Proxy for China's rising crude oil imports； initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Energy Oil & Gas Company Sinopec Kantons Date 16 June 2016 Initiation of Coverage Proxy for China's rising crude oil imports; initiating with Buy Reuters Bloomberg Exchange Ticker 0934.HK 934 HK HSI 0934 Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E EBITDA (HKDm) 1,365.3 1,284.1 1,258.8 1,293.1 1,409.8 Reported NPAT (HKDm) 1,017.8 1,027.0 1,129.6 1,212.0 1,369.3 DB EPS FD(HKD) 0.46 0.43 0.45 0.49 0.55 DB EPS growth (%) 129.0 -6.3 5.7 7.3 13.0 PER (x) 15.1 12.2 8.4 7.8 6.9 EV/EBITDA (x) 9.9 6.4 5.1 4.3 3.2 DPS (net) (HKD) 0.05 0.05 0.05 0.10 0.14 Yield (net) (%) 0.7 1.0 1.4 2.6 3.6 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Unique energy logistics company; initiating with Buy on 37% upside potential ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 15 Jun 2016 (HKD) 3.81 Price target - 12mth (HKD) 5.25 52-week range (HKD) 6.48 - 3.44 HANG SENG INDEX 20,468 Vitus Leung Research Analyst (+852 ) 2203 6158 vitus.leung@db.com Johnson Wan Research Analyst (+852 ) 2203 6163 johnson.wan@db.com Price/price relative 3.04.05.06.07.08.09.06/1412/146/1512/15Sinopec KantonsHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute 5.0 -2.3 -39.4 HANG SENG INDEX 3.8 0.9 -23.8 Source: Deutsche Bank Stock data Market cap (HKDm) 9,472 Market cap (USDm) 1,221 Shares outstanding (m) 2,486.2 Major shareholders Sinopec Corp (60.34%) Free float (%) 40 Avg daily value traded (USDm) 1.3 Source: Deutsche Bank DB vs. Consensus Year DB EPS (HK$/shr) Cons EPS (HK$/shr) vs Cons 2016E 0.45 0.47 -3% 2017E 0.49 0.52 -6% 2018E 0.55 0.57 -4% Source: Bloomberg Finance LP, Deutsche Bank estimates The wind has changed in favour of Sinopec Kantons, a subsidiary of Sinopec and its flagship logistics arm for handling oil imports, with a gas pipeline, LNG vessels and oil storage. On organic growth, we expect an upturn in Kantons’ return on assets in the coming years; it should benefit from liberalisation of import oil quota, resumed gas demand growth and a surge in LNG imports. ROIC could rise from 10.6% in 2015 to 13.0% in 2018E. Kantons trades at a deep discount to peers; hence its favourable risk-reward warrants a Buy rating. Beneficiary of teapot refiners’ ramp-up with surge in import crude oil Kantons’ dominance of oil jetties in Shandong (five VLCC berths in Qingdao and Rizhao) should allow it to benefit from a rise in teapot refiners’ utilisation and a surge in crude oil import volumes. A healthy GRM should mean a rise in imports, as teapot refiners have used only 30% of the quota since Nov 2015. We expect Kantons’ throughput to rise from 187mntons in 2015 to 230mntons in 2018E (+44mntons). Key catalyst: new NDRC approval of the oil import quota, with 33m tonnes of the quota left to be applied (+60% of current levels). Yuji resumes pipeline growth; lower impact from regulatory changes Gas demand growth has returned after the gas price cut in Nov 2015. We expect Yuji gas volume growth to record a 10% CAGR in 2015-18E, after a 7% drop in 2015, and ROE to improve to 18% in 2018E from 11% in 2015. We also see potential regulatory changes in pipeline tariffs, which could be benchmarked to ROA and utilisation rates. Yuji Pipeline could do better as its ROA is only 4-6% in 2015-18E, vs. the potential benchmarked ROA of 8%. Valuation; risk-reward Our target price of HK$5.25/share is based on sum-of-the-parts, using DCF for the Huade oil jetty and Yuji gas pipeline with WACC of 9.8% and 0% terminal growth, NAV for LNG vessels, DDM for equity-accounting oil jetties and overseas oil storage facilities, and 1x EV/EBITDA for vessel charter due to uncertainty over charter renewals in 2017. Our target price implies 1.15x 17E P/B, representing 8% and 27% discounts to Chinese ports and gas peers, respectively, although Kantons has a premium ROIC over 2016E-18E. Risk: Lower-than-expected crude oil import volume; changes in government policy towards teapot refiners. 16 June 2016 Oil & Gas Sinopec Kantons Page 2 Deutsche Bank AG/Ho