Company profile

Kunlun Energy Company is an international energy company focusing on exploration of oil and gas field, natural gas pipeline, terminal sales and comprehensive utilization, and the development of new energy etc, whose parent company, PetroChina, is the largest manufacturer and supplier of gas and natural gas in mainland China. The company's business of gas exploration and development is distributed throughout the mainland China, The Republic of Kazakhstan, Oman, Peru, Thailand, Azerbaijan and Indonesia etc., and its business of natural gas is mainly scattered in mainland China.

Investment Summary

Natural gas in the Twelfth Five-Year Plan has been officially published and the natural gas market has gradually switched from government guidance price to the pricing methods based on market supply and demand. Once the perfect internal market mechanism is established, the company's performance will grow continually and strongly.

The proportion of upstream oil exploration and production in company's business is still declining, and such business proportion in the company's total operating revenue in 2012 is expected to be less 20%. From the long-term development strategy of the company, it doesn`t have much new funds and projects input in exploration and production segment. So the business may lack of new performance point in the future.

The company's downstream distribution businesses of natural gas currently still focus on the city gas pipeline, and will move to LNG stations in the future. The company planed to double the quantity of current LNG stations benefiting from large natural gas network and source advantages of its parent company, PetroChina.

Currently natural gas is only 4% in China's energy consumption, and it reaches to 24.1% in the world energy consumption. The market of natural gas has great potential of development in China, and it is the trend that natural gas would instead of liquefied petroleum gas in future, therefore the company would also have larger potential of expansion.

The company's performance is better than our expectation, and the target price has been achieved ahead. Currently the P/E ratio is quite high, and there is no much room for the increase of price due to the large demand of adjustments in the short run. However, the price should go up continually in the medium and long term based on strong supports coming from the company's performance and great development prospects. In summary, we continue increase the company's estimated EPS to HK$0.97 in 2013, with the latest target price of HK$18.1, maintain `Accumulate` rating.

Financial Statements and Predictions

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