Tuesday, March 20, 2007
Results Brief: HK & China Gas (3)
The 2006 results came up last night and offered no surprises, market price though jumped up by more than 3% this morning, quite a movement for an utility. Maybe the market is really excited about the China unit's 60% jump in operating profit to about $400m, which was now over 10% of total earnings (excluding property). Gross investment in China, which includes gas and water projects, grew by some 40% to $10.5b, starting to catch up with that in HK of $12.6b.
Growth in China earnings apparently lacked behind the speed and scale of expansion (ROA at only 4%) but Chairman Lee offered no insights into when these investments are gonna give meaningful return other than that "these projects are projected to thrive within the next three years". Since Chairman Lee is known to be a very long term investor, it could be in 2009 when the thriving really happens.
The problem seems to stem from a lack of supply of natural gas as the giant west-to-east gas pipe can't cope with the rapid conversion from coal to natural gas taking place in many cities. This is because coal price has gone up whilst the natural gas price is still under strict government control to promote usage. Hence supply has run tight and HKCG is tackling this by establishing its own upstream projects. It remains to be seen how long will this situation resolve itself. I'll probably need to dig deep into the PetroChina and Sinopec reports to find out more.
Using the same valuation yardstick last time, the China part is worth 3x p/b at $30 billion. If we assume the supply situation can revert to normal, which will eventually, and the return on investment can reach 15% (with gearing), then the valuation will be about 20x p/e, certainly justifiable but in what year? $1.5b is about 5x of last year's China earnings after some adjusting for profits tax. It'll take more than 3 years if profit growth can be maintained at 50% annually. Alternatively if a 30x p/e can be accepted in light of the growth potential, then a mere $1b earnings can support the valuation. Either way Chairman Lee's words 'thriving within 3 years' comes to mind again. To be any more aggressive than this really requires imagination, which I never have much in disposal.
The performance of the HK gas business was as predicted lackluster. No detailed figures were given but earnings should be a little less than $3b. The partial switch to natural gas is said to create cost savings which will be passed on to customers. But I think it's equally likely and understandable that some savings will find its way to the bottom line. For now I'd stick to the same price tag of $48b.
HK properties including the IFC had a book value of about $10b, since the IFC has been marked to market and the Grand Promenade was largely sold, I'd say it's worth $12b which allows for one or two more years' profit. HKG also held some cash and investment worth about $3b on book.
The total valuation of HKCG is $93b, about the current capitalization. Downside risk at this price is little to none. Personally I'd prefer to wait for one or two reports to see if the China earnings can really take off, or wait for some market signal given by other gas companies. Since many brokerages have already issued buy calls with bullish forecasts, soon I may be left behind in dust regretting my inaction. However I'm not afraid to buy at a higher price if it becomes a sure bet.
DISCLOSURE: I don't hold 3 at time of writing.
Growth in China earnings apparently lacked behind the speed and scale of expansion (ROA at only 4%) but Chairman Lee offered no insights into when these investments are gonna give meaningful return other than that "these projects are projected to thrive within the next three years". Since Chairman Lee is known to be a very long term investor, it could be in 2009 when the thriving really happens.
The problem seems to stem from a lack of supply of natural gas as the giant west-to-east gas pipe can't cope with the rapid conversion from coal to natural gas taking place in many cities. This is because coal price has gone up whilst the natural gas price is still under strict government control to promote usage. Hence supply has run tight and HKCG is tackling this by establishing its own upstream projects. It remains to be seen how long will this situation resolve itself. I'll probably need to dig deep into the PetroChina and Sinopec reports to find out more.
Using the same valuation yardstick last time, the China part is worth 3x p/b at $30 billion. If we assume the supply situation can revert to normal, which will eventually, and the return on investment can reach 15% (with gearing), then the valuation will be about 20x p/e, certainly justifiable but in what year? $1.5b is about 5x of last year's China earnings after some adjusting for profits tax. It'll take more than 3 years if profit growth can be maintained at 50% annually. Alternatively if a 30x p/e can be accepted in light of the growth potential, then a mere $1b earnings can support the valuation. Either way Chairman Lee's words 'thriving within 3 years' comes to mind again. To be any more aggressive than this really requires imagination, which I never have much in disposal.
The performance of the HK gas business was as predicted lackluster. No detailed figures were given but earnings should be a little less than $3b. The partial switch to natural gas is said to create cost savings which will be passed on to customers. But I think it's equally likely and understandable that some savings will find its way to the bottom line. For now I'd stick to the same price tag of $48b.
HK properties including the IFC had a book value of about $10b, since the IFC has been marked to market and the Grand Promenade was largely sold, I'd say it's worth $12b which allows for one or two more years' profit. HKG also held some cash and investment worth about $3b on book.
The total valuation of HKCG is $93b, about the current capitalization. Downside risk at this price is little to none. Personally I'd prefer to wait for one or two reports to see if the China earnings can really take off, or wait for some market signal given by other gas companies. Since many brokerages have already issued buy calls with bullish forecasts, soon I may be left behind in dust regretting my inaction. However I'm not afraid to buy at a higher price if it becomes a sure bet.
DISCLOSURE: I don't hold 3 at time of writing.
Comments:
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Abacus1 ,
what do you think about the related company 1083?
I think HKGAS is losing its attractive about the gas concept in China cause the attention should change to 1083.
what do you think about the related company 1083?
I think HKGAS is losing its attractive about the gas concept in China cause the attention should change to 1083.
goalgoal hing,
i didn't write about 1083 much as it's only a paper-for-paper deal so it's not that indicative of real value. plus looking at how mr. lee handled the sunlight reit i strongly think this 1st batch of assets injected from HKCG were far from prime. that of 1083 aren't that good either as i remember it's mostly wholesale of LPG, as opposed to the more valuable pipeline network. so i expect there'll be more spin-off by HKCG in the future and it might but not necessarily be 1083.
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i didn't write about 1083 much as it's only a paper-for-paper deal so it's not that indicative of real value. plus looking at how mr. lee handled the sunlight reit i strongly think this 1st batch of assets injected from HKCG were far from prime. that of 1083 aren't that good either as i remember it's mostly wholesale of LPG, as opposed to the more valuable pipeline network. so i expect there'll be more spin-off by HKCG in the future and it might but not necessarily be 1083.
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