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China Energy: Gas - Lower EPS estimates for Kunlun and BHEL on pipeline tariff cut

研究机构:高盛高华证券 研究员:Frank He,Shuai Liu 发布时间:2014-09-02

Shaanxi-Beijing pipeline’s transmission tariff reduced by 13.6%

Kunlun Energy and Beijing Enterprises (BHEL) reported 1H14 results, whichwere overall below our expectations as it represented 44% and 47% of ourfull year estimates, mainly due to a 13.6% weighted-average selling pricereduction of the Shaanxi-Beijing pipeline by PetroChina from Jan 2014,despite a robust 20% yoy growth in gas sales volume in 1H14 to 14.7bnm3. As per BHEL, the purpose of the tariff cut was in response to theNDRC’s proposal to limit the transmission pipeline return at 8% IRR in2013, vs. BEHL’s 18% estimated IRR.

Return still appears high, post tariff revision

After the tariff revision, we lower our 2014E ROE of the Shaanxi-Beijingpipeline from the previous 21.6% to 18.8%, which is still higher than thegovernment’s benchmark return of 8%. While we do not expect furthertariff cuts for the No.1-3 pipelines, we do not exclude the possibility of alower tariff for the No.4 Shaanxi-Beijing pipeline to further reduce theoverall return profile of PetroChina Beijing Gas pipeline, in whichKunlun/BHEL hold 60/40% stakes. Our sensitivity analysis shows a 10%additional tariff reduction would lower 2015E net profit by 8%/6% forKunlun/BHEL. Moreover, we believe gas utilities and end users will notbenefit from the tariff cut, as the city gate price in the provinces connectedto the Shaanxi-Beijing pipelines were not changed.

Lower earnings estimates and target prices

We cut our 2014-16E EPS by 10-16% for Kunlun and 3-5% for BEHL, mainlyto factor in the reduced transmission tariff: (1) For Kunlun, we also trim ourearnings forecast for its oil E&P business, especially for its Kazakhstanproject as it was affected by a HK$500mn foreign exchange loss on localcurrency depreciation in 1H14. Thus, we cut our SOTP-based 12m TP toHK$14.8 (from HK$15.9). We believe the pipeline’s earnings will resumegrowth in 2015 and Kunlun’s move to shut down some LNG plants couldalso reduce further loss. Maintain Buy. Risks: capacity bottleneck inpipeline. (2) For BHEL, we lift our downstream gas sales volume estimatesfor 2015/16 to reflect better than expected execution at its gas powerplants. But, we cut our EV/GCI vs. CROCI/WACC-based 12m TP to HK$70(from HK$72.0). Maintain Neutral. Risks: Macro recovery to drive gasdemand in 2H14 (upside); Margin contraction from gas price hikes(downside).

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