1. The residential gas price increase is a positive catalyst for the company. The company expects the actual price increase to be lower than Rmb0.35/cbm, as some areas might not be able to see full implementation.
2. The company realised an 11% price hike during the winter premium period last year. It is not clear how much of a price increase the company can realise in 2018, but theoretically it can charge a higher price this winter as well.
3. The company is targeting to achieve higher gas import volume, but with no increase in loss amount. This assumption does not consider the recent residential gas price increase.
4. Gas imports from Central Asia have seen improving economics in the first five months of 2018, at roughly breakeven level.
5. The company will invest Rmb20 bn in shale gas between now and 2020. The cost per well has declined from Rmb100 mn from the beginning to Rmb50 mn in 2017.
6. The lifting cost per boe is likely to increase on the back of a higher oil price.
Valuation Methodology & Risks
Our price target of HK$7.97 is our base-case scenario value, derived from sum-of-theparts methodology. We apply DCF valuation for the E&P, marketing, and gas businesses, and a P/B valuation for the refinery chemicals businesses. In our DCF valuation, we use a WACC of 8.0% and a long-term growth rate of 0.5%. For our P/B valuation for the refinery & chemical businesses, we use 1.2x 2018e equity value of the segment, in line with the valuation of regional refiners.
Key downside risks include: 1) Weaker-than-expected Chinese economic growth and demand; 2) lower-than-expected oil price; 3) larger-than-expected surge in E&P costs and capex; 4) larger-than-expected natural gas price and pipeline tariff cuts.