Beijing Enterprises Holdings:Good things come in threes

We believe integrated public utilities company BEHL is well positioned to benefit from secular demand growth fornatural gas in China, with the government targeting gas’ contribution to primary energy to reach c.10% in 2020 fromc.6% in 2016. With BEHL the market leader in solid waste management, China’s doubled investment budget in its 13th5-yr plan (Rmb252bn) is another source of upside. BEHL offers a favorable risk-reward profile, with sustainable earningsgrowth and attractive valuation, and we forecast 18% core net profit CAGR in 2016-18. Given the company consistentlygenerates positive free cash flow with improving ROE (9.7% in 2016 to 11.3% in 2018E), we see deep value in the stock.

BEHL’s share price underperformed the Hang Seng Index in 2016 (-21%vs. -0.6%) likely due to investor concerns on potential tariff cuts for itsgas pipeline, limited synergies and a full valuation for the EEWacquisition. We believe the selloff is overdone and expect thefollowing to drive a rerating:

1. Lower-than-expected tariff cut for the gas pipeline if storagefacilities can be factored into the proposed 8% ROIC capcalculation. The current share price already implies c.50% net profitdownside risk; even in our bear case BEHL would still deliver 11%/8% yoy net profit growth in 2017/18E.

2. Value-accretive acquisition/s. As a conglomerate with a healthybalance sheet (48% 2016E net gearing), we believe BEHL has thefirepower to undertake M&A.