonnes

Throughput capacity, mtpa

Kantons stake %

1 湛江港 Zhanjiang 300 55.0 50%

2 青岛港 Qingdao 300 45.0 50%

3 宁波实华 Ningbo Shihua 250 35.0 50%

4 惠州华德 Huizhou Huade 300 30.0 100%

5 大连港大孤山 Dalian Dagushan 300 22.8 -

6 曹妃甸 Caofeidian 300 20.0 90%

7 天津港 Tianjin 300 20.0 50%

8 日照港 Rizhao 300 20.0 50%

9 舟山港册子岛 Zhoushan Cezidao 300 20.0 -

10 宁波港镇海算山 Ningbo Zhenhai 250 20.0 -

11 广西涠洲岛 Guangxi Weizhou 300 20.0 -

12 大连新港 Dalian New Port 300 19.0 -

13 营口港仙人岛 Yingkou 300 18.0 -

14 海南洋浦港 Hainan Yangpu 300 18.0 -

15 福建泉州青兰山 Quanzhou Qinglanshan 300 18.0 -

16 连云港 Lianyungang 300 18.0 -

17 锦州港 Jinzhou 150 16.0 -

18 舟山港岙山 Zhoushan Aoshan 300 15.0 -

19 南京港 Nanjing 300 12.0 -

20 广东茂名 Guangdong Maoming 250 11.0 -

21 广州港 Guangzhou 150 8.0 -

22 莱州港 Laizhou 150 7.0 -

23 盘锦港 Panjin 150 3.0 -

Kantons total throughput capacity, mtpa 225.0China total throughput capacity, mtpa 470.8Kantons as % of China total* 48%

*Gross capacity, not net capacity to Kantons. Source: CLSA, Company

The business model of the crude jetty business is quite straight forward. The company charges unloading tariffs in the range of Rmb10-15/tonne for crude from the incoming VLCCs for unloading the crude oil into the storage tanks or pumping it into the crude pipelines. The company also charges some storage fee or transmission fee here and there, but it’s a minor component compared to unloading fees. Unloading tariff is largely fixed, set and regulated by the NDRC and local gov’t, thus the oil jetty business is mainly a volume play.

We like the company’s crude jetty business for its steady growth in volume throughput, high operating leverage and low risk bearing nature.

China’s crude demand, though set to slow down with the macro economy, still sees a steady 3% growth into 2020CL, and the country now has to meet more than half of its total crude demand by imports due to stagnant domestic crude output. Therefore, the visibility in crude import growth is actually quite

Operating 7 out of the biggest 8 crude jetties

Unloading tariff is fixed

High visibility in growth of volume throughput



high and we don’t see much risk from this perspective. Beside, given 90% of the total operating cost in crude jetty is fixed cost, the operating leverage for crude jetty business is actually quite high so the volume growth will safely translate into earnings growth. Last but not the least, the company is only engaged in crude unloading, storage and transmission, and it doesn’t bear any risks arising from changes in crude oil price. All the risk goes to the crude buyer Sinopec, its parent. We like its non-risk bearing nature in an environment of high crude price volatility and that’s what sets Sinopec Kantons apart from the major oil trades like Vitol and Glencore.

Figure 5

Sinopec Kantons crude oil jetties


High operating leverage

No a crude oil trader



The company’s 7 crude jetties are dotted along the East and South coast of China and cover the 3 major economic zones – Bohai Bay, Yangtze River Delta and Pearl River Delta.

The company’s crude jetties almost exclusively service Sinopec refineries, and out of the 35 Sinopec refineries nationwide, 29 refineries import crude liquids via the company.

A safe bet on China’s crude importation Though China’s crude demand is cooling off with GDP growth slowing down, total crude demand is expected to deliver a sustainable 3% growth driven by robust gasoline demand growing at 10% YoY, thanks to near 20m vehicles that China added on the road every year.

Figure 6 Figure 7

China’s gasoline demand, as of May 2014 China’s diesel demand, as of May 2014

Source: CEIC Source: CEIC

Overall correlation between China’s gasoline demand and GDP growth is weak, almost non-existent, whereas diesel demand shows a very tight correlation with GDP growth, as China’s economy is still heavily weighted towards industrial activities that consume diesel fuels.

Figure 8 Figure 9

China’s diesel demand v’s GDP growth China’s gasoline demand v’s GDP growth

Source: CEIC Source: CEIC

We expect China’s domestic crude output to grow at 1% going forward, due to the steep decline in rates at aging oilfields, and demand to grow at 3% outpacing production, therefore China will be more dependent on foreign oil

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Covering China’s major economy zone

Serving 29 out of 35 Sinopec refineries

Gasoline demand not correlated to GDP growth



to fill the gap. China’s crude import ratio soared to 59% in 2013, and we expect a further jump to 65% by 2020CL.

Figure 10

China’s total crude production, demand and net imports

Source: CLSA

Figure 11

China’s crude demand & refining capacity

Source: BP, CLSA

Figure 12

China’s crude demand, production & imports

10A 11A 12A 13A 14CL 15CL 16CL 17CL 18CL 19CL 20CLChina's crude demand, mbpd 9.3 9.9 10.4 10.8 11.1 11.4 11.8 12.1 12.5 12.8 13.2Growth % 12% 6% 5% 4% 3% 3% 3% 3% 3% 3% 3%China's domestic crude output, mbpd 4.1 4.1 4.2 4.2 4.2 4.3 4.3 4.3 4.4 4.4 4.5Growth % 7% 0% 2% 1% 1% 1% 1% 1% 1% 1% 1%China's implied crude imports, mbpd 5.2 5.8 6.2 6.6 6.9 7.1 7.4 7.8 8.1 8.4 8.7Growth % 7% 11% 7% 6% 4% 4% 4% 4% 4% 4% 4%Source: CLSA, BP, CEIC

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(mbpd) (mbpd)China crude demandChina refining capacityUtilization ratio (%) - RHS

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Crude import has surged in the past decades

Refineries utilization ratio trending down



As shown in the table above, we expect China’s imports to grow at 4% into 2020CL, based on our projections, underpinning our argument that the total volume throughput at the company’s 7 jetties will deliver a 3% Cagr into 2018CL.

Figure 13

Sinopec Kantons, unloading volumes by jetty

*Unloading volumes in Qingdao Jetty also includes liquid chemical and outsource, not just crude liquids as for other jetties. Source: Company

The visibility in forecasting the throughput of each jetty is relatively low, as the VLCC that was destined to one jetty could re-route to another from time to time, in case the berths are preoccupied with no spare unloading capacity. Therefore, the throughput volume in each jetty shows little consistency over the years, and we recommend investors focus on the total volume throughput.

Figure 14

Sinopec Kantons gross crude unloading volumes

mtpa 2012 2013 2014CL 2015CL 2016CL 2017CL 2018CLHuade 12.4 11.7 13.0 13.4 13.5 14.5 15.8Zhanjiang 22.1 24.0 24.7 24.5 25.2 26.8 28.2Ningbo 24.9 24.8 25.6 26.3 26.0 27.1 27.9Qingdao 38.7 47.5 48.9 48.5 50.4 51.9 51.0Tianjin 10.8 10.1 10.4 10.7 10.2 11.0 11.3Rizhao 14.7 23.5 24.2 25.0 25.7 26.5 27.3Caofeidian 12.9 11.1 12.0 12.5 12.6 13.8 14.5Total 136.5 152.6 158.8 160.9 163.6 171.6 176.0Change % 11.8% 4.1% 1.3% 1.7% 4.9% 2.6%2014-18CL Cagr 3%Source: CLSA, Company

Overseas business – Delayed & Underutilised Apart from its domestic oil jetties, the company also owns crude jetties and storage through overseas acquisitions.

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Total throughput to grow at 3% into 2018CL

Focusing on the total volume throughput



Figure 15 Figure 16 Figure 17

Batam Project, Indonesia Fujairah Project, UAE VTA Project, Antwerp, Belgium


Figure 18

Kantons’ overseas oil jetty businessProject Region Storage

Capacity, mmcm

Throughput Volumes, mtpa

No. of Berth

No. of VLCC Berth

Status

Batam Indonesia 2.62 50 9 1 Under construction, put in operation by end of 2016Fujairah UAE 1.16 - - - Under construction, put in operation by end of 2014Vesta Project- VTA Antwerp, Belgium 0.83 - 5 0 Currently in operation- VTF Flushing, Netherland 0.39 - 3 0 Currently in operation- VTT Tallinn, Estonia 0.41 - 5 2 Currently in operationVesta Total 1.62 - 13.00 2

Source: Bloomberg

The Batam Project in Indonesia hasn’t started tendering for engineering and construction, plus will require another 21-22 months to complete the construction, and we expect the project to be delayed to the first half of 2017.

The Vesta Project is already up and running but profitability is also lower than the company’s domestic jetty business due to much higher operating cost in Europe.

The project is also overly reliant on Sinopec’s Yanbu refinery, which is still under construction and has been delayed from 2013 to this year, and we expect it to be further delayed to the first half of 2015 at the earliest. Adding to the construction delay, it will take around 12-18 months for the refinery to ramp up its utilisation ratio, and before it hits normalised run rates, Vesta projects will continue to be underutilised.

Sinopec intended to direct the fuels produced in Yanbu refinery in Saudi to the European market to capture a higher margin, due to the fuel subsidy mechanism in Saudi. But now it looks like Europe is no better than Saudi when it comes to refining margins. The weak demand will ultimately translate into weak throughput volume, and we maintain our cautious stance on profitability of the Vesta project.

EPC tendering for Batam has yet started

Sinopec Yanbu Refinery is also delayed



Figure 19 Figure 20

Europe total crude demand Global crude demand Cagr by regions

Source: CLSA, BP Source: BP

The Fujairah project seems to be the only overseas project that could be delivered on time, and we expect the construction to be completed by this year end and put into operation starting 2015.

The Fujairah project is located in the UAE and sits along the Strait of Hormuz. Given the project only provides crude & petroleum storage service without unloading revenue income, the margin will be relatively lower.

The overseas jetties look like ‘service to its parent’, as the benefits are more on Sinopec’s side and initial cost to build and maintain is borne by Kantons. To conclude, we are much less bullish on the company’s overseas jetty business and have low expectations on perspective earnings and profitability.

Strong tailwinds from maintaining crude reserves China has been beefing up its petroleum reserve to ensure energy security in case of supply disruptions by building up a Strategic Petroleum Reserve (SPR), initiated by the central gov’t, and Commercial Petroleum Reserve (CPR), initiated by oil companies. According to the IEA, SPR should hold a crude reserve that’s equivalent to 90 days of net imports in the prior year, and currently China’s SPR is way below international standard at only 40 days.

Figure 21 Figure 22

SPR inventory days, Global v’s China China’s Strategic Petroleum Reserve (SPR)

Source: CLSA Source: NDRC, CLSA

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Overall, we don’t like the company’s overseas jetty

business

Fujairah Project will be delivered on time

China is beefing up its SPR



China has pledged to boost its SPR to meet the 90 days international standard by building crude reserve bases in 3 phases. The SPR could also act as a cushion, releasing crude in times of high oil price and refilling when oil prices come off. We believe the company could also benefit from this ongoing turnover in China’s SPR to gain incremental throughput volumes on top of the organic demand in Sinopec refineries.

Based on the 2020 target of 500 mmbbls in strategic reserves, we estimate there are 300 mmbbls to be imported and injected into the SPR from now to 2020 and an average 50 mmbbls per year, implying a no less than 4% addition in throughput volume growth, which is yet to be included in our numbers.

Diversifying into LNG shippingThe company is exiting its loss making VLCC business and switching into the more lucrative LNG vessel business. We believe the move should be appreciated by the market. The company formed JVs with China Shipping Development (1138 HK) and MOL (Mitsui O.S.K. Lines Ltd) to build 2 LNG vessels for the PNG LNG project and 8 for the APLNG project, holding a 9% and 39.2% stake in each JV, respectively.

Figure 23

Shareholder structure in Sinopec Kantons LNG vessel business

Source: Company

Forming LNG vessel with CSD and MOL

China’s move to boost SPR benefits the company

The company is exiting its loss making crude vessel

business

SPR adding another 4% in growth that’s not in our

numbers



The vessels will be deployed by Sinopec to import LNG at its 3 LNG receiving terminals in China, namely Qingdao, Tianjin and Beihai.

The vessels will be commissioned to its parent Sinopec at contracted day rates to guarantee an IRR at 8.4%, thus the vessels will be fully utilised without risks resulting from declining spot rates. Therefore, the earnings visibility of the company’s LNG vessel chartering business is very high.

Figure 24

Sinopec (386 HK) LNG import capacity & volume forecast

Terminal (mt) 14CL 15CL 16CL 17CL 18CL 19CL 20CLQingdao 3.0 3.0 3.0 4.5 4.5 4.5 6.0Beihai 3.0 3.0 3.0 3.0 3.0Tianjin 3.0 3.0 3.0 5.0 6.0

Total capacity (mt) 3.0 3.0 9.0 10.5 10.5 12.5 15.0Total imports (mt) 0.8 2.3 6.8 7.9 8.4 10.0 12.0

Utilisation (%) 25 75 75 75 80 80 80Source: CLSA, Company

Figure 25

Sinopec Kantons planned LNG vessel capex - spend by year during construction and totals Vessel Planned

Delivery Date

2011 2012 2013 2014 2015 2016 2017 Total Capex(US$ mil)

Outgoing Capex (net to

KantonsUS$ mil)

Daily profits to Kantons,

US$

Annual profits to Kantons(US$ mil

p.a)

Paybackperiod (yrs)

PNG LNG No.1 2015.01.31 10.0 18.9 11.0 2.7 9.7 52.4 4.7 3,091 1.1 4.2

PNG LNG No.2 2016.04.30 5.3 3.0 2.5 28.8 13.8 53.4 4.8 3,091 1.1 4.3

PNG Total 15.3 21.9 13.5 31.5 23.5 105.7 -

PNG net to Kantons 1.4 2.0 1.2 2.8 2.1 9.5 6,182 2.3 4.2

APLNG No.1 2015.12.31 10.1 19.0 10.8 11.4 51.3 20.1 12,656 4.6

APLNG No.2 2016.05.31 3.1 16.4 19.9 2.2 10.0 51.7 20.3 12,656 4.6

APLNG No.3 2016.07.31 3.1 7.4 28.9 2.2 10.3 51.9 20.3 12,656 4.6

APLNG No.4 2016.10.31 3.2 7.3 19.2 11.7 10.8 52.1 20.4 12,656 4.6

APLNG No.5 2016.12.31 3.2 7.3 19.1 11.0 11.7 52.2 20.5 12,656 4.6

APLNG No.6 2017.03.31 3.2 1.8 15.4 19.8 2.4 9.8 52.4 20.5 12,656 4.6

APLNG No.7 2017.05.31 3.2 1.8 14.9 20.1 2.4 10.1 52.5 20.6 12,656 4.6

APLNG No.8 2017.07.31 3.2 1.8 5.9 29.0 2.4 10.5 52.7 20.7 12,656 4.6

APLNG Total 32.2 62.9 134.1 107.4 49.9 30.3 416.8 -

APLNG net to Kantons 12.6 24.6 52.6 42.1 19.6 11.9 163.4 101,250 37.0 4.4

Kantons total 1.4 14.6 25.9 55.4 44.2 19.6 11.9 - 172.9 107,433 39.2 4.4

Source: Company, CLSA

Gas Pipeline injection the next leg up, but also comes with dilution risksThe company announced in Dec 2013 that its parent Sinopec decided to inject the Yulin-Jinan gas pipeline into the company.

According to our checks with management, the company is going through the re-valuation process right now and overall progress is right on track, but the completion date to a large extent hinges on the regulating authorities – NDRC and local gov’ts.

The deal was announced in Dec 2013

No risk in vessel day rates

….but the completion date to a large extent hinges

on the regulating authorities



Figure 26

Basic information on Yulin-Jinan Gas Pipeline

Yulin-Jinan Gas PipelineLength, km 941Date of operation 2010Asset base, Rmb m 7,000Capacity, bcm 30Provinces Shaanxi, Shanxi, Henan & ShandongDate announced to be injected into Kantons Dec 13Date the injection to be completed (CLSA estimate) By 1Q15 endFunding option (CLSA estimate) 50%/50% by new equity/debt Source: CLSA, Company

The gas pipeline injection is a very positive sign as it shows Sinopec’s intentions to build the company into a natural gas vehicle. Based on the non-compete clause between Sinopec and its listed subsidiaries, we expect the other gas pipelines will be injected into the company over time.

However, the completion of the injection might take longer than the market expects due to various reasons, e.g. asset re-valuation takes time; Sinopec needs to decide how much debt to put into the pipeline asset; lengthy process to obtain approvals from all relevant parties, etc.

We expect the pipeline injection to be completed by 1Q15, taking 15 months in total, which is largely in line with the last asset injection of 5 crude jetties, which took 13 months.

Figure 27

Gas pipeline injection impact on financials

Capacity, bcm 3.0Utilization ratio, % 100%*Throughput volume, bcm 3.0Transmission tariff incl. VAT, Rmb/cm 0.42Transmission tariff net of VAT, Rmb/cm 0.37Total transmission income, Rmb mil p.a. 1,115Depreciable asset base, Rmb mil 7,000Asset life in years 20Depreciation, Rmb mil p.a. 350Maintenance costs, Rmb mil p.a. 112Other fees & operating cost, Rmb mil p.a. 134Pre-tax profits, Rmb mil p.a. 520Effective tax rate, % 25%Net profits, Rmb mil p.a. 390Net profit margin, % 35%Net profits, HKD mil p.a. 468Sinopec Kantons 14CL net profits, HKD mn 701Lift on 14CL earnings % by pipeline injection 67%

Sinopec Kantons 15CL net profits, HKD mn 1,212Pipeline earnings as % of 15CL earnings 39%Source: CLSA, Company *Utilization ratio could be higher than 100% by compression

According to the NDRC disclosure, the transmission tariff for Yulin-Jinan gas pipeline in Shandong Province is Rmb0.46/cm (VAT included), and the overall tariff averaged to Rmb0.42/cm due to the lower tariffs in Shaanxi, Shanxi and Henan Province. Based on our assumptions, the gas injection could nearly double the company earnings in 2013.

The gas pipeline is a big lift on company earnings

Very positive signs signalling more to come

We expect the deal to be completed by 1Q15



The Yulin-Jinan gas pipeline mainly transports natural gas produced in Sinopec’s gas fields in the Ordos Basin to Shandong Province, Eastern China. To meet the surging demand in Shandong, Sinopec has been ramping up its development and production in the Daniudi gas field (大牛地气田) and soon the gas flow will exceed the designed capacity of the pipeline. Therefore, we expect the pipeline to be retrofitted with higher pressure pumping, which will essentially expand the capacity from a current 3bcm up to 5bcm, saving the capex spending to build a new pipeline along the existing one.

Equity issuance to partially fund the acquisition We expect the company to partially fund the acquisition of Yulin-Jinan gas pipeline by new equity issuance, as it did in the past, and it could either be a rights issue or a private placement to Sinopec.

Back in 2012, the company issued rights shares to fund the acquisition of 5 oil jetties it announced in the prior year, but this time we are leaning towards a private placement to its parent Sinopec as it’s a connected transaction between it and its parent, and since the announcement of gas pipeline acquisition, the share price has reacted quite negatively partly owing to selling on good news and partly on concerns over looming dilution risks.

Figure 28

Sinopec Kantons share price movement with major events

Source: CLSA, Bloomberg

Historically, the company acquired the injected assets at around 1.1x PBaverage, which is favourable to the minority shareholders given the company is trading at north of 1.5x book value in the past 12 months.

According to our estimate, the Yulin-Jinan gas pipeline will be injected at 2x PB, at a discount to PetroChina’s pipeline sales, which was done at 3x PB, mainly because the Yulin-Jinan gas pipeline was only put into use in 2010 and relatively new, and book value appreciation is not as much as PetroChina’s WEP 1&2.

0

2

4

6

8

10

12

Jan 10 Jan 12 Jan 14

(HKD p.s.)

Announcement of acquisition of Zhanjiang oil jetty

Announcement of acquisition of 5 oil jetties

Annoucement of acquisition of - Batam Project (PT West)- 3 Vesta terminals in Europe

Announcement to form APLNG LNG vessel JV with MOL

Announcement to form PNG LNG vessel JV with MOL

Rights issue of 1,038.83mn shares @ HKD 3.37 p.s.

Placement of 412.5mn shares @ HKD 6.75 p.s.

Sinopec announced to establishSinopec Crude Pipeline & Storage Co

Annoucement of acquisitionof Jinan-Yulin gas pipeline

Historical asset injection came in at 1.1x PB

New equity issuance to partially fund the deal

since the announcement of gas pipeline

acquisition, share price has reacted negatively on

looming risks of equity dilutions

Capacity expansion from 3bcm to 5bcm

2x not expensive at all for gas pipeline assets



Figure 29

PetroChina valuations in sale of WEP 1&2 pipeline assets

Rmb bn

50% sale of western pipeline assets of WEP 1&2

PetroChina 20

Taikang Asset Mgmt 36

Guolian Fund 24

50% NAV of western pipeline assets in WEP 1&2 20

Implied Price to book value (x) to external buyers 3.0Source: CLSA, Company

Figure 30

Funding scenario for gas pipeline acquisition, CLSA estimate

Original Book value, Rmb bn 4.0Debt adjustment after re-evaluation, Rmb bn 2.0New Book value, Rmb bn 2.0New Book value, HKD bn 2.4Last price, HKD p.s. (new issuance at 10% discount to last px) 6.0PB (x) valuation for asset injection 2.0Total consideration, HK$ bn 4.850% funded by private placement to Sinopec 50%- New shares of issuance, m 444- Existing No. of shares, m 2,486- New No. of shares (pro forma), m 2,93150% funded by debt @ 3% borrowing cost 50%- Interest expenses, HKD m 72.02015CL net earnings, HKD m 1,212No. of shares, m 2,9312015 EPS, HKD p.s. 41.4Source: CLSA

In our base case scenario, we assumed the company will fund the acquisition 50%/50% by new equities/debt, reaching 15CL EPS at HK$41.4 cents per share after accounting for the equity dilution.

Figure 31

15CL EPS scenario analysis – injection PB (Row) & % of funding by equity issuance (Column)

HK$ cents p.s.

1.0x 1.2x 1.5x 1.8x 2.0x

50% 45.5 44.5 43.2 42.3 41.460% 44.9 43.9 42.5 41.2 40.370% 44.4 43.4 41.8 40.4 39.580% 43.9 42.8 41.2 39.7 38.890% 43.5 42.3 40.6 39.0 38.1100% 43.0 41.7 40.0 38.4 37.4Source: CLSA

We factored in an equity dilution scenario mainly to highlight the risk, with the company sitting on HK$1.6bn cash without any debt, it doesn’t necessarily have to tap equity markets to fund the deal, and it might as well deploy internal cash plus some borrowings to avoid a dilution.

PetroChina sold its WEP 1&2 at 3.0x book value

We are assuming the company will fund the

deal by 50/50 equity/debt

CL base case assumed 50% funding by equity

issuance and 2x price to book value

Equity dilution might not happen



Therefore, the dilution might not take place and when that happens, it will be upside to our EPS forecast.

More asset injections aheadSinopec has been in the spotlight this year for its SOE re-structuring at the group level, and the centrepiece of the re-structuring is spinning off separate business units and potentially listing some.

Sinopec Engineering Group (2386 HK) kicked off the group re-structuring by listing on the HKEx in May 2013, with several other units such as marketing business and oilfield service business in the process of a re-organisation.

Sinopec just announced plans to establish Sinopec Crude Pipeline Co to house its crude oil pipelines along with some storage facilities, raising fresh concerns that asset injection into Sinopec Kantons might be put to an end.

We believe the move was solely aimed at improving the safety standard on the domestic aging crude pipelines in light of the pipeline explosion in Qingdao, which caused a death toll of 62 lives.

The newly established company was to oversee the crude & petroleum pipelines sitting within Sinopec, and we are looking at natural gas pipelines as injection targets, not the crude pipelines. Therefore, the news flow is irrelevant to our investment thesis and investors shouldn’t be concerned.

With Sinopec kicking off the group re-structuring, we believe the company is in transition to a Sinopec business unto to house all the midstream assets including crude oil jetties and gas pipelines, evidenced by the first gas pipeline injection announced last year and we expect more to come.

SEG kicked off the restructuring

Establishment of Crude pipeline Co has no impact

on the company

Only for crude pipelines

The company to hold all the jetties and pipelines



Figure 32

Sinopec Group re-structuring


The table below shows all the potential assets that could be potentially injected into the company. Gas pipelines and crude jetties are understandable as the company already owns similar assets injected from Sinopec.

The LNG receiving terminal could also be a target and when that happens, the gas business of the company will resemble that of Kunlun Energy.

Figure 33

Sinopec Kantons potential asset injections from parent Pipeline Length Initial capex, Rmb bn Capacity, bcm Date of operation

Sichuan-Shanghai 1045 7 3.0 2010

Xinjiang-Guangdong-Zhejiang (XYZ) 8280 159 30.0 2015, CL estimate

Xinjiang-Shandong (XL) 4463 86 30.0 2018, CL estimate

LNG terminal Capacity, m tonnes (Phase 1/2) Initial capex, Rmb bn Date of operation

Qingdao 3.0/6.0 10.0 Oct 14

Tianjin 3.0/10.0 17.1 Dec 15

Beihai 3.0/5.0 17.0 Oct 15

Crude jetty Capacity, m tonnes Storage capacity, '000 tonnes

Zhoushan Cezidao 20 300

Ningbo Zhenhai 20 250

Guangxi Weizhou 20 300

Quanzhou Qinglanshan 18 300

Lianyungang 18 300

Source: CLSA

LNG terminal could also be a target



Finally exiting a bad business – VLCC chartering The company had 3 VLCCs (Very Large Crude Vessels) chartered at a fixed rate then commissioned them out at spot market rates. The business suffered heavy losses in 2012/13 as the spot market rate slipped below chartering cost due to an oversupply in vessels.

In May 2014, the contract for 2 out of the 3 VLCCs expired and the company didn’t renew it and returned the vessels already. The remaining VLCC has more favourable contract rate standing at US$27,000 per day, much lower than the expired ones, and the contract will expire in Dec 2014.

The company guided to discontinue the VLCC chartering business when the last vessel lease expires in this year end, and will completely exit the business by then. We appreciate the move by the company to refocus on its core business and eliminate the risk exposure to VLCC rate movements.

Figure 34

Operating profits in VLCC chartering business


Figure 35

Sinopec Kantons P&L summary

HKD mn 2012 2013 2014CL 2015CL 2016CL 2017CL 2018CLOperating profits 207 97 182 844 939 963 989Investment income from JV 60 457 595 657 786 1,045 1,179Investment income from Associates 92 109 117 132 144 154 162Finance cost & Taxes & Minority interests -67 -172 -193 -420 -465 -488 -521Net attributable profits 292 491 701 1,212 1,405 1,674 1,809Cagr 2013-18CL 30%Source: CLSA, Company

(180)

(160)

(140)

(120)

(100)

(80)

(60)

(40)

(20)

0

2012 2013 2014CL 2015CL 2016CL 2017CL 2018CL

(HK$ mn)

Discontinued ...

The company is exiting the business when VLCC

lease expires

Exiting unfavourable business

Discontinued starting 2015CL



Figure 36

Sinopec Kantons B/S & C/F, HK$ mB/S 2012 2013 2014CL 2015CL 2016CL 2017CL 2018CL

PP&E 1,855 1,958 2,260 10,547 10,320 10,054 9,751Total non-current assets 4,778 8,791 10,688 19,701 21,017 23,849 25,129Cash and cash equivalents 2,405 1,622 1,158 1,801 2,235 3,043 5,038Total current assets 3,087 2,400 1,959 2,626 3,085 3,918 5,940LT-debt 0 0 0 2,400 1,400 400 400Non-currnet liabilities 2 98 118 2,599 1,648 684 707ST debt 0 0 0 0 0 0 0Total current liabilities 1,355 1,237 2,058 3,103 4,527 7,585 9,157Total liabilities 1,357 1,334 2,176 5,702 6,175 8,268 9,865Total equity 6,508 9,856 10,471 16,625 17,927 19,498 21,204Total debt 0 0 0 2,400 1,400 400 400Net debt -2,405 -1,622 -1,158 599 -835 -2,643 -4,638Net gearing % -37% -16% -11% 4% -5% -14% -22%C/F

Net cash generated from operating activities 302 408 937 1,557 2,221 2,521 2,670Net cash used in investing activities -1,796 -3,787 -1,311 -5,528 -635 -597 -558- Capex on PP&E -584 -395 -400 -5,200 -300 -250 -200- Capex on equity investment -1,266 -2,114 -600 0 0 0 0Net cash generated from financing activities 3,122 2,567 -90 4,613 -1,152 -1,117 -117Source: CLSA, Company

Valuations based on DCFWe valued the company with a DCF model as we believe it’s the most appropriate valuation method for a company that has relatively high visibility in cash flows in existing business.

Figure 37

CLSA assumption in WACC

Cost of debt, pre-tax 3%Effective tax rate 25%Cost of debt, post-tax 2%Risk-free return 3%ERP 7%Company beta 1.20Cost of equity 11%Target net debt to total capital 15%Target equity to total capital 85%WACC 10%Source: CLSA

Figure 38

Sinopec Kantons (934 HK) DCF-based SoTP valuation, 12M forward

Value,HK$mn

Value,HK$ p.s.

Comments

Crude trading -250 -0.09 Based on 10x 15CL earnings7 Oil Jetties 9,970 3.40 DCF based, implied 8x 15CL earningsBatam (PT West) Project 601 0.21 DCF based, 6x normalized earningsFujairah Project 510 0.17 DCF based, 6x normalized earningsVesta Project 600 0.20 DCF based, 6x normalized earningsAPLNG JV (LNG Vessel) 2,868 0.98 DCF based, 10x earnings at full capacityPNGLNG JV (LNG Vessel) 171 0.06 DCF based, 10x earnings at full capacityYulin-Jinan Gas Pipeline 9,000 3.07 Based on 3.0x book value

Total asset value 23,469 8.01

We value the stock at 10% WACC



Net debt as of 15CL end -599 -0.20NAV 22,870 7.80Last closing price 5.77Upside 35%Source: CLSA

We used 2,931m as the total no. of shares in our NAV per share calculation, including the new shares issued per our analysis in Figure 30. Therefore, our target NAV already bakes in an equity dilution, and we need to flag to investors that if the dilution doesn’t happen, there is upside in our target NAV.

Figure 39

WACC sensitivity analysis on NAV

Source: CLSA

We also assumed a 3% unloading volume growth and no unloading tariff hike going forward, and below sensitivity analysis shows what our target NAV could be when our assumptions are altered.

Figure 40

Sinopec Kantons 12M NAV target sensitivity analysis to volume growth & tariff hike %

Unloading tariff hike %

12M NAV, HKD p.s. 0% - CL base case 3% 5% 8%

1.0% 5.9 6.1 6.3 6.41.5% 6.4 6.7 6.8 7.02.0% 6.7 7.0 7.1 7.32.5% 7.3 7.6 7.7 8.0

Unloading volume growth % 3.0% - CL base case 7.8 8.1 8.3 8.53.5% 8.2 8.6 8.7 9.04.0% 8.7 9.1 9.2 9.54.5% 9.2 9.6 9.8 10.05.0% 9.8 10.2 10.4 10.75.5% 10.4 10.8 11.0 11.36.0% 11.0 11.4 11.7 12.06.5% 11.4 11.9 12.1 12.47.0% 11.7 12.2 12.4 12.8

Source: CLSA

9.89.1

8.57.8

7.26.5

5.8

0

2

4

6

8

10

12

5% 6% 8% 10% CLbase case

12% 14% 15%

(HKD p.s.)

Our base case assumed a 10% WACC, in line with

CL regional peers

Our target NAV already bakes in a dilution

Zero unloading tariff hike in our model



Our base case valuation reached a TP at HK$7.80 p.s. implying less than 14x 2015CL PE and we believe the valuation is not demanding at all for 30% earnings Cagr during 2013-18CL.

EPS growth came in relatively slower than earnings growth as we factored in an equity dilution late this year, in a bid to partially fund the gas pipeline injection. That said, EPS Cagr stands at 24% for 2013-18CL, and also this could explain why we are below consensus in 2015CL as the Street might have yet to factor in the new equity issuance.

Figure 41 Figure 42

Sinopec Kantons (934 HK) PER bands, 12M forward Sinopec Kantons (934 HK) PB bands, 12M forward

Source: CLSA Source: CLSA

Not Sinopec’s ‘Kunlun EnergyThough the company does resemble Kunlun Energy in the sense of asset injections driving share price and both stocks massively outperformed the market in the past decade, we are arguing Sinopec Kantons is a better company than Kunlun Energy when it comes to corporate governance, and most noticeably, there is no conflict of interests in the case of Kantons as management don’t own any shares or share options in the company.

Figure 43

Sinopec Kantons v’s Kunlun Energy v’s HSCEI

Source: Bloomberg

-1sd7.7x

avg16.4x

+1sd25.1x

3.4

8.4

13.4

18.4

23.4

28.4

33.4

Jul04 Jul06 Jul08 Jul10 Jul12 Jul14

-1sd0.61x

avg1.06x

+1sd1.52x

0.3

0.50.7

0.91.1

1.3

1.51.7

1.92.1

Jul04 Jul06 Jul08 Jul10 Jul12 Jul14

0

500

1,000

1,500

2,000

2,500

Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11 Dec 13

HSCEI Index Sinopec Kantons Kunlun Energy

Both Companies O-PF the market massively riding

on asset injections

Better CG than Kunlun Energy

30% earnings Cagr for 13-18CL



Figure 44

Cross comparison between Kantons, SPC and Kunlun Energy Company Sinopec Kantons Shanghai Petrochem Kunlun Energy

Ticker 934 HK 338 HK 135 HK

Parent Sinopec (386 HK) Sinopec (386 HK) PetroChina (857 HK)

Business area Crude jetty & storage, LNG vessel, Gas Pipelines Refinery & Petrochemical LNG/CNG stations, City gas & Pipelines

Business overlap with parent Minimum 100% overlap Some overlap

Asset injection in the past Yes No Yes

Asset injection in the future Almost definitely Very likely Very unlikely

Mgmt holding or stock options No Soon to come Yes

Parent influence on the company Very strong Neutral Very strong


Figure 45

Global port operator comp table

Ticker Company Name Market cap

P/E P/B ROE Div. Yield

PEG ratio

(US$bn) 13A 14E 15E 13A 14E 15E 13A 14E 15E 13A 14E 15E 15E

China/HK

934 HK SINOPEC KANTONS 1.9 23.6 17.8 11.8 1.5 1.3 1.1 7.3 8.2 11.1 0.8 0.8 1.2 0.4

144 HK CHINA MERCHANTS 8.3 15.8 14.7 13.3 1.3 1.1 1.1 8.6 8.3 8.5 2.9 3.1 3.5 2.1

1199 HK COSCO PACIFIC 4.0 13.1 11.8 10.6 0.9 0.8 0.8 13.7 7.3 7.7 7.3 3.4 3.8 1.3

3382 HK TIANJIN PORT 1.0 9.6 9.1 8.9 0.9 0.6 0.6 9.4 9.0 8.6 4.1 4.5 4.5 4.8

2880 HK DALIAN PORT 1.9 10.3 10.2 9.5 0.6 0.6 0.5 5.6 5.7 5.9 3.8 3.8 4.3 1.3

1308 HK SITC INTERNATIONAL 1.1 10.3 8.1 6.4 1.4 1.3 1.2 14.5 17.0 19.1 4.7 5.0 6.6 1.1

000022 CH SHENZHEN CHIWAN WHARF 1.2 16.3 16.3 15.4 2.1 2.0 1.8 13.0 12.2 12.0 3.0 3.4 3.5 2.7

600017 CH RIZHAO PORT 1.4 9.4 10.1 9.8 0.9 0.8 0.8 9.2 8.2 8.2 - - - 2.6

600717 CH TIANJIN PORT 2.1 - - - - 1.0 0.9 - 8.6 8.4 - 2.6 2.6 -

600018 CH SHANGHAI INT'L PORT 16.2 18.9 16.0 15.0 2.0 1.9 1.8 10.6 11.8 12.0 2.9 3.4 3.5 2.2

Average 3.9 14.2 12.7 11.2 1.3 1.1 1.1 10.2 9.6 10.1 3.7 3.3 3.7 2.1

Global Peers

HPHT SP HUTCHISON PORT 5.2 25.9 28.5 27.7 0.8 0.8 0.8 2.8 2.7 2.8 7.1 7.2 7.3 2.8

DPW DU DP WORLD 4.5 27.8 25.8 23.0 2.0 1.8 1.7 7.1 7.3 7.7 1.2 1.2 1.4 1.9

POT NZ PORT OF TAURANGA 1.8 26.2 26.4 25.7 2.7 2.6 2.5 10.3 9.6 9.5 2.9 3.0 3.2 2.6

2615 TT WAN HAI LINES 1.2 24.1 16.9 17.0 1.1 - - 7.3 - - 1.4 3.4 1.5 0.6

Average 3.2 26.0 24.4 23.3 1.6 1.7 1.7 6.9 6.5 6.7 3.1 3.7 3.4 2.0

Source: Bloomberg

https://www.clsa.com/member/company/index.asp?clsa_id=300010727



Risks to our investment thesis

1) China’s oil demand riskThough we have high conviction that China’s crude demand will continue to grow at 3% annually going forward, we do sense some risks from this capacity should China’s GDP growth further deteriorate to below 7.0%. If that happens, China’s diesel demand growth might fall to negative territory and drag the overall crude demand.

2) Execution riskGiven the company is controlled by Sinopec and all the asset injections require approval from both the central and local gov’ts, the company has little say in which assets to be injected and how fast it could be injected. Therefore, risks arise that potential asset injections could be delayed. Regarding the Yulin-Jinan gas pipeline, we expected it to be completed by 1Q15 vs 4Q14 by the Street, so our numbers have partially baked in the delay risks.

3) Lack of control risk For the 5 domestic crude jetties the company owns a 50% stake, the company is not an operator and therefore the company has limited control in daily operations. Risks arise from this capacity that the interest of the operators might not be aligned with the company.

4) LNG vessel day rate riskThe LNG vessel of Sinopec Kantons will service Sinopec LNG terminals only and all will be chartered at contract price locking in a decent IRR, so there is no downside risk to the day rate, but it also means the company will be losing out if future spot rates come in higher than the contracted rate and margins will be capped.

5) Corporate governance risks in ParentcoUNIPEC, a subsidiary of Sinopec (386 HK) and parentco of the company, was warned and pressured by the US to cease its crude imports from National Iranian Oil Co (NIOC) during the sanction period, otherwise UNIPEC will be banned from doing business with US companies. We believe the risks will be subdued with various signs showing the sanction could be lifted in the latest nuclear talk.



Summary financialsYear to 31 December 2012A 2013A 2014CL 2015CL 2016CLSummary P&L forecast (HK$m)Revenue 22,042 23,356 24,058 25,983 26,582Op Ebitda 386 283 378 1,070 1,994Op Ebit 207 97 182 844 939Interest income 0 3 16 12 18Interest expense (2) (4) (3) (84) (49)Other items 152 566 712 788 930Profit before tax 357 662 908 1,560 1,838Taxation (66) (171) (206) (348) (434)Minorities/Pref divs - 0 0 0 0Net profit 292 491 701 1,212 1,405

Summary cashflow forecast (HK$m)Operating profit 207 97 182 844 939Operating adjustments - - - - -Depreciation/amortisation 178 186 196 226 1,055Working capital changes (19) 197 631 687 421Net interest/taxes/other (64) (71) (71) (200) (194)Net operating cashflow 302 408 937 1,557 2,221Capital expenditure (1,850) (2,508) (1,000) (5,200) (300)Free cashflow (1,548) (2,100) (63) (3,643) 1,921Acq/inv/disposals 0 (1,361) (386) (405) (425)Int, invt & associate div 54 82 75 77 90Net investing cashflow (1,796) (3,787) (1,311) (5,528) (635)Increase in loans (267) 0 0 2,400 (1,000)Dividends (73) (87) (87) (103) (103)Net equity raised/other 3,461 2,654 (3) 2,316 (49)Net financing cashflow 3,122 2,567 (90) 4,613 (1,152)Incr/(decr) in net cash 1,628 (811) (464) 643 434Exch rate movements 5 29 0 0 0Opening cash 772 2,405 1,622 1,158 1,801Closing cash 2,405 1,622 1,158 1,801 2,235

Summary balance sheet forecast (HK$m)Cash & equivalents 2,405 1,622 1,158 1,801 2,235Debtors 629 730 752 775 798Inventories 48 47 49 50 51Other current assets 5 0 0 0 0Fixed assets 1,930 2,682 2,876 11,070 10,765Intangible assets - - - - -Other term assets 2,848 6,108 7,812 8,630 10,253Total assets 7,865 11,191 12,647 22,327 24,102Short-term debt - - - - -Creditors 1,345 1,223 2,042 3,076 4,493Other current liabs 10 13 16 27 34Long-term debt/CBs - - - 2,400 1,400Provisions/other LT liabs 2 98 118 199 248Minorities/other equity 0 10 10 10 10Shareholder funds 6,508 9,847 10,461 16,615 17,917Total liabs & equity 7,865 11,191 12,647 22,327 24,102

Ratio analysisRevenue growth (% YoY) 12.0 6.0 3.0 8.0 2.3Ebitda growth (% YoY) (17.0) (26.6) 33.5 183.4 86.3Ebitda margin (%) 1.7 1.2 1.6 4.1 7.5Net profit margin (%) 1.3 2.1 2.9 4.7 5.3Dividend payout (%) 22.6 16.7 12.4 8.5 7.3Effective tax rate (%) 18.4 25.8 22.7 22.3 23.6Ebitda/net int exp (x) 247.9 256.0 - 14.8 64.3Net debt/equity (%) (37.0) (16.5) (11.1) 3.6 (4.7)ROE (%) 6.3 6.0 6.9 9.0 8.1ROIC (%) 10.7 4.1 7.3 12.6 9.0EVA®/IC (%) 0.6 (5.9) (2.8) 2.5 (1.0)Source: CLSA

ROE set to improve

De-leveraging on strong operating cash flows

HKD 4.8bn consideration in acquiring the pipelines

Top line driven by natural gas related business



Companies mentionedSinopec Kantons (934 HK - HK$5.77 - BUY)Kunlun Energy (N-R)Shanghai Petrochem (338 HK - HK$2.27 - BUY)Sinopec (386 HK - HK$7.24 - UNDERPERFORM)

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