Company overview

Hans Energy is primarily engaged in the business of specialized terminalling, storage and logistic services for petroleum products, chemicals and gases. It currently operates the Xiao Hu Island Terminal (XHIT) at Nansha Zone of Guangzhou. The XHIT has 86 tanks with a total storage capacity of 330,450 cubic meters. In addition to it, Hans is now constructing the Dongzhou International Terminal (DZIT) at Dongguan, which can finally provide 147 tanks with a storage capacity of 960,950 cubic meters. The DZIT is expected to become operational by 3Q2007. The table summarizes the information of each terminal.

Hans has simplified its business structure so as to focus on the most profitable sector, namely the storage business. In the first half of 2006, Hans’ revenue from storage business was HK$ 76.59 million, accounting for 90.55% of the total, while the revenue from port services was HK$ 7.99 million, accounting for the other 9.45%. The gross profit margins of the storage business for 2004, 2005 and 1H2006 were 78.09%, 76.48% and 71.97% respectively.

The import and export demand for refined oil products influence Hans’ earning

The following table shows China’s import and export growth of the main refined oil products in 2006. We can see that the import volume and consumption volume of the listed products reached positive changes compared with the data in 2005. The increase in the domestic demand for foreign refined oil products can benefit the companies that provide port and oil storage services.

According to PRC authorities, the port of XHIT has been classified as a Class A open port which is allowed to cater both domestic and foreign cargoes (Class B is limited to only domestic cargoes). This advantage helps Hans earn more port income and also helps increase the utilization of the storage tanks by foreign clients. Though currently foreign cargoes only accounted for 9.15% of all Hans’ cargoes received, we believe that the services for foreign cargoes will expand as the domestic refined oil product markets is opening. Firstly, China’s oil product wholesale market began to open to foreign investors from 1 January 2007. The policy allows foreign investors to import refined oil products and to carry out wholesale business in China. This will surely lead to increases in the import volume of oil products and the demand for port and oil storage services. Secondly, the new pricing mechanism for refined oil products will help boost the import. For foreign investors, they will be more willing to transport oil products to China if the domestic prices of refined oil products are less controlled by the government, especially during the period when the international crude oil prices stay high.

The continuous lease contracts with customers will ensure Hans’ future profit

Sinopec Guangdong is one of Hans’ largest customers. From the beginning of 2005, Sinopec Guangdong has been using XHIT as a distribution hub of its refined oil products to cover retail outlets and sales destinations, such as power stations and factories, in the Pearl River Delta. In last December, Hans announced to sign an MOU with Sinopec with regard to a new oil storage project in DZIT. We believe that this new lease contract will become a key driver of Hans’ future growth. In fact, according to the Guangdong Petroleum and Chemical Industry Association, the province’s total demand for refined oil products in 2006 was 20.5 million tones. The association forecasted that the demand would increase by 8% to 22 million tones in 2007. Moreover, for Sinopec, its Yangpu refinery project with capacity of 8 million tones in Hainan province has begun to operate, its refined oil products will be transported to Guangdong province exactly through the Pearl River Delta, where XHIT and DZIT are located. We believe that all the above factors will favor Hans’ future profit.

Conclusion and valuation

We expect that Hans’ net profit will significantly increase in 2008 because the newly launched DZIT will make remarkable earning contribution to the company. Hans is now trading at 15x PE, based on the expected PE of 10x and expected EPS of HK$ 0.07 in 2008, we give the target price of HK$ 0.70.

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