PetroChina (857 HK)：Corporate action to fill core earnings gap

abcGlobal Research PetroChina’s near-term outlook will continue to be impacted by “the capital and cost” theme we identified earlier in 2014. Management seeks to boost investment return and refocus on ‘quality and profitability’ by running an ‘asset-light(er)’ strategy. The 2014 capex budget is 7% lower y-o-y at RMB296bn compared to RMB318bn in 2013, with the biggest cut in the gas and pipeline segment. Core profitability will be sequentially weaker. After a slight beat in 2013, 1Q14 net profit fell 5% y-o-y, pointing to weaker 2014 core earnings. Although refining and marketing results both improved on pricing reforms and fuel specification upgrades, E&P cost inflation and continuous sluggish chemical demand restrain the momentum. In this environment potential JVs can generate capital and fill the earnings gap, but come at a longer-term cost. Potential asset divestments or cooperation with social and private capital is consistent with the company’s strategy to improve capital efficiency and should fill the earning gap in 2014, but may impair longer-term earnings growth potential. Earning forecast change. We raise our EPS forecast by 2% in 2014 and cut it by 9% in 2015. We were too optimistic about 2015 core pipeline earnings, and we cut pipeline EBIT by 12% in 2014e and 41% in 2015e. We also cut our expectations in marketing, but lower our loss in refining and chemicals after refining made a profit in 1Q14. Valuation and risks: We remain OW and retain our TP of HKD11.8. Our TP is derived using a 10% discount (previously 15%) to our DCF-based NAV per share of HKD13.1 (HKD13.9), with a cross-check to historical PE ratio ranges. The TP implies 11.8x 2014e EPS (previously 12.2x), within the range of the historical trailing PE over 2009-13. Our 2014, 2015 and 2016 net profit forecasts are 7%, 2% and 4% ahead of consensus, respectively. Downside risks include on-going corporate governance issues, lower-than-expected oil prices, lack of follow through on pricing reform and parent injections at unfavourable prices. PetroChina (857 HK) OW: Corporate action to fill core earnings gap  Gains from JV creation can help to fill earnings gaps created by cost inflation, lacklustre demand and higher leverage  With the third pipeline JV announcement, we see a high probability of one-off gains in 2014; pipeline JV may create another gain of RMB25bn, and potentially E&P JV(s)  We maintain our OW rating and TP of HKD11.8; raise 2014e earnings by 2%, and cut 2015e by 9% to reflect the latest earnings and cost data as well as expected pipeline JV gain Nat Resources & Energy Oil & Gas Equity – China Company report Index^ HANG SENG INDEXIndex level 22,352RIC 0857.HKBloomberg 857 HKSource: HSBC Overweight Target price (HKD) 11.80 Share price (HKD) 9.24 Forecast dividend yield (%) 4.7 Potential return (%) 32.4 Note: Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield Dec 2013 a 2014 e 2015 e HSBC EPS 0.71 0.77 0.78 HSBC PE 10.5 9.6 9.5 Performance 1M 3M 12M Absolute (%) 4.4 18.3 -8.2 Relative^ (%) 7.4 17.3 -5.5 Note: (V) = volatile (please see disclosure appendix) Enterprise value (CNYm) 1725183Free float (%) 11Market cap (USDm) 223,986Market cap (HKDm) 1,736,598Source: HSBC 14 May 2014 Thomas Hilboldt*, CFA Head of Oil, Gas & Petrochemicals Research, Asia-Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2822 2922 thomaschilboldt@hsbc.com.hk Tingting Si* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6590 tingtingsi@hsbc.com.hk Meredith Hu* Associate View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: The Hongkong and Shanghai Banking Corporation Limited Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it 2 PetroChina (857 HK) Oil & Gas 14 May 2014 abc Financials & valuation Financial statements Year to 12/2013a 12/2014e 12/2015e 12/2016eProfit & loss summary (CNYm) Revenue 2,258,124 2,842,829 2,932,953 3,045,727EBITDA 340,787 383,008 393,616 411,270Depreciation & amortisation -152,145 -175,006 -183,539 -189,468Operating profit/EBIT 188,642 208,002 210,077 221,802Net interest -20,859 -22,113 -21,743 -21,867PBT 178,060 196,938