QR DeCode AWS
2 December 2016
QR DeCode AAG Energy – Improving efficiency with cost reduction AAG Energy (“AAG”) is a leading coalbed methane (CBM) producer in China, holding two concessions (Panzhuang and Mabi) in the southern Qinshui Basin which contains the largest amount of CBM in China. The estimated net 2P reserve of AAG’s two concessions reached 670.4bcf at the end of 2015. With its advanced technology and comprehensive pipelines, AAG has continued to reduce its production costs and improved its profitability and operating efficiency. Gross operating costs reduced to RMB0.47/cm for Panzhuang – AAG realized its efforts in cost reduction, where its gross operating expenses decreased by 26% to RMB0.47/cubic meter (“cm”) of gross production volume in Panzhuang Concession. Challenged by the oversupply of natural gas and the average selling price slump from RMB1.77/cm to RMB1.20/cm in 1H16, AAG improved its profitability and achieved a 7.2ppt increment in operating margin to about 56.5% during the same peroid. Although PetroChina intends to raise the natural gas price for non-residents by 1020% this winter, but we consider this may only be a seasonal adjustment and the price might be back to normal level before next summer. Long-term partnerships with CUCBM and PetroChina – AAG has entered into long-term production sharing contracts with China United Coalbed Methane (“CUCBM”) and PetroChina in Panzhuang and Mabi, respectively. The long-term partnerships with SOEs where AAG acts as operator ensure stable operation of the company. AAG distributes CBM through its comprehensive pipelines to its downstream clients and pipeline distributors mainly in Henan and Shandong Province, and also supplies to LNG producers including ENN Energy. The Mabi ODP application is to be submitted in 2H16 and the approval process is expected to take 6 to 12 months. We believe Mabi could become a new revenue driver from 2018. Valuation – AAG is currently generating net profit of about RMB13.1mn/bcf of net production volume, which implies the potential value of its net 2P reserve of RMB8.80bn, equivalent to HKD9.85bn. The current market cap is about HKD4.39bn, indicating a discount at about 55% of its net 2P reserve. Healthy financial position – AAG has a healthy financial position with minimal debt and strong liquidity. As at 30 Jun 2016, AAG has RMB2.31bn cash in hand with RMB439mn debt, resulting in net cash of RMB1.87bn, equivalent to about RMB0.56 per share. The company’s total liabilities ratio was kept at a low level and had improved to about 15.1% in 1H16, compared to 16.3% in FY15. We believe the sufficient liquidity would benefit the operation as well as looking into M&A opportunities in southeast Asia.
Share Information Stock Code Quam’s Rating Last Closing (HK$) 52-week range (HK$) 3-mth ADT (HK$’mn) Market Cap. (HK$’mn) Shares outstanding (‘mn) Free float
2686 HK Not Rated HK$1.32 0.94 – 2.60 0.67 4,391 3,327 31.7%
Substantial Shareholders Warburg Baring Private Equity Asia Ping An Insurance (Group) Co. Zou Xiangdong, Stephen Chongqing Three Gorges Gas
25.4% 20.7% 10.4% 6.4% 5.4%
Share Price Performance
Source: Bloomberg Key Financials – FY DEC FY13 FY14 138 426 99 391 Operating profit 40 195 Net profit HKD’mn Revenue
EPS (HKD) Growth DPS (HKD ) BVPS (HKD)
0.050 na 0.000 na
n.a PER (x) 2.7 PBR (x) n.a EV/EBITDA (x) 0.0 Dividend Yield (%) Source: Company data
FY15 537 372 (57)
0.230 3.600 0.000 3.357
(0.020) (1.087) 0.000 1.380
n.a 2.6 n.a n.a
137.6 1.8 n.a n.a
Li Yiming, Eric : +852 2971 5433 : [email protected]
Howard Wong : +852 2971 5435 : [email protected]
For important disclosures regarding Quam Research, including with respect to any issuers mentioned herein, please refer to the disclaimers at the back of the report.
The abundant CBM reserve in China AAG’s two concessions in southern Qinshui Basin, Panzhuang and Mabi, contains abundant CBM reserve with total net 2P reserves reaching 670.4 bcf. With the technological advancement in CBM exploration, the total CBM reserve is expected to grow in the coming years. The current PSC of Panzhuang and Mabi will expire in 2028 and 2034 respectively but will be renewable afterwards. We believe the abundant CBM reserve will support sustainable growth of the company. Figure 1. Net reserve of two concessions as at 31 Dec 2015 and ODP designed capacity Net Reserve (bcf)
Panzhuang
1P
Mabi
Total
93.5
-
93.5
1P+2P
186.0
484.4
670.4
1P+2P+3P
243.4
1,330.4
1,573.8
17.5
35.3
ODP designed annual capacity Source: Company data
The efforts in cost reduction have been realized With its technological advancement, AAG had achieved a CAGR of about 70.2% in gross production volume of Panzhuang concession in FY12-15, reaching about 488mmcm in FY15. Furthermore, AAG has realized its efforts in cost management where the unit operating expense was reduced by about 26% to RMB0.47/cm in 1H16. It is expected that AAG will obtain the ODP approval for the Mabi concessions from NDRC in 2017, which would be a new driver for AAG’s revenue in the coming years.
Production Volumn (mmcm)
600
1.73
488
500 400
1.06
358
300 0.65 200
156
241
0.63
0.47
99
100
0 2012
2013
2014
Gross Production Volume (mmcm) (LHS)
2015
1H16
Unit Opex (RMB/cm) (RHS)
Remark: Unit Opex = Total Operating Expenses / Net Production Volume Source: Company data, Quam Securities
AAG Energy (2686 HK)
2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00
Unit Opex (RMB/cm)
Figure 2. Gross production volume and unit operating expense of Panzhuang Concession
2
Risk factors
Delay in Mabi ODP application submission and approval
Lower than expected production
Devaluation of RMB
Changes in government policies
AAG Energy (2686 HK)
3
Appendix: Financial Statements & Ratios Figure 3: Financial Statements & Ratios Income Statement (RMB'mn)
2013
2014
2015
138
426
537
Cost of goods sold
na
na
na
PPE
Gross profit
na
na
na
Other income and gains, net
65
151
128
Selling and distribution expenses
na
na
na
Administration expenses
na
na
na
(175)
(294)
(434)
28
284
230
0
0
0
Other gains/ (expenses)
41
(9)
(178)
Profit before tax
69
275
52
(29)
(80)
(109)
Profit after tax
40
195
(57)
Total assets
Attributable profit to shareholders
40
195
(57)
Current liabilities
0
0
na
2013
2014
2015
Debt to equity (%)
na
12.9
9.1
Net debt to equity (%)
na
(26.3)
(46.5)
SG&A to revenue (%)
na
na
na
Current ratio (x)
0.18
4.26
7.18
Quick ratio (x)
0.13
3.83
6.76
Interest coverage (x)
1.94
11.14
8.00
Revenue
Other operating expenses Operating profit Finance costs
Income tax expense
Minority interest Key Ratios
Balance Sheet (RMB'mn)
2013
2014
2015
1,843
2,142
2,652
Intangible assets
3
5
15
LT investments & receivables
0
0
0
Others
0
(0)
0
1,847
2,147
2,667
Non-current assets
Total non-current assets Current assets Inventories
7
1
1
Account receivables
36
113
101
Others
96
134
408
209
1,100
2,310
349
1,348
2,820
2,196
3,495
5,488
36
14
95
1,601
0
0
251
302
298
1,888
316
393
358
362
419
6
13
85
Bank balances and cash Total current assets
Account payables ST borrowings Others Total current liabilities Non-current liabilities LT borrowings Other non-current liabilities Total non-current liabilities
Days inventory (days)
na
na
na
Total liabilities
Days receivable (days)
94
64
73
Shareholders’ equity
293
182
175
Days payable (days) Cash conversion cycle (days) Ratio Analysis
na
na
na
2013
2014
2015
Share capital Reserves Total shareholders’ equity
Growth (YoY%)
Minority interest
364
375
503
2,251
692
896
0
1
2
(56)
2,802
4,589
(56)
2,803
4,591
0
0
0
(56)
2,803
4,591
(1,749)
737
2,137
49.8
207.8
26.0
Total equity
EBITDA
na
295.6
(5.0)
Net Cash / (Debt)
Net profit
na
392.8
na
Cash Flow Statement (RMB'mn)
2013
2014
2015
Diluted EPS
na
360.0
na
Operating cash in/(out) flow
(18)
289
273
Investing cash in/(out) flow
(608)
(424)
(749)
Financing cash in/(out) flow
803
1,025
1,685
Net change in cash
177
890
1,210
Revenue
Margins Gross profit margin
na
na
na
EBITDA margin
71.5
91.9
69.3
Net profit margin
28.6
45.8
(10.6)
Other ratios
Per Share (RMB)
2013
2014
2015
EPS
0.050
0.230
(0.020)
Return on average assets
2.2
6.9
(1.3)
Diluted EPS
0.050
0.230
(0.020)
Return on average equity
na
na
(1.5)
DPS
0.000
0.000
0.000
Dividend payout ratio
0.0
0.0
na
na
3.357
1.380
BVPS
Source: Bloomberg
AAG Energy (2686 HK)
4
Disclaimer and Risk Statement This document is published by Quam Securities Company Limited ("Quam Securities"), a licensed corporation (CE number AAC577) regulated by the Securities and Futures Commission in Hong Kong. Quam Securities is an affiliate of Quam Limited (0952.hk) and its group of companies (collectively "Quam Group"). This document is not intended for distribution to or use by, any person or entity who is a citizen or resident of any jurisdiction where such distribution or use would be contrary to applicable law or regulation within such jurisdiction. In particular but without limitation, neither this document nor any copy hereof may be taken or transmitted into Japan, Canada or the United States or distributed, directly or indirectly, into the United States or to any U.S person (within the meaning of Regulation S under the U.S. Securities Act of 1933) or general public located in Mainland China (but not including people in Hong Kong, Macau and Taiwan). This document is circulated to addresses solely and may not be reproduced or redistributed to any other person or published, in whole or in part, for any purpose. Quam Group has an investment banking relationship with the issuer within the preceding 12 months from the date of publication of this document from the date of publication of this document. This document does not constitute an offer or a solicitation of an offer to buy or sell any securities. Any recommendation does not have regard to specific investment objectives, financial situation and particular needs of any specific addressee. Quam Securities accepts no liability whatsoever for any direct or consequential loss arising from any use of this document. The opinions and/or recommendations of this document do not take into account the recipients' own investment objectives, investment experience, financial situation and other personal circumstances. The recipients of this document shall be solely responsible for making their own independent investigation of the business, financial condition and prospects of companies referred to in this document. The research is based on information obtained from sources believed to be reliable, but Quam Securities does not make any representation or warranty as to its accuracy, completeness or correctness. This document is for informational purpose only and should not be treated as a recommendation on any particular securities, financial instrument, investment portfolio or trading strategy. Opinions and/or recommendations expressed in this document are subject to change without prior notice to all recipients. The prices of securities may move up or down, and past performance is not an indication of future performance. Investors shall consider seeking separate legal or financial advice before making investment decisions. The following analyst hereby certify that their views about the issuer and its securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Li Yiming (CE No. BIE646) and Howard WONG (CE No. ADV962) and their associates declare that as of the date of the publication of this report, they do not hold any financial interest in the company.
AAG Energy (2686 HK)
5
QR DeCode AAG Energy – Improving efficiency with cost reduction AAG Energy (“AAG”) is a leading coalbed methane (CBM) producer in China, holding two concessions (Panzhuang and Mabi) in the southern Qinshui Basin which contains the largest amount of CBM in China. The estimated net 2P reserve of AAG’s two concessions reached 670.4bcf at the end of 2015. With its advanced technology and comprehensive pipelines, AAG has continued to reduce its production costs and improved its profitability and operating efficiency. Gross operating costs reduced to RMB0.47/cm for Panzhuang – AAG realized its efforts in cost reduction, where its gross operating expenses decreased by 26% to RMB0.47/cubic meter (“cm”) of gross production volume in Panzhuang Concession. Challenged by the oversupply of natural gas and the average selling price slump from RMB1.77/cm to RMB1.20/cm in 1H16, AAG improved its profitability and achieved a 7.2ppt increment in operating margin to about 56.5% during the same peroid. Although PetroChina intends to raise the natural gas price for non-residents by 1020% this winter, but we consider this may only be a seasonal adjustment and the price might be back to normal level before next summer. Long-term partnerships with CUCBM and PetroChina – AAG has entered into long-term production sharing contracts with China United Coalbed Methane (“CUCBM”) and PetroChina in Panzhuang and Mabi, respectively. The long-term partnerships with SOEs where AAG acts as operator ensure stable operation of the company. AAG distributes CBM through its comprehensive pipelines to its downstream clients and pipeline distributors mainly in Henan and Shandong Province, and also supplies to LNG producers including ENN Energy. The Mabi ODP application is to be submitted in 2H16 and the approval process is expected to take 6 to 12 months. We believe Mabi could become a new revenue driver from 2018. Valuation – AAG is currently generating net profit of about RMB13.1mn/bcf of net production volume, which implies the potential value of its net 2P reserve of RMB8.80bn, equivalent to HKD9.85bn. The current market cap is about HKD4.39bn, indicating a discount at about 55% of its net 2P reserve. Healthy financial position – AAG has a healthy financial position with minimal debt and strong liquidity. As at 30 Jun 2016, AAG has RMB2.31bn cash in hand with RMB439mn debt, resulting in net cash of RMB1.87bn, equivalent to about RMB0.56 per share. The company’s total liabilities ratio was kept at a low level and had improved to about 15.1% in 1H16, compared to 16.3% in FY15. We believe the sufficient liquidity would benefit the operation as well as looking into M&A opportunities in southeast Asia.
Share Information Stock Code Quam’s Rating Last Closing (HK$) 52-week range (HK$) 3-mth ADT (HK$’mn) Market Cap. (HK$’mn) Shares outstanding (‘mn) Free float
2686 HK Not Rated HK$1.32 0.94 – 2.60 0.67 4,391 3,327 31.7%
Substantial Shareholders Warburg Baring Private Equity Asia Ping An Insurance (Group) Co. Zou Xiangdong, Stephen Chongqing Three Gorges Gas
25.4% 20.7% 10.4% 6.4% 5.4%
Share Price Performance
Source: Bloomberg Key Financials – FY DEC FY13 FY14 138 426 99 391 Operating profit 40 195 Net profit HKD’mn Revenue
EPS (HKD) Growth DPS (HKD ) BVPS (HKD)
0.050 na 0.000 na
n.a PER (x) 2.7 PBR (x) n.a EV/EBITDA (x) 0.0 Dividend Yield (%) Source: Company data
FY15 537 372 (57)
0.230 3.600 0.000 3.357
(0.020) (1.087) 0.000 1.380
n.a 2.6 n.a n.a
137.6 1.8 n.a n.a
Li Yiming, Eric : +852 2971 5433 : [email protected]
Howard Wong : +852 2971 5435 : [email protected]
For important disclosures regarding Quam Research, including with respect to any issuers mentioned herein, please refer to the disclaimers at the back of the report.
The abundant CBM reserve in China AAG’s two concessions in southern Qinshui Basin, Panzhuang and Mabi, contains abundant CBM reserve with total net 2P reserves reaching 670.4 bcf. With the technological advancement in CBM exploration, the total CBM reserve is expected to grow in the coming years. The current PSC of Panzhuang and Mabi will expire in 2028 and 2034 respectively but will be renewable afterwards. We believe the abundant CBM reserve will support sustainable growth of the company. Figure 1. Net reserve of two concessions as at 31 Dec 2015 and ODP designed capacity Net Reserve (bcf)
Panzhuang
1P
Mabi
Total
93.5
-
93.5
1P+2P
186.0
484.4
670.4
1P+2P+3P
243.4
1,330.4
1,573.8
17.5
35.3
ODP designed annual capacity Source: Company data
The efforts in cost reduction have been realized With its technological advancement, AAG had achieved a CAGR of about 70.2% in gross production volume of Panzhuang concession in FY12-15, reaching about 488mmcm in FY15. Furthermore, AAG has realized its efforts in cost management where the unit operating expense was reduced by about 26% to RMB0.47/cm in 1H16. It is expected that AAG will obtain the ODP approval for the Mabi concessions from NDRC in 2017, which would be a new driver for AAG’s revenue in the coming years.
Production Volumn (mmcm)
600
1.73
488
500 400
1.06
358
300 0.65 200
156
241
0.63
0.47
99
100
0 2012
2013
2014
Gross Production Volume (mmcm) (LHS)
2015
1H16
Unit Opex (RMB/cm) (RHS)
Remark: Unit Opex = Total Operating Expenses / Net Production Volume Source: Company data, Quam Securities
AAG Energy (2686 HK)
2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00
Unit Opex (RMB/cm)
Figure 2. Gross production volume and unit operating expense of Panzhuang Concession
2
Risk factors
Delay in Mabi ODP application submission and approval
Lower than expected production
Devaluation of RMB
Changes in government policies
AAG Energy (2686 HK)
3
Appendix: Financial Statements & Ratios Figure 3: Financial Statements & Ratios Income Statement (RMB'mn)
2013
2014
2015
138
426
537
Cost of goods sold
na
na
na
PPE
Gross profit
na
na
na
Other income and gains, net
65
151
128
Selling and distribution expenses
na
na
na
Administration expenses
na
na
na
(175)
(294)
(434)
28
284
230
0
0
0
Other gains/ (expenses)
41
(9)
(178)
Profit before tax
69
275
52
(29)
(80)
(109)
Profit after tax
40
195
(57)
Total assets
Attributable profit to shareholders
40
195
(57)
Current liabilities
0
0
na
2013
2014
2015
Debt to equity (%)
na
12.9
9.1
Net debt to equity (%)
na
(26.3)
(46.5)
SG&A to revenue (%)
na
na
na
Current ratio (x)
0.18
4.26
7.18
Quick ratio (x)
0.13
3.83
6.76
Interest coverage (x)
1.94
11.14
8.00
Revenue
Other operating expenses Operating profit Finance costs
Income tax expense
Minority interest Key Ratios
Balance Sheet (RMB'mn)
2013
2014
2015
1,843
2,142
2,652
Intangible assets
3
5
15
LT investments & receivables
0
0
0
Others
0
(0)
0
1,847
2,147
2,667
Non-current assets
Total non-current assets Current assets Inventories
7
1
1
Account receivables
36
113
101
Others
96
134
408
209
1,100
2,310
349
1,348
2,820
2,196
3,495
5,488
36
14
95
1,601
0
0
251
302
298
1,888
316
393
358
362
419
6
13
85
Bank balances and cash Total current assets
Account payables ST borrowings Others Total current liabilities Non-current liabilities LT borrowings Other non-current liabilities Total non-current liabilities
Days inventory (days)
na
na
na
Total liabilities
Days receivable (days)
94
64
73
Shareholders’ equity
293
182
175
Days payable (days) Cash conversion cycle (days) Ratio Analysis
na
na
na
2013
2014
2015
Share capital Reserves Total shareholders’ equity
Growth (YoY%)
Minority interest
364
375
503
2,251
692
896
0
1
2
(56)
2,802
4,589
(56)
2,803
4,591
0
0
0
(56)
2,803
4,591
(1,749)
737
2,137
49.8
207.8
26.0
Total equity
EBITDA
na
295.6
(5.0)
Net Cash / (Debt)
Net profit
na
392.8
na
Cash Flow Statement (RMB'mn)
2013
2014
2015
Diluted EPS
na
360.0
na
Operating cash in/(out) flow
(18)
289
273
Investing cash in/(out) flow
(608)
(424)
(749)
Financing cash in/(out) flow
803
1,025
1,685
Net change in cash
177
890
1,210
Revenue
Margins Gross profit margin
na
na
na
EBITDA margin
71.5
91.9
69.3
Net profit margin
28.6
45.8
(10.6)
Other ratios
Per Share (RMB)
2013
2014
2015
EPS
0.050
0.230
(0.020)
Return on average assets
2.2
6.9
(1.3)
Diluted EPS
0.050
0.230
(0.020)
Return on average equity
na
na
(1.5)
DPS
0.000
0.000
0.000
Dividend payout ratio
0.0
0.0
na
na
3.357
1.380
BVPS
Source: Bloomberg
AAG Energy (2686 HK)
4
Disclaimer and Risk Statement This document is published by Quam Securities Company Limited ("Quam Securities"), a licensed corporation (CE number AAC577) regulated by the Securities and Futures Commission in Hong Kong. Quam Securities is an affiliate of Quam Limited (0952.hk) and its group of companies (collectively "Quam Group"). This document is not intended for distribution to or use by, any person or entity who is a citizen or resident of any jurisdiction where such distribution or use would be contrary to applicable law or regulation within such jurisdiction. In particular but without limitation, neither this document nor any copy hereof may be taken or transmitted into Japan, Canada or the United States or distributed, directly or indirectly, into the United States or to any U.S person (within the meaning of Regulation S under the U.S. Securities Act of 1933) or general public located in Mainland China (but not including people in Hong Kong, Macau and Taiwan). This document is circulated to addresses solely and may not be reproduced or redistributed to any other person or published, in whole or in part, for any purpose. Quam Group has an investment banking relationship with the issuer within the preceding 12 months from the date of publication of this document from the date of publication of this document. This document does not constitute an offer or a solicitation of an offer to buy or sell any securities. Any recommendation does not have regard to specific investment objectives, financial situation and particular needs of any specific addressee. Quam Securities accepts no liability whatsoever for any direct or consequential loss arising from any use of this document. The opinions and/or recommendations of this document do not take into account the recipients' own investment objectives, investment experience, financial situation and other personal circumstances. The recipients of this document shall be solely responsible for making their own independent investigation of the business, financial condition and prospects of companies referred to in this document. The research is based on information obtained from sources believed to be reliable, but Quam Securities does not make any representation or warranty as to its accuracy, completeness or correctness. This document is for informational purpose only and should not be treated as a recommendation on any particular securities, financial instrument, investment portfolio or trading strategy. Opinions and/or recommendations expressed in this document are subject to change without prior notice to all recipients. The prices of securities may move up or down, and past performance is not an indication of future performance. Investors shall consider seeking separate legal or financial advice before making investment decisions. The following analyst hereby certify that their views about the issuer and its securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Li Yiming (CE No. BIE646) and Howard WONG (CE No. ADV962) and their associates declare that as of the date of the publication of this report, they do not hold any financial interest in the company.
AAG Energy (2686 HK)
5
