Natural Gas Sales Growth to Accelerate, Maintain Buy

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1 股票研究 Equity Research : Binhai Investment (02886 HK) Kevin Guo 郭勇公司报告 : 滨海投资 (02886 HK) kevin.guo@gtjas.com Natural Gas Sales Growth to Accelerate, Maintain Buy 天然气销售增速将会加快, 维持 买入 评级 公司报告证券研究报告清洁能源行业 天然气滨海投资 Binhai Investment (02886 HK) Clean Energy Sector Natural Gas Equity Research Report The 2016 annual results of the Company were lower than our expectations, mainly due to foreign exchange loss and less-than-expected gas sales. Total revenue of the Company decreased by 16% yoy to HKD 2.15 billion, net profit attributable to shareholders decreased by 13% yoy to HKD million. The Company expects total sales of gas to increase by about 20% in 2017, and gas transporting business is also expected to grow significantly. Environmental protection pressure and adjustments in energy structure will be the major drivers for gas consumption in the coming years. We expect the gas dollar margin of the Company to improve in 2017 and remain at a stable level in We expect the gas dollar margin of the Company to remain at a steady level in under a new pricing mechanism. The Company plans to connect about 0.15 million new residential customers in 2017, an increase of 15% compared to that of The management of the Company expects total revenue contributed by connection services to increase by about 10% in Maintain TP at HK$ 3.54, and maintain Buy. 公司 2016 年业绩低于我们的估计, 主要是由于汇兑损失以及少于我们预计的天然气销量 公司收入同比减少 16% 至港币 21.5 亿元, 股东净利同比减少 13% 至港币 亿元 公司预计 2017 年天然气销量将增长 20% 左右, 且输气业务也将显著增长 环保压力和能源结构调整将是未来天然气消费的主要推动力 我们预计公司 2017 年的销气价差将会改善且在 年保持在一个稳定的水平 我们预计在新的价格机制下公司 年的销气价差将保持在一个稳定的水平 公司计划在 2017 年新接驳 15 万户的居民用户, 比 2016 年增长 15% 公司管理层预计 2017 年接驳收入将增长 10% 左右 维持公司目标价在 3.54 港元, 维持 买入 评级 Rating: Buy Maintained 评级 : 买入 ( 维持 ) 6-18m TP 目标价 : HK$3.54 Revised from 原目标价 : HK$3.54 Share price 股价 : Stock performance 股价表现 HK$1.880 (50.0) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 See the last page for disclaimer Page 1 of (10.0) (20.0) (30.0) (40.0) % of return HSI Index Change in Share Price 股价变动 1 M 1 个月 Binhai Investment 3 M 3 个月 1 Y 1 年 Abs. % 绝对变动 % 11.9 (6.9) (27.4) Rel. % to HS index 相对恒指变动 % 11.0 (19.7) (45.4) Avg. share price(hk$) 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) (%) (%) 2015A 2, (7.0) A 2, (13.2) F 2, F 2, F 3, Shares in issue (m) 总股数 (m) 1,174.3 Major shareholder 大股东 TEDA HK 63.2% Market cap. (US$ m) 市值 (US$ m) 2,207.7 Free float (%) 自由流通比率 (%) month average vol. 3 个月平均成交股数 ( 000) FY17 Net gearing (%) FY17 净负债 / 股东资金 (%) Weeks high/low (HK$) 52 周高 / 低 / FY17 Est. NAV (HK$) FY17 每股估值 ( 港元 ) 4.1

2 The 2016 annual results of the Company were lower than our expectation, mainly due to foreign exchange loss and lower gas sales. Total revenue of the Company decreased by 16% yoy to HKD 2.15 billion, net profit attributable to shareholders decreased by 13% yoy to HKD million. Revenue contributed by gas distribution business decreased by 18% yoy to HKD 1.67 billion, and revenue contributed by connection services declined by 7% to HKD 0.46 billion. The decline in gas distribution business was mainly due to the decline in gas prices. Total sales of natural gas increased by 12.3% yoy to million m 3, lower than our estimations, mainly due to less gas consumed by its largest industrial customer. Natural gas consumed by residential customers increased by 24.6% yoy to 101.1million m 3 and gas consumed by industrial/commercial customers increased by 10.2% yoy to million m 3. The Company newly added 0.15 million residential customers in 2016, which increased by 12.9% yoy. However, revenue contributed by connection services decreased due to delayed revenue recognition. The general gross margin of the Company was raised to 25.0% in 2016 and the gross margin of gas distribution business was 13%. The Company recorded a foreign exchange loss of about HKD 115 million in The Company expects total sale of gas to increase by about 20% in 2017, and gas transporting business is also expected to grow significantly in Environmental protection pressure and adjustments in energy structure will be the major drivers for gas consumption in the coming years. To improve air quality, the government has already set several no coal zones in northern China, and is determined to substitute coal with gas in these zones. Coal is not only forbidden in urban areas, but also in rural districts. We expect that such policies will strongly drive gas consumption in northern China, which include the main operation districts of the Company. More coal to gas projects are on the way, and the Company has already signed seven coal to gas projects in Binhai New Area. These projects are expected to contribute around 90 million m 3 in gas consumption in We expect natural gas consumed by residential customers to maintain at a growth rate of about 20%, and natural gas consumed by industrial/commercial customers is also expected to maintain fast growth. The largest industrial customer, Tianjin Steel Pipe, was adversely impacted by the financial status of its mother group and consumed about 50 million m 3 less of gas than its normal level. The management of the Company believes that gas consumption of Tianjin Steel Pipe group will return to normal in Besides, the Company also signed new contracts with several large industrial customers, which will strongly support sales growth in As a result, the Company expects total sale of gas to grow by about 20% in Gas transporting business of the Company is also expected to grow significantly in The Company has already signed contracts with four large customers to start supplying gas in If successful, these customers will consume more than 1 billion m 3 of natural gas in We are optimistic about natural gas sales growth of the Company. Figure 1: Total Sale of Natural Gas of Binhai Investment Figure 2: Gas Tariffs of Binhai Investment million m3 HKD gas dollar margin 2,500 sale of piped gas yoy 80% % ,000 60% ,500 50% % ,000 30% % % F 2018F 2019F 0% F 2018F 2019F We expect the gas dollar margin of the Company to improve in 2017 and remain at a stable level in Generally speaking, gas dollar margins of industrial customers are higher than that of residential customers. Natural gas consumed by Tianjin Steel Pipe returning to normal levels would be helpful for improving the average dollar margin of the Company. On the other hand, the implementation of a step pricing mechanism will help to raise the dollar margin of residential customers. After the gas price reform which took place in 2015, the price difference between legacy and incremental gas was removed. The price adjustments will not have a structural impact on the purchase costs of the Company and has made gas dollar margins of gas distribution companies much more stable. Hence, we expect the gas dollar margin of the Company to improve slightly in 2017 and remain at a stable level in See the last page for disclaimer Page 2 of 6

3 The Company plans to connect about 0.15 million new residential customers in 2017, an increase of 15% compared to that of The Company is expected to continue to add more customers as the current gas penetration rate remains low and the Company plans for the acquisition of more gas projects. New residential customers added in 2016 increased by 13.5% yoy, and is expected to accelerate slightly in According to the management of the Company, the Company will connect several new developed residential estates and expect total new connected customers to increase in The management of the Company also expects total revenue contributed by connection services to increase by about 10% in Maintain TP of the Company at HK$ 3.54 and maintain Buy. Binhai Investment is a fast developing gas distributor in China. The Company benefited greatly from the fast growing gas demand within 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 services to remain at current levels. The gas dollar margin of the Company is expected to improve in 2017 and to become more stable in the future. 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 greater gas consumption need in We believe that the natural gas sales prospects of the Company are bright. The natural gas sales growth of the Company is expected to be faster than that of large natural gas distribution companies. We maintain TP of the Company at HK$ 3.54, which represents 14.6x FY17 PE, and maintain Buy rating. See the last page for disclaimer Page 3 of 6

4 Table 1: Peers Comparison Company PE (fiscal year) PB (fiscal year) ROE(%) Stock Code Currency Last price 15A 16F 17F 18F 15A 16F 17F 18F 17F Large Cap. Gas Distributors Hong Kong & China Gas 3 HK HKD 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 China Tian Lun Gas Holdings 1600 HK HKD n.a Zhongyu Gas Holdings Ltd 3633 HK HKD n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Binhai Investment Company Lt 2886 HK HKD n.a. n.a. n.a Tianjin Jinran Public Util-H 1265 HK HKD 0.68 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 6.3 Chinese People Holdings Co 681 HK HKD 0.11 n.a. n.a. n.a. n.a. n.a. 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 n.a. 1.1 n.a. n.a. n.a. 7.7 Shenzhen Gas Corp Ltd-A CH CNY Shaan Xi Provincial Natura-A CH CNY n.a. n.a. n.a. n.a Changchun Gas Co Ltd -A CH CNY 8.12 n.a n.a. n.a. n.a. n.a. n.a. Sichuan Datong Gas Develop-A CH CNY n.a. n.a. n.a. 3.6 n.a. n.a. n.a. n.a. Simple Average Weighted Average Source: Bloomberg, Guotai Junan International. 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) 2015A 2016A 2017F 2018F 2019F Year end 31 Dec (HKD m) 2015A 2016A 2017F 2018F 2019F Total Revenue 2,555 2,145 2,441 2,865 3,377 Land use rights COGS (2,012) (1,605) (1,763) (2,110) (2,533) PPE 2,732 2,834 3,006 3,108 3,237 Gross profit Long-term investments Administration Expenses (163) (156) (183) (215) (253) Deferred income tax assets Other income and losses 21 (61) (21) (22) (23) Total non-current assets 2,885 2,980 3,134 3,247 3,443 Finance costs-net (105) (63) (58) (51) (57) Others Inventories Profit before income tax Trade and other receivables Income tax expenses (94) (83) (104) (117) (129) Cash & cash equivalents Total net profit Others Minority Interest (5) (5) (11) (12) (13) Asset held for sale Profit attributable to shareholders' Total current assets 1,083 1,092 1,098 1,272 1,482 Basic EPS Total Assets 3,968 4,072 4,232 4,519 4,925 DPS Borrowings 1,533 1,722 1, ,081 Derivative financial instruments Cash Flow Total non-current liabilities 1,533 1,755 1, ,081 Year end 31 Dec (HKD m) 2015A 2016A 2017F 2018F 2019F Trade and other payables ,013 EBIT Current income tax liabilities Income tax (94) (83) (104) (117) (129) Borrowings Adjust for depre. & amort Total current liabilities 1,255 1,095 1,743 1,920 1,894 Change in WC (7) (15) (35) Others (240) (83) (474) (209) (127) Total Liabilities 2,789 2,850 2,793 2,837 2,975 Cash from Operations Minority Interest Capital expenditure (253) (232) (212) (201) (232) Total Shareholders Equity 1,147 1,187 1,398 1,635 1,896 Others Cash from Investing (253) (232) (212) (201) (232) Proceeds from issuance of bonds Net cash flow from borrowings (190) (215) (71) (276) (261) Financial Ratios Interest paid (77) (72) (76) (77) (72) Year end 31 Dec (HKD m) 2015A 2016A 2017F 2018F 2019F Others Cash flows from financing (33) (18) 145 (55) (28) Gross margin 21.3% 25.2% 27.8% 26.3% 25.0% Net margin 7.8% 8.0% 12.4% 11.8% 11.0% Foreign exchange impact ROE 17.3% 14.5% 21.6% 20.7% 19.6% Net Change in Cash (140) (17) ROA 5.0% 4.2% 7.1% 7.5% 7.6% Cash & cash equivalents at 1st Jan Free CF (107) 1 (89) Cash & cash equivalents at 31st Dec Net gearing 127.6% 123.6% 111.4% 88.3% 70.4% 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 have financial interests in relation to the issuer mentioned in this Research Report. (3) Except for SMI Holdings Group Limited (00198 HK), Guotai Junan International Holdings Limited (01788 HK), Binhai Investment Company Limited (02886 HK), Link Holdings Limited (08237 HK), GFI MSCI A I-R (CNY) (83156 HK), GFI MSCI A I (03156 HK) and CAM SCSMALLCAP (03157 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 not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. (5) Guotai Junan and its group companies are not making a market in the securities in respect of the issuer mentioned in this Research Report. (6) Guotai Junan and its group companies have not employed individuals serving as officers of the issuer mentioned in this Research Report. There is no officer of the issuer mentioned in this Research Report associated with Guotai Junan and its group companies. 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, 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