Beijing Enterprises Holdings:Update on oil field acquisition,low cost,cash/earnings accretive

What's changed

BEHL has completed the acquisition of a 20% stake in Verkhnechonskneftegaz(VERK) from Rosneft on 21 Dec 2016 and hosted an investor conferencecall today. Key takeaways: (1) VERK is a quite profitable asset despite oilprice volatility. BEHL indicated net profit in 1H16 amounted to US$350mn,vs. US$762mn in FY2015 as the average Brent oil price reached US$41.5/bblin 1H16 vs. US$53.6/bbl in 2015. Moreover, VERK has no debt and budgetsUS$200mn capex per year in 2017-2019, suggesting strong free cash flowand dividend payout potential ahead, in our view. (2) BEHL plans totransport natural gas from Russia to China in the long run. VERK is 167kmfrom the east Sino-Russia pipeline and BEHL has the option to purchase 3bnm3 gas from the project, plus rights to purchase an additional 7bn m3 fromadjacent gas fields. BEHL expects to finalize pricing and procurementvolume terms in 2019, before the official operation of the Sino-Russiapipeline in 2019-20. BEHL said the purchase price will be lower than thecurrent gas price from Central Asia.

Implications

We believe BEHL has timed the investment in VERK well, taking advantageof oil price weakness in 2016. Our Russia energy team estimates theproduction cost for VERK is less than US3/bbl. Meanwhile, BEHL said gassegment operating data remained solid in 2016, with downstreamdistribution sales volume up over 10% (14-15bn m3) and mid-streamtransmission volume up 3-5% yoy, in line with our estimates.

Valuation

We fine-tune our 2016 estimates and raise 2017E-18E by 9%/8%, mainly tofactor in the earnings contribution from VERK. We lift our EV/GCI vs.

CROCI/WACC-based 12m TP from HK$53 to HK$55. Reiterate CL-Buy.