Leading regional midstream company may expand gas business with existing assets
The newly signed crude oil supply agreement (up to 115 million metric tons within a 5-year contract period) can promote long-term business expansion
Book value is undervalued, which may usher in asset revaluation returns and opportunities for new business expansion
Focus on natural gas business expansion opportunities
Hans Energy is a leading regional midstream company with two liquefied product terminals and a solid chemicals warehouse center in Guangdong. On November 10, 2015, the company signed a letter of intent to cooperate with an independent LPG distributor. Possible cooperation matters include the construction and operation of a gas receiving station at Hansi's existing terminal, the construction and operation of a gas filling station in Guangdong, and the leasing of a vacant plot of land to a third party for the construction of an LPG receiving station. It is expected that the company will enter into a formal agreement before August 10, 2016. We believe this partnership will improve the efficiency and utilization rate of existing assets and is a key catalyst for the near future.
Newly signed crude oil supply agreement
After settling the lawsuit with Sinopec, Hansi Energy signed a crude oil supply agreement with Sinopec on May 5, 2015. According to the agreement, Hans Energy will supply 115 million metric tons of crude oil within 5 years (maximum 15 million metric tons for the first contract year and 25 million metric tons for each subsequent contract year). Assuming that the profit of the crude oil supply contract is 0.5 US dollars per barrel, Hans Energy will earn a total profit of 2.7 billion yuan (RMB, same below) during the five-year contract period (an average of 537 million yuan per year). In the long run, this will help the company transform from a loss-making midstream company to a profitable oil trading company after successfully fulfilling crude oil supply contracts. However, due to fluctuations in crude oil prices, execution risks have increased, so we do not expect Hansi Energy to launch a crude oil trading platform in the short term.
Book value is undervalued
After considering the market value of the property, we estimate that Hansi Energy's net book value is HK$1,496 million, a 17% premium over the company's current market value (0.8 times net market ratio), which is equivalent to 4.9 times the book value in 2014. Our valuation does not include the company's possible expansion into gas terminals and crude oil trading platform businesses.