Thu, 20 Dec 2018 E q u i t y R e s e a r c h Tian Lun Gas (1600 HK) N a t u r a l G a s / C h i n a A different coal-to-gas tale from Henan  Sustainable and deliverable coal-to-gas story with direct cash settlements from government-backed fund is expected to generate RMB818mn/RMB2,182mn/RMB3,273mn connection fee in FY18/19/20E.  Well-paced project acquisitions in low-tier cities and gas price liberalization underpin scale-driven growth outlook.  Initiate BUY with target price HK$11.18 based on 10x FY19E P/E. Riding on the Coal to Gas conversion initiative in Henan to double revenue scale in 2 years. The policy-driven coal-to-gas conversion (CGC) projects since 2013 got retarded pervasively due to slow settlement of government subsidies and gas supply shortage. Tian Lun Gas (TLG) formed an exclusive partnership with Henan provincial government in Jun 2018 to ensure direct and on-time settlement from the co-invested fund for connection fee receivables. Meanwhile, the cooperation with LNG plants of Kun Lun Energy is expected to increase gas supply by 10% starting from FY19E to back up rural CGC winter demand. We estimate Henan CGC projects to contribute RMB3,273mn or 36.5% revenue by FY20E at FY18-20E CAGR of 100%. Well-paced city gas project acquisitions on synergies with existing operations in tier 3-5 cities. As market consolidation in tier 1-2 cities approaches the end, gas distributors are turning to low-tier cities for regional expansion as they set eyes on further urbanization and penetration of natural gas consumption, where we have seen TLG actively making M&A for synergies with existing business. We expect newly acquired projects to contribute 10% FY18E earnings and keep at a similar pace in the near-term. Demand potentials to be released by gas price liberalization and Russian gas. The structural trend of liberalizing pipeline gas price and increasing sources of gas supply are expected to stimulate consumption volume growth. Initiate with BUY. We forecast 45.2% FY17-20E earning CAGR for TLG and initiate with BUY at target price of HK$11.18 based on 10x FY19E PE, at 24% discount to industry peers and indicating 79% potential upside. Risks: (1) Policy and regulation risks related to CGC projects; (2) execution risks of the coal-to-gas fund; (3) lower than expected gas consumption of I&C users. Yuji Fung +852 2135 0236 yuji.fung@oriental-patron.com.hk Dallas Cai +852 2135 0248 dallas.cai@oriental-patron.com.hk Initial Coverage BUY Close price: HK$6.25 Target Price: HK$11.18 (+79%) Key Da t a HKEx code 1600 HK 12 Months High (HK$) 10.90 12 Month Low (HK$) 5.11 3M Avg Dail Vol. (mn) 1.39 Issue Share (mn) 989.62 Market Cap (HK$mn) 6,185.09 Fiscal Year 12/2017 Major shareholder (s) Director Zhang Yingcen & asso. (54.62%) Source: Company data, Bloomberg, OP Research Closing price are as of 19/12/2018 Pr i c e Ch a r t 1mth 3mth 6mth Absolute % -9.3 -20.1 -11.6 Rel. MSCI CHINA % -6.0 -10.5 9.2 PE C o m p a n y P r o f i l e China Tian Lun Gas Holdings Ltd. is an investment holding company principally engaged in the transportation and sale of gas. The Company is also engaged in the gas pipeline connections and production and sales of liquefied natural gas. E x h i b i t 1: For e c a s t a n d Va l u a t i o n Year to Dec (RMB mn) FY16R FY17 FY18E FY19E FY20E Revenue 2,693.1 3,109.0 4,885.3 7,107.2 8,974.7 Growth (%) 19.6 15.4 57.1 45.5 26.3 Net Profit 313.4 404.2 597.7 926.5 1,237.1 Growth (%) 10.2 29.0 47.9 55.0 33.5 Diluted EPS (HK$) 0.376 0.457 0.721 1.118 1.493 EPS growth (%) 0.9 21.7 57.7 55.0 33.5 Change to previous EPS (%) 0.0 0.0 Consensus EPS (HK$) 0.758 1.178 ROE (%) 13.1 15.5 19.7 25.3 27.3 P/E (x) 16.6 13.7 8.7 5.6 4.2 P/B (x) 2.1 2.0 1.6 1.3 1.0 Yield (%) 1.3 1.6 2.6 4.0 5.3 DPS (HK$) 0.083 0.102 0.161 0.249 0.332 Source: Bloomberg, OP Research 0.02.04.06.08.010.012.0Dec/17Mar/18Jun/18Sep/18Dec/18HK$1600 HKMSCI CHINA0510152025Jan/15Aug/15Mar/16Oct/16May/17Dec/17Jul/18Forw ard P/E Ratio+1std.avg.-1std. Thu, 20 Dec 2018 Tian Lun Gas (1600 HK) Page 2 of 27 Table of Contents Table of Contents ......................................................................................................................................... 2 Sustainable and deliverable Henan coal to gas story with government-backed funds .................................. 3 Well-paced regional expansion fuels gas sales growth ...............................................................................13 Long-term positives from natural gas price liberalization .............................................................................16 Initiate with BUY on 45% earnings CAGR ...................................................................................