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Deutsche Bank Markets Research
Rating
Buy Asia
China
Energy
Oil & Gas
Company
Sinopec Kantons
Date
16 June 2016
Initiation of Coverage
Proxy for China's rising crude oil imports; initiating with Buy
Reuters Bloomberg Exchange Ticker 0934.HK 934 HK HSI 0934
Forecasts And Ratios
Year End Dec 31 2014A 2015A 2016E 2017E 2018E
EBITDA (HKDm) 1,365.3 1,284.1 1,258.8 1,293.1 1,409.8
Reported NPAT (HKDm) 1,017.8 1,027.0 1,129.6 1,212.0 1,369.3
DB EPS FD(HKD) 0.46 0.43 0.45 0.49 0.55
DB EPS growth (%) 129.0 -6.3 5.7 7.3 13.0
PER (x) 15.1 12.2 8.4 7.8 6.9
EV/EBITDA (x) 9.9 6.4 5.1 4.3 3.2
DPS (net) (HKD) 0.05 0.05 0.05 0.10 0.14
Yield (net) (%) 0.7 1.0 1.4 2.6 3.6
Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses
the year end close
Unique energy logistics company; initiating with Buy on 37% upside potential
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.
Price at 15 Jun 2016 (HKD) 3.81
Price target - 12mth (HKD) 5.25
52-week range (HKD) 6.48 - 3.44
HANG SENG INDEX 20,468
Vitus Leung
Research Analyst
(+852 ) 2203 6158
Johnson Wan
Research Analyst
(+852 ) 2203 6163
Price/price relative
3.0
4.0
5.0
6.0
7.0
8.0
9.0
6/14 12/14 6/15 12/15
Sinopec Kantons
HANG SENG INDEX (Rebased)
Performance (%) 1m 3m 12m
Absolute 5.0 -2.3 -39.4
HANG SENG INDEX 3.8 0.9 -23.8
Source: Deutsche Bank
Stock data
Market cap (HKDm) 9,472
Market cap (USDm) 1,221
Shares outstanding (m) 2,486.2
Major shareholders Sinopec Corp (60.34%)
Free float (%) 40
Avg daily value traded (USDm)
1.3
Source: Deutsche Bank
DB vs. Consensus
Year DB EPS (HK$/shr)
Cons EPS
(HK$/shr)
vs Cons
2016E 0.45 0.47 -3%
2017E 0.49 0.52 -6%
2018E 0.55 0.57 -4%
Source: Bloomberg Finance LP, Deutsche Bank estimates
The wind has changed in favour of Sinopec Kantons, a subsidiary of Sinopec and its flagship logistics arm for handling oil imports, with a gas pipeline, LNG vessels and oil storage. On organic growth, we expect an upturn in Kantons’ return on assets in the coming years; it should benefit from liberalisation of import oil quota, resumed gas demand growth and a surge in LNG imports. ROIC could rise from 10.6% in 2015 to 13.0% in 2018E. Kantons trades at a deep discount to peers; hence its favourable risk-reward warrants a Buy rating.
Beneficiary of teapot refiners’ ramp-up with surge in import crude oil Kantons’ dominance of oil jetties in Shandong (five VLCC berths in Qingdao and Rizhao) should allow it to benefit from a rise in teapot refiners’ utilisation and a surge in crude oil import volumes. A healthy GRM should mean a rise in imports, as teapot refiners have used only 30% of the quota since Nov 2015. We expect Kantons’ throughput to rise from 187mntons in 2015 to 230mntons in 2018E (+44mntons). Key catalyst: new NDRC approval of the oil import quota, with 33m tonnes of the quota left to be applied (+60% of current levels). Yuji resumes pipeline growth; lower impact from regulatory changes Gas demand growth has returned after the gas price cut in Nov 2015. We expect Yuji gas volume growth to record a 10% CAGR in 2015-18E, after a 7% drop in 2015, and ROE to improve to 18% in 2018E from 11% in 2015. We also see potential regulatory changes in pipeline tariffs, which could be benchmarked to ROA and utilisation rates. Yuji Pipeline could do better as its ROA is only 4-6% in 2015-18E, vs. the potential benchmarked ROA of 8%. Valuation; risk-reward Our target price of HK$5.25/share is based on sum-of-the-parts, using DCF for the Huade oil jetty and Yuji gas pipeline with WACC of 9.8% and 0% terminal growth, NAV for LNG vessels, DDM for equity-accounting oil jetties and overseas oil storage facilities, and 1x EV/EBITDA for vessel charter due to uncertainty over charter renewals in 2017. Our target price implies 1.15x 17E P/B, representing 8% and 27% discounts to Chinese ports and gas peers, respectively, although Kantons has a premium ROIC over 2016E-18E. Risk: Lower-than-expected crude oil import volume; changes in government policy towards teapot refiners.
16 June 2016
Oil & Gas
Sinopec Kantons
Page 2 Deutsche Bank AG/Hong Kong
Model updated:15 June 2016
Running the numbers
Asia
Hong Kong
Oil & Gas
Sinopec Kantons Reuters: 0934.HK Bloomberg: 934 HK
Buy Price (15 Jun 16) HKD 3.81
Target Price HKD 5.25
52 Week range HKD 3.44 - 6.48
Market Cap (m) HKDm 9,472
USDm 1,221
Company Profile
Sinopec Kantons was established in 1998. It is the flagship logistic arm of Sinopec for crude oil import. Sinopec Kantons primarily engages in the operation of oil jetties, long-distance gas pipeline assets, LNG vessels and oil storages.
Price Performance
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Jun 14Sep 14Dec 14Mar 15Jun 15Sep 15Dec 15Mar 16
Sinopec KantonsHANG SENG INDEX (Rebased)
Margin Trends
-15
0
15
30
45
60
75
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
02468101214
-100
-80
-60
-40
-20
0
20
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
20
40
60
80
100
-20-10
01020304050
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Vitus Leung
+852 2203 6158 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (HKD) 0.20 0.46 0.43 0.45 0.49 0.55
Reported EPS (HKD) 0.21 0.41 0.41 0.45 0.49 0.55
DPS (HKD) 0.04 0.05 0.05 0.05 0.10 0.14
BVPS (HKD) 4.0 5.0 3.8 4.2 4.6 5.0
Weighted average shares (m) 2,340 2,486 2,486 2,486 2,486 2,486
Average market cap (HKDm) 16,229 17,181 13,001 9,472 9,472 9,472
Enterprise value (HKDm) 8,404 13,526 8,174 6,451 5,524 4,538
Valuation Metrics P/E (DB) (x) 34.6 15.1 12.2 8.4 7.8 6.9
P/E (Reported) (x) 33.0 16.9 12.7 8.4 7.8 6.9
P/BV (x) 2.14 1.23 1.22 0.91 0.84 0.77
FCF Yield (%) 0.1 1.2 8.9 13.9 5.8 5.3
Dividend Yield (%) 0.5 0.7 1.0 1.4 2.6 3.6
EV/Sales (x) 0.4 0.7 4.0 3.3 3.0 2.3
EV/EBITDA (x) 29.9 9.9 6.4 5.1 4.3 3.2
EV/EBIT (x) 86.3 16.6 11.2 9.4 7.7 5.4
Income Statement (HKDm)
Sales revenue 23,356 20,670 2,044 1,952 1,811 1,937
Gross profit 155 916 839 785 772 895
EBITDA 281 1,365 1,284 1,259 1,293 1,410
Depreciation 172 541 539 556 558 562
Amortisation 11 12 14 14 14 14
EBIT 97 813 730 689 721 835
Net interest income(expense) -1 -198 -183 -196 -191 -175
Associates/affiliates 457 490 554 682 728 777
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) 109 104 118 124 134 143
Profit before tax 662 1,208 1,219 1,299 1,393 1,579
Income tax expense 171 190 192 170 181 210
Minorities 0 0 0 0 0 0
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 491 1,018 1,027 1,130 1,212 1,369
DB adjustments (including dilution) -22 123 42 0 0 0
DB Net profit 469 1,141 1,069 1,130 1,212 1,369
Cash Flow (HKDm)
Cash flow from operations 408 1,113 1,475 1,695 925 1,075
Net Capex -395 -901 -313 -377 -377 -577
Free cash flow 13 212 1,162 1,318 549 498
Equity raised/(bought back) 0 0 0 0 0 0
Dividends paid -87 -428 -353 -137 -242 -342
Net inc/(dec) in borrowings 0 0 0 -1,586 -581 -500
Other investing/financing cash flows -709 -612 -551 228 361 426
Net cash flow -783 -828 259 -176 86 81
Change in working capital 227 -107 364 606 -187 -125
Balance Sheet (HKDm)
Cash and other liquid assets 1,622 799 1,058 881 968 1,049
Tangible fixed assets 1,973 8,441 7,781 7,594 7,401 7,445
Goodwill/intangible assets 0 0 0 0 0 0
Associates/investments 6,213 7,078 7,746 7,713 7,973 8,377
Other assets 1,382 1,935 1,029 899 879 879
Total assets 11,191 18,252 17,614 17,088 17,220 17,750
Interest bearing debt 0 4,183 3,939 5,535 4,954 4,454
Other liabilities 1,334 1,565 4,263 1,148 892 896
Total liabilities 1,334 5,748 8,202 6,683 5,846 5,349
Shareholders' equity 9,847 12,465 9,373 10,366 11,336 12,363
Minorities 10 39 39 39 39 38
Total shareholders' equity 9,856 12,504 9,412 10,405 11,374 12,401
Net debt -1,622 3,384 2,881 4,654 3,986 3,405
Key Company Metrics
Sales growth (%) 6.0 -11.5 -90.1 -4.5 -7.2 7.0
DB EPS growth (%) 23.4 129.0 -6.3 5.7 7.3 13.0
EBITDA Margin (%) 1.2 6.6 62.8 64.5 71.4 72.8
EBIT Margin (%) 0.4 3.9 35.7 35.3 39.8 43.1
Payout ratio (%) 16.7 12.2 12.1 12.1 20.0 25.0
ROE (%) 6.0 9.1 9.4 11.4 11.2 11.6
Capex/sales (%) 1.7 4.4 15.3 19.3 20.8 29.8
Capex/depreciation (x) 2.2 1.6 0.6 0.7 0.7 1.0
Net debt/equity (%) -16.5 27.1 30.6 44.7 35.0 27.5
Net interest cover (x) 88.1 4.1 4.0 3.5 3.8 4.8
Source: Company data, Deutsche Bank estimates
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 3
Investment thesis
Outlook
We favour Kantons, an energy logistics company, for its stable earnings
stream, improving assets returns and the potential to outperform oil and gas
peers with on-going reforms and deregulation amid a volatile commodity price
environment. Kantons is clearly a beneficiary of China’s increasing reliance on
imported crude oil and rising appetite for supplies from teapot refiners as they
utilise their crude oil import quotas. Its dominant position in the oil jetty market
gives Kantons an increasingly valuable asset. Key catalysts are 1) new NDRC
approvals on crude oil import quota; and 2) reassurance of China gas
demand growth.
Kantons has a long track record in M&A and has been perceived as a
beneficiary of Sinopec’s assets reshuffle. However, its share price has plunged
since M&A activity stalled in 2014 and the return from its largest acquisition,
Yuji Pipeline, is lower than expected due to a shortfall in transmission volume
in 2015. However, we now believe the tide has turned. Kantons should start to
re-rate as previously acquired assets become profitable and it is also a likely
beneficiary of a surge in crude oil imports.
Our positive views are based on: 1) independent (teapot) refiners’ ramp-up of
crude oil imports; 2) reacceleration of long-distance gas pipeline transmission
growth; and 3) Kantons being a likely long-term beneficiary of China’s LNG
import ramp-up with its eight LNG vessels. We expect Kantons’ net profit to
register a 10% CAGR over 2015-18E, with a pick-up in oil jetty, gas pipeline
volume growth, and in LNG vessels’ contributions. We expect Kantons’ ROIC
to improve from 10.6% in 2015 to 13.0% in 2018E.
Valuation
We derive our TP for Kantons by adopting a sum-of-the-parts valuation, using
DCF for the Huade oil jetty and Yuji gas pipeline with a WACC of 9.8% (CoE of
11.3%, after-tax CoD of 3.8%, and a debt-to-capital ratio of 20%) and 0%
terminal growth for their capacity expansion constraints, NAV for LNG vessels,
DDM for equity-accounting oil jetties and overseas oil storage, and 1x
EV/EBITDA for vessel charter given the uncertainty of its charter renewal in
2017. Our TP implies 1.15x 2017E P/B. As compared to its ports and gas peers
trading at 1.3x and 1.6x 2017E P/B, this represents a discount of 8% and 27%
respectively, while Kantons could achieve ROIC of 12% (a premium to its port
and gas peers at 5.5% and 9.0%).
Risks
Lower-than-expected crude oil import volume; changes in government policy towards teapot refiners
Change in China’s oil and gas reforms, including unexpected pipeline reform. Lower-than-expected growth in gas pipeline transmission and unanticipated LNG spot cargo imports
Lower-than-expected oil storage occupancy
Cancellation of the Batam project, which could lead to an asset write-down
Sin
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Oil &
Gas
16
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6
Pag
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G/H
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Comp sheet
Figure 1: Comps for Chinese ports, China gas utility and regional container shipping
Reuters DB 14-Jun-16 Market CapName Ticker Rating Price (USD mn) FY16E FY17E FY15-17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E
Sinopec Kantons 0934.HK Buy HKD 3.76 -18% 1,205 8.3 7.7 9% 0.9 0.8 11.4 11.1 1.5 2.6 11.1 10.3 11.3 12.0
China oil & gas 3 5 7.00 9 22 23 27.0 28.0 32 33 37 38 17 18 43 44
PetroChina 0857.HK Buy HKD 5.34 5% 191,329 NM 26.2 -6% 0.7 0.7 -1.5 2.7 1.0 1.7 10.1 6.7 -0.2 2.8
Sinopec 0386.HK Buy HKD 5.31 13% 85,950 19.2 9.2 27% 0.8 0.8 4.2 8.5 3.3 5.6 5.4 3.8 3.2 6.9
CNOOC Ltd 0883.HK Hold HKD 9.41 17% 54,113 NM 28.5 -26% 1.0 1.0 -1.1 3.5 5.2 5.2 7.1 4.9 -0.5 2.6
SPC - H 0338.HK Buy HKD 3.65 18% 8,000 8.5 8.2 12% 1.5 1.3 18.6 17.1 3.5 3.7 7.4 6.9 16.6 16.8
SEG 2386.HK Buy HKD 6.92 5% 3,947 7.5 7.3 3% 1.0 0.9 13.4 12.7 5.4 5.5 3.0 2.6 20.8 20.1
China oil & gas 9% 17.9 21.6 0% 0.8 0.8 0.6 4.7 2.3 3.3 8.3 5.7 1.2 4.3
Chinese ports - H & SGX 5 7.00 9 22 23 27.0 28.0 32 33 37 38 17 18 43 44
China Merchants 0144.HK Buy HKD 19.74 -20% 6,607 10.5 10.2 13% 0.7 0.7 6.9 6.8 3.8 3.9 4.9 4.4 2.8 2.7
Qingdao Port 2039.HK NR HKD 9.65 -30% 4,755 13.0 11.4 -14% 0.7 0.7 6.0 6.2 2.4 2.6 12.4 11.2 2.3 2.5
Hph Trust HPHT.SI Buy USD 0.46 -14% 3,963 17.1 21.0 -8% 0.7 0.8 4.3 3.6 9.2 7.6 9.9 10.6 3.9 3.5
Dalian Port 2880.HK NR HKD 3.17 -21% 3,707 27.2 29.0 1% 0.9 0.9 3.2 3.1 1.1 1.5 NA NA 2.5 2.5
Cosco Pacific 1199.HK Hold HKD 7.80 -9% 2,724 13.5 12.1 -10% 0.6 0.6 4.5 4.8 3.9 3.3 5.6 5.8 1.7 1.9
Qinhuangdao Port 3369.HK NR HKD 2.78 -24% 1,802 8.7 9.0 -15% 1.0 0.9 11.0 9.9 5.4 5.3 7.3 7.1 6.6 6.2
Tianjin Port 3382.HK NR HKD 1.05 -15% 833 7.0 6.6 3% 0.5 0.5 7.6 7.7 5.7 5.7 NA NA 4.7 4.7
Xiamen Port 3378.HK NR HKD 1.46 -23% 513 9.5 8.9 6% 0.6 0.6 6.6 6.7 4.0 4.0 NA NA 4.0 4.0
Weighted average -20% 0 14.6 14.9 -2% 0.7 0.7 5.8 5.7 4.2 4.0 8.0 7.7 3.1 3.0
Chinese ports - A
Shanghai Int'L Port 600018.SS NR CNY 5.04 -22% 17,713 17.0 16.2 5% 1.8 1.7 10.8 10.8 3.1 3.3 10.9 10.4 8.8 9.5
Ningbo Port 601018.SS NR CNY 4.95 -38% 9,609 23.8 22.8 -2% 1.9 1.8 7.8 7.5 1.3 1.3 13.9 13.1 5.5 5.5
Rizhao Port 600017.SS NR CNY 4.04 -38% 1,884 30.8 26.4 3% 1.2 1.2 2.8 3.2 NA NA NA NA 2.9 2.9
Yantian Port 000088.SZ NR CNY 6.27 -27% 1,847 26.1 24.1 4% NA NA NA NA NA NA NA NA 0.6 0.6
Shenzhen Chiwan Wharf 000022.SZ NR CNY 14.75 -24% 1,313 18.9 18.0 6% NA NA NA NA NA NA NA NA 10.5 10.5
Weighted average -28% 20.4 19.3 3% 1.8 1.7 9.3 9.2 2.5 2.6 12.0 11.3 7.1 7.5
Weighted average - Chinese ports -25% 17.9 17.4 0% 1.3 1.3 7.7 7.6 3.3 3.3 10.3 9.8 5.3 5.5
China gas utility
BJ Enterprises 0392.HK Buy HKD 41.90 -11% 6,855 8.1 8.2 11% 0.9 0.8 10.9 10.1 3.1 3.7 2.8 2.7 3.7 3.6
Kunlun Energy 0135.HK Sell HKD 6.27 -9% 6,483 12.8 14.2 -2% 1.0 0.9 7.8 6.7 1.0 1.5 5.5 6.1 8.9 6.8
China Gas 0384.HK Buy HKD 11.36 2% 7,310 22.6 13.6 14% 2.6 2.3 13.3 19.2 1.2 2.3 12.4 10.2 9.6 11.0
CR Gas 1193.HK Hold HKD 22.30 -4% 6,388 14.6 13.3 11% 2.5 2.2 18.1 17.4 1.7 1.8 9.3 8.7 11.8 11.2
ENN Energy 2688.HK Hold HKD 38.05 -8% 5,307 12.0 11.2 10% 2.2 1.9 21.3 19.7 2.2 2.4 7.5 6.7 13.1 13.2
Towngas China 1083.HK Hold HKD 4.22 -6% 1,419 9.2 9.1 -3% 0.8 0.7 8.8 8.3 2.4 2.7 11.2 10.6 4.0 3.9
Weighted average -6% 14.0 12.0 8% 1.8 1.6 13.8 14.2 1.8 2.4 7.7 7.1 9.0 8.8
Regional container shipping
Nippon Yusen 9101.T Hold JPY 187.00 -37% 4,383 28.8 24.3 -49% 0.5 0.4 2.3 1.7 2.6 3.2 6.1 5.3 1.3 0.9
China Cosco Hldgs 1919.HK Sell HKD 2.62 -26% 3,447 NM NM NM 1.5 2.5 -46.4 -50.5 0.0 0.0 NM NM -6.5 -4.4
MOL 9104.T Sell JPY 222.00 -28% 3,331 NM 12.8 -47% 0.5 0.5 -25.7 3.8 0.0 1.2 11.5 10.2 0.1 0.1
Neptune Orient Lines NEPS.SI Sell SGD 1.31 6% 2,502 NM NM NM 1.1 1.2 -11.0 -2.9 0.0 0.0 28.2 13.8 -3.6 0.1
OOIL 0316.HK Buy HKD 27.20 -27% 2,192 24.9 14.0 -26% 0.5 0.4 1.8 3.2 1.0 1.8 9.2 8.1 1.9 2.7
Kawasaki Kisen 9107.T Sell JPY 231.00 -11% 2,063 NM NM NA 0.6 0.7 -12.9 -16.4 3.6 0.0 5.6 9.6 2.5 -1.5
Evergreen Marine 2603.TW Hold TWD 11.90 -10% 1,123 NM NM NM 0.8 0.9 -8.8 -10.7 0.0 0.0 41.7 88.4 -4.0 -4.2
Yang Ming Marine 2609.TW Sell TWD 7.64 -12% 549 NM NM NM 1.1 1.4 -34.8 -27.7 0.0 0.0 NM 22.5 -7.7 -3.4
Weighted average -22% 27.5 18.2 -43% 0.8 1.0 -16.1 -11.0 2.4 2.2 13.7 14.9 -1.3 -0.7
ROIC (%)Trading
Curr
YTD
Perf
P/E (x) EPS CAGR P/B (x) ROE (%) Dvd yield (%) EV/EBITDA (x)
Source: Bloomberg Finance LP, Company data, Deutsche Bank estimates. Note: Bloomberg consensus estimates for non-rated (NR) companies.
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 5
Proxy for China’s rising crude oil imports
We initiate coverage with a Buy on Sinopec Kantons (Kantons, 934 HK), and a
target price of HK$5.25/share. Kantons is a subsidiary of China’s largest oil
refiner, Sinopec, and its flagship logistic arm that handles crude oil imports. It
has long distance gas pipeline assets, LNG vessels and oil storage, with assets
spread across China, Europe and the Middle East. Kantons is a close proxy for
the rise in crude oil imports in China, and the resurrection of gas
demand growth.
Our investment thesis covers: Fade in M&A; rise in organic growth
Oil jetty: Key beneficiary of the liberalisation of the crude oil import quota
Gas pipeline: Rejuvenation of pipeline gas transmission growth
LNG vessels are its hidden gem
With a pick-up in the utilisation rate at different segments, we estimate
Kantons’ net profit should register a 10% CAGR over 2015-2018E, with a
strong pick-up in oil jetties, gas pipeline volume growth and contribution from
LNG vessels. We expect Kantons’ ROIC to improve from 10.6% in 2015 to
13.0% in 2018E.
Figure 2: Sinopec Kantons – M&A Roadmap
Announce
ment Date
Completion
Data
Asset type Location Asset acquired Stake Consideration
(HKD mn)
P/B P/E Seller Other existing owners
Jul-06 Dec-06 Oil terminal China Huade Petrochemical +30% 571.0 1.3 12.9 Sinopec Corp NA
May-11 Oct-11 Oil terminal China Zhan Jiang Port Petrochemical Terminal 50% 407.3 0.9 3.6 Zhan Jiang Port Group Zhan Jiang Port Group (Zhanjiang SASAC:
50%, China Merchants Int'l Terminals: 40.3%,
Shanghai Baosteel: 8%, Shenzhen Yantian
Port: 1.4%, Zhanjiang Ocean Shipping
Agency & Guangdong Hengxing: 0.3%
Dec-11 Oct-12 Oil terminal China Ningbo Shihua Curde Oil Terminal 50% 212.6 1.3 5.3 Sinopec Corp Ningbo Port Company Limited
Dec-11 Oct-12 Oil terminal China Qingdao Shihua Curde Oil Terminal 50% 718.8 1.5 5.9 Sinopec Corp Qingdao Port (Group) Company Limited
Dec-11 Oct-12 Oil terminal China Tianjin Port Shihua Curde Oil Terminal 50% 428.9 1.5 18.7 Sinopec Corp Tianjin Port (Group) Company Limited
Dec-11 Oct-12 Oil terminal China Rizhao Shihua Curde Oil Terminal 50% 525.0 1.4 NM Sinopec Corp Rizhao Port Group Company Limited
Dec-11 Oct-12 Oil terminal China Tangshan Caofeidian Shihua Curde Oil Terminal 90% 335.3 1.2 5.2 Sinopec Corp Tangshan Caofeidian Port Company Limited
Jan-12 Jan-13 Oil storage UAE Fujairah Oil Terminal FZC 50% 194.9 NM NM Concord Energy Concord Energy
Oct-12 Mar-13 Oil terminal Indonesia PT. West Point Terminal 95% 3,840.1 NM NM PT. Batam Sentralindo PT. Batam Sentralindo
Oct-12 Apr-13 Oil storage Europe Vesta Terminals 50% 1,302.1 0.9 72.0 Mercuria Energy Mercuria Energy
Dec-14 Dec-15 Gas pipeline China Yu-Ji Pipeline 100% 3,221.1 1.7 9.7 Sinopec Corp NA
Total 11,757.2 1.5 9.5 Source: Company data, Deutsche Bank
Figure 3: Kantons’ share price performance vs. peers (since 2014)
-60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%
Sinopec Kantons
China gas utility
China oil & gas
HSCEI Index
Chinese ports - H & SGX
HSI Index
Chinese ports - A
Source: Bloomberg Finance LP, Company data, Deutsche Bank estimate. Data as of Jun 14, 2016
16 June 2016
Oil & Gas
Sinopec Kantons
Page 6 Deutsche Bank AG/Hong Kong
M&A activity fades out; strong organic growth ahead: Kantons has a long track record in M&A, and the market has perceived it as a beneficiary of Sinopec’s assets reshuffle. However, its share price has de-rated since M&A activity stalled in 2014. The latest, also the largest, acquisition of Yuji Pipeline also played a large part in the de-rating, with ROE erosion due to a drop in transmission volume and ASP in 2015. However, we see that the tide has turned, and expect acquired assets’ profitability to kick in with ROIC improving from 10.6% in 2015 to 13.0% in 2018E.
Key beneficiary of liberalisation of crude oil import quota: Kantons has 2 oil jetty terminals in Shandong with 5 VLCC (very large crude carrier) capacities to handle an increase in crude oil imports for independent (teapot) refiners. Moreover, Kantons’ Rizhao port plans to add another VLCC berth to accommodate demand growth. Sinopec is also set to lower domestic oil production while refining throughput remains stable. Hence, we expect Kantons, as a flagship crude importer for Sinopec, to benefit from higher utilisation of the terminals.
Rejuvenation of pipeline gas transmission growth: Yuji gas pipeline volume disappointed in 2015 with a volume dip of 7.7% YoY. However, the government’s cutting of the city-gate tariff in Nov 2015 has rejuvenated demand. We expect Yuji Pipeline transmission volume to grow 10% p.a. in 2015-18E, from 2.98bcm to 3.92bcm. Moreover, we see Yuji Pipeline’s ROA improving from 4% in 2015 to 6% by 2018E. Besides, Yuji will potentially be better off if the NDRC changes its long distance tariff regulation with a change in benchmarking to ROA and utilisation, given that ROA is lower than the potential benchmark based on 8%.
LNG vessels are its hidden gem. Kantons has 8 LNG vessels and 7 of these will come on stream in 2016-2018. We see a strong pick-up in its income stream with guaranteed occupancy. We expect the LNG vessels JV to contribute HK$94mn in 2018E vs. only HK$3mn in 2015. Management expects each LNG vessel to achieve levered IRR of 20+% while long term ROA would be c.5%.
Figure 4: Segmental net income contributed to Kantons Figure 5: Segment ROE 2013-2018E
-200
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2014 2015 2016E 2017E 2018E 2019E 2020E
LNG vessel
Oil storage
Gas pipeline
Oil Jetty
Others
0%
5%
10%
15%
20%
25%
Oil Jetty Gas pipeline Oil storage LNG vessel *
2014
2015
2016E
2017E
2018E
2019E
2020E
Source: Company data, Deutsche Bank estimates
Source: Company data, Deutsche Bank estimates. Note: *ROE calculation for LNG vessels included shareholder loans as part of equity.
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 7
Oil jetty business – key beneficiary of China’s market liberalisation
Unparalleled leader in China oil jetty sector
Kantons has 11 VLCC berths in operation in China. It dominates the oil jetty
VLCC market with c.40% of China’s capacity and has the best leverage with
China’s recent liberalisation of import crude oil quota for independent refiners
(teapot refiners). As of 2015, Kantons accounts for 39% of total China oil jetty
throughput.
Figure 6: Oil jetty market share by Sinopec Kantons Figure 7: VLCC berths in China (2016)
Sinopec Kantons
39%
Other oil jetties61%
Oil jetty market share (by throughput, 2015)
Sinopec Kantons:11 berthsOther oil
jetties:16 berths
VLCC berths in China
Source: Company data, Ministry of Transportation, Deutsche Bank
Source: Company data, Ministry of Transportation, Deutsche Bank
Strong operating leverage with oil jetty throughput surge
We expect Kantons’ oil jetty throughput to increase in the next few years at an
7.2% CAGR in 2015-18E, driven by 1) a strong surge in teapot refiners’ crude
oil imports; 2) Sinopec lifting its import volume to cut domestic high cost crude
oil production; 3) strategic petroleum reserve build-up. With Kantons’ oil jetties
operating above the breakeven utilisation rate (we estimate breakeven is c.40%,
depending on which oil jetty), it has strong operating leverage. Meanwhile, we
adopt conservative assumptions on Huade / Zhanjiang, where we project no
growth on throughput and expect Rizhao phase II to commence only in 2H18E.
Financially, we expect Rizhao/Caofeidian to start accounting taxation at 25% in
2017/18E.
Figure 8: Sinopec Kantons: oil jetty throughputs Figure 9: Kantons’ oil jetty ROE
0
50
100
150
200
250
2014 2015 2016E 2017E 2018E
Qingdao Port Rizhao Port Ningbo Port Zhanjiang Port
Caofeidian Port Huade Port Tianjin Port
mmtpa
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Huade Zhanjiang Qingdao Rizhao Caofeidian Ningbo & Tianjin
2014
2015
2016E
2017E
2018E
Source: Company data, Deutsche Bank estimates
Source: Company data, Deutsche Bank estimates
16 June 2016
Oil & Gas
Sinopec Kantons
Page 8 Deutsche Bank AG/Hong Kong
Dominance of Shandong market – best leverage in teapot ramp-up
Kantons has the undisputed advantage in Shandong, where it has 5 out of a
total of 6 VLCC berths in operation in the region. Moreover, Rizhao port has
received NDRC’s approval for a VLCC berth expansion. Teapot refiners are
mainly located in Shandong, Shanxi and Shaanxi provinces. The closest crude
oil import terminals for these teapot refiners would be Shandong.
Figure 10: VLCC berths in Shandong
Port Investor Tanker size (ton) Width (m) Annual capacity (mmtpa)
Qingdao Port Sinopec Kantons 200,000 498 17.00
Qingdao Port Sinopec Kantons 300,000 520 18.00
Qingdao Port Sinopec Kantons 300,000 450 18.00
Rizhao Port Sinopec Kantons 300,000 486 20.00
Rizhao Port Sinopec Kantons 300,000 418 18.50
Yantai Port CNOOC 300,000 430 16.25
Total 107.75
Under construction
Rizhao Port Phase II Sinopec Kantons 300,000 418 17.50 Source: Company data, NDRC, China Ports, Deutsche Bank
Guangdong has several teapot refiners, but their run rates have been close to
zero, and they have not had any import quota approvals. Kantons owns two oil
jetties (Huade Port and Zhanjiang Port) in Guangdong. Hence, it would benefit
from any potential changes in import quota in Guangdong.
Figure 11: Oil jetties, crude oil pipelines and teapot refiners in Shandong
Hengyuan Petrochemical
Huaxiang Petrochemical
Chenxi ChemicalLandbridge Port PetrochemicalShida Technology Petrochemical
Desheng PetrochemicalGaoqing PetrochemicalJincheng PetrochemicalQifeng PetrochemicalQilu PetrochemicalQingyuan PetrochemicalWonfull Petrochemical (Huifeng)Xintai Petrochemical
Jinan Changcheng Refinery
Anbang ChemicalQingdao Guangyuanfa.
Boyuan PetrochemicalDongying DongmingChemicalFuhai PetrochemicalGenlin ChemicalHaike ChemicalHengrunde PetrochemicalHualian PetrochemicalHualong ChemicalHuashengHuaxing PetrochemicalKeli PetrochemicalKenli Petrochemical.Lihai Chemical
Lihuayi Group (Lijin)Lijinshen ChemicalLongyuan ChemicalMingyuan ChemicalQirun ChemicalShenchi Chemical.Shida Shenghua Refinery Shitong ChemicalWanda TianhongWantong PetrochemicalYatong PetrochemicalZhenghe GroupZhonghai Chemical
Dongying Port
Yantai Port
- 1 VLCC berth
Rizhao Port
- 2 existing VLCC berths
- 1 VLCC berth under construction
Qingdao Port
- 3 VLCC berths
Longkou Port
Laizhou PortBinyang Fuel ChemicalBoxing Yongxin PetrochemicalChambroad PetrochemicalJingbo PetrochemicalWudi Yuexin Chemical
Changyi PetrochemicalLuqing PetrochemicalShandong HaihuaShouguang Union PetrochemicalShuntai PetrochemicalYoubang Chemical
Shandong DongmingYuhuang Chemical
Huangdao, Qingdao Port -Weifang Binhai Economic Development Zone pipeline
Laizhou Port - ChangyiPetrochemical pipeline
Rizhao Port - Dongming Petrochemical pipeline
Yantai Port - Zibo crude oil pipeline
Dongying Port - ZhonghaiAsphalt (Binzhou) pipeline
Source: Company data, NDRC,, Deutsche Bank
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 9
Figure 12: China teapot refiners and their imported oil processing quotas
Original Capacity Capacity cut Remaining Capacity
Refinery Province mmtpa mmtpa mmtpa Applied Approved
Jul-15 Shanndong Dongming Shandong 11.00 3.50 7.50 7.50 7.50 YesAug-15 Panjin Beifang Asphalt Liaoning 10.50 3.50 7.00 7.00 7.00 YesSep-15 Sinochem Hongrun Shandong 6.70 1.00 5.70 5.30 5.30 No
Sep-15 Shandong Lihuayi Shandong 6.00 2.50 3.50 3.50 3.50 YesSep-15 Shandong Kenli Shandong 5.10 2.10 3.00 2.52 2.52 YesSep-15 Dongying Yatong Shandong 5.20 1.70 3.50 3.36 2.76 Yes
Sep-15 Baota Shihua Ningxia 8.70 1.20 7.50 6.16 6.16 YesDec-15 Wonfull Petrochemical (Huifeng)Shandong 7.60 1.80 5.80 4.16 4.16 YesDec-15 Shandong Tianhong Shandong 5.00 0.00 5.00 4.40 4.40 YesDec-15 Shandong Jingbo Shandong 5.80 2.30 3.50 3.31 3.31 YesDec-15 Shandong Shouguang Shandong 3.25 0.25 3.00 2.58 2.58 YesJan-16 Dongying Qirun Shandong 2.20 0.00 2.20 2.20 2.20 YesApr-16 Shandong Haiyou Shandong 6.10 2.60 3.50 3.20 3.20 NoPending Shaanxi Yanchang Shaanxi 20.40 3.00 17.40 3.60 CPCIF prelim approval NoPending Shandong Wudi Xinyue Shandong 3.20 0.80 2.40 2.40 CPCIF prelim approval NoPending Hengyuan Petrochemical Shandong 4.80 1.30 3.50 3.50 CPCIF prelim approval NoPending Hebei Xinhai Hebei 6.00 0.00 6.00 3.72 CPCIF prelim approval No
Pending Shandong Qingyuan Shandong 5.20 2.50 2.70 4.62 Pending NoPending Henan Fengli Henan 3.40 0.40 3.00 2.93 Pending NoPending Shandong Jincheng Shandong 5.90 3.80 2.10 4.56 Pending NoPending Shandong Shenchi Shandong 2.60 2.10 0.50 2.52 Pending NoPending Landbridge Port Petrochemical Shandong 3.50 0.33 3.17 2.40 Pending NoPending Zhonghai Chemical Shandong 2.30 1.57 0.73 1.97 Pending NoPending Wantong Petrochemical Shandong NA NA NA Applied Pending NoPending Haike Chemical Shandong NA NA NA Planning Pending No
Total 140.45 38.25 102.20 87.40 54.59
Imported crude processing quota (mmtpa) Non-SOE crude
oil import license
Approval
Date
Source: NDRC, Deutsche Bank; Note: Without Non-SOE crude oil import licence would require import oil through oil traders
Teapot refiners’ appetite for imported crude is likely to remain strong in 2016E
NDRC has approved teapot refiners’ 54.6mntons of crude oil import quota, and
a further 32.8mntons of quota applications have been submitted (a +60%
increase), of which 13.2mntons already have preliminary approval from China
Petroleum and Chemical Industry Federation (CPCIF) (+24% increase). In the 6
months since Nov 2015, 10 major teapot refiners have imported crude of
11.7mnton in total, representing just 29% of total granted imported quota.
Teapot refiners to continue to accelerate their pace of crude imports alongside
a strong GRM in China in 2016, using up to c.70-80% of the import quota
(c. 38-44mnton) representing an addition c.11-13% of total crude imports in
2015. However, we anticipate a bottleneck due to insufficient logistic facilities
connecting teapot refiners to oil jetties and this could raise the overall cost.
Figure 13: Major teapot refiners’ crude oil imports
Refiner
Imported crude
processing quota
Crude imports since
Nov 2015
% of quota
used
Dongming Petrochemical 7,500 2,863 38%
Kenli Petrochemical 2,520 1,050 42%
Lijin Petrochemical 3,500 1,052 30%
Yatong Petrochemical 2,760 823 30%
Wonfull Petrochemical 4,160 708 17%
Baota Petrochemical 6,160 200 3%
Chambroad Petrochemicals 3,310 367 11%
Shouguang Luqing Petrochemical 2,580 1,508 58%
Qirun Chemical 2,200 1,115 51%
Sinochem Hongrun 5,300 1,985 37%
Total 39,990 11,671 29%
Source: ICIS China, Deutsche Bank
Superior locations and connections in Shandong
Teapot refiners have run at low margins historically. Although the import crude
oil quota allows refiners to yield higher value added products for a better
margin, logistic transportation cost is a large consideration if teapot refiners
decide to import crude. Transportation by pipeline costs approximately
RMB40-50/ton while railway and trucks cost RMB90/ton and RMB105-125/ton
in Shandong. According to ICIS, Shandong teapot refiners using Russia M100
crude have an average GRM of RMB-282/ton; hence, teapot refiners are highly
sensitive to cost.
16 June 2016
Oil & Gas
Sinopec Kantons
Page 10 Deutsche Bank AG/Hong Kong
Figure 14: Shandong crude oil transportation cost (RMB/ton)
Transportation by pipeline
Cost: RMB40-50/ton
Transportation by train
Cost: RMB90/ton (including short-distance car transfer
cost of RMB30/ton)
Transportation by car
Cost: RMB105-125/ton
Source: Oilchem, Deutsche Bank
Kantons’ oil jetties in Shandong are well connected by crude oil pipelines to
major teapot refiners. Its Rizhao port has a pipeline to the largest teapot refiner
in China, Dongming Petrochemical, with 7.5mnton refining capacity and
import crude oil quota. Also, not only will Rizhao port build a new VLCC berth,
but it will also construct another crude oil pipeline to teapot refiners.
Figure 15: Oil pipelines in Shandong & connected refineries
Oil pipeline Connected teapot refineries Length
(km)
Capacity
(mmtpa)
Huangdao, Qingdao Port - Weifang Binhai
Economic Development Zone
Hongrun Petrochemical, Luqing
Petrochemical, Wonfull Petrochemical
176 20
Laizhou Port - Changyi Petrochemical Changyi Petrochemical 106 13
Rizhao Port - Dongming Petrochemical Dongming Petrochemical 462 10
Rizhao Port - Yizheng NA 379 20
Yantai Port - Zibo crude oil pipeline c.10 teapot refineries including Jingbo
Petrochemical, Wanda Yatong, Wonfull
Petrochemical
540 15
Dongying Port - Zhonghai Asphalt (Binzhou) Zhonghai Asphalt 123 5
Under construction
Dongjiakou, Qingdao port - Weifang - Central
& Northern Shandong
Hongrun Petrochemical, Qilu
Petrochemical
364 22-30
Rizhao Port - Puyang - Luoyang NA 782 18
Rizhao Port - Yizheng (Capacity expansion) NA 379 +20 (tot: 40) Source: Company data, NDRC,, Deutsche Bank
Major refiners’ run rates hit by teapots, yet margins are resilient
Since the first teapot refiners were granted licences to process crude, teapot
refiners have registered a big leap in run rates from low-40% in Jul 2015 to the
current c.50% level, while major refiners’ run rates have fallen markedly from
c.80% in Jul 2015 to the current mid-70%. Conversely, thanks to extensive
marketing channels, major refiners have maintained a stable refining margin at
c.RMB470/t during this period.
Figure 16: China GRM proxy (20 day inventory) vs. majors / teapots run rate
-5
0
5
10
15
20
25
30%
40%
50%
60%
70%
80%
90%
Ju
n-1
4
Ju
l-1
4
Au
g-1
4
Se
p-1
4
Oct-
14
Nov-1
4
Dec-1
4
Ja
n-1
5
Fe
b-1
5
Ma
r-1
5
Ap
r-1
5
Ma
y-1
5
Ju
n-1
5
Ju
l-1
5
Au
g-1
5
Se
p-1
5
Oct-
15
Nov-1
5
Dec-1
5
Ja
n-1
6
Fe
b-1
6
Ma
r-1
6
Ap
r-1
6
Ma
y-1
6
Ju
n-1
6
Major Refiners' Run Rate Shandong Teapot Refiners' Run Rate China GRM Proxy (20 day inventory, RHS)
USD/bbl
Source: NDRC, Datastream, Deutsche Bank estimates
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 11
Beneficiary of SPR build-up
We see Kantons benefiting from the future build-up of strategic petroleum
reserves (SPR) and commercial petroleum reserves. The Chinese government
has pushed back SPR phase III, but the construction of SPR phase II continues.
We expect 11.6mcm (9.3mn tons, equals to 6 days of inventory) of storage
under construction will commence operations by 2020.
NDRC issued guidance in commercial crude oil storage operations on Jan 26,
2015, in which it suggested crude oil refiners should maintain minimum crude
reserves of at least 15 days of inventory under a normal oil price environment,
or no less than 10 inventory days if the oil price goes above US$130/bbl. Based
on China’s crude throughput in the past 12 months, this could mean a
minimum crude reserve of c.22mnton at the current oil price. Following the
NDRC document, National Energy Administration (NEA) issued “The Rules of
National Oil Storage – Draft for public consultation” on June 5, 2016, which for
the first time laid down ground rules for both the government’s petroleum
reserves and commercial reserves required for crude oil refiners, refined oil
wholesalers and crude traders.
China’s SPR planning started in 2004 with the aim of mitigating the risk of oil
supply disruptions. In 2007, NDRC established the National Oil Reserve Centre
to enhance the construction and management of SPR. The construction of the
first phase was completed in 2008 and fully filled by mid-2009. The
government’s plan is to have enough SPR to cover 90 days of net imports
(c. 85mnton) by 2020.
Figure 17: Strategic petroleum reserve plan
Size Capacity Stockpile*Phase Status Location mm cm mmton mmton
Government strategic petroleum reserve
Phase 1 Completed 2008 16.4 12.4 12.5
Phase 2 By 2020 15.2 16.2 13.6
11.6 9.3 NA
Phase 3 Delayed; Preliminary planning to commence by 2020
Total 43.2 38.0 26.1
Corporate mandatory petroleum reserve
- Corporates are obliged to maintain the minimum petroleum inventory for daily operations (NDRC Guidance: 10-15 day inventory)
Expected
Completion
Completed: Dushanzi, Lanzhou, Tianjin, Huangdao (Underground), Qingdao
Under construction including Jinzhou, Huizhou, Jitan, Zhanjiang, Shanshan
Zhoushan, Zhenhai, Dalian, Huangdao (Above ground)
- Only 90% of the total inventory in petroleum storage tanks and refineries are qualified to fulfill the obligation. Petroeleum in pipelines/ transport are excluded
Under
construction
Source: Bloomberg Finance LP, NBS, NEA, NDRC, Deutsche Bank. Note: Stockpile statistics excl. commercial storage leased for SPR (as of Jun-2015)
16 June 2016
Oil & Gas
Sinopec Kantons
Page 12 Deutsche Bank AG/Hong Kong
Figure 18: Government strategic petroleum reserve distribution
Phase Province City Size (mm cm) Owner
Completed
Phase 1 Zhejiang Zhoushan 5.0 Sinochem
Phase 1 Zhejiang Zhenhai 5.2 Sinopec
Phase 1 Liaoning Dalian 3.0 CNPC
Phase 1 Shandong Huangdao (Aboveground) 3.2 Sinopec
Phase 2 Shandong Huangdao (Underground) 3.0 Sinopec
Phase 2 Xinjiang Dushanzi 3.0 CNPC
Phase 2 Gansu Lanzhou 3.0 CNPC
Phase 2 Tianjin Tianjin 3.2 Sinopec
Phase 2 Shandong Qingdao 3.0 Sinopec
Planning/ Under construction
Xinjiang Shanshan 3.0 CNPC
Guangdong Huizhou 5.0 CNOOC
Guangdong Zhanjiang 5.0 Sinopec
Liaoning Jinzhou 3.0 CNPC
Zhejiang Zhoushan (Phase 2) 2.5 Sinochem
Jiangsu Jitan 2.5 CNPC Source: Bloomberg Finance LP, NBS, NEA, NDRC, Deutsche Bank estimate
Sinopec cuts domestic supply = more crude oil imports
Kantons has been handling more than 70% of Sinopec’s import crude volume
historically. With Sinopec expected to lower domestic crude oil production by
6% YoY while maintaining its refining throughput in 2016E, Kantons’ oil jetties
will benefit. Sinopec requires to import 84% of its required crude oil.
As of 1Q16, Sinopec scaled back its domestic crude oil production by 10.3%
YoY, more than its guided 6% cut for 2016E. As a sensitivity check, if Sinopec
cuts 10% and keeps its refining throughput target of 238mntons and Kantons
keeps its share, Kantons would need to import 4.3mntons more for Sinopec,
which is equal to 2% of Kantons’ oil jetty occupancy rate.
Figure 19: Sinopec’s reliance on crude imports Figure 20: Kantons’ oil jetty throughput breakdown est.
80.0%
80.5%
81.0%
81.5%
82.0%
82.5%
83.0%
83.5%
84.0%
84.5%
85.0%
160
170
180
190
200
210
220
230
240
2013 2014 2015 2016E 2017E 2018E
Import volume Refining throughputs Import reliance (RHS)
mmton
0
50
100
150
200
250
2013 2014 2015 2016E 2017E 2018E
Teapot demand Sinopec demand
mmton
Source: Company data, Deutsche Bank estimates
Source: Company data, Deutsche Bank estimates
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 13
Figure 21: China ‘s net crude import hovering at 5Y high Figure 22: China reliance on imported oil continues rising
17.0
19.0
21.0
23.0
25.0
27.0
29.0
31.0
33.0
35.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Crude - Net Import
5-yr range 2016 2015 2014 Average
(In mn ton)
30%
35%
40%
45%
50%
55%
60%
65%
70%
0
10
20
30
40
50
60
Ja
n-0
5
Ju
l-0
5
Ja
n-0
6
Ju
l-0
6
Ja
n-0
7
Ju
l-0
7
Ja
n-0
8
Ju
l-0
8
Ja
n-0
9
Ju
l-0
9
Ja
n-1
0
Ju
l-1
0
Ja
n-1
1
Ju
l-1
1
Ja
n-1
2
Ju
l-1
2
Ja
n-1
3
Ju
l-1
3
Ja
n-1
4
Ju
l-1
4
Ja
n-1
5
Ju
l-1
5
Ja
n-1
6
Crude - Production Crude - Net Import Net imports as % of crude oil consumption (RHS)
mmton
Source: CEIC, Deutsche Bank
Source: CEIC, Deutsche Bank
Figure 23: Throughput of oil jetties in China Figure 24: Oil jetty throughput: Kantons vs. peers
388410
393 406429
474
0
100
200
300
400
500
2010 2011 2012 2013 2014 2015
mmton
Throughput of oil jetties above designated sizeThroughput of oil jetties above designated size: External tradesTotal cude oil imports
155.7 162.9 186.8
250.3 266.1287.2
37.0%
37.5%
38.0%
38.5%
39.0%
39.5%
40.0%
0
100
200
300
400
500
2013 2014 2015
mmton
Throughputs of oil jetties invested by Sinopec Kantons
Throughputs of other oil jetties above designated size
Market share of Sinopec Kantons
Source: Ministry of Transportation, Company data, Deutsche Bank. Note: Oil jetties above designated size refers to which has >RMB20mn annual revenue from principal business.
Source: Ministry of Transportation, Company data, Deutsche Bank. Note: Oil jetties above designated size refers to which has >RMB20mn annual revenue from principal business.
16 June 2016
Oil & Gas
Sinopec Kantons
Page 14 Deutsche Bank AG/Hong Kong
Turnaround for Yuji Pipeline
Kantons completed the Yulin-Jinan (Yuji) Pipeline acquisition in 2015 and it is
the largest asset in Kantons’ balance sheet, accounting for 37% of total assets
in 2015. Yuji Pipeline achieved disappointing ROA of 4% in 2015 on volume
and ASP decline. The lower than expected return led to Kantons’ sluggish
share price performance. However, the tide has turned for Yuji Pipeline with
strong CAGR growth ahead.
After the NDRC lowered the city-gas price in Nov 2015, natural gas demand
growth recovered in 1Q16 and grew 15% YoY. We believe Kantons’ Yuji
Pipeline will resume gas transmission volume growth and achieve 10% CAGR
in 2015-18E after an 8% drop in 2015. However, we expect the key growth
areas for Yuji Pipeline to be Henan and Shanxi provinces for 2016E and 2017E.
This means shorter transmission distances, so we expect Yuji Pipeline’s overall
ASP for 2016E/17E to lower 2.1% / 1.1% YoY. We expect ROE to bottom in
2016E at 10%, then recover to 18% by 2018E.
Figure 25: Yuji Pipeline ASP & transmission volume Figure 26: Yuji Pipeline ROE vs. ROA
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
0.300
0.305
0.310
0.315
0.320
0.325
0.330
0.335
0.340
0.345
0.350
0.355
2014 2015 2016E 2017E 2018ETransmission volume (Bcm) RHS
Yuji gas transmission ASP (RMB/cm)
Rmb/cm bcm
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
2014 2015 2016E 2017E 2018E
ROE ROA Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank
Further capacity expansion and competitive threat
Yuji Pipeline plans to increase capacity by 25% from 4bcm to 5bcm to cope
with demand growth in the region. We expect this capex to be RMB400mn.
Conversely, we see capacity expansion being completed only after 2018
because of intensifying competition – Sinopec’s LNG regasification terminals in
Shandong started in 2014 and Shaanjing pipeline III / IV capacity is also
coming on stream to serve the Shandong area.
Figure 27: Yuji Pipeline key assumptions
Tariff Transmission volume
RMB/cm 2014 2015 2016E 2017E 2018E 2019E 2020E
Total capacity bcm 3.00 4.00 4.00 4.00 4.00 5.00 5.00
Shaanxi 0.05 0.27 0.33 0.34 0.38 0.41 0.43 0.46
Shanxi 0.19 0.04 0.09 0.10 0.12 0.13 0.14 0.14
Henan 0.35 0.94 1.33 1.59 1.83 2.01 2.11 2.22
Shandong 0.46 1.98 1.24 1.24 1.24 1.37 1.43 1.51 Source: Company data, Deutsche Bank estimates
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 15
Potential regulatory changes in transmission pipelines – less impactful for Yuji
We expect potential regulatory changes in long distance pipeline tariffs in
2016E/2017E. One of these is the transmission tariff could be based on ROA
and utilisation rate. Please see China Gas Utilities report – “Navigating through
the clouds for sunshine” dated 9 June 2016 by Michael Tong for details.
However, we think Yuji Pipeline will suffer less of a negative impact because it
achieved ROA below 6% during our estimate periods even with utilisation
above the 80% level. But if NDRC were to normalise the transmission return to
8% ROA, there would be upside potential for the pipeline. We have not
factored any transmission tariff adjustment in our model.
Figure 28: Long distance pipeline returns comparison − 2015
Source: Deutsche Bank * SJ Pipeline = Shaanjing Pipeline; PEP=PetroChina Eastern Pipeline; PNP=PetroChina Northwest United Pipelines; PUP=PetroChina United Pipeline; PEP,PNP,PUP were consolidated into PetroChina Pipelines (PP) in Dec 2015; returns of PEP, PNP,PUP, PP and Yuji are Deutsche Bank estimates.
Figure 29: Yulin-Jinan natural gas pipeline vs. Shaan-Jing pipeline
Gansu
Jiangsu
Inner Mongolia
Hebei
ShaanxiHenan
LiaoningBeijing
NingxiaShanxi
Shandong
Yulin-Jinan Pipeline
SJ Pipeline (Route 2)
SJ Pipeline (Route 3)
SJ Pipeline (Route 1)
SJ Pipeline (Route 4, under construction)
Jining supplementary pipeline
Source: Company data, Deutsche Bank
26%
17%
10%
2%
9% 10% 12%
19%
8% 10%
2%
7%
4% 6%
0%
5%
10%
15%
20%
25%
30%
SJ* Pipeline
PEP* PNP* PUP* PP* YuJi Pipeline
Shaanxi Provincial Pipeline
ROE ROA
16 June 2016
Oil & Gas
Sinopec Kantons
Page 16 Deutsche Bank AG/Hong Kong
LNG vessels
Kantons is exposed to the LNG vessel business, with 8 vessels to carry
Sinopec’s LNG. These vessels are basically new and 7 will be delivered in
2016E-2018E. Sinopec signed take-or-pay contracts at a total of 9.65mnton of
LNG p.a. exclusively with Kantons’ so the utilisation rate is guaranteed for
contract periods.
Currently, two vessels are up and running, and the rest will be in operation by
2018E. We believe the LNG vessels business will generate a levered IRR of
20+% with a capital structure of 80% in debt, and 20% in equity (under
shareholder loans); unlevered IRR would be c.9-10%. We believe each LNG
vessel will be able to generate approximately HK$130mn of EBIT per year. We
expect LNG vessels to achieve ROE of 8.3% by 2018E, up from 0.5% in 2015.
Figure 30: LNG project details: PNGLNG & APLNG (Export)
PNGLNG Australia Pacific LNG (Export)
Supply country Papua New Guinea Australia
Supply project PNG LNG Australia Pacific LNG
Initial reserves 8.3 tcf Gas 12.2 tcf Gas
Gas field operator ExxonMobil (33.2%) ConocoPhillips (37.5%), Origin Energy (37.5%), Sinopec (25%)
Total plant capacity 7.4 mmtpa 9.0 mmtpa
LNG quality (loaded) 1140 Btu/scf 985-1010 Btu/scf
Port Port Moresby Gladstone
LNG project start-up 2015 2014
Contract with Sinopec Group
Year signed 2009 Train 1: 2011/ Train: 2012
Contract type SPA SPA
FOB/DES DES FOB
First shipment to Sinopec Feb, 2015 2016
Supply period 20 years 20 years
Annual delivery for Sinopec 2.05mmtpa 7.6 mmtpa
Total contract volume 41.0 mmton 151.6 mmton
Sales point DES FOB
No. of LNG carriers invested by Kantons 2 6
- LNG carrier size 172,000 cubic metres 174,000 cubic metres
Source: Woodmac, Company data, Deutsche Bank
Figure 31: PNG LNG vessel project Figure 32: Australia Pacific (AP) LNG vessel project
Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 17
Figure 33: Kantons: LNG vessel segment NP vs. ROE
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
50
100
150
200
250
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
LNG Vessel: Net profits LNG Vessel ROE (RHS)
RMB mn
Source: Company data, Deutsche Bank estimates. ROE calculation incl. S/H loans as part of equity
Figure 34: IRR Analysis on PNGLNG & APLNG vessel projects
PNGLNG APLNG
HK$ mn 2015 2016E 2017E 2018E 2019E 2020E 2035E 2016E 2017E 2018E 2019E 2020E 2035E 2036E 2037E
Kantons’ stake 9% 39%
No. of vessels 1 2 2 2 2 2 1 2 4 6 6 6 6 4 2
Average utilisation 92% 79% 100% 100% 100% 100% 100% 67% 75% 75% 100% 100% 100% 100% 100%
Annual EBIT/ vessel 131.4 131.4 131.4 131.4 131.4 131.4 131.4 131.4 131.4 131.4 131.4
Unlevered cash flow
Capex -4,033 0 0 0 0 0 0 -12,098 0 0 0 0 0 0 0
EBITDA 221 410 464 464 464 464 232 377 798 1,196 1,393 1,393 1,393 929 464
Unlevered cash flow -3,811 410 464 464 464 464 232 -11,721 798 1196 1393 1393 1393 929 464
NPV 113 124 -338
- entitled by Kantons 10 11 -133
Unlevered IRR 10.2% 9.3%
Levered cash flow
Shareholder loan -613 -194 0 0 0 0 807 -2,420 0 0 0 0 0 0 2,420
Principal repayment -124 -155 -155 -155 -155 -155 -155 -484 -460 -437 -437 -437 -437 -437 -437
Bank Interest cost -161 -155 -147 -140 -132 -124 -8 -484 -460 -437 -415 -393 -66 -44 -22
Bank Instalment -285 -310 -302 -295 -287 -279 -163 -968 -919 -873 -852 -830 -502 -480 -459
EBITDA 221 410 464 464 464 464 232 377 798 1,196 1,393 1,393 1,393 929 464
Levered cash flow -677 -94 162 170 178 185 876 -2,043 -122 323 542 564 891 449 2,425
NPV 877 963 2,783
- entitled by Kantons 79 87 1,091
Levered IRR 21.1% 21.8%
S/H loan interest rate LIBOR +3.7% LIBOR +2.2%
ROA 0.9% 1.6% 2.1% 2.3% 2.4% 2.6% 0.4% 1.1% 1.8% 2.6% 2.8%
ROE 5.1% 6.9% 8.0% 8.8% 9.5% 10.3% 1.8% 4.3% 6.5% 8.6% 8.8%
Source: Deutsche Bank estimates. Note: ROE calculation included shareholder loans as part of equity.
16 June 2016
Oil & Gas
Sinopec Kantons
Page 18 Deutsche Bank AG/Hong Kong
Valuation
We derive our TP for Kantons by adopting a sum-of-the-parts valuation, using
DCF for the Huade oil jetty and Yuji gas pipeline with a WACC of 9.8% (CoE of
11.3%, after-tax CoD of 3.8%, and a debt-to-capital ratio of 20%) and 0%
terminal growth for their capacity expansion constraints, NAV for LNG vessels,
DDM for equity-accounting oil jetties and overseas oil storage, and 1x
EV/EBITDA for vessel charter given the uncertainty of its charter renewal in
2017.
Our TP implies 1.15x 2017E P/B. Compared with its ports and gas peers, which
are trading at 1.3x and 1.6x 2017E P/B, this represents a discount of 8% and
27% respectively, while Kantons could achieve ROIC of 12% (a premium to its
port and gas peers at 5.5% and 9.0%).
Figure 35: Sinopec Kantons: Company valuation
16E EBITDA Multiples 16E Dividend WACC LT growth Value Value
Segments (HKD mn) (x) (HKD mn) (%) (%) (HKD mn) (HKD/sh)
Domestic Oil Jetty - Huade DCF 376 1,484 0.60
Domestic Oil Jetties - Other associates & JV DDM 1,097 385 9.8% 2.6% 5,357 2.15
Domestic Oil Jetties 1,473 6,842 2.75
Vessel Charter EV/EBITDA 20 1.0 20 0.01
Natural Gas Pipeline DCF 843 8,501 3.42
Offshore Oil Storage Terminals - JV DDM 283 72 9.8% 3.8% 1,201 0.48
LNG Vessels - Associates & JV NAV 185 1,177 0.47
Enterprise value 17,742 7.14
Less: Net Debt 1x of book value -4,654 -1.87
Less: Minority interest 1x of book value -39 -0.02
Equity value\ Price target 13,049 5.25
Valuation
Methodology
Source, Deutsche Bank estimates
Valuation cross-check
Our target price implies P/B is higher than Gordon Growth Model-derived
target valuation multiple, since our model has captured long-term growth
prospects from LNG vessel operations.
Figure 36: Sinopec Kantons: target price implied valuation
TP Implied Valuation 2015 2016E 2017E 2018E
P/E 12.8x 11.6x 10.8x 9.5x
P/B 1.40 1.26 1.15 1.06
Adjusted ROIC 10.6% 11.3% 12.0% 13.0%
ROE 9.4% 11.4% 11.1% 11.5% Source: Bloomberg Finance LP, Deutsche Bank estimates. Note: ROIC adjusted for share of profits from associates and JV.
Figure 37: Valuation cross-check on Gordon Growth Model target multiple
P/B [ROE-g]/[COE-g]
P/E [ROE-g]/[ROEx(COE-g)]
2016E 2017E 2018E
ROE 11.4% 11.1% 11.5%
Terminal growth 0.0% 0.0% 0.0%
COE 11.3% 11.3% 11.3%
P/E 8.9x 8.9x 8.9x
P/B 1.0x 1.0x 1.0x Source: Deutsche Bank estimates
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 19
Sensitivity
FX could have significant impact on earnings and target price
As Kantons’ reporting currency (HK$) differs from its principal functional
currency (RMB), FX movement could lead to a material change in earnings
estimates/ target price. Based on our calculation, should RMB depreciate 10%,
2016E earnings would likely fall 13.8% along with a 13.5% decline in
target price.
Meanwhile, every 10% increase in oil jetty throughput would raise 2016E
earnings by 14.2% and target price by 10.3%. In gas pipelines, each 10%
increase in transmission volume would raise 2016E earnings by 7.4% and
target price by 8.6%. Nevertheless, a RMB0.05/cm (or +c.15%) hike in the
average realised transmission tariff will likely lead to a 12.3% and 14.3%
increase in 2016E earnings/ target price, respectively.
Figure 38: EPS & TP sensitivity to FX movement Figure 39: EPS & TP sensitivity to oil jetty throughput
FX Sensivitiy
EPS (HKD) 2016F 2017F 2018F TP (HKD)
Base case USD:RMB 6.85 7.00 7.00
-20% 0.627 0.666 0.742 7.20
-10% 0.531 0.567 0.636 6.12
Base Case 0.454 0.487 0.551 5.25
+10% 0.392 0.423 0.481 4.54
+20% 0.339 0.369 0.423 3.95
Every +/- 10% -13.8% -13.3% -12.7% -13.5%
Oil jetty throughput sensivitiy
EPS (HKD) 2016F 2017F 2018F TP (HKD)
Base case oil jetty throughput (mmton) 211.5 221.3 230.4
-20% 0.325 0.358 0.418 4.17
-10% 0.390 0.423 0.484 4.71
Base Case 0.454 0.487 0.551 5.25
+10% 0.519 0.552 0.617 5.79
+20% 0.584 0.617 0.683 6.33
Every +/- 10% 14.2% 13.3% 12.1% 10.3% Source: Deutsche Bank estimates
Source: Deutsche Bank estimates
Figure 40: EPS & TP sensitivity to gas transmission tariff Figure 41: EPS & TP sensitivity to gas transmission vol
Realized gas transmission tariff sensivitiy
EPS (HKD) 2016F 2017F 2018F TP (HKD)
Base case transmission tariff (RMB/cm) 0.323 0.320 0.320
-RMB0.1/cm 0.343 0.369 0.417 3.74
-RMB0.05/cm 0.398 0.428 0.484 4.49
Base Case 0.454 0.487 0.551 5.25
-RMB0.05/cm 0.510 0.547 0.618 6.00
-RMB0.1/cm 0.566 0.606 0.685 6.76
Every +/- RMB0.05/cm 12.3% 12.2% 12.2% 14.3%
Gas transmission volume sensitivity
EPS (HKD) 2016F 2017F 2018F TP (HKD)
Base case transmission volume (bcm) 3.28 3.56 3.92
-20% 0.387 0.417 0.471 4.36
-10% 0.421 0.452 0.511 4.80
Base Case 0.454 0.487 0.551 5.25
+10% 0.488 0.523 0.591 5.70
+20% 0.522 0.558 0.631 6.14
Every +/- 10% 7.4% 7.2% 7.2% 8.6% Source: Deutsche Bank estimates
Source: Deutsche Bank estimates
Target price sensitivity to WACC/ terminal growth
Our Kantons target price is sensitive to our WACC and terminal growth
assumptions. According to our calculation, every +1% and +1% change in
WACC and terminal growth would result in -15.6% and +4.0% changes in
target price, respectively.
Figure 42: Target price sensitivity to WACC/ terminal growth
TP sensitivity
Sinopec Kantons Holdings Limited WACC %
TP sensitivity Base case
5.25 7.8% 8.8% 9.8% 10.8% 11.8%
-2.0% 7.10 5.88 4.94 4.19 3.58
Terminal growth (%) -1.0% 7.35 6.06 5.08 4.30 3.67
Base case 0.0% 7.66 6.29 5.25 4.43 3.77
1.0% 8.07 6.58 5.46 4.58 3.88
2.0% 8.62 6.95 5.72 4.77 4.02 Source: Deutsche Bank estimates
16 June 2016
Oil & Gas
Sinopec Kantons
Page 20 Deutsche Bank AG/Hong Kong
Consensus
Our EPS estimates in 2017/18E are mildly below consensus by 6%/4%, as we
have factored in a discontinuation of the vessel chartered business in 2017E,
given its low earnings visibility amid oil price recovery.
Figure 43: DB estimates vs. consensus estimates
2016E 2017E 2018E
DB estimates HKD/share 0.45 0.49 0.55
Bloomberg Consensus HKD/share 0.47 0.52 0.57
Variance -3% -6% -4% Source: Bloomberg Finance LP, Deutsche Bank estimates
Figure 44: Consensus estimates movement vs. Sinopec Kantons
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
0.40
0.45
0.50
0.55
0.60
0.65
Ja
n-1
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May-
16
2016E Consensus EPS 2017E Consensus EPS Sinopec Kantons share price (RHS)
HKD/shr HKD/shr
Source: Bloomberg Finance LP, Deutsche Bank
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 21
Valuation charts
Sinopec Kantons vs peers
Figure 45: Sinopec Kantons P/B vs. China ports
Average : +31%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
Ja
n-1
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Ap
r-1
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l-1
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Oct-
10
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15
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n-1
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Ap
r-1
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Kantons premium/ (discount) to China Ports Average premium +1 SD -1 SD
Current:-39%
Source: Bloomberg Finance LP, Deutsche Bank estimates
Figure 46: Sinopec Kantons P/B vs. China gas companies
Average:-38%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
Ja
n-1
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Ap
r-1
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l-1
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Oct-
10
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l-1
5
Oct-
15
Ja
n-1
6
Ap
r-1
6
Kantons premium/ (discount) to China Gas Companies Average premium +1 SD -1 SD
Current:-46%
Source: Bloomberg Finance LP, Deutsche Bank estimates
Figure 47: Sinopec Kantons P/B vs. China oil & gas sector
Average:+17%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Ja
n-1
0
Ap
r-1
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Ju
l-1
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Oct-
10
Ja
n-1
1
Ap
r-1
1
Ju
l-1
1
Oct-
11
Ja
n-1
2
Ap
r-1
2
Ju
l-1
2
Oct-
12
Ja
n-1
3
Ap
r-1
3
Ju
l-1
3
Oct-
13
Ja
n-1
4
Ap
r-1
4
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l-1
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Oct-
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n-1
5
Ap
r-1
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Ju
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5
Oct-
15
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n-1
6
Ap
r-1
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Kantons premium/ (discount) to China Oil&Gas Sector Average premium +1 SD -1 SD
Current:-1%
Source: Bloomberg Finance LP, Deutsche Bank estimates
16 June 2016
Oil & Gas
Sinopec Kantons
Page 22 Deutsche Bank AG/Hong Kong
12M forward valuation (P/B, P/E, EV/EBITDA)
Figure 48: 12-month forward P/E band Figure 49: 12-month forward P/E
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Jan-1
0
May-1
0
Sep-1
0
Jan-1
1
May-1
1
Sep-1
1
Jan-1
2
May-1
2
Sep-1
2
Jan-1
3
May-1
3
Sep-1
3
Jan-1
4
May-1
4
Sep-1
4
Jan-1
5
May-1
5
Sep-1
5
Jan-1
6
May-1
6
Price 6X 12X 18X 24X
5.0X
10.0X
15.0X
20.0X
25.0X
30.0X
35.0X
Jan-1
0
May-1
0
Sep-1
0
Jan-1
1
May-1
1
Sep-1
1
Jan-1
2
May-1
2
Sep-1
2
Jan-1
3
May-1
3
Sep-1
3
Jan-1
4
May-1
4
Sep-1
4
Jan-1
5
May-1
5
Sep-1
5
Jan-1
6
May-1
6
P/E 8.0x
Average 19.0x
+1SD 25.2x
-1SD12.7x
Source: Bloomberg Finance LP, Deutsche Bank estimates Source: vv Finance LP, Deutsche Bank estimates
Figure 50: 12-month forward P/B band Figure 51: 12-month forward P/B
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
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0
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Jan-1
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1
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2
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Price 0.4X 0.8X 1.2X 1.6X
0.8X
1.0X
1.2X
1.4X
1.6X
1.8X
2.0XJan-1
0
May-1
0
Sep-1
0
Jan-1
1
May-1
1
Sep-1
1
Jan-1
2
May-1
2
Sep-1
2
Jan-1
3
May-1
3
Sep-1
3
Jan-1
4
May-1
4
Sep-1
4
Jan-1
5
May-1
5
Sep-1
5
Jan-1
6
May-1
6
P/B 0.86x
Average 1.35x
+1SD 1.61x
-1SD 1.10x
Source: Bloomberg Finance LP, Deutsche Bank estimates Source: Bloomberg Finance LP, Deutsche Bank estimates
Figure 52: 12-month forward EV/EBITDA band Figure 53: 12-month forward EV/EBITDA
0
5,000
10,000
15,000
20,000
25,000
Jan-1
0
May-1
0
Sep-1
0
Jan-1
1
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Sep-1
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May-1
4
Sep-1
4
Jan-1
5
May-1
5
Sep-1
5
Jan-1
6
May-1
6
EV 6X 9X 12X 15X
HKD mn
0.0X
5.0X
10.0X
15.0X
20.0X
25.0X
30.0X
35.0X
40.0X
Jan-1
0
May-1
0
Sep-1
0
Jan-1
1
May-1
1
Sep-1
1
Jan-1
2
May-1
2
Sep-1
2
Jan-1
3
May-1
3
Se
p-1
3
Jan-1
4
May-1
4
Sep-1
4
Jan-1
5
May-1
5
Sep-1
5
Jan-1
6
May-1
6
EV/EBITDA 10.03x
Average 15.73x
+1SD 24.90x
-1SD 6.57x
Source: Bloomberg Finance LP, Deutsche Bank estimates
Source: Bloomberg Finance LP, Deutsche Bank estimates
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 23
Key assumptions and financials
Income statement
Sinopec Kantons generates its earnings primarily from oil jetties, the Yuji gas
pipeline, overseas (Europe & Middle East) oil storage and LNG vessel
operations, which contribute 69%, 22%, 4% and 0% of Kantons’ net profit
(excluding corporate expenses) as of 2015. As Kantons has started to ramp up
its LNG vessel operations, we expect its segmental profit contributions to rise
to 7% by 2018E. We forecast Kantons’ ROIC (adjusted for share of profits from
JV and associates) will improve from 10.6% in 2015 to 13.0% in 2018E.
With increased crude import activity by teapot refiners, we expect oil jetty
throughput to improve from 187mnton in 2015 to 230mnton in 2018E.
Assuming a flat ASP, we expect this to drive up unit EBIT from RMB7.52/t
in 2015 to RMB8.10/t in 2017E, before mildly retreating to RMB8.06/t in
2018E due to increased operating expenses from the new VLCC berth,
which is expected to be launched during the year.
Due to softened gas demand growth and gas source competition in
Shandong, we expect Kantons to delay its Yuji gas pipeline capacity
expansion plan till 2018/19E. While we believe gas transmission volume
will continue to rise within existing capacity, as gas demand growth from
Shandong (which offers the highest transmission tariff among the 4
provinces under Yuji Pipeline coverage) will likely lag behind the other 3
provinces, we expect Kantons’ average realised transmission tariff to
continue to decline from RMB0.33/cm in 2015 to RMB0.32/cm in
2017/18E. Offsetting the operational leverage of increasing transmission
volume, EBIT per gas transmitted is expected to recover to RMB0.149/cm
in 2018E from RMB0.127/cm in 2016E.
We expect the overseas oil storage facilities to be fully occupied by end-
2016 (from 81% in 2015), driving up segment EBIT per leased storage from
HK$102/cm in 2015 to HK$112/cm in 2018E.
We forecast the total 8 vessels under APLNG & PNGLNG projects will
gradually commence operations through 2015-18E, with each of the
vessels generating a stable EBIT per annum.
Figure 54: Net profit breakdown
(2015)
Oil Jetty69%
Gas pipeline
22%
Oil storage
4%
Vessel charter
5%
LNG vessel
0%
Oil Jetty
Gas pipeline
Oil storage
Vessel charter
LNG vessel
Source: Company data, Deutsche Bank
Figure 55: Net profit breakdown
(2018E)
Oil Jetty62%
Gas pipeline
25%
Oil storage
6%
LNG vessel
7%Oil Jetty
Gas pipeline
Oil storage
LNG vessel
Source: Deutsche Bank estimates
16 June 2016
Oil & Gas
Sinopec Kantons
Page 24 Deutsche Bank AG/Hong Kong
Figure 56: Earnings assumptions
Unit 2014 2015 2016E 2017E 2018E
Oil jetty
Total capacity Mmton 272.5 272.5 272.5 272.5 290.0
Utilisation % 60% 69% 78% 81% 79%
Throughputs Mmton 162.9 186.8 211.5 221.3 230.4
EBIT/t RMB/t 7.74 7.52 7.93 8.10 8.06
Earnings to Kantons HKD mn 700 773 823 833 845
ROE % 10.7% 11.5% 12.2% 11.8% 11.5%
Natural gas pipeline
Total capacity (year-end) bcm 3.00 4.00 4.00 4.00 4.00
Utilisation % 108% 75% 82% 89% 98%
Average realised transmission tariff RMB/cm 0.350 0.330 0.323 0.320 0.320
EBIT/ gas transmitted RMB/cm 0.139 0.146 0.127 0.135 0.149
Earnings to Kantons HKD mn 318 254 225 275 361
ROE % 16.5% 11.2% 10.2% 13.5% 18.4%
Oil storage
Total capacity mm cm 1.62 2.78 2.78 2.78 2.78
Average occupancy % NA 81% 98% 100% 100%
Storage rental per year HKD/cm NA 362 336 314 326
EBIT/ leased storage HKD/cm NA 102 108 104 112
Earnings to Kantons HKD mn 58 50 72 78 89
ROE % 3.6% 3.3% 4.9% 5.3% 6.1%
LNG Vessel
Total vessels in operation Unit NA 1 4 6 8
Utilisation % NA 92% 73% 83% 81%
EBIT per vessel HKD mn NA 131.4 131.4 131.4 131.4
Earnings to Kantons HKD mn 0 3 27 60 94
ROE % 0.0% 0.5% 2.6% 5.4% 8.3%
Vessel Chartered
Total vessels in operation Unit 2 1 1 0 0
Average daily rate of rental US$/day NA 66,524 56,546 NA NA
Earnings to Kantons HKD mn -38 50 22 0 0 Source: Company data, Deutsche Bank estimates
Figure 57: Key ratios
2014 2015 2016E 2017E 2018E
Invested capital HKD mn 15,888 15,475 15,058 15,360 15,806
ROIC (adj for profits from asso/JV) % 13.7% 10.6% 11.3% 12.0% 13.0%
Net Debt (adj for acquisition payables) HKD mn 3,417 6,063 4,654 3,986 3,405
Equity HKD mn 12,504 9,412 10,405 11,374 12,401
Net gearing (%) % 27.3% 64.4% 44.7% 35.0% 27.5%
Source: Company data, Deutsche Bank estimates. Note: ROIC adjusted for share of profits from associates and JV. Net gearing ratio adjusted for acquisition payables.
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 25
Figure 58: Income statement (HK$ mn)
For the year ended Dec 31 2014 2015 2016E 2017E 2018E
Revenue 20,670 2,044 1,952 1,811 1,937
Cost of Goods Sold -19,754 -1,205 -1,167 -1,039 -1,042
Gross Profit 916 839 785 772 895
GPM (%) 4% 41% 40% 43% 46%
SG&A -176 -164 -157 -145 -156
Other operating income/ expenses 73 55 61 94 95
EBIT 813 730 689 721 835
Crude oil jetty services - Huade 235 232 198 190 190
Vessel charter services -33 43 19 0 0
Natural gas pipeline transmission services 424 536 472 531 645
EBITDA 1,365 1,284 1,259 1,293 1,410
Financial Costs -198 -183 -196 -191 -175
Share of profits from associates 104 118 124 134 143
Zhanjiang Port Petrochemical Jetty 104 115 118 127 135
East China LNG Shipping Investment (PNGLNG) 0 3 6 7 8
Share of profits from JV 490 554 682 728 777
Qingdao Shihua 197 204 259 280 295
Rizhao Shihua 98 121 141 122 123
Caofeidian Shihua 75 110 107 108 95
Ningbo Shihua 50 49 50 53 55
Tianjin Shihua 12 23 33 34 35
Vesta 58 50 51 48 59
Fujairah Oil Terminal (FOT) 0 -3 21 30 30
China Energy Shipping Investment (APLNG) 0 0 21 53 86
Profit before tax 1,208 1,219 1,299 1,393 1,579
Income tax -190 -192 -170 -181 -210
Effective tax rate (%) 16% 16% 13% 13% 13%
Profit after tax 1,018 1,027 1,130 1,212 1,369
Minority interest 0 0 0 0 0
Net income 1,018 1,027 1,130 1,212 1,369
EPS (RMB/share) HKD/shr 0.409 0.413 0.454 0.487 0.551
Growth (%) % 45% 1% 10% 7% 13%
DPS (RMB/share) HKD/shr 0.050 0.050 0.055 0.097 0.138
Payout (%) % 12% 12% 12% 20% 25%
Weight No# of shares (mn) mn 2,486 2,486 2,486 2,486 2,486 Source: Company data, Deutsche Bank estimates
16 June 2016
Oil & Gas
Sinopec Kantons
Page 26 Deutsche Bank AG/Hong Kong
Balance sheet
To deleverage to 2014 level by 2018E Following the HK$3.2bn acquisition of Yuji Pipeline which was completed
at end-2015, Kantons’ net gearing ratio (adjusted for the non-interest
bearing acquisition payables) has hiked to a 6-year high of 64.4%. In 2016-
18E, we expect Kantons will gradually pay off debt related to the
acquisition, and reduce its gearing ratio to the restated 2014-level of c.27%
by 2018E.
As Kantons refinances its non-interest bearing payables for the Yuji
acquisition with offshore debt, we expect interest expense to rise to
RMB213mn during 2016E, partly offset by potential renegotiation on
interest rates with its parent, Sinopec Corp. Benefiting from the ongoing
deleveraging, we believe Kantons will gradually reduce its interest
expenses to HK$191mn in 2018E.
Figure 59: Balance sheet (HK$ mn)
For the year ended Dec 31 2014 2015 2016E 2017E 2018E
Cash and cash equivalents 799 1,058 881 968 1,049
Inventories 24 21 22 0 0
Trade/bill/ other receivables 1,430 988 456 421 521
Other current assets 0 0 0 0 0
Total Current Assets 2,253 2,067 1,359 1,389 1,570
PP&E 8,302 7,576 7,402 7,225 7,245
Lease prepayment and other assets 747 709 695 681 667
Investment properties 29 68 63 58 53
Interests in associated companies 687 679 737 775 816
Interests in joint ventures 6,125 6,379 6,702 6,975 7,253
Other long term assets 109 137 130 118 147
Total long term assets 16,000 15,547 15,728 15,832 16,181
Total Assets 18,252 17,614 17,088 17,220 17,750
Short-term borrowings 0 0 0 0 0
Trade/bill/ other payable 1,451 4,140 1,025 769 773
Other payables 6 23 23 23 23
Total Current Liabilities 1,457 4,163 1,048 792 795
Long-term borrowings 4,183 3,939 5,535 4,954 4,454
Other long-term liabilities 108 100 100 100 100
Total long-term liabilities 4,291 4,039 5,635 5,054 4,554
Total Liabilities 5,748 8,202 6,683 5,846 5,349
Shareholder's Equity 12,465 9,373 10,366 11,336 12,363
Minority interests 39 39 39 39 38
Total equity 12,504 9,412 10,405 11,374 12,401
Total Liabilities and Equity 18,252 17,614 17,088 17,220 17,750
Source: Company data, Deutsche Bank estimates.
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 27
Cash flow statement
Strong cash dividends from equity-accounted investment On top of annual maintenance capex of HK$377mn across 2016-18E, we
expect Kantons to spend an additional HK$400mn on Yuji Pipeline capacity
expansion in 2018/19E.
With Kantons ramping up its Europe & Middle East oil storage and LNG
vessel operations, alongside the strong performance of oil jetties
connected with teapot refiners, we expect it to generate a strong cash
dividend stream of c.HK$600mn from its equity-accounted businesses in
2018E.
After Kantons has paid off half of its Yuji acquisition consideration, we
believe it will gradually lift its dividend payout ratio, from 12% in 2015-16E
to 20% and 25% in 2017/18E, as a way to align its own payout ratio with
that of parent, Sinopec Corp.
As Kantons continues to deleverage and to gradually raise its dividend
payout, we expect a net cash outflow of HK$192mn in 2016E, followed by
a mild net cash inflow of HK$86mn/81mn in 2017/18E, respectively.
We adjusted the operating cash flow in 2016E to net of M&A payable to
reflect the genuine operating cash flow.
Figure 60: Cash flow statement (HK$ mn)
For the year ended Dec 31 2014 2015 2016E 2017E 2018E
Profit before tax 1,208 1,219 1,299 1,393 1,579
Adjustments:
DD&A 552 554 570 572 575
Other non-cash items -587 -684 -823 -877 -935
Finance cost 219 198 213 205 191
Income tax paid -173 -176 -170 -181 -210
Change in working capital -107 364 606 -187 -125
Net operating cash flow 1,113 1,475 1,695 925 1,075
Capex -902 -313 -377 -377 -577
Investments in asso/ JV -96 8 0 0 0
Loans to subsidiaries/ asso/JV -94 -662 -33 58 0
Dividends from asso/JV 130 333 457 494 601
Other investing cash flow -455 6 17 14 15
Net cash used in investing activities -1,417 -628 64 190 40
Equity raised 29 0 0 0 0
Net proceeds from borrowings 0 0 -1,586 -581 -500
Interest paid -219 -198 -213 -205 -191
Dividend paid -428 -353 -137 -242 -342
Other financing cash flow 95 0 0 0 0
Net cash used in financing activities -523 -551 -1,935 -1,029 -1,033
Net cash inflow/ (outflow) -827 296 -176 86 81
FX & other adjustment 0 -38 0 0 0
Beginning cash balance 1,626 799 1,058 881 968
Ending cash balance 799 1,058 881 968 1,049
Source: Company data, Deutsche Bank estimates.
16 June 2016
Oil & Gas
Sinopec Kantons
Page 28 Deutsche Bank AG/Hong Kong
Company profile
Sinopec Kantons was established in 1998 and listed on HKEx in June 1999. It
is a subsidiary of China oil major and largest oil refiner – Sinopec. It is the
flagship logistics arm of Sinopec for oil imports, with a long-distance gas
pipeline, LNG vessels and oil storage facilities. Moreover, Kantons is an energy
logistics company with assets in China, Europe and the Middle East. Sinopec
Kantons currently holds an interest in seven domestic oil terminals, three
overseas oil terminal/ storage projects and eight LNG vessels.
Figure 61: Shareholder structure
60.34%
39.66%
Sinopec Public Shareholders
Source: Company data, Deutsche Bank
Figure 62: Corporate structure summary
100%
71.32%
100%
100%
60.34%
Kantons InternationalInvestment LimitedSinomart KTS Development Limited
- Crude oil trading
SASAC
Sinopec Kantons International LimitedPublic Shareholders
39.66%
Unipec
Sinopec Kantons (0934.HK)
Sinopec Group
Sinopec Corp (0386.HK)
Oil jetty/ storage - China
- Zhanjiang Port (50%, Associate)- Ningbo Shihua (50%)- Qingdao Shihua (50%)- Rizhao Shihua (50%)- Tianjin Port Shihua (50%)- Tangshan Caofeidian Shihua (90%)
Transportation/ Logistics
- East China LNG Shipping (30%)- China Energy Shipping (49%)
Oil jetty/ storage
- Huade Petrochemical (100%)
Natural gas pipelinetransmission
- Yu Ji Pipeline (100%)
Oil jetty/ storage - Outside China
- PT. West (95%)- Fujairah Oil Terminal FZC (50%)- Vesta Terminal BV (50%)
Source: Company data, Deutsche Bank
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 29
Business overview
Domestic oil jetties
After the asset injection of five oil jetties, completed in Oct 2012, Kantons has
investments in seven oil jetties along China’s eastern and southern coast, with
a total capacity of 273mmtpa. Among the existing 35 berths, 11 are capable of
accommodating VLCC. An additional VLCC berth is expected to come on
stream at Rizhao port in 2018E. In 2015, total throughput in the seven oil jetties
amounted to 187mmton.
Figure 63: Overview of Kantons’ domestic oil jetties
Source: Company data, Deutsche Bank
Natural gas pipeline
Kantons completed the acquisition of the Yulin-Jinan (Yuji) pipeline from
Sinopec Corp at end-2015. Yuji Pipeline transmits natural gas from Sinopec’s
Daniudi Gas Field in the Ordos Basin to Shandong province via Shaanxi, Shanxi
and Henan provinces. It is one of the key energy projects under the 11th Five-
Year plan. As of end-2015, it has annual capacity of 4bcm.
Oil storage
Kantons currently holds interests in three international oil terminal projects,
namely Fujairah Oil Terminal (FOT) in the Middle East, VESTA Terminals in
Europe and the Batam Project in Indonesia. The FOT and Vesta projects have
storage capacity of 1.16mm cubic meters in 34 tanks and 1.62mm cubic
meters in 127 tanks, respectively; both projects commenced operations in
2015. Meanwhile, Batam project construction has been put on hold regarding
a dispute with local stakeholder. If the problem remains unsolved, Kantons
Kantons would need to write down on its prepaid land lease for a maximum
loss of SGD102mn.
16 June 2016
Oil & Gas
Sinopec Kantons
Page 30 Deutsche Bank AG/Hong Kong
Figure 64: Overview of Kantons’ oil storage and logistics operations
Source: Company data, Deutsche Bank
LNG vessels
Kantons has invested in two LNG vessel projects, including the PNGLNG and
APLNG projects. Both of the projects are responsible of importing LNG cargos
from the Pacific Basin to China for Sinopec. The two PNGLNG vessels have
respectively started operations in Feb 2015 and May 2016, while the six
APLNG vessels are expected to launch across 2016-18E.
Vessel chartering
Against a backdrop of low earnings visibility, Kantons has operated only one
chartered vessel since 2015. Should the crude price continue to recover in the
coming years, we expect the profitability of vessel chartering to be further
dragged down by rising fuel costs. Hence, we believe Kantons may forsake its
renewal option on hiring the vessel at end-2016.
Figure 65: Sinopec Kantons’ share price, adjusted ROIC movement and key events
7%
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Adj ROIC - RHS Sinopec Kantons Share Price (HK$)
16E
17E
HK$
18E
Jul-06: Acq. announcementon additional Huade Port
Dec-07: New berth with 300kdwt capacity in Huade Port started operation
Feb-11: Set up East China LNG Shipping Inv, a JV with China Shipping Development
May-11: Acq. announcement on Zhanjiang Port
Feb-12: Raised HK$3.5bn from right issue of 1,037 mn share
Dec-11: Acq. announcement on 5 domestic oil jetties
Jan-12: Acq. announcement on FOT
Apr-12: Set up China Energy Shipping Inv, a JV with China Shipping Development
Oct-12: Acq. announcement on PT West Terminal & Vesta Terminal
May-13: Placed shares for HK$2.7bn
Dec-14: Acq. announcement on Yuji Pipeline
Source: Bloomberg Finance LP, company data, Deutsche Bank estimates. Note: ROIC adjusted for share of profits from associates and JV.
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 31
Figure 66: Management profile
Name Position Age Profile
Chen Bo Chairman 53 Mr. Chen graduated from East China Institute of Chemical Technology, currently known as East China
University of Science and Technology, majoring in oil refining engineering and obtained a Bachelor of
Engineering in July 1986 and also has a professional qualification of engineer. Mr. Chen is currently the
General Manager and Executive Director of UNIPEC. After graduation from university, Mr. Chen has been
working in Sinopec Group. Since joining UNIPEC in 1993, he has successively held various positions including
the Business Manager of Crude Oil Department of UNIPEC, Business Manager and Deputy Manager of
UNIPEC Asia Company Limited, Deputy Manager and Manager of Crude Oil Department of UNIPEC and
Assistant to General Manager and Deputy General Manager of UNIPEC. Mr. Chen has extensive working
Xiang Xiwen Deputy Chairman 50 Mr. Xiang graduated from Liaoning University in July 1989 majoring in accounting. He has the professional
qualification of professor accountant. Also, he obtained a Master of Economics and has extensive experience
in financial management and accounting. From July 1989 to April 2000, Mr. Xiang was Deputy Section Chief
and Section Chief of Henan Petroleum Exploration Administration of Sinopec Group; from May 2000 to May
2002, he was Chief Accountant of the First Oil Production Plant of Henan Oilfield Branch Company of Sinopec
Group (“Henan Oilfield Company”); from June 2002 to April 2014, he was Deputy Chief Accountant and Chief
Dai Liqi Executive Director 48 Mr. Dai graduated from China Textile University in July 1989 majoring in chemical fiber with a Bachelor of
Engineering. He also has a professional qualification of senior engineer. From August 1989 to February 1994,
Mr. Dai was Lead Technician and Engineer of the Post-combed Drawing Workshop of Polyester Factory of
Sinopec Tianjin Petrochemical Corporation; from February 1994 to January 2002, he was Engineer and Senior
Engineer of Planning & Development Department of Sinopec Corp.; from February 2002 to October 2005, he
was Deputy Head of the Project Cooperation Office of Planning & Development Department of Sinopec Corp.;
from October 2005 to October 2010, he was the Head of the Project Cooperation Office of Planning &
Li Jianxin Executive Director 48 Mr. Li graduated from Hangzhou University in 1990 majoring in finance with a Bachelor’s Degree in Economics.
In June 1998, he graduated from International Business College of Nanjiang University with a Master’s Degree
in Business Administration. From August 1990 to August 1991, Mr. Li was a worker of air separation workshop
of ethylene factory of Sinopec Yangzi Petrochemical Company Ltd. (“Yangzi Petrochemical Company”); from
September 1991 to July 1996, he was the clerical officer in the Finance Department of Yangzi Petrochemical
Company; from August 1997 to April 2000, he was the Section Chief of Costs in Finance Department of Yangzi
Petrochemical Company; from May 2000 to April 2002, he was the Deputy Director of the Finance and Assets
Department of Sinopec Guangdong Oil Products Branch Company; from May 2002 to September 2005, he was
Wang Guotao, Executive Director 50 Mr. Wang graduated from Huazhong University of Science and Technology in July 1988 majoring in applied
chemistry. From July 1988 to July 1995, he was an oil tanks technician of Shengli Oil Company of Pipeline
Bureau; from July 1995 to November 1996, he was the Deputy Station Head of Shou Guang Station of Shengli
Oil Company of Pipeline Bureau; from November 1996 to June 1998, he was the Station Head of Shou Guang
Station of Shengli Oil Company of Pipeline Bureau; from June 1998 to June 2001, he was the Station Head of
Shou Guang Station of Shengli Oil Company and the Station Head of Shou Guang Station of Weifang Pipeline
Division of Pipeline Storage & Transportation Company; from June 2001 to August 2001, he was the Deputy
Head and the Director of Huangdao Oil Tanks of Weifang Pipeline Division of Pipeline Storage &
Ye Zhijun Managing Director 50 Mr. Ye has a bachelor degree in chemical engineering and Master of Business Administration and has
professional qualification of senior economist. He worked in Sinopec Guangzhou Petroleum and Chemical
Plant in August 1988. He was Deputy Officer and Officer of Marketing Department of Guangzhou Yinzhu
Polypropylene Ltd of Guangzhou Petroleum and Chemical Plant from June 1995 to July 1997; Deputy General
Manager of Guangzhou Yinzhu Polypropylene Ltd of Guangzhou Petroleum and Chemical Plant from July 1997
Chen Hong Chief Financial Officer 43 Mr. Chen graduated from Renmin University of China in July 1994 majoring in international accounting and has
a Bachelor of Economics and professional qualification of senior accountant. He worked with the Finance
Department of Sinopec International Co. Ltd, Sinopec International Products Trading Co, Sinopec (Singapore)
Company, UNIPEC (Singapore) Company and other units successively. He was the Deputy Chief of Finance
Li Wen Ping Secretary to the Board 52 Mr. Li Wen Ping, aged 52, Secretary to the Board of the Company. Mr. Li holds an Master of Business
Administration (MBA) and has the professional qualification of senior economist. He joined the research
institute of Sinopec Yangzi Petrochemical Co. Ltd. in August 1985. He was Deputy Head of Plastic Research
and Development Centre of Yangxi Petrochemical Company from January 1994 to September 1994, and
Project Manager of Joint Venture and Cooperation Division of Yangxi Petrochemical Company from January Source: Company data, Deutsche Bank
The author of this report would like to acknowledge the contribution made by
Yvonne Lai.
16 June 2016
Oil & Gas
Sinopec Kantons
Page 32 Deutsche Bank AG/Hong Kong
Appendix
Ramp-up of teapot refiners
China teapot refiners have started to import crude oil since 2015 as part of the
deregulation in the China oil & gas industry, exacerbating the overcapacity in
domestic China. As a result, the major refiners’ run rates dropped from 82% to
77% currently. Teapot refiners’ production ramp-up may cause overall major
refiners’ run rates to drop further.
In addition, in order to apply for crude oil import quotas, teapot refiners are
required to either retire old low-inefficient capacity or to upgrade to GBV
standards (China National Standards V). This facilitates supply-side reforms on
refining capacity. In our view, improving China’s utilisation rate would provide
better refining margins in the long run. According to CNPC Research Institute
of Economics and Technology, China’s independent refining capacity should
drop by c.21m tons by end-2016.
Policy has become more supportive of teapot refiners since 2013
In a disguised attempt to encourage refinery capacity cuts, government
officials have turned more supportive to teapot refiners since 2013, with the
National Energy Administration (NEA) first starting to draft a new scheme to
grant crude importing and processing quotas to local refineries. In February
2015, NDRC officially launched the new measures to grant an imported oil
processing quota to teapot refiners that accepted capacity cuts, followed by
MOFCOM which announced it was to allow teapot refines to apply for refined
oil export quotas. Since then, 13 teapot refiners have obtained a quota to
process total imported crude oil of 55.2mmtpa, and seven of them possess a
total refined oil export quota of 490,000ton in 2Q16.
Figure 67: Timeline of policy changes for teapot refiners
First cleanup on small-scaled teapot refiners -
Allocation on all crude oil supply have been
centralized. Only 21 Shangdong teapot
refiners were granted with Shengli grade
crude oil quota of <2mmtpa in total. Further tightened control on refined oil
distribution.
1999
2003
2001
NDRC announced to grant the first imported
oil processing quota to the teapot refiner
Shandong Dongming. In Aug, MOFCOM
further announced to grant the oil importing
license to Shandong Dongming, marking the
first teapot refiner with both the oil import
license and imported oil processing quota.
NEA started drafting the new scheme to grant
oil import/processing quota to the teapot
refiners who take capacity cuts.
NDRC released new measures on granting
the imported oil processing quota to the teapot
refiners who scrap their inefficient capacity.
Ministry of Railway stopped train services for
any crude oil outside CNPC/ Sinopec's
refining production plans.
2014
Jul
Shandong Province Governor urged for
granting a total oil importing quota of
20mmtpa to teapot refiners in Shandong.
MOFCOM announced new measures to allow
the eligible teapot refineries to apply for the
refined oil exporting quota.
2015
Nov
16 local refineries founded the first petroleum
purchasing association in China to centralize
their purchase of imported crude oils.
Shandong Province Govnerment issued a
proposal to optimize their teapot refining
industry, which advocated for helping key
companies in obtaining oil import/ processing
quota. By 2017, the Province targeted to
eliminate/restructure >20 substandard refiners
and cut/upgrade inefficient crude oil
processing capacity by 12mmtpa.
2013
Oct
2015
Feb
2014
Dec
2015
Jul
2016
Feb
Source: NDRC, NEA, Ministry of Commerce, Ministry of Railway, Shandong Province Government, Deutsche Bank
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 33
History of independent (teapot) refiners policy
1999-2001: Policy to scrap oversupply capacity
Back in 1999, the government announced the first clean-up of small-scale
“teapot” refiners, wherein:
(1) Refineries that were built without the approval of the State Council or
excluded from the “1998 national crude oil allocation plan”.
(2) Refineries included in the 1998 national crude oil allocation plan but non-
compliant with the national emission or production quality standards
would be shut down.
(3) The oil quota for refineries included in the 1998 national crude oil
allocation plan but possessing no refining units would be retracted.
(4) Without State Council approval, it would be forbidden to establish new
refining companies or to expand oil primary processing capacity; the
current construction of any refineries without approval would be halted.
(5) Ownership of the compliant teapot refiners would be restructured by
CNPC & Sinopec via asset transfer, JV or M&A.
(6) Going forward, allocation of all domestic and imported crude oils would be
centralised.
As a result of the clean up, only 21 compliant Shandong teapot refiners were
granted a Shengli grade crude oil supply quota of less than 2mmtpa in total.
Other refiners had to either process crude oil under sub-contracts, operate as a
JV with the state-owned oil companies, or process fuel oils of a lower grade
(e.g. heavy oils).
2003-2013: Suppressed by majors
In May 2003, the Ministry of Railways announced it was to stop train services
for any crude oil outside CNPC/ Sinopec’s refining production plans.
2013 – Current: turning supportive with supply side reform angle
In Oct 2013, the National Energy Administration (NEA) started drafting a new
scheme which grants the quotas for importing crude oil and processing the
imported oils to the teapot refiners who take capacity cuts.
At a State Council meeting held in July 2014, the Shandong Province
Governor, Guo Shuqing, urged the granting of a total 20mntpa oil-importing
quota to Shandong teapot refiners. Later, at end-2014, the Shandong Province
issued a Proposal to optimise their teapot refining industry, which advocated
supporting key refiners to apply for the license to import oil and process the
imported oils. By 2017, the Province targets to eliminate/restructure over 20
substandard refiners, cut/upgrade inefficient crude oil processing capacity by
12mmtpa and limit the teapot refining capacity within 100mntpa.
In Feb 2015, the NDRC announced new measures on granting the imported oil
processing quota to teapot refiners, in an effort to optimise the refining
industry structure, scrap excessive inefficient capacity and encourage refining
unit upgrade. In particular, the NDRC would follow the rules below to
designate the quota in processing imported oil:
16 June 2016
Oil & Gas
Sinopec Kantons
Page 34 Deutsche Bank AG/Hong Kong
Figure 68: Rules allocating imported oil processing quota
Particulars Quota granted (Multiple of scraped/ reformed capacity
1) To scrap oil distillation units with capacity of ≤2mn ton/year 1.0x
2) To scrap oil distillation units with capacity of >2mn ton/year 1.2x
3) To scrap refining units compliant with the 1999/2000 clean-up
2.0x
4) To scrap any inefficient refining units across provinces, autonomous regions or municipal cities
Additional 20% on Rule 1-3
5) To fulfill fuel upgrades (China-V) by 2015 (except BTH, YRD & PRD region)
Additional 20% on Rule 1-4
Particulars Quota granted
1) To build LNG, CNG storage capacity linking to the urban underground gas pipeline network, with ≥25mcm storage capacity in any single city (exc storages connected to LNG manufactories/ terminals)
1mn ton/year per 50mcm storage added
2) To build underground gas storage 1mn ton/year per 200mcm storage added
3) To co-build gas storage as a JV Allocated on pro-rata basis
Source: NDRC, Deutsche Bank
Refiners who take the imported oil processing quota are prohibited from
building any new refining units without State Council approval, and selling/
rebuilding the scraped refining units in other provinces.
In Jul 2015, the NDRC announced it was to grant the first imported oil
processing quota to teapot refiner, Shandong Dongming. One month later,
MOFCOM further announced it was to grant the oil importing license to
Shandong Dongming, marking the first teapot refiner to possess both the
rights to import oil and to process the imported oil.
In Nov 2015, MOFCOM further announced it was to allow the eligible teapot
refineries to apply for the refined oil exporting quota. To qualify, the refinery
would need to (1) possess imported oil processing quota, (2) be qualified for
and possess crude oil processing quota, and (3) guarantee supply to the
domestic market.
In late Feb, 16 local refineries (six of whom possessed both the license to
import oil and process the imported oil) have founded the first petroleum
purchasing association in China to centralise their purchase of imported crude
oils.
As of today, 12 independent refiners have obtained the quota to process
imported crude oil of 51.39mn ton/year in total. Among them, 10 of the
refiners also have the license to import crude oil of an aggregate of 42.39mn
ton. Meanwhile, another 11 independent refiners are pending approval for
processing imported oil of 38.11mn ton/year in total. Among the total 23
teapot refiners who have applied for imported oil processing, 18 are located in
Shandong.
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 35
Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist
Company Ticker Recent price* Disclosure
Sinopec Kantons 0934.HK 3.79 (HKD) 15 Jun 16 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=0934.HK
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Vitus Leung
Historical recommendations and target price: Sinopec Kantons (0934.HK) (as of 6/15/2016)
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16
Secu
rity
Pri
ce
Date
Previous Recommendations
Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating
Current Recommendations
Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002
**Analyst is no longer at Deutsche Bank
16 June 2016
Oil & Gas
Sinopec Kantons
Page 36 Deutsche Bank AG/Hong Kong
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock
Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.
Newly issued research recommendations and target prices supersede previously published research.
54 %
35 %
11 %16 % 15 % 21 %
050
100150200250300350400450500
Buy Hold Sell
Asia-Pacific Universe
Companies Covered Cos. w/ Banking Relationship
Regulatory Disclosures
1.Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
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Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are
consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the
SOLAR link at http://gm.db.com.
16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 37
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16 June 2016
Oil & Gas
Sinopec Kantons
Page 38 Deutsche Bank AG/Hong Kong
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16 June 2016
Oil & Gas
Sinopec Kantons
Deutsche Bank AG/Hong Kong Page 39
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