PetroChina:Ground work for future spin-off

The announced pipeline consolidation appears on paper to be goingagainst the anticipated spin-off. However, in our view this move lays thegroundwork for a future spin-off which is very likely to take place in theform of an IPO listing. The new pipeline company would become the soleplatform to house PetroChina’s major gas pipelines. We view the deal as apositive for the stock in the near term as it would avoid immediateearnings dilution and boosted earnings for 2015 (and also boosteddividends).

Consolidation versus anticipated spin-off

PetroChina announced it would consolidate its three pipelines, United Pipeline,Eastern Pipeline and United Northwestern Pipeline (essentially West-to-East 1,2 & 3 combined), through an equity swap and cash buyout. Pursuant to theconsolidation, China Petroleum Pipeline Co will become the sole platformhousing the three pipelines with a 100% stake. On paper, the consolidationgoes against market anticipation of a spin-off, but we believe this a clean-upin shareholder structure and lays the groundwork for a future spin-off.

Quasi-National Pipeline Co with potential for an IPO listing

China Petroleum Pipeline Co is very similar to the speculated China NationalPipeline Co; it would house & run the major pipelines of PetroChina, and notbe limited to just the three lines announced and more could be transferredinto it. We believe the company would seek to IPO at some point to raisecapital to fund the construction of future pipelines, such as West-to-East 4, 5,6 & 7. Via the IPO and follow-on placements, PetroChina would graduallylower its stake in the company and ultimately spin-off its pipeline assets.

Revaluation gains to boost 2015 earnings, albeit mostly non-cash

The revaluation gains from the consolidation process, estimated to beRmb4.0bn, will boost 2015 earnings for PetroChina, though the majority ofthe one-off gains will be non-cash. The revaluation profits will lift our 15CLEPS forecast by 9%.

Short-term positive for the stock

We view the deal as a positive for the stock in the near term as an immediatesell down in pipelines has been avoided which means earnings dilution willalso be delayed. The potential IPO will also boost the valuation of PetroChinabut it is still a long shot and will not take place any time soon.