PetroChina:Media reports parent is planning to divest non-energy assets

What's changed.

According to a November 14 Bloomberg news article, China NationalPetroleum Corporation (“CNPC”, parent of PetroChina) plans to divest mostof its non-energy businesses before 2019. This would imply shedding about10% of its workforce of 1.52mn people (2015 annual report), according to thearticle. The article indicates non-energy assets to include hotels, schools, andhospitals. These units are common in the social support network of largestate-owned-enterprises (SOEs) and often underperform or are unprofitable.

Bloomberg cites CNPC could shift these divisions and their employees toprovincial or local governments or into joint ventures with outsideinvestors. CNPC and its state-owned regulator did not comment on the news.

Implications.

Historically, SOEs have been reluctant to lay off employees due to their socialresponsibility in employment. We think the ability to properly shift theirsocial responsibility may potentially be a step forward in SOE reform; in theline of professional management and focus on shareholder value (even if thegovernment is the majority shareholder in this case). However, we recognizesuch divestments may not be easy.

PetroChina recently stated publicly its aspiration to be a world-class energycompany. To the extent that the above SOE reform could also positively affectPetroChina, we think it offers the potential to unlock value opportunities.

Divesting non-core or sub-par assets and adjusting labor size to long-termbusiness opportunities may help enhance operating efficiency and potentiallyre-rate shares, in our view.

Valuation.

We reiterate Buy rating on PetroChina (H), its estimates and 12-monthEV/DACF-based target price of HK$6.5. On our 2017 forecasts, stock trades at4.8X EV/DACF (2001-2016 average 5.7X), 0.7X P/B, 2.2% dividend yield.