China Tian Lun Gas (1600 HK)

Transcription

1 China Tian Lun Gas (1600 HK) Scrambling for growth in vehicle market We initiate on China Tian Lun Gas with an Outperform rating. Our DCF-based target price of HK$6.80 suggests 16% potential upside. The stock is currently trading at 24x and 19x P/E based on our 2013F and 2014F EPS forecasts with a 23% EPS CAGR. Regional play with solid foothold in Henan and Jilin provinces. Tian Lun Gas will continue to focus on gas projects in third- and fourth-tier cities. It will continue to expand in the eight provinces where it has already established footholds while entering into new areas. The company targets 50% YoY piped gas volume growth in 2013F of which 30% will be through M&A and 20% through organic growth. It is riding the booming Chinese city gas and vehicle gas market and we believe the company is capable of achieving a 22% net profit CAGR for 2013F-2015F. Vehicle gas market is thriving. On the strength of robust growth of CNG/LNG demand over the next few years, we forecast Tian Lun Gas will achieve a 33% and 171% CAGR for its annual CNG and LNG refilling capacity for 2013F-2015F, representing a 53% vehicle gas revenue CAGR. To support its rapid expansion in downstream refilling stations, we expect Tian Lun Gas to continue establishing new gas sources. We are 4% below and 5% above consensus for our 2013F-2014F earnings forecasts after factoring in recent non-residential city gate price hikes. We are more conservative on the impact to company margins of the project-by-project pass-through mechanism. Near-term share-price catalysts include acquisitions of profit-accretive gas projects and earlier-than-expected asset injections from the parent company. Forecasts and valuation Year ended 31 December F 2014F 2015F Revenue (RMB m) ,016 1,418 1,878 Operating profit (RMB m) Operating margin (%) Net profit (RMB m) EPS (HK$) Change (%) (12.2) P/E (x) DPS (HK$) Dividend yield (%) P/B (x) ROE (%) Net gearing (%) Company Rating: Outperform (initiation) Price: Target: Trading data 52-week range Market capitalization (b) HK$5.84 HK$6.80 (initiation) HK$ HK$4.8b/US$0.6b Shares outstanding (m) 828 Free float (%) 26 3M average daily T/O (m share) 0.6 3M average daily T/O (US$m) 0.5 Expected return 1 year (%) 16.4 Price as at close on 5 July 2013 Stock price and HSCEI HK$ Jan Apr-12 8-Aug Nov Mar-13 4-Jul-13 Tianlun Gas HSCEI (rebased) Source: Bloomberg Christeen So (852) christso@ccbintl.com Gary Chiu, CFA (852) garychiu@ccbintl.com Stephanie Tong (852) stephanietong@ccbintl.com 98

2 Scrambling for growth in the vehicle market Regional player with a solid foothold in Henan and Jilin Continue to expand into thirdand fourth-tier cities while seeking acquisition opportunities to fuel growth Tian Lun Gas owned 28 city gas projects as at the end of 2012 and is now planning to add 10 new projects in 2013F. About 46% of its existing projects are operated in Henan province, followed by 25% in Jilin province and the rest in Shandong, Gansu, Guangxi, and Hunan provinces. We believe the company will to continue to expand into peripheral regions given its already strong presence in Henan and Jilin. Furthermore, its gas sales growth and connection income over the medium term will be underpinned by M&A and greenfield project development in third- and fourth-tier cities. With a backdrop of strong C&I and vehicle gas demand growth, we forecast Tian Lun Gas s piped gas sales will increase 45% YoY, from 155m m 3 in 2012 to 224m m 3 in 2013F, or a 2013F-2015F CAGR of 42%. Contributions from newly acquired city gas projects in 2012 (an average of 155,000 and 1,100 new residential and C&I customers based on our estimates) will be fully realized in 2013F-2014F. We expect the company to make new acquisitions in its quest to deliver strong bottom-line growth in the next few years. Tian Lun Gas gas projects exposure breakdown in 2012 Location City gas CNG/LNG Gas source base Henan Jilin Gansu Shandong Guangxi Sichuan Hunan Hebei Total number of projects in operation Riding on a robust gas-fueled vehicle market growth Government policy to aid CNG/LNG downstream infrastructure growth In October 2012, the Chinese government announced a new policy making natural gas consumption in China a priority, beginning with the promotion of natural gas-fueled vehicles. Natural gas usage will also be a priority within various categories of city gas usage, including residential, public, and heating/cooling. The new policy at the national level is prompting municipal authorities to introduce ancillary social and financial policies to fuel infrastructure construction for gas-fueled vehicles and vessels. In view of these developments, we expect sharp growth in CNG/LNG refilling station infrastructure in China over the medium term. As at the end of 2012, Tian Lun Gas had a total of 18 refilling stations in operation, including 17 CNG and 1 LNG refilling stations in the provinces of Henan, Gansu, Jilin, Hebei, and Hunan. The company plans to add 13 CNG refilling stations and 8 LNG refilling stations in 2013F, which would translate to 48% and 54% YoY CNG/LNG gas sales volume growth in 2013F and 2014F. Tian Lun Gas is making strides to widen its CNG/LNG exposure as vehicle gas sales becomes an ever more important earnings driver for the company over the medium term given (1) annual gas consumption per vehicle is much larger than that of residential household; (2) unit gas prices are now at a 20-30% discount to petroleum/diesel prices, which would induce vehicle gas demand growth; and (3) higher gross margin from CNG/LNG sales compared with residential/c&i gas sales. 99

3 As of the end of 2012, at least two LNG refilling stations were developed by Tian Lun Gas s parent, Tian Lun Group. Tian Lun Gas has plans to increase the number of refilling stations to 12 by the end of 2013F. Management sees the possibility of asset injections from its parent in 2014F-2015F. If the asset injections are forthcoming, we believe they will serve as a positive catalyst to Tian Lun Gas s earnings after 2015F. Tian Lun Gas gas sales volume mix in 2013F-2015F 100% 90% 80% 70% 60% 31% 37% 38% 40% 40% 50% 40% 43% 36% 37% 38% 40% 30% 20% 10% 27% 27% 25% 22% 20% 0% F 2014F 2015F Residential C&I Vehicle Long-term earnings to be driven by piped gas sales An increase in piped gas sales will trim connection income mix from 42% in 2012 to 25% in 2015F Tian Lun Gas achieved a 45% net profit CAGR for on the back of solid growth in residential (61% CAGR) and vehicle (101% CAGR) gas sales volume. We forecast earnings will grow 17-26% YoY in 2013F-2015F, or a 22% CAGR in 2013F-2015F, after factoring in over 48% in C&I demand together with more than 46% and 29% average annual growth in vehicle gas sales and residential sales, respectively, for the period. We expect gas connection fee income, which is one-off in nature, to remain a substantial contributor to company revenues in 2013F-2014F. We forecast connection income and piped gas sales revenue to grow 21% YoY and 57% YoY to reach RMB364m and RMB620m, respectively, for 2013F. If we assume a stronger trend towards piped gas sales in the coming years, the revenue mix of gas connection income, we believe, will shrink from 42% in 2012 to 25% in 2015F. Bearing in mind that connection fee income carries a much higher gross margin than piped gas sales, we forecast overall gross margin will gradually slide from 35% in 2012 to 27% in 2015F. The NDRC has announced an average city gate price hike of RMB0.26/m 3 (up 15.4%) from RMB1.65/m 3 to RMB1.95/m 3 on 28 June Recent price reforms have focused on non-residential natural gas users including C&I and vehicle gas customers. We believe Tian Lun Gas could largely pass its cost increment onto C&I and vehicle customers in most of its existing projects; however, we expect some time buffer to pass before a complete pass-through is permitted for a small portion of its projects, which would slightly pressurize margins in 2H13F-2014F. We forecast piped gas sales to account for 25% of gross profit in 2013F, compared with 22% in 2012, given the greater weight placed on higher-margin CNG/LNG sales and the diminishing reliance on connection fee income. 100

4 Tian Lun Gas earnings prospects in 2013F-2015F RMB m 2,100 1,800 1,500 1, F 2014F 2015F Revenue (LHS) Gross margin (RHS) Net margin (RHS) 40% 35% 30% 25% 20% 15% 10% Our 2013F earnings forecasts are most sensitive to residential connection fees, gas ASP, and gas cost changes By applying an earnings sensitivity analysis to some of the key drivers of Tian Lun Gas s gas business, we see net profit most affected by changes in piped gas ASP and piped gas procurement costs. For any 5% movement in our piped gas ASP assumption, our 2013F earnings forecasts would vary by 12%, while a 5% change in our piped gas procurement cost assumption would raise/trim our 2013F earnings forecasts by 7%. The company plans to improve its debt structure and effective interest rate by raising long-term offshore debt to replace short-term and domestic debt this year. Post debt restructuring, we estimate Tian Lun Gas will be 66% geared in 2013F. Despite a relatively high net gearing ratio, the company s interest coverage ratio remains at a healthy level of 17x for 2013F, indicating negligible earnings sensitivity to interest rate changes. Our analysis shows that any 25bp change in interest rate would only affect our earnings forecasts by 1% for 2013F. Tian Lun Gas earnings sensitivity to key drivers Earnings driver % impact to 2013F earnings +/-5% change in new residential connections +/-6.2 +/-5% change in the residential gas sales volume +/-1.6 +/-5% change in the C&I gas sales volume +/-1.9 +/-5% change in the vehicle gas sales volume +/-2.0 +/-5% change in connection fee per residential customer +/-6.6 +/-5% change in connection fee per C&I customer +/-0.7 +/-5% change in the gas ASP +/ % change in gas cost, assuming zero pass-thru to residential /-5% change in CNG station utilisation +/-3.4 +/-5% change in LNG station utilisation +/-1.2 +/-25bps change in effective interest rate +/-1.0 Source: CCBIS research 101

5 Valuation and risks Our DCF-based target price of HK$6.80 suggests 16% potential upside We initiate coverage on Tian Lun Gas with an Outperform rating. Our target price of HK$6.80 suggests 16% upside potential. As the gas business is cash-intensive, we derive our target price based on a DCF valuation with 8.5% WACC and a 2% terminal growth rate. Tian Lun Gas target price calculation Total DCF/share (2014F-2020F) (HK$) 1.70 Terminal growth rate (%) 2.0 WACC (%) 8.5 Discount factor 0.57 RMB/HK$ 0.80 DCF/share (terminal value in 2020F) (HK$) 7.39 DCF/share (firm value) (HK$) 9.09 Less: net debt/share (end 2013F) (1.08) 8.01 % shared by minority shareholders (end 2013F) 15.1 Less: value shared by minority interest (1.21) DCF/share (equity value) (HK$) 6.80 Source: CCBIS research Tian Lun Gas target price sensitivity to WACC and terminal growth rate WACC (%) Terminal growth rate Source: CCBIS research Tian Lun Gas is currently trading at 24x, 19x, and 16x P/E on our 2013F-2015F EPS forecasts, on the back of our 23% EPS CAGR projection for the period. Our 2013F BVPS estimate translates to 4.2x P/B, which we believe is justified given Tian Lun Gas s 20% average ROE for 2013F-2015F is higher than its peer average of 14%. 102

6 Tian Lun Gas 12-month rolling P/E bands HK$ x 26.5x x x x 1 Nov-10 Apr-11 Oct-11 Mar-12 Aug-12 Feb-13 Jul-13 Dec-13 Tian Lun Gas 12-month rolling P/B bands HK$ x 4.7x 3.7x x x 1.0 Nov-10 Apr-11 Oct-11 Mar-12 Aug-12 Feb-13 Jul-13 Dec-13 The downside risks to our target price include (1) worse-than-expected C&I and vehicle gas sales, (2) an unexpected interruption of upstream gas supply, and (3) worse-than-expected profit contribution from newly acquired projects. Catalysts In our view, near-term share price catalysts include (1) acquisitions of profit-accretive gas projects and (2) better-than-expected gas cost-through capability. Business summary Established in 2002, Tian Lun Gas is a regional city gas player based in Henan province. Since 2010 the company has been making forays into new provinces in China, including Jilin, Shandong, and Gansu. In 2012, Tian Lun Gas sold 155m m 3 of piped gas, including natural gas and coal gas, to residential, C&I, and vehicle users. It has connected over 450,000 residential households and 2,400 C&I users, and by the end of 2012 was operating 18 CNG/LNG refilling stations. Tian Lun Gas also owns 1 LNG processing plant and 5 CNG parent stations. 103

7 Tian Lun Gas 2012 revenue breakdown Other 3% Gas connection 42% Transportation and sales of piped gas 55% Tian Lun Gas key assumptions Year ended 31 December F 2014F 2015F Connected residential users 328, , , , ,424 % change Connected C&I users 1,838 2,467 3,454 4,766 6,434 % change Residential connection fee (RMB/m³) 2,458 2,603 2,731 2,837 2,919 % change C&I connection fee (RMB/m³) 56,290 48,480 43,208 39,806 37,865 % change (27.3) (13.9) (10.9) (7.9) (4.9) Total piped gas sold (m m³) % change Blended gas ASP, VAT-inclusive (RMB/m³) % change Annual CNG refilling capacity (m m³) % change Annual LNG refilling capacity (m m³) % change

8 Tian Lun Gas consolidated income statement Year ended 31 December (RMB m) F 2014F 2015F Revenue ,016 1,418 1,878 COGS (279) (465) (690) (1,000) (1,367) Gross profit % change Gross margin (%) Other revenue and gains Distribution expenses (8) (12) (17) (24) (30) Administrative expenses (48) (56) (70) (85) (101) (45) (46) (77) (100) (121) Operating profit % change Operating margin (%) Net interest expense (9) (3) (15) (22) (24) Pretax profit Taxation (27) (54) (60) (75) (93) Net profit Minority interest (8) (14) (17) (21) (26) Net profit attributable to shareholders % change Net margin (%) EPS (HK$) % change (12.2) DPS (HK$) % change NM NM NM NM NM 105

9 Tian Lun Gas consolidated cash flow statement Year ended 31 December (RMB m) F 2014F 2015F Operating activities Pretax profit Depreciation and amortization Interest expense Interest income (5) (32) (37) (51) (67) Other (2) (14) Change in working capital (59) (21) Operating cash flow before change in working capital Interest paid (28) (47) (57) (79) (99) Tax paid (26) (37) (60) (75) (93) Net operating cash flow Investing activities Additions to fixed assets (170) (104) (500) (500) (500) Addition to intangible assets (0) (15) Addition to lease prepayments (1) (19) Disposal of subsidiaries Dividend received Interest received Other (401) (321) Net investing cash flow (568) (457) (498) (497) (496) Financing activities Shares issues (repurchases) Capital contributions from minority interest Increase/(decrease) in borrowings Dividends paid to minority interest Dividends paid to shareholders Other Net financing cash flow Increase/(decrease) in cash (100) Cash at beginning of year Cash at beginning of year (1) Cash at beginning of year BVPS (HK$) % change

10 Tian Lun Gas consolidated balance sheet Year ended 31 December (RMB m) F 2014F 2015F Inventories Short-term trade and other receivables AFS financial assets Financial assets at fair value Restricted cash Cash and cash equivalents Current assets ,208 1,547 1,883 Property, plant and equipment ,445 1,875 Lease prepayments Investment properties Intangible assets Deferred tax assets Long-term trade and other receivables Other non-current assets Non-current assets 1,051 1,043 1,508 1,955 2,384 Total assets 1,576 2,022 2,716 3,501 4,267 Short-term borrowings Short-term trade and other payables Advance from customers Tax payables Current liabilities ,145 1,447 Long-term borrowings ,020 1,211 Long-term trade and other payables Deferred tax liabilities Non-current liabilities ,063 1,254 Minority interests Shareholders equity ,110 1,357 Total equity and liabilities 1,576 2,022 2,716 3,501 4,267 Tian Lun Gas key financial ratios Year ended 31 December F 2014F 2015F EPS (HK$) EPS growth (%) (12.2) P/E (x) DPS (HK$) DPS growth (%) NM NM NM NM NM Yield (%) Cash earnings/share (HK$) P/CE (x) BV/share (HK$) P/B (x) EV (HK$m) 5,047 5,387 5,728 5,979 6,136 EBITDA (HK$m) EV/EBITDA (x) Net debt/(cash) (HK$m) ,035 Net debt/equity (%) Interest cover (x) ROE (%) ROA (%)