Gas Sales Prospect Remains Bright, Maintain Buy

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1 : Binhai Investment (02886 HK) Kevin Guo 郭勇 公司报告 : 滨海投资 (02886 HK) kevin.guo@gtjas.com Gas Sales Prospect Remains Bright, Maintain Buy 天然气销售前景光明, 维持 买入 评级 GTJA Research 国泰君安研究 The 2015 annual results of the Company were lower than our expectations mainly due to lower natural gas sale and foreign exchange loss. Total revenue increased by 0.5% yoy to HKD 2.55 billion, but net profit attributable to shareholders declined by 6.9% yoy to HKD billion. Rating: Buy Maintained 评级 : 买入 ( 维持 ) The Company expects total sale of piped natural gas to maintain fast growth in the next 3 years. The Company expects total sale of natural gas to grow by about 30% in 2016 and grow at a faster speed in We expect gas tariff of the Company to continue to improve in 2016 and to be more stable. Gas tariff of the Company benefited greatly from the gas prices reform that took place in We expect connection fees of the Company to generally remain flat in Maintain TP at HKD 3.96 and maintain Buy. 公司 2015 年业绩低于我们的估计, 主要是由于天然气销量较低以及汇兑损失 公司收入同比增长 0.5% 至港币 25.5 亿元, 但股东净利同比下降 6.9% 至港币 1.99 亿元 公司预计未来三年管道天然气销量将保持快速增长 公司预计 2016 年天然气销量将增长 30% 左右, 年的销量增速将更快 我们预计公司的销气价差在 2016 年将会继续改善且更加稳定 公司销气价差极大受益于 2015 年的气价改革 我们预计公司的接驳收入在 2016 年将基本持平 维持目标价在 3.96 港元, 维持 买入 评级 6-18m TP 目标价 : HK$3.96 Revised from 原目标价 : 3.96 Share price 股价 : Stock performance 股价表现 (10.0) (20.0) (30.0) (40.0) (50.0) (60.0) % of return HK$2.550 (70.0) Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 HSI Index Change in Share Price 股价变动 1 M 1 个月 Binhai Investment 3 M 3 个月 1 Y 1 年 Abs. % 绝对变动 % (40.0) Rel. % to HS index 相对恒指变动 % (22.9) Avg. share price(hk$) 平均股价 ( 港元 ) Source: Bloomberg, Guotai Junan International. Year End 年结 Turnover 收入 Net Profit 股东净利 EPS 每股净利 EPS 每股净利变动 PER 市盈率 BPS 每股净资产 PBR 市净率 DPS 每股股息 Yield 股息率 ROE 净资产收益率 12/31 (HKD m) (HKD m) (HKD) ( %) (x) (HKD) (x) (HKD) (%) (%) 2014A 2, A 2, (7.0) F 2, F 3, F 4, Shares in issue (m) 总股数 (m) 1,182.6 Major shareholder 大股东 TEDA HK 57.1% Market cap. (HK$ m) 市值 (HK$ m) 2,731.2 Free float (%) 自由流通比率 (%) month average vol. 3 个月平均成交股数 ( 000) FY16 Net gearing (%) FY16 净负债 / 股东资金 (%) Weeks high/low (HK$) 52 周高 / 低 5.250/1.400 FY16 Est. NAV (HK$) FY16 每股估值 ( 港元 ) 6.5 See the last page for disclaimer Page 1 of 6

2 The 2015 annual results of the Company were lower than our expectations mainly due to lower natural gas sale and foreign exchange loss. Total revenue increased by 0.5% yoy to HKD 2.55 billion, but net profit attributable to shareholders declined by 6.9% yoy to HKD billion. Revenue contributed by gas distribution business increased by 11% yoy to HKD 2.03 billion, and revenue contributed by connection service declined by 12% to HKD 0.49 billion. Total sale of natural gas increased by 15.0% yoy to million m 3, which was about 6.5% lower than our estimations, mainly due to unfavorable macro economy. Natural gas consumed by residential customers increased by 21.7% yoy to 81.1 million m 3 and gas consumed by industrial/commercial customers increased by 13.9% yoy to million m 3. The Company added million residential customers in 2015, which was 16.6% lower than that of The gross margin of gas distribution business was raised to 11% in 2015 after the Gas Prices Reform and the general gross margin was 21%. The Company recorded a foreign exchange loss of about HKD 61.9 million in The Company expects total sale of piped natural gas to maintain fast growth in the next 3 years. Total natural gas consumption of China was negatively impacted by the slowdown of macro economy and only increased by 5.7% yoy in China s macro economy growth rate is expected to continue to slowdown in 2016 and therefore natural gas consumption will continue to be adversely impacted. However, the Company expects there may be another price cut in 2016 and the low price of natural gas is expected to drive sales growth of industrial and commercial consumers. We believe the price cut will partly offset the negative impact of macro economy and drive natural gas sales growth, we also believe the new price mechanism will leave more room for the Company to adopt more flexible prices policy to its customers. Binhai New Area, which is the main operating area of the Company, also holds great natural gas consumption potentials. As a main industrial area and the Free Trade Zone of Tianjin, Binhai New Area attracts many large high-end manufacturing projects to locate in the Area, such as FAW-Volkswagon project and the Future Technology City projects. At the same time, according to the Tianjin Clean Air Act, the government will drive more coal to gas and oil to gas replacement projects, and will bring about million m 3 of gas consumption demand in The current low gas prices also have positive impact on gas power stations. The Company expects Huaneng gas power station to start commercial operating in 2016 and more gas power station to under construction. The Company expects total sale of natural gas to grow by about 30% in 2016 and grow at a faster speed in Figure 1: Total Sale of Natural Gas of Binhai Investment Figure 2: Gas Tariff of Binhai Investment million m3 HKD 2,500 sale of piped gas yoy 140.0% gas tariff 120.0% , % , % , % % % A2011A2012A2013A2014A2015F2016F2017F2018F 0.0% FY A 2013A 2014F 2015F 2016F 2017F 2018F We expect gas tariff of the Company to continue to improve in Gas tariff of the Company benefited greatly from the gas prices reform took place in 2015, which significantly raise the profitability of gas distribution business of the Company. As the price difference between legacy and incremental gas were removed, the prices adjustment will not have structural impact on the purchase costs of the Company and made gas tariff of gas distribution companies much more stable. We expect gas tariff of the Company to continue to improve in 2016 and to be more stable. We also expect natural gas prices to continue to decline in 2016 due to low oil prices and ample supply. Hence, we expect gross margin of gas distribution business of the Company to continue to improve in See the last page for disclaimer Page 2 of 6

3 We expect connection fees of the Company to generally remain flat in The Company is expected to continue to add more customers as current gas penetration rate remains low and acquisition of more gas projects. The Company added around million residential customers in 2015, which was 16.6% lower than that of We expect the Company to add about million residential customers in 2016 and connection fees to remain flat. Maintain the TP of the Company at HK$ 3.96 and maintain Buy. Binhai Investment is a fast developing gas distributors in China. The Company benefit greatly from the fast growing gas demand of Binhai New Area. We expect the sale of piped gas of the Company to maintain fast growth in the next 3 years, we also expect revenue contributed by connect service to maintain at current level. Gas tariff of the Company benefited greatly from the gas prices reform takes effect in 2015 and is expected to continue to improve in 2016 and to be more stable in the future. Although total gas consumption of China is negatively impacted by the slowdown of macro economy, but we believe gas price cut will partly offset the negative impact of macro economy and drive sales growth. As more and more high-end manufacturing projects settle in Binhai New Area, the future natural gas consumption potential is very large. In addition, the coal to gas and oil to gas act driven by the government will also bring more gas consumption need in We believe natural gas sale prospect of the Company is bright. The natural gas sales growth of the Company is expected to be faster than that of large natural gas distribution companies and the profitability of gas distribution business of the Company is also expected to be higher than other gas companies. Hence, we believe the Company deserves comparable PE valuation level to large gas companies. We maintain our TP of the Company at HK$ 3.96, which represents 15.0x FY16 PE, and maintain Buy rating. See the last page for disclaimer Page 3 of 6

4 Table 1: Peers Valuation Comparison Company PER (x) PBR (x) ROE(%) Stock Code Currency Last price 14A 15A 16F 17F 14A 15A 16F 17F 16F Large Cap. Gas Distributors Kunlun Energy Co Ltd 135 HK HKD Beijing Enterprises Hldgs 392 HK HKD China Gas Holdings Ltd 384 HK HKD Enn Energy Holdings Ltd 2688 HK HKD China Resources Gas Group Lt 1193 HK HKD Towngas China Co Ltd 1083 HK HKD Simple Average Weighted Average Small Cap. Gas Distributors China Oil And Gas Group Ltd 603 HK HKD n.a n.a. n.a. (5.8) China Tian Lun Gas Holdings 1600 HK HKD n.a. n.a. n.a Zhongyu Gas Holdings Ltd 3633 HK HKD n.a. 2.3 n.a. n.a. n.a. n.a. Binhai Investment Company Lt 2886 HK HKD Tianjin Jinran Public Util-H 1265 HK HKD n.a. n.a. 0.6 n.a. n.a. n.a. n.a. Simple Average Weighted Average A-share Gas Distributors Guanghui Energy Co Ltd-A CH CNY Shenergy Company Limited-A CH CNY Shenzhen Gas Corp Ltd-A CH CNY Shaan Xi Provincial Natura-A CH CNY n.a. n.a. n.a. n.a. Simple Average n.a. n.a. n.a. 2.2 n.a. n.a. n.a. n.a. Weighted Average Source: Bloomberg, Guotai Junan International. Note: Companies with fiscal year ended at 31 March have been adjusted to be comparable to Companies with calendar year. See the last page for disclaimer Page 4 of 6

5 Financial Statements and Ratios Income Statement Balance Sheet Year end 31 Dec (HKD m) 2014A 2015A 2016F 2017F 2018F Year end 31 Dec (HKD m) 2014A 2015A 2016F 2017F 2018F Total Revenue 2,543 2,555 2,882 3,451 4,165 Land use rights COGS (2,078) (2,012) (2,137) (2,546) (3,011) PPE 2,584 2,732 2,890 3,006 3,108 Gross profit ,155 Long-term investments Administration Expenses (157) (163) (216) (259) (312) Deferred income tax assets Other income and losses Total non-current assets 2,733 2,885 3,006 3,133 3,246 Finance costs-net (108) (105) (95) (92) (81) Others Inventories Profit before income tax Trade and other receivables Income tax expenses (81) (94) (113) (144) (196) Cash & cash equivalents Total net profit Others Minority Interest (5) (5) (12) (15) (21) Asset held for sale Profit attributable to shareholders' Total current assets 1,256 1,083 1,230 1,490 1,779 Basic EPS Total Assets 3,989 3,968 4,236 4,623 5,025 DPS Borrowings 847 1,533 1,499 1,484 1,333 Derivative financial instruments Cash Flow Total non-current liabilities 1, ,000 1,063 1,042 Year end 31 Dec (HKD m) 2014A 2015A 2016F 2017F 2018F Trade and other payables ,009 1,104 1,250 EBIT Current income tax liabilities Income tax (81) (94) (113) (144) (196) Borrowings Adjust for depre. & amort Total current liabilities 1,966 1,255 1,325 1,429 1,579 Change in WC 35 (7) (9) Others (252) (240) (121) (303) (322) Total Liabilities 2,905 2,789 2,823 2,913 2,912 Cash from Operations Minority Interest Capital expenditure (403) (253) (232) (212) (201) Total Shareholders Equity 1,054 1,147 1,376 1,667 2,063 Others Cash from Investing (403) (253) (232) (211) (199) Proceeds from issuance of bonds Net cash flow from borrowings (158) (190) (265) (251) (396) Financial Ratios Interest paid (95) (77) (74) (73) (66) Year end 31 Dec (HKD m) 2014A 2015A 2016F 2017F 2018F Others Cash flows from financing (4) (33) (71) (31) (164) Gross margin 18.3% 21.3% 25.8% 26.2% 27.7% Net margin 8.4% 7.8% 11.3% 12.0% 13.6% Foreign exchange impact ROE 20.3% 17.3% 23.8% 24.9% 27.5% Net Change in Cash (229) (140) ROA 5.4% 5.0% 7.7% 9.0% 11.3% Cash & cash equivalents at 1st Jan Free CF (225) (107) Cash & cash equivalents at 31st Dec Net gearing 127.2% 127.6% 95.0% 70.0% 43.0% See the last page for disclaimer Page 5 of 6

6 Company Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Buy Relative Performance >15%; or the fundamental outlook of the company or sector is favorable. Accumulate Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Reduce Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable. Sell Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable. Sector Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Outperform Relative Performance >5%; or the fundamental outlook of the sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform Relative Performance <-5%; or the fundamental outlook of the sector is unfavorable. DISCLOSURE OF INTERESTS (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for SMI Holdings Group Limited (00198 HK), Guangshen Railway Company Limited-H shares (00525 HK), China All Access (Holdings) Limited (00633 HK), Guotai Junan International Holdings Limited (01788 HK), Binhai Investment Company Limited (02886 HK) and Link Holdings Limited (08237 HK), Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. DISCLAIMER This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services and etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for 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 Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel.: (852) Fax: (852) Website: See the last page for disclaimer Page 6 of 6