As a natural gas terminal sales platform owned by CNPC and the domestic gas sales leader, Kunlun Energy's natural gas sales growth rate is far higher than the industry average. The company integrates many advantages such as resources, location, customers, and the entire industry chain. It is expected that in the future, it will fully benefit from the accelerated implementation of policies such as increasing natural gas storage, production, and price adjustment. The profit of the natural gas business is expected to further increase and achieve a sharp increase in quantitative profit. We predict that the company's EPS for 2023-2025 will be 0.70/0.81/0.92 (HK$0.82/0/95/1.08). The comprehensive PE and PB valuation method will give the target price of HK$8, and maintain the “buy” rating.
The company is a natural gas terminal sales platform owned by CNPC. The company started with oil and gas development, expanded the entire natural gas industry chain, focused on natural gas sales, and became the leading natural gas dealer in China. As of 2022, the company's annual natural gas sales scale is about 45 billion square meters, accounting for 12% of the country. In the past five years, the company's performance has grown rapidly in line with the growth of the natural gas business. In 2018-2022, the company's revenue CAGR was 13%, net profit from continuing operations was 16%, while the natural gas business revenue CAGR reached 23%, increasing from 61% to 77%.
The development of natural gas is imperative, and the company's growth is highly certain. Natural gas is a type of clean energy that is in line with the carbon neutrality strategy. In 2010-2022, China's apparent natural gas consumption CAGR reached 11%, and currently accounts for 9% of primary energy. Compared with developed countries, there is still plenty of room for improvement. According to SIA Energy Consulting, China's demand for natural gas will peak to 660 billion square meters in 2040. The company's sales growth rate is significantly higher than the industry. In 2018-2022, the sales growth rate CAGR reached 20%, while the market share increased from 8% to 12%. Assuming a neutral scenario, we expect the company's natural gas sales growth rate to maintain 12%, with sales volume of 504/564/63.2 billion square meters in 2023-2025, respectively.
Upstream supply remains cheap and stable, and downstream price promotion policies are advancing at an accelerated pace. In order to ensure the safety and stability of China's natural gas supply and avoid excessive reliance on imports, according to the “China Natural Gas Development Report (2023)” issued by the National Energy Administration, China will step up efforts to “increase storage and production” to ensure that the natural gas self-sufficiency rate is not less than 50%. As a subsidiary of CNPC, the company has obvious advantages in obtaining a safe and stable gas source. At the same time, since 2023, China has vigorously promoted the implementation of a natural gas promotion policy, guaranteed reasonable profits in the natural gas industry chain, and relieved the cost pressure on gas companies.
The user structure is continuously optimized, location advantages are gradually emerging, and price difference correction is highly certain. In 2018-2023H1, the retail sales share of the company's industrial and commercial users increased from 62% to 15pcts to 77%, making it number one in the industry. Meanwhile, industrial and commercial users had a relatively smooth price advantage, and the price difference advantage was obvious, increasing the company's profitability. At the same time, the company's natural gas business layout competes misplaced with other gas companies, and its location advantage in the Midwest, which is cheap and rich in resources, is obvious.
Under the combined effects of upstream and downstream, the company's price difference bucked the trend. We expect the 2023-2025 price difference to be further repaired to 0.51/0.52/0.535 yuan/square meter.
Deeply lay out the entire natural gas industry chain and build an integrated leader. The company has high-quality assets at two major LNG terminals in Tangshan and Rudong, with an average load rate close to 90%. At the same time, it has set up a new LNG receiving station in Fujian. While building a natural gas industry chain, it is also improving the layout of gas sources in the southeast coastal region. LNG plants, on the other hand, will gradually become profitable, the LPG business will remain stable, and the exploration and development business will gradually be divested, focusing on the main natural gas sales business.
Emerging businesses are in full swing, creating a comprehensive supplier of green energy. In the context of the carbon-neutral era, developing emerging non-gas businesses is an important direction for gas companies' strategic transformation. The company focuses on the main natural gas business to develop value-added services in the “Internet+Energy+Life” multi-format lifestyle, and actively explores comprehensive energy businesses such as gas power, new energy generation, and full coverage of “gas, electric cooling and heating” scenarios, and has a pioneering layout for long-term development.
Risk factors: macroeconomic downside risk; geopolitical risk; risk of policy implementation falling short of expectations; risk of customer expansion falling short of expectations; risk of project construction progress falling short of expectations; risk of production and operation safety accidents.
Profit forecasting, valuation and rating: Considering that the company has fully benefited from the accelerated implementation of policies such as increasing natural gas storage and production and promoting prices, profits are expected to gradually pick up; at the same time, the company has a good customer structure, and the natural gas sales growth rate is significantly higher than the industry average. We expect the company's net profit for 2023-2025 to be 60.54/69.87/7.960 billion yuan, corresponding to EPS of 0.70/0.81/0.92 yuan (HK$0.82/0/95/1.08). We selected Xinao Energy, China Resources Gas, Ganghua Smart Energy, and China Gas as comparable companies. Combined with PE and PB valuation methods, we expect the company's reasonable stock price in 2023 to be HK$8-9, corresponding to 9.9xPE and 1.0XPb. Due to careful considerations, we gave the company a target price of HK$8/share in 2023 to maintain a “buy” rating.