China/Hong Kong Infrastructure Please read the analyst certification and other important disclosures on last page Brightoil Petroleum (933 HK) 8 July 2010 Fueling growth and higher margins Company Rating: Sector Rating: Outperform (Initiation) Neutral (Initiation)
Initiate coverage with an Outperform rating. We set a sum-of-the-parts-based price target of HK$4.60 per share.
Margin expansion and diversification. Brightoil’s entry into the nationally strategic oil storage business will drive both an overall gross margin expansion to 13.7% in FY14F from 9.9% in FY09 and profit diversification. We expect the oil storage business to become the company’s primary profit contributor upon completion of its oil storage facilities in Zhoushan and Dalian in FY14F, constituting 51% of gross profit on 14% of revenue.
Robust long-term earnings outlook. We project continued strong growth in marine bunker volumes and the move into the storage market will fuel strong earnings growth, which we forecast will rise at a CAGR of 39% over the five years to FY14F on revenue growth of 40% CAGR during the same timeframe.
Strong growth undervalued relative to peers. Though the company’s valuation appears dear relative to comparable companies on PER and EV/EBITDA bases, Brightoil appears attractive when its earnings growth is factored in using price-to-growth valuation metrics. The company’s price-to-earnings growth (PEG) of 0.8x is near the lowest in its global peer group.
Key Risks. Key investment risks include increasing leverage during the storage facilities construction, and the resulting potential need for raising capital. Brightoil is exposed to execution risk as it expands into new business lines and attempts a more vertical integration, and licensing risk in its current core marine bunker business. Forecast and valuation Year to 30 June FY09 FY10F FY11F FY12F FY13F FY14F Revenue (HK$ m) 5,455 13,280 17,271 23,147 27,077 29,199 YoY change (%) 13,153 143 30 34 17 8 Operating income (HK$ m) 474 1,158 1,324 1,769 2,388 3,502 Net income (HK$ m) 263 1,042 1,140 1,437 1,861 2,402 YoY change (%) N/A 144 14 34 35 47 Gross margin (%) 9.9 10.2 9.3 9.3 10.5 13.7 Operating margin (%) 8.7 8.7 7.7 7.6 8.8 12.0 Adjusted net margin (%) 4.8 7.8 6.6 6.2 6.9 8.2 EPS (HK$) 0.05 0.12 0.13 0.16 0.21 0.27 PER (x) 77.0 34.1 31.1 24.7 19.1 14.8 ROE (%) 27.9 39.7 24.5 24.2 23.6 23.2 Source: Company data, CCBIS estimates Price: HK$3.97 Target: HK$4.60 Trading data 52-week range HK$0.598-4.225 Market capitalization (m) HK$25,660 Shares outstanding (m) 6,463 Free float (%) 30 3M avg. daily T/O (m share) 16.1 Expected Return (%) – 1 yr 16 Closing price on 8 July, 2010 Stock price and HSI 4060801001201401601802001-Jan-10 27-Jan-10 22-Feb-10 20-Mar-10 15-Apr-10 11-May-10 6-Jun-10 2-Jul-10BrightoilHSI Data as of 8 July, 2010 Source: Bloomberg Yan Tsui (852) 2532 6164 yantsui@ccbintl.com Tim Bacchus, CFA (852) 2532 2549 timbacchus@ccbintl.com Brightoil Petroleum (933 HK) 8 July 2010 2 Table of Contents Brightoil Petroleum: Fueling growth and higher margins.............................................................................................. 3 Margin expansion and diversification............................................................................................................................ 5 Robust long-term earnings outlook............................................................................................................................... 7 Strong earnings growth undervalued ............................................................................................................................ 8 Valuation — SOTP target price of HK$4.60..................................................................................................................9 Earnings model and operating assumptions .............................................................................................................. 13 Investment positives ................................................................................................................................................... 21 Investment risks .......................................................................................................................................................... 26 Appendix 1: Company background............................................................................................................................. 28 Appendix 2: Segment study — marine bunkering ...................................................................................................... 33 Appendix 3: Segment study — oil storage ................................................................................................................. 37 Appendix 4: