Summary of the report
The company was selected as a member of the Hang Seng Index. The company announced in the morning of March 6, 2017, it was selected as the constituent stocks of Hang Seng China Oil and Gas Index, Hang Seng Global Composite Index and Hang Seng Composite Index Series (including Hang Seng Composite Index, Hang Seng Composite Industry Index-Energy Class, Hang Seng Composite small cap Index and Hang Seng Composite small cap Index). The company said that the inclusion of a number of Hang Seng Index indices reflects that the company has reached recognized standards in terms of market capitalization, liquidity and share liquidity, marking the affirmation of the company in Hong Kong's capital market. The selection of Hang Seng China Oil and Gas Index and Hang Seng Composite Industry Index-Energy also reflects that the company is a large-scale enterprise in the industry and has a certain degree of recognition.
There is a good chance that the company will be included in the next Shenzhen-Hong Kong Stock Connect list. The Shenzhen-Hong Kong Stock Connect is required to be a constituent of the Hang Seng Composite small-cap Index, and the average market capitalization at the end of the last 12 months at the time of the review was not less than HK $5 billion. The next interim review will be published in August 2017 to calculate the average market capitalization from July 2016 to the end of June 2017.
From July 2016 to February 2017, the company had an average market capitalization of HK $5.239 billion at the end of the last eight months, and has met the criteria for inclusion in the Hang Seng Composite small Capitals Index. We expect that the company will be selected in the next review of the Shenzhen-Hong Kong Stock Connect list.
The natural gas industry has entered a period of strategic development, and downstream gas companies are the most profitable. According to the 13th five-year Plan of Natural Gas
According to the Plan, by 2020, natural gas will account for 8.3-10% of China's energy consumption. Based on this, it is estimated that by 2020, China's annual natural gas consumption will exceed 300 billion cubic meters, with an annual growth rate of more than 10%.
At present, the reform of natural gas gate station price and gas transmission network is under way in China, and we believe that the terminal gas price will enter the long-term downward channel, which will further stimulate the growth of gas sales downstream and benefit the gas plate.
The company's business structure is reasonable and its performance has entered a period of rapid growth. The transformation of the company has acquired several city gas and vehicle filling station projects. Since then, the company has entered the field of LNG trade. At present, the company has formed a complete industrial chain from the upstream LNG receiving terminal, the middle reaches LNG trade and transportation, and the downstream gas operation. We judge that the scale effect of the follow-up company will continue to be reflected, resulting in a reduction in procurement costs and an improvement in profitability.
Beijing Combustion Group shares bring continuous asset injection expectations. Beijing Combustion Group injected HK $1.32 billion into the company in May 2016 and currently holds about 28% of the company, making it the single largest shareholder of the company. After Beijing Combustion Group took a stake in the company, it has injected Guangxi Tengxian city natural gas project into the company, and Beijing Luyuanda Company, a wholly owned subsidiary of Beijing Combustion Group, signed a 3-year LNG supply contract with the company, with a total contract amount of 500 million yuan. At present, Zhi Xiaoye, vice president of Beijing Control Group and general manager of Beijing Combustion Group, serves as the non-executive director and co-chairman of the board of directors. We expect that Beijing Combustion Group will continue to inject high-quality assets into the company and bring more business cooperation opportunities.
High capital expenditure leads to rapid expansion. The company currently has plenty of cash on hand, with HK $1 billion in cash on hand as of June 2016. The company's asset-liability ratio is only 24.6%, much lower than the industry's average asset-liability ratio of 55%. If all convertible bonds are converted, the asset-liability ratio will fall further to 11%. Ample cash on hand and a very low debt ratio enable the company to maintain high capital expenditure plans. At present, the company plans to maintain an annual capital expenditure of HK $1.5 billion to HK $2 billion over the next two years, mainly for the acquisition of city gas projects. At present, the company has announced Jilin Haoyuan city gas project and Shanxi Yuncheng, Yongji city gas project.
We expect the company to achieve rapid scale growth through sustained high capital expenditure.
The high elasticity target of gas plate should be paid attention to continuously. At present, in the Hong Kong gas sector, the company has the highest performance flexibility, we expect the company's performance to show multiple growth in 2016, followed by high-speed growth.
At present, the market attention of the company is low, and we expect that with the inclusion of the company in the Hang Seng Composite Index and the subsequent selection of Hong Kong Stock Connect, the market recognition will increase significantly and there will be room for a significant improvement in the company's valuation level.
Risk tips: I) the growth rate of natural gas demand is not as fast as expected; ii) the gas price gap between natural gas purchase and sale has narrowed.