China S Gas Choices Beijing, Tianjin, Hebei Burgeoning Demand Faces Midstream Bottlenecks April 2014

Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our
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ASIA EX JAPAN

Chinas Gas Choices is our thematic
research series on Chinese gas markets,
featuring granular bottom-up work on:
- Demand by province and by end-customer,
including associated implications on coal
demand and carbon emissions
- Supply by field (conventional onshore,
offshore, tight gas, shale gas, coal bed
methane), pipe imports, LNG
- Infrastructure trunklines, storage,
distribution, import terminals

Beijing, Tianjin, Hebei gas growth plays

Source: Bloomberg, Macquarie Research, March 2014
Related Research
Chinas Gas Choices - Light My Fire
The Chinese NGV (R)Evolution
Analyst(s)
Aditya Suresh, CFA
+852 3922 1265 aditya.suresh@macquarie.com
James Hubbard, CFA
+852 3922 1226 james.hubbard@macquarie.com
Gary Chiu, CFA
+852 3922 1435 gary.chiu@macquarie.com
Patrick Dai
+852 3922 1295 patrick.dai@macquarie.com
Matty Zhao
+852 3922 1293 matty.zhao@macquarie.com
Janet Lewis, CFA
+852 3922 5417 janet.lewis@macquarie.com
Candice Chen
+86 21 2412 9087 candice.chen@macquarie.com

13 March 2014
Macquarie Capital Securities Limited

Chinas Gas Choices
Beijing, Tianjin, Hebei: Burgeoning
demand faces midstream bottlenecks
We take a detailed look at the gas supply-demand outlook for Beijing, Tianjin
and Hebei provinces with the worst air quality problems in China, and that we
expect to account for one-fourth of incremental Chinese gas demand growth
over the next decade. We foresee an implied gas shortage of c.30bcm or one-
third of the provincial gas demand targets by 2020e, with lack of midstream
infrastructure the key bottleneck (pipelines, LNG regas, and gas storage). We
conclude that if these provinces want to improve air quality, via increased gas
usage, then a wave of new midstream projects is urgently required.
An insatiable thirst for gas in Beijing, Tianjin and Hebei
demand to quadruple by 2020e
The major structural tailwind for gas demand growth in these provinces is the
growing resolve to enforce a switch from coal/oil to gas for industrial boilers,
powergen, vehicles and residential. Based on our bottom-up work, we forecast
gas demand in these provinces to grow 21% pa (almost double the national
average) to reach 70bcm by 2020e - at which point these provinces would
account for 18% of China gas demand, and would have contributed to a 70mt or
2% cut in national coal consumption.
Gas supply rising fast but midstream capacity has to more
than double to realize government demand targets
During the same period, based on existing and confirmed new capacity, we
expect total gas supply to these provinces to grow an impressive 17% pa, but
this still falls 37% short of the provincial demand targets due to midstream
constraints. In our view, this implied shortage provides impetus to commission
Kunluns Shaanjing line-5 (15bcm; on top of line-4 under construction), LNG
regas expansion projects, and/or formalize the agreement with Russia.
Structurally long the mid/downstream players
Our forecast gas shortage structurally underpins gas volume growth for Kunluns
Shaanjing pipelines at least until the end of this decade. We raise our Kunlun
price target by 10% to HK$22 on higher transmission volumes and a higher
implied target PE. China Suntien benefits from its leveraged downstream gas
exposure in Hebei and we raise our price target by 36% to HK$4.75.
A wave of new midstream projects needs to be commissioned soon

Source: WMAC, CEIC, Macquarie Research, March 2014
Company Ticker
MacQ
Rating
NEW PT
(HK$)
PT upside
Current
2015E
PER
Direct Beneficiaries
Kunlun 135 HK OP 22.00 60% 9.9x
Suntien 956 HK OP 4.75 39% 12.4x
CR Gas 1193 HK OP 30.00 17% 14.8x
Beijing Enterprises 392 HK NR 14.8x
Beijing Jingneng 579 HK NR 10.1x
Indirect Beneficiaries
Petro-King 2178 HK OP 6.90 92% 10.3x
Anton 3337 HK OP 7.50 35% 14.4x
More social obligations?
PetroChina 857 HK N 8.00 2% 7.9x
Sinopec 386 HK UP 5.00 -26% 7.6x
-30.0
-20.0
-10.0
0.0
10.0
2014 2015 2016 2017 2018 2019 2020
(bcm)
Implied Gas Excess/(Shortfall) vs. Govt Targets
Base case (Existing + Confirmed Capacity) Base + Shaanjing Line-5 Base + Shaanjing Line-5 + LNG expansion
Shaanjing Line-5 + LNG
regas projects have to be built
if the provincial demand
targets are to be met
Macquarie Research Chinas Gas Choices
13 March 2014 2
demand faces midstream bottlenecks
In this edition of Chinas Gas Choices we take a detailed look at the gas supply-
demand outlook for Beijing, Tianjin and Hebei provinces with the worst air
quality problems in China and provinces that we forecast will account for one-fourth
of incremental Chinese gas demand growth over the next decade. This note
complements our detailed work in Light My Fire, which looked at overall China gas
supply-demand dynamics.
An insatiable thirst for gas in Beijing, Tianjin and Hebei demand to
quadruple by 2020e
As an extreme example of the air quality issues facing these provinces, PM2.5
emissions in Beijing reached 35x the WHO-recommended daily health safety
limit during peak smog last year.
These provinces target cutting annual coal consumption by 63mt or 16% by
2017 (vs. 2012), to help cut PM2.5 emissions by 25% over the same period.
The major structural tailwind for gas demand in these provinces is the growing
resolve to enforce a switch from coal/oil to gas industrial boilers, powergen,
vehicles and residential.
We forecast gas demand from these provinces to grow 21% pa over the next
seven years (almost double the national average) to 70bcm by 2020e, at which
point these provinces would account for 18% of overall Chinese gas demand
(vs 11% today).
Gas supply rising fast but faces midstream constraints
The Kunlun Energy/Beijing Enterprises operated Shaanjing or Shaanxi-Beijing
pipelines cater to c.90% of gas demand in Beijing, Tianjin and Hebei, and will
remain the major conduit of supply (70%+) until the end of this decade.
Based only on existing and confirmed new capacity we expect total available
gas supply to these provinces to rise an impressive 17% pa, but this still falls
37% short of the provincial demand targets due to midstream constraints.
Our preferred Beijing-Tianjin-Hebei gas growth plays
If Beijing, Tianjin and Hebei want to improve air quality, via increased gas
usage, then Shaanjing line-5 (on top of line-4 under construction), and the
Tangshan and Tianjin LNG regas expansion projects must break ground.
We raise our Kunlun price target by 10% to HK$22 on higher transmission
volumes and a higher implied target PE. China Suntien benefits from its
leveraged downstream gas exposure in Hebei, and we raise our price target by
36% to HK$4.75.
Fig 1 Order of preference for Beijing, Tianjin, Hebei gas growth plays

Source: Bloomberg, Macquarie Research, March 2014. 2015E for non-rated stocks based on Bloomberg consensus
Company Ticker
Mkt Cap
(US$, bn)
MacQ
Rating
Price
Local
(HK$)
NEW PT
(HK$)
PT %
change
PT upside
NEW
2015E EPS
(LC)
2015 EPS
% change
2015e EPS
MacQ vs
Cons
Current
2015E
PER
Target
2015E
PER
Direct Beneficiaries
Kunlun 135 HK 14.4 OP 13.7 22.00 10% 60% 1.38 4% 19% 9.9x 15.8x
Suntien 956 HK 1.5 OP 3.4 4.75 36% 39% 0.23 3% 4% 12.4x 16.1x
CR Gas 1193 HK 7.3 OP 25.7 30.00 0% 17% 1.71 0% 19% 14.8x 17.3x
Beijing Enterprises 392 HK 11.8 NR 71.9 14.8x
Beijing Jingneng 579 HK 3.9 NR 4.7 10.1x
Indirect Beneficiaries
Petro-King 2178 HK 0.5 OP 3.6 6.90 0% 92% 0.35 0% 3% 10.3x 20.0x
Anton 3337 HK 1.6 OP 5.6 7.50 0% 35% 0.31 0% 7% 14.4x 20.0x
More social obligations?
PetroChina 857 HK 183.4 N 7.8 8.00 0% 2% 0.78 0% 3% 7.9x 8.0x
Sinopec 386 HK 98.5 UP 6.7 5.00 0% -26% 0.69 0% 0% 7.6x 6.0x

Inside
demand faces midstream bottlenecks 2
Gas demand to rise four-fold by 2020e 7
Gas supply rising fast but faces
midstream constraints 20
The choices to achieve government
targets 27
Kunlun Energy 34
China Suntien 40
PetroChina 47
China coal sector 50
Great Wall Motor Company 52

Whats New?
Granular work on the gas demand
outlook by end-customer for Beijing,
Tianjin, Hebei.
Feasibility of provincial coal demand
destruction targets.
Analysis of the gas supply options -
Ordos, Tarim, West-East pipelines, coal-
to-gas, LNG regas, local gasfields
Associated work looking at midstream
infrastructure to get the gas to market
Shaanjing pipelines, gas storage etc.

13 March 2014 3
Fig 2 Beijing, Tianjin and Hebei have the worst air
quality problems in China
Fig 3 providing these provinces the impetus to
accelerate the switch from coal to gas

Source: Macquarie Research, March 2014 Source: NDRC, Macquarie Research, March 2014
Fig 4 ...translating to four-fold rise in gas demand
from these provinces by 2020e
Fig 5 However, rising demand meeting constrained
supply due to infrastructure bottlenecks

Source: NDRC, WMAC, Interfax, Macquarie Research, March 2014 Source: NDRC, WMAC, Interfax, Macquarie Research, March 2014
Fig 6 resulting in an implied gas shortage of nearly
one-third of the provincial demand target by 2020
Fig 7 Shaanjing line-5, LNG regas expansion
projects all need to be commissioned

Source: NDRC, WMAC, Interfax, Macquarie Research, March 2014 Source: NDRC, Interfax, WMAC, Macquarie Research, March 2014

-60%
-50%
-40%
-30%
-20%
-10%
0%
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
Beijing Tianjin Hebei
(mt)
Coal demand destruction targets
Absolute cut (2012-17) % cut vs 2012 levels (RHS)
0%
3%
6%
9%
12%
15%
18%
21%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
bcm Beijing, Tianjin, Hebei gas dmd outlook
Beijing Tianjin
Hebei NDRC estimates
% of overall China dmd (RHS)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(bcm)
Beijing, Tianjin, Hebei Demand-Supply Summary
Supply: existing + confirmed MQe Dmd
Govt Dmd Targets
A widening gap due to midstream
infrastructure bottlenecks, rather
than lack of supply...
-35.0
-30.0
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
2014 2015 2016 2017 2018 2019 2020
(bcm)
Base case (Existing + Confirmed Capacity)
Base + Shaanjing Line-5
Base + Shaanjing Line-5 + LNG expansion
Shaanjing Line-5 + LNG
regas projects have to be built
if the provincial dmd targets
are to be met, in our view
0
10
20
30
40
50
60
70
80
90
2013 2014 2015 2016 2017 2018 2019 2020
(bcm)
Beijing, Tianjin, Hebei midstream capacity required
Existing available capacity Confirmed additions
New capacity needed Provincial Dmd Target
New capacity
needed: Shaanjing 5
+ LNG expansions
Confirmed:
Shaanjing 4, Keqi,
Tangshan LNG,
Tianjin LNG
13 March 2014 4
Stock Implications
We see multiple stock/sector implications as a result of the burgeoning gas demand growth
outlook for Beijing, Tianjin and Hebei.
Structurally long the mid/downstream players: We raise our Kunlun price target by
10% to HK$22, on higher transmission volumes and a higher implied target PE. We now
model 24%/17% y/y gas transmission volume growth for Kunlun's Shaanjing pipeline
over 2014/15, above consensus at ~10-15% y/y growth. We continue to think the risk-
reward for Kunlun is compelling, with potential 60-95% base-bull fair value upside
potential versus 20% downside in a low probability bear scenario. China Suntien
(covered by Patrick Dai) benefits from its leveraged downstream gas exposure in Hebei
and we raise our price target by 36% to HK$4.75. Also China Resources Gas (covered
by Gary Chiu) will benefit from downstream gas volume growth in Tianjin.
Play upstream growth via oilfield services, rather than PetroChina or Sinopec. We
believe it is likely that PetroChina will continue to be responsible for the majority of the
new upstream gas required to satisfy Chinas rapidly growing gas demand. This role has
unambiguously destroyed shareholder value thus far and we continue to see such work
as more social duty than value creation. Our preferred upstream gas volume related
plays remain the independent oilfield service provides Petroking (Outperform, HK$6.9
PT 92% upside) and Anton (Outperform, HK$7.5 PT 35% upside), rather than
PetroChina (Neutral rating) or Sinopec (Underperform rating). Separately, while
Datang International Power (Neutral rating) will benefit from coal-to-gas volume
growth in Beijing, the impact on group EPS is minimal.
Fig 8 Whos most exposed to Beijing, Tianjin, Hebeis insatiable gas demand?

Source: Company data, Bloomberg, Macquarie Research, March 2014. Estimated gas volume and group EPS impact for 2014e.
Company Gas volume mix (MQe) Impact of gas vols on EPS (MQe)
Key assets impacted by Beijing,
Tianjin, Hebei gas growth
Growth drivers
Kunlun Energy
(135 HK, Outperform, TP: HK$22)
Shaanjing pipelines 60% (line 1-3, 35bcm)
Shaanjing line 4 (15bcm) in 2015
Taangshan LNG regas (4.7bcm) - potential
asset injection
Strong anti-pollution inspired thirst for gas in
Beijing, Tianjin, Hebei...
& Shaanjing pipelines is the only major
conduit of gas supply to the entire region
Suntien Green Energy
(956 HK, Outperform, TP: HK$4.75)
~30% mkt share for gas & wind in Hebei Anti-pollution inspired switch away from coal
to gas/wind
China Resources Gas
(1193 HK, Outperform, TP: HK$30)
159 city gas projects in 20 provinces
JV with Tianjin gas group
176 CNG/LNG gas refueling statio; ~300 by
2015
Tianjin coal/oil to gas growth
Turnaround of 50 currently loss-making
projects, to drive group earnings growth
PetroChina
(857 HK, Neutral, TP: HK$8.0)
Chaangqing Gas Fields in Ordos Basin
supplies a bulk of Shaanjing vols
West-East Pipelines (Tarim, Turkmen imports)
also feeds the Shaanjing pipelines
Offtake agreement with Datang CTG for
supply to Beijing
Taangshan LNG regas terminal (4.7bcm)
While P'China would benefit from higher
upstream vols...
this is offset by losses in its gas imports and
refining businesses; and mature oil production
declines in Daqing
Sinopec
(386HK, Underperform, TP: HK$5.0)
Daniudi gas field in Ordos supplies small vols
to Beijing, Tianjin, Hebei
8bcm pipeline under const to serve Hebei
(2015e)
Tianjin LNG under construction, startup in
2017e
Limited near-term impact from gas growth in
these provinces
Near-term refining remains a headwind, while
medium-term we continue to see a poor FCF
outlook
Beijing Enterprises
(392 HK, Not Rated)
Shaanjing pipelines 40% (1-3, 35bcm)
Shaanjing line 4 (15bcm) in 2015
Keqi coal-to-gas (33% stake)
50 CNG retail stations
Strong government support driven by growing
environmental concern
LNG/CNG volume growth
Beijing Jingneng
(579 HK, Not Rated)
Largest gas-fired power supplier in Beijing
56% gas powergen mkt share
Beijing plans to become coal free by 2017
BJ Jingneng to add 2.4 GW capacity by 2017
and maintain its leading gas powergen mkt
share
BTH
Others
BTH
Others
BTH BTH
Wind
BTH
BTH
Others
BTH BTH
Others
BTH
Others
BTH
Others
BTH BTH
BTH
Others
BTH
Others
13 March 2014 5
Remain cautious on thermal coal sector. We estimate annual coal consumption in
Beijing, Tianjin and Hebei will decline 70mt or 20% by 2020e, due to the expected coal-
to-gas switch. While the absolute impact on coal demand is not large from a national
perspective (~2%), this trend supports our expectation for a slowdown in Chinas coal
demand growth to 2-3% in the next few years, and we maintain our Underperform
ratings on Yanzhou Coal, Fushan and Hidili.
Further we highlight three non-rated stocks that could benefit from this forecast gas
growth in Beijing, Tianjin, Hebei: Beijing Enterprises (not rated) could directly benefit
from higher gas transmission volumes (as it controls 40% of Shaanjing pipeline) and
downstream gas volumes in Beijing; Beijing Jingneng (not rated) could benefit from
gas-fired powergen growth in Beijing; CIMC Enric (not rated) could benefit in the
medium term from LNG equipment growth.
Risk-reward outlook for our key stock picks
Fig 9 Kunlun still offers a compelling risk-reward valuation skew

Base: HK$22.0/sh @ 15.8x base HK$1.40/sh 2015e EPS, 60% TSR
upside
Gas transmission: 24%/17% y/y gas transmission vol growth in
2014/15e, and flat EBITDA margins
Natural gas sales (incl LNG): 38%/20% y/y gas sales volume
growth, and a rebound in EBITDA margins to Rmb0.42/cu.m in
2014/15 (from Rmb0.34/cu.m)
E&P: $106/109/bbl realized oil prices in 2014/15e
LNG regas: 95% utilization rates, backed by take-or-pay contracts
Target 15.8x 2015 PE, 10% disc to HK/China gas sector, backed by
DCF.
Bull: HK$26.8/sh @ 18x bull target PE, 95% upside
Assuming no valuation gap to the HK/China gas sector.
Bear: HK$10.9/sh @ 7.8x bear target PE, 20% TSR downside
Pipelines sold at acquisition cost; further PE suppression related to
senior exec investigations.
Risks to our base case thesis
Pipeline tariff cuts; inability to pass on rising upstream gas costs;
higher than forecast capex would imply higher DD&A and a delay in
achieving +ve FCFs.
Source: Datastream, Macquarie Research, March 2014
Fig 10 Suntien (covered by Patrick Dai) risk-reward shows limited downside for material potential upside

Base: HK$4.75/sh, 39% TSR upside, gas market share in Hebei falls
to 15% in 2020 from 27% in 2012
Natural gas sales: 16%/17% y/y gas sales volume growth in
2014/15e, average ASP increase by 3% pa, and gross margins
rebound to Rmb0.48-0.49/cu.m in 2014/15 (from Rmb0.47/cu.m),
gas sales vol CAGR 15% in 2014-2020.
Wind power sales: 21%/26% y/y wind power revenue growth, new
capacity addition 400MW pa in 2014/15 (up from 150MW-250MW
pa) , and 85%/86% EBITDA margins in 2014/15
TP from DCF implies 16.1x 2015 PE, 10% disc to HK/China gas
sector (from 30% disc), 17% prem to valuation derived from sum-of-
the-parts.
Bull: HK$6.15/sh, 70% upside, gas market share falls to 20% in 2020
Implies 20.9x 2015PE, 20% gas sales vol CAGR in 2014-2020.
Bear: HK$3.00/sh, 20% TSR downside, gas gross margin falls to
Rmb0.4/cu.m by 2020
Implies 10.6x 2014PE, assuming 70% cost hike pass-through.
Inability to pass on rising upstream gas costs; lower than forecast
receivable turnover imply a delay in achieving +ve FCFs.

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Fig 11 Beijing, Tianjin, Hebeis Gas Supply Options

Source: WMAC, CEIC, Macquarie Research, March 2014
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Note: All figures in bcm. Scale for all charts 0-70bcm
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0
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Ordos Tarim
Turkmen Imports LNG regas
Via
Shaanjing
Pipelines
13 March 2014 7
Gas demand to rise four-fold by 2020e
We expect Beijing, Tianjin and Hebei to account for one-fourth of incremental Chinese
gas demand growth over the next decade.
Beijing, Tianjin and Hebei have the worst air quality problems in China. As an
extreme example, PM2.5 emissions in Beijing reached nearly 35x the WHO-
recommended daily health safety limit in Jan-13.
These provinces target cutting annual coal consumption by 16% by 2017 versus 2012,
in turn to help cut PM2.5 emissions by 25% during the same period.
The major structural tailwind for gas demand in these provinces is the growing resolve to
enforce the switch from coal/oil to gas industrial boilers, powergen, vehicles,
residential.
Over the next seven years, we forecast gas demand from these provinces to grow 21%
pa, or an average increase of 7.5bcm pa, to 70bcm by 2020e, at which point these
provinces would account for 18% of overall Chinese gas demand.
Our bottom-up demand forecasts are lower than the provincial target of 84bcm by 2020e,
due to more conservative assumptions.
Beijing, Tianjin and Hebei together consumed 18.2bcm of gas in 2013, representing 11% of
overall Chinese gas demand. Till the end of this decade, we forecast demand from these
regions to grow 21% cagr (well above the industry trend of 13% cagr) and reach 70bcm or
18% of overall Chinese demand by 2020e. These provinces have the highest concentration of
PM2.5 emissions in China (fig 16), and the growing resolve to improve air quality by
accelerating the switch from coal to gas is a major tailwind supporting gas demand in these
provinces.

Fig 12 Beijing, Tianjin, Hebei account for 11% of
overall China gas demand today
Fig 13 but these provinces would be responsible
for ~25% incremental Chinese gas demand growth
(2013-20e)

Source: WMAC, CEIC, Macquarie Research, March 2014 Source: WMAC, CEIC, Macquarie Research, March 2014
The Airborne Pollution Prevention and Control Action Plan introduced by Chinas
Ministry of Environment Protection in Sept-13 calls for a 10% reduction in nationwide PM2.5
emissions by 2017, from 2012 levels. The plan outlines 35 broad action points, including
cutting coal consumption in several regions, banning heavy polluting motor vehicles, and
accelerating the process of monitoring and disclosing PM2.5 readings. Over the same time
frame, Beijing-Tianjin-Hebei target cutting PM2.5 emissions by at least 25%. Towards
achieving these PM2.5 emissions cut goals these provinces target cutting coal consumption
by 63mt or 16% of 2012 coal consumption (fig 18).

Beijing
6%
Tianjin
2%
Hebei
3%
Others
89%
2013 China Gas Demand (162bcm)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
50
100
150
200
250
300
350
400
2010 2013 2015 2020
(bcm)
China Gas Demand Outlook
Others Beijing
Tianjin Hebei
BTH as % of overall dmd
13 March 2014 8
Fig 14 Beijings air quality today is as poor as it was in London and Tokyo in the 1950s

Source: Greater London Authority, Bureau of Environment of Tokyo Metropolitan Government, Macquarie Research, March 2014
Beautiful China The Proven Path Towards Cleaner Air
Macquarie Analysts: Jiong Shao, Jing Yang
Beautiful China (II) - The proven paths towards cleaner air
In The Proven Path Towards Cleaner Air, our strategy team reviews the history of air pollution controls in the United Kingdom,
United States, and Japan, to shed some light on how China may proceed to combat air pollution. They outline the necessary
changes in Chinas anti-pollution legislations and regulatory regimes for sustainable environmental protection in the coming
decades identifies, and also highlight three near-term priorities for China;
Coal Control Areas to cut emissions from coal combustion (referring to the smokeless zones in the UK)
The designation of Coal Control Area in London and other cities were widely recognized as the most effective air
pollution control measures in response to the 1952 Great Smog. The measure directly led to the energy consumption
structure shift in the country towards cleaner fuels. In January 2013, immediately after several days of severe smog,
Beijings municipal government introduced Coal Control Areas calling for a ban in coal consumption in the fourth ring
road by 2014, and in the sixth ring road by 2015.
Stricter emission limits for industrial plants (referring to the 1968 UK Clean Air Act):
In mid-February 2013 the Ministry of Environmental Protection of China announced that from March 2013, stricter
emission standards would be implemented for greenfield projects of coal-fired plants/boilers, steel mills, petrochemical,
non-ferrous and chemical plants, and also for retro-fit projects of coal-fired plants/boilers, steel mills and petrochemical
plants in over 47 cities and 19 provinces. In addition the Airborne Pollution Prevention and Control Action Plan
introduced in Sept-13 calls for a 10% reduction in nationwide PM2.5 emissions by 2017, from 2012 levels.
Gasoline & diesel quality upgrades to reduce emissions from automobiles (referring to the US Ultra-Low Sulphur
Gasoline/Ultra-Low Sulphur Diesel standards).
Since 2006, refiners in the US are required to supply Ultra-Low Sulphur Gasoline and Ultra-Low Sulphur Diesel to
reduce sulphur levels in these fuels by 90% and 97%, respectively. In Feb-2013 the State Council of China announced
to accelerate refined oil quality upgrades, by 1) strictly implementing the existing gasoline and diesel standards (with
max sulphur content at 50ppm and 350ppm), and 2) accelerating publication and promotion of new National IV & V
diesel standards and National V gasoline standards.
All these measures highlighted are a clearly step in the right direction, and serve as major structural tailwind for gas demand
growth in Beijing, Tianjin and Hebei provinces with some of the worst air quality problems in China.
Tokyo 1950s Beijing today London 1950s
13 March 2014 9
Fig 15 Beijing, Tianjin, Hebei Gas, Coal, PM2.5 targets

Source: WMAC, Beijing DRC, CEIC, Macquarie Research, March 2014.
Note: If an official provincial gas demand target is unavailable, we include estimates by local gas planning authorities, gas distribution companies etc.
MacQ demand forecasts lower than provincial estimates due to more conservative assumptions.

Fig 16 Beijing, Tianjin and Hebei have the highest
concentration of PM2.5 emissions in China
Fig 17 recent PM2.5 emissions cut targets, whilst a
step in the right direction, still leave emissions in these
provinces well above the WHOs air quality guidelines

Source: Greenpeace, Macquarie Research, March 2014 Source: MEP, WHO, Greenpeace, Macquarie Research, March 2014
Fig 18 Beijing, Tianjin and Hebei advocate the coal
to gas switch and target cutting annual coal
consumption by 16% versus 2012 levels...

Fig 19 translating to a potential four-fold rise to gas
demand growth from these provinces by 2020e

Source: NDRC, Interfax, Macquarie Research, March 2014 Source: NDRC, Interfax, WMAC, Macquarie Research, March 2014
PM2.5
emissions
reduction 2012-
17e
Coal dmd
destruction
target 2012-17e
(mt)
Gas Dmd 2013A
(bcm)
Gas Dmd
Target 2015
(bcm)
Gas Dmd
Target 2017
(bcm)
Gas Dmd
Target 2020
(bcm)
Gas Dmd
Growth (2013-
17 cagr)
Gas Dmd
Growth (2013-
20 cagr)
Beijing 25% 13.0 9.6 20.0 24.0 30.0 26% 18%
Tianjin 25% 10.0 3.4 16.0 20.0 23.6 56% 32%
Hebei 25% 40.0 5.2 4.0 15.0 30.0 30% 28%
Combined Target 25% 63.0 18.2 40.0 59.0 83.6 34% 24%
MacQe 45.3 18.2 33.7 47.0 70.5 27% 21%
Guangdong
Shandong
Jiangsu
Hebei
Henan
Beijing
PM2.5>40g/m3 PM2.5<10g/m3
0
10
20
30
40
50
60
70
80
90
100
g/cu.m
PM 2.5 Yearly Emission Targets
Current Target WHO (annual avg) WHO (daily limit)
-60%
-50%
-40%
-30%
-20%
-10%
0%
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
(mt)
Coal demand destruction targets
Absolute cut (2012-17) % cut vs 2012 levels (RHS)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
bcm Beijing, Tianjin, Hebei gas dmd outlook
Beijing Tianjin Hebei NDRC estimates
13 March 2014 10
Beijing
Beijing is currently the fifth-largest consumer of gas in China, and demand has grown 13%
cagr over the past five years (2008-13), broadly in line with the industry growth trend. The
severe smogs in Beijing in January 2013, when PM2.5 emissions in Beijing touched 886/
cu.m or 35x the WHO- recommended health safety levels, raised concerns domestically and
internationally. Recent official rhetoric and policy suggest Beijing is getting more serious on
solving its pollution problems, and as things stand gas is the only viable substitute for coal in
Beijing. By 2017, the NDRC (National Development and Reform Commission) expects Beijing
to cut annual coal consumption by at least 13mt (56% versus the 2012 baseline), and projects
gas demand to rise to 24bcm (2.5x 2013 levels) or 35% of the local energy mix (from 14% in
2013). Based on our bottom-up work, we forecast Beijings gas demand to rise to 18.6bcm by
2017 (17% cagr 2013-17e) and 25.1bcm by 2020 (15% cagr 2013-20e), lower than the
provincial targets due to more conservative assumptions. Our work indicates the provincial
coal demand destruction targets are achievable; we forecast a 15.5mt cut to coal demand
versus the target of at least 13mt by 2017.
Fig 20 Beijing gas demand to grow 15% cagr 2013-
20e
Fig 21 Incremental gas demand growth to peak over
the next two years

Source: Beijing DRC, CEIC, Macquarie Research, March 2014 Source: CEIC, Macquarie Research, March 2014
Powergen Beijing currently has 4.2GW of gas-fired powergen capacity and targets
having 7.2GW capacity by end-2014, rising to 8.6GW by end-2017. Beijing Jingneng is
the main gas-fired IPP in Beijing and is set to add 2.5GW of capacity by 2017, followed
by Datang (1.4GW NW centre), and Guohua (0.7GW NE centre). By the end of 2015,
Beijing plans to have decommissioned all four existing coal-fired power plants with a
combined 2.7GW capacity. While the cost of gas-fired powergen in Beijing is more
expensive than coal, the on-grid tariff for gas is now ~65% more than that for coal.
Further, the Beijing government also provides subsidies (~Rmb0.05/KWh) to broadly
ensure that the power plant operator makes an 8% IRR. Based on the gas-fired
powergen capacity additions, and assuming Beijing continues to generate one-third of its
electricity needs locally, we forecast gas demand from powergen to rise to 9.3/12.6bcm
by 2017/20e, from 4.4bcm in 2013a, and during the same time this results in a 11.9mt cut
in coal consumption.
0.0
4.0
8.0
12.0
16.0
20.0
24.0
28.0
(bcm)
Beijing Gas Demand
Industrial Powergen Residential NGV Other
Provincial
Target
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2013 2014 2015 2016 2017
(bcm)
Beijing Incremental Gas Demand Growth
Beijing Downstream Gas
Volume Split
Source: Company data, Macquarie Research, March 2014
Beijing
Enterprises
13 March 2014 11
Fig 22 Gas to play an increasingly important role in
Beijings energy mix
Fig 23 and higher powergen costs offset by higher
on-grid tariff and subsidies

Source: Beijing DRC, CEIC, Macquarie Research, March 2014 Source: Beijing Jingneng, Beijing DRC, Macquarie Research, March 2014
Industrial Beijing targets banning coal consumption from industrial boilers in the 4
th

ring road by end-2014, and the 6
th
ring road by end-15. To date 93 boilers have been
retrofitted to use gas, and over the next couple of years another 44 boilers should be
converted (note that the typical size of an industrial boiler in Beijing is nearly three times
the nationwide average). In addition to the demand growth due to the coal-to-gas switch,
historically industrial gas demand has had an extremely strong correlation with GDP
growth (R
2
98%). Consequently, if we assume 7% sustainable growth long-term GDP,
we forecast underlying industrial gas demand to grow at 10% pa. Put together, we
forecast industrial gas demand to rise to 5.6/7.4bcm in 2017/20e, from 2.9bcm in 2013a.
Residential In 2013, 66% of Beijings 21mn population had access to gas nearly 2x
the nationwide average. By 2017, Beijing targets to increase the residential gas
penetration rate to 80%. Further, with rising household incomes, gas demand per capita
has been growing at 2% pa over the past five years. Consequently as more households
get access to gas and with rising consumption per capita, we forecast residential gas
demand to rise to 1.7/2.2bcm by 2017/20e, from 1.1bcm in 2013a.
NGVs Beijing targets converting two-thirds of its 21k bus fleet to gas or EV by 2015;
and also targets 200k new energy vehicles by 2017e. Over the next seven years, we
assume a steady ramp-up in LNG/CNG truck/buses to 42k by 2020e or 20% of the
provincial commercial vehicle fleet (from 3.5k in 2013), and 50k CNG-based taxis in
2020e (from 6.5k today). Consequently, we model gas demand from NGVs to grow to
1.4/2.2 bcm in 2017/20e, from 0.4bcm in 2013a.
Fig 24 Beijing gas demand growth led by new gas-fired powergen capacity and conversion of industrial boilers

Source: WMAC, Beijing DRC, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
(bcm)
(TWh)
Beijing powergen outlook
Coal Gas
Imported from other provinces Powergen gas dmd (RHS)
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
J
a
n
-
1
0
A
p
r
-
1
0
J
u
l
-
1
0
O
c
t
-
1
0
J
a
n
-
1
1
A
p
r
-
1
1
J
u
l
-
1
1
O
c
t
-
1
1
J
a
n
-
1
2
A
p
r
-
1
2
J
u
l
-
1
2
O
c
t
-
1
2
J
a
n
-
1
3
A
p
r
-
1
3
J
u
l
-
1
3
O
c
t
-
1
3
J
a
n
-
1
4
Rmb/KWh
Beijing powergen tariffs
Coal-fired on-grid tariff Gas-fired on-grid tariff
Gas-fired total settlement tariff
Tariff
paid by
local grid
Subsidy
from local
govt
6.8
9.6
3.6
1.4
0.8
0.3
15.3
4.6
3.1
1.3
0.8
25.1
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2010a 2013a Powergen Industrial NGV Residential 2015e Powergen Industrial NGV Residential 2020e
(bcm)
Beijing Gas Demand Growth Outlook
3.4GW of
new capacity
added
~30 large
scale boilers
convt to gas
Ramp up
twds
200k"New
Energy
Vehicles" by
2017
Resi
penetration
increases to
73% in 2015,
from 66% in
2013
5GW of new
capacity
added; gas
ramps to
40% mkt
share
10% pa GDP
driven
industrial
dmd growth
LNG reaches
20%CV
penetration
by 2020e
Resi
penetration
increases to
90% by
2020e
Provincial
target
Provincial
target
13 March 2014 12
Fig 25 Beijing gas demand growth summary outlook

Source: WMAC, Beijing DRC, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+
Tianjin
120km south of Beijing, the coastal province of Tianjin currently consumes one-third the gas
of Beijing. However, Tianjin is set to quickly close the gas consumption gap to Beijing and
local authorities have aggressive plans in place to quadruple gas demand over the next two
years to 12.3bcm by 2015. By 2020, Tianjin expects gas demand to rise to 23.6bcm and
account for 20% of its primary energy mix. We conservatively assume a more gradual ramp-
up in gas demand to 13.3/19.3bcm in 2017/20e, implying 28% cagr (2013-20e). We forecast
an 8.7mt cut to annual coal consumption by 2017, slightly lower than the 10mt provincial
target.
Fig 26 Tianjin gas demand to grow 6x by 2020e Fig 27 Tianjin Incremental Gas Demand Growth

Source: NDRC, Interfax, Macquarie Research, March 2014 Source: NDRC, Interfax, Macquarie Research, March 2014
Powergen Tianjin commissioned the 250MW GreenGen plant in 2013; Chinas coal
gasification powerplant (integrated gasification combined cycle; coal is converted to
syngas and then combusted). GreenGen is funded by a group of power companies led by
Huaneng. By end-2015 Tianjin targets to have more than 5GW of gas-fired capacity with
Huaneng, Datang, Guodian, Huadian, and China Power New Energy all bringing on
stream new capacity. Beyond these known capacity addition projects, we assume
another 2GW of capacity to be added between 2017-20e. Consequently, we forecast gas
demand from powergen to rise to 6.3/9.0bcm by 2017/20e, from 0.7bcm in 2013a.
BEIJING 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2013-20
CAGR
Comments
Industrial (bcm) 0.3 0.4 0.5 0.7 0.7 0.9 0.9 1.5 2.9 3.7 4.4 5.1 5.6 6.1 6.7 7.4 14% Ban coal boilers 4th ring road 2014; 6th ring road 2015
Cumulative # of boilers converted 30 93 115 125 137 137 137 137 137
Powergen (bcm) 0.8 1.2 1.0 1.8 2.4 2.9 3.1 3.6 4.4 5.6 8.0 8.8 9.3 10.5 11.5 12.6 16% 40% gas mkt share by 2020, from 16% today
Total electricity consumption TWh 57 62 68 71 76 83 85 87 90 92 94 97 99 102 104 107 3%
% locally produced 38% 32% 33% 33% 32% 32% 31% 33% 33% 33% 33% 33% 33% 33% 33% 33%
...Coal TWh 15.1 13.5 16.1 17.4 17.8 20.2 16.4 17.0 15.2 11.8 4.8 2.8 2.0 0.0 0.0 0.0
...Gas TWh 6.3 6.3 6.3 6.3 6.3 6.6 9.9 12.1 14.7 18.8 26.6 29.4 31.0 35.0 38.5 42.0
% Gas mkt share 11% 10% 9% 9% 8% 8% 12% 14% 16% 20% 28% 30% 31% 34% 37% 39% Target 35% of power consumption mix by 2017e
Gas-fired powergen capacity GW 1.8 1.8 1.8 1.8 1.8 1.9 2.8 3.4 4.2 5.4 7.6 8.4 8.9 10.0 11.0 12.0
Residential (bcm) 0.6 0.8 0.9 0.9 1.0 1.0 1.0 1.1 1.2 1.3 1.4 1.6 1.7 1.9 2.1 2.2 10% 90% resi penetration by 2020, from 66% in 2013
Population w access to gas (mn) 9 10 10 11 11 13 13 14 14 15 16 17 18 19 21 22
% popln w access to gas 57% 60% 60% 60% 61% 66% 66% 66% 66% 69% 73% 76% 80% 83% 87% 90%
Gas dmd per capita w access 64 88 90 86 86 79 79 81 83 86 88 91 94 97 100 103 3% Grows with rising urbanization
NGVs (bcm) 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.4 0.6 0.9 1.2 1.4 1.7 1.9 2.2 28% Half of target 200K new energy vehicles gas-based
# of LNG trucks, buses ('000) 4 9 15 20 26 31 37 42 Target 2/3rd of 21k bus fleet to be gas/EV by 2015
# of CNG taxis, light vehicles ('000) 2 7 12 17 23 28 34 39 50
Others (bcm) 1.4 1.3 1.3 1.6 1.7 1.8 1.7 1.9 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6
Beijing Gas Demand (bcm) 3.1 3.8 3.9 5.2 6.1 6.8 6.9 8.4 9.6 12.0 15.3 17.2 18.6 20.8 22.9 25.1 15%
Incremental demand y/y (bcm) 0.8 0.1 1.3 0.9 0.8 0.1 1.5 1.1 2.4 3.3 1.9 1.4 2.2 2.1 2.2
Y/Y growth % 25% 2% 33% 16% 12% 1% 22% 14% 25% 28% 13% 8% 12% 10% 10%
Gas Dmd Targets/Research Institute Ests (bcm) 9.6 11.5 20.0 24.0 30.0
of which winter (Nov-Mar) gas dmd ests (bcm) 4.7 5.3 6.6 7.8 9.9 12.1 16.3 50%+ annual dmd in winter months mid-Nov to mid-Mar
Cumulative coal dmd destruction from gas (mt) 3.5 7.0 12.8 14.8 15.5 17.0 17.0 17.0
Overall coal dmd destruction target 2012-17 (mt) 13.0 Target 3mt cut in 2014; 13mt between 2012-17e
0.0
4.0
8.0
12.0
16.0
20.0
24.0
(bcm)
Tianjin Gas Demand
NDRC
est
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2013 2014 2015 2016 2017
(bcm)
Tianjin Incremental Gas Demand Growth
Tianjin Downstream Gas
Volume Split
CR
Gas/Tianjin
Gas JV
13 March 2014 13
Industrial Tianjin plans to retrofit 132 coal-fired boilers to gas by end-2015, and
expects gas demand from these boilers to reach 3.58bcm in 2015. Further, Tianjins Gas
Heat Planning Institute expects a steady increase in the use of gas for central heating/
cooling by commercial users to 1.74bcm in 2015. In addition, if we assume GDP-driven
10% pa underlying industrial gas demand growth (similar to that for Beijing), we forecast
gas demand from industrial to increase to 4.7/6.2bcm by 2017/20e, from 2.1bcm in
2013a.
Residential As on end-2013, 48% of Tianjins 14mn population had access to gas.
Assuming the residential penetration rate rises gradually to 80% by 2020e (in line with
Beijings target but with a three-year lag), and assuming 3% pa increase in gas demand
per capita, in line with the trend over the past three years, we model residential gas
demand to rise to 0.9/1.3bcm in 2017/20e, from 0.5bcm in 2013a.
NGVs Tianjin plans to have more than 20k NGVs by 2015. We model the number of
LNG trucks/buses in Tianjin to rise to 58k by 2020, implying a commercial vehicle NGV
penetration rate of 20% by 2020 (at the top end of NDRCs target of a 10-20% nationwide
commercial vehicle penetration rate by 2020 for NGVs), from less than 1% today. In
addition we assume the number of CNG taxis increases to 25k by 2020, from c.3k today,
implying an 80% taxi penetration rate. Put together, we forecast NGV gas demand to rise
to 1.4/2.5bcm in 2017/20e, from essentially zero today.
Fig 28 Tianjin gas growth also led by new powergen and industrial conversions

Source: Tianjin Gas Heat Planning Institute, C1 Energy, Interfax, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+

2.3
3.4
3.4
1.4
0.7
0.2
9.1
4.9
3.1
1.7
0.5
19.3
0.0
5.0
10.0
15.0
20.0
25.0
2010a 2013a Powergen Industrial NGV Residential 2015e Powergen Industrial NGV Residential 2020e
(bcm)
Tianjin Gas Demand Growth Outlook
3GW of new
capacity
added
50 medium
scale boilers
convt to gas
LNG
reaches
5% CV
penetration
Resi
penetration
increases to
58% in 2015,
from 48% in
2013
5GW of new
capacity
added; gas
ramps to
34% mkt
share
10% pa GDP
driven
industrial
dmd growth
LNG reaches
20%CV
penetration
by 2020e
Resi
penetration
increases to
80% by
2020e
Provincial
target
Provincial
target
TIANJIN 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2013-20
CAGR
Comments
Industrial (bcm) 0.4 0.5 0.7 0.9 0.9 1.3 1.5 1.7 2.2 2.9 3.6 4.6 5.0 5.5 6.1 6.7 17% Conv of 163 boilers to gas & GDP led organic growth
Cumulative # of boilers converted 25 40 55 81 106 132 163 163 163 163 163
Coal TWh 34 34 37 37 39 56 57 57 58 55 50 47 46 46 44 42
Gas TWh 2 2 2 2 2 2 2 2 2 7 14 18 21 23 26 30
% Gas mkt share 4% 4% 3% 3% 3% 3% 2% 2% 3% 10% 17% 23% 26% 27% 31% 34%
Annualised powergen capacity (GW) 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6 2.1 3.9 5.3 6.0 6.5 7.5 8.5 Target >5GW gas-fired powergen by end-15e
Population w access to gas (mn) 4 5 6 6 6 6 6 6 7 8 9 10 10 11 12 13 9%
% popln w access to gas 39% 44% 53% 50% 46% 44% 44% 45% 49% 54% 58% 63% 67% 71% 76% 80% Assuming resi penetration similar to Beijing by 2020
Gas dmd per capita 76 66 58 64 68 72 73 75 78 80 82 85 87 90 93 96 3%
NGVs (bcm) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4 0.7 1.1 1.4 1.8 2.1 2.5 80% 20% LNG penetration by 2020, from essentially zero
# of LNG trucks, buses ('000) 0 1 9 17 25 34 42 50 58
# of CNG taxis, light vehicles ('000) 1 3 6 10 14 18 22 26 30
Others (bcm) 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Tianjin Gas Demand (bcm) 0.9 1.1 1.4 1.7 1.8 2.3 2.6 2.8 3.4 6.1 9.1 11.7 13.3 14.8 16.8 19.3 28%
Y/Y growth % 24% 27% 18% 8% 27% 11% 10% 21% 79% 50% 28% 14% 11% 14% 15%
Gas Dmd Targets/Research Institute Ests (bcm) 3.4 12.3 16.8 23.6
of which winter (Nov-Mar) gas dmd ests (bcm) 1.0 1.2 3.2 4.7 6.8
Overall coal dmd destruction target 2012-17 (mt) 10.0 Target 10mt cut between 2012-17e
13 March 2014 14
Hebei
Hebei is the largest consumer of coal in China, and unsurprisingly its air quality problems are
worse than that in Beijing and Tianjin. In 2013, Hebei announced a multi-pronged strategy to
cut PM2.5 emissions by at least 25% and annual coal consumption by 40mt by 2017,
including: decommissioning cement and steel factories (see Environmental restrictions curb
North China Output, 6-Jan); retrofitting all coal-fired boilers in Shijiazhuang, Tangshan etc;
and bringing on stream new gas and wind power plants. Hebei expects its gas demand to rise
to 15bcm by 2017, from 5.2bcm in 2013. Based on our bottom up work, we model 15.0/
26.1bcm in 2017/20e, implying 26% cagr between 2013-20e. We estimate the switch from
coal to gas alone would cut Hebeis annual coal consumption by 20mt by 2017, or half the
provincial target.
Fig 29 Hebei gas demand to grow 5x to 26bcm by
2020e with industrial and powergen accounting for a
bulk of growth

Fig 30 Hebei incremental gas demand growth driven
by conversion of coal-fired boilers

Source: NDRC, Interfax, C1 Energy, Macquarie Research, March 2014 Source: NDRC, Interfax, C1 Energy, Macquarie Research, March 2014
Powergen Shijiazhuang, the capital city of Hebei province, issued its own five-year
plan on gas in Oct-13, calling for the construction of three new gas-fired power plants (of
which two would be constructed by Huadian) with a combined capacity of 2.4GW and an
expected 2015 start-up. Further, we assume an additional 2.5GW of capacity gets
commissioned across Hebei between 2016-20e. Consequently, we forecast gas demand
from powergen to rise to 6.4bcm by 2020e, from 0.5bcm in 2013a, but this would still
imply that gas accounts for only 6% of Hebeis powergen mix by 2020e.
Industrial Overall Hebei plans to retrofit all 1765 coal-fired boilers in the province to
gas by 2017. By 2013, nearly 700 boilers had been converted, with 329 conversions
coming in 2013 alone. For instance, Shijiazhuang has already converted its ~600 coal-
fired boilers to gas by end-2013, and targets all petchem plants to use gas for its local
electricity needs by 2017; Tangshan plans to convert all its coal-fired boilers to gas by
end-2015 and targets the penetration rate for gas among industrial customers to rise to
30%/80% by 2015/20e; and Handan, Xintai, Baoding etc. have similar conversion targets
in place. We conservatively assume another 800 boilers are converted by 2020e; taking
the total conversions to 1500, below the 1765 target by 2017. This then equates to 21%
cagr industrial gas demand growth to 12.6bcm by 2020e.
Residential As of end-2013, only 16% of Hebeis 74mn population had access to gas,
nearly half the nationwide average. We assume the residential penetration rate rises
gradually to 50% by 2020e, and gas demand per capita increases 2% pa (similar to that
in Beijing and Tianjin). Consequently we expect residential gas demand to rise to 2.0/
3.5bcm in 2017/20e, from 0.8bcm in 2013a.
0.0
4.0
8.0
12.0
16.0
20.0
24.0
28.0
(bcm)
Hebei Gas Demand
NDRC
est
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2013 2014 2015 2016 2017
(bcm)
Hebei Incremental Gas Demand Growth
Hebei Downstream Gas
Volume Split
China
Suntien
13 March 2014 15
NGVs We havent come across any specific NGV targets for Hebei, apart from noting
that Shijiazhuang plans to add 30/105 LNG/CNG stations by end-2016. We assume 5%
of Hebeis 1.4mn truck fleet converts to LNG by 2020; note that the NDRCs nationwide
target is 10-20% NGV penetration rate for commercial vehicles by 2020. We model NGV
gas demand to grow to 2.1/3.5bcm in 2017/20e, from 0.6bcm in 2013a.
Fig 31 Hebei Gas Demand Growth Outlook

Source: C1 Energy, Interfax, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+
Beijing-Tianjin-Hebei summary demand outlook
Putting things together, we expect overall gas demand in Beijing, Tianjin and Hebei to
grow by an average increase of 7.5bcm pa to 47/70bcm in 2017/20e, implying 21% cagr
between 2013-20e. By 2020, we expect these provinces will account for 18% of overall
Chinese gas demand, from 11% today.
Our bottom-up demand forecasts are lower than the provincial target of 84bcm by 2020e,
due to more conservative assumptions.
2.9
5.2
2.3
0.6
0.5
0.6
9.3
7.1
5.3
2.4
2.1
26.1
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2010a 2013a Industrial Powergen NGV Residential 2015e Industrial Powergen NGV Residential 2020e
(bcm)
Hebei Gas Demand Growth Outlook
0.5GW of
new
capacity
added in
2015
250 small
scale
boilers
convt to
gas
LNG
reaches
2% CV
penetration
Resi
penetration
increases to
25% in 2015,
from 16% in
2013
LNG reaches
5%CV
penetration
by 2020e
Resi
penetration
increases to
50% by
2020e
Provincial
target
Provincial
target 500 small
scale
boilers
convt +
10% pa
GDP driven
growth
5GW of new
capacity
added; gas
mkt share
incr to 6%
HEBEI 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2013-20
CAGR
Comments
Industrial (bcm) 0.8 1.0 1.1 1.5 1.7 2.1 2.5 2.8 3.2 4.4 5.5 6.6 7.9 9.3 10.9 12.6 22% Conv of ~1000 remaining boilers to gas by 2017e
Cumulative # of boilers converted 811 961 1061 1161 1261 1361 1461 1561
Coal TWh 130 143 154 157 165 185 212 217 216 220 222 222 224 224 225 226
Wind TWh 0 0 0 2 6 10 15 17 20 22 24 26 28 31 33 35
Gas TWh 0 0 0 1 1 1 1 2 2 2 4 8 9 14 18 21
% Gas mkt share 0% 0% 0% 0% 0% 0% 0% 1% 1% 1% 1% 2% 3% 4% 5% 6%
Annualised powergen capacity (GW) 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.5 0.5 0.5 1.1 2.2 2.7 4.1 5.1 6.1 2.4GW additions in Shijiazhuang from 2015
Population w access to gas (mn) 1 2 3 6 7 8 9 10 12 15 19 23 27 32 36 43 20%
% popln w access to gas 2% 3% 5% 8% 10% 12% 13% 13% 16% 20% 25% 30% 34% 39% 43% 50%
Gas dmd per capita 56 18 11 11 42 49 53 64 66 68 70 72 74 77 79 81 3%
# of LNG trucks, buses ('000) 5 17 28 40 51 63 74 86 Assuming 5% LNG truck penetration in 2020
# of CNG taxis, light vehicles ('000) 5 9 13 16 20 24 28 30
Others (bcm) 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Hebei Gas Demand (bcm) 0.9 1.1 1.2 1.7 2.3 2.9 3.5 4.6 5.2 6.8 9.3 12.4 15.0 18.7 22.2 26.1 26%
Y/Y growth % 20% 10% 42% 35% 28% 19% 30% 15% 30% 36% 34% 21% 25% 19% 17%
Gas Dmd Targets/Research Institute Ests (bcm) 5.2 15.0 30.0
of which winter (Nov-Mar) gas dmd ests (bcm) 2.1 2.5 7.5 13.0
Overall coal dmd destruction target 2012-17 (mt) 40.0 Target 8mt reduction in 2014; 40mt between 2012-17e (incl wind)
13 March 2014 16
Fig 32 Gas demand from Beijing, Tianjin and Hebei to reach 70bcm+ by 2020, or 18% of overall Chinese
demand

Source: NDRC, C1 Energy, Interfax, CEIC, Macquarie Research, March 2014. Note: MQ estimates 2014+
Demand seasonality and gas storage
Gas demand in Beijing, Tianjin and Hebei peaks in winter (mid-Nov to mid-Mar) due to higher
demand from residential and commercial users for space heating needs. To get a sense of
the scale of gas demand seasonality in Beijing, Tianjin, Hebei, in fig 33 we show the
estimated monthly average gas demand split between winter and non-winter months, and
highlight that typically demand for gas in winter months is ~2.5x that in summer months.
Further, since residential users receive top priority in terms of gas supply allocation, these
provinces are forced to rationalize supply to industrial customers, due to the under-
utilization/lack of gas storage facilities. For example, in 2013, gas supply to chemical fertilizer
producer Cangzhou Dahua and auto maker Great Wall Motor was curtailed due to the surge
in winter gas demand (see Great Wall Motor Company - Running low on gas).

4.9
12.0
18.2
33.7
70.5
5.7
5.7
4.0
9.8
10.2
16.8
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
2005a 2010a 2013a Beijing Tianjin Hebei 2015e Beijing Tianjin Hebei 2020e
bcm
Beijing, Tianjin, Hebei Gas Demand Outlook
BEIJING, TIANJIN, HEBEI 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2013-20
CAGR
Comments
Total Demand (bcm) 4.9 6.1 6.6 8.6 10.2 12.0 12.9 15.8 18.2 24.8 33.7 41.3 47.0 54.3 62.0 70.5 21%
Incremental demand y/y (bcm) 1.2 0.5 2.0 1.6 1.9 0.9 2.8 2.4 6.7 8.8 7.6 5.7 7.3 7.6 8.6 Avg 7.5bcm pa incremental gas dmd growth
Y/Y growth % 24% 8% 31% 18% 18% 7% 22% 15% 37% 35% 23% 14% 16% 14% 14%
% of overall China gas demand 10% 11% 9% 11% 11% 11% 10% 11% 11% 13% 15% 17% 17% 17% 18% 18%
Gas Dmd Targets/Research Institute Ests (bcm) 4.9 6.1 6.6 8.6 10.2 12.0 12.9 15.8 18.2 25.2 32.3 44.1 55.8 65.1 74.3 83.6 MQe lower due to conservative industry/power assumptions
Cumulative Coal Dmd Destruction (mt) 9.3 17.4 29.8 39.4 45.3 54.5 61.9 69.5
% of total Beijing-Tianjin-Hebei coal dmd 2% 5% 8% 11% 13% 16% 19% 22%
Overall coal dmd destruction target 2012-17 (mt) 63.0
Gas supply from existing sources (bcm) 12.0 12.9 15.8 18.2 25.0 31.8 33.1 34.5 35.9 37.3 38.7 11% Mainly vols from Shaanxi-Beijing
Risked incr vols via WEP 3.6 4.5 7.2 9.8 12.5 15.2 17.9 Higher allocation of WEP volumes
Total risked supply to Beijing-Tianjin-Hebei (bcm) 12.0 12.9 15.8 18.2 28.5 36.2 40.3 44.4 48.4 52.5 56.6 18%
MacQ - Implied gas excess/(shortfall) (bcm) 0.0 0.0 0.0 0.0 3.7 2.6 -1.0 -2.6 -5.9 -9.4 -13.9 Excess implies gas diverted to other provinces
Govt Targets - Implied gas excess/(shortfall) (bcm) 0.0 0.0 0.0 0.0 3.3 3.9 -3.8 -11.4 -16.6 -21.8 -27.0
Gas to play a major role towards achieving coal dmd
destruction targets
13 March 2014 17
Fig 33 Beijing, Tianjin, Hebei gas demand
seasonality avg monthly gas demand in winter
months typically ~2.5x than in other months

Fig 34 Gas storage capacity is set to double over the
next two years

Source: NDRC, Interfax, Macquarie Research, March 2014 Source: NDRC, PetroChina, Macquarie Research, March 2014
Fig 35 better utilization of newly commissioned
storage facilities should help alleviate the winter gas
shortages
Fig 36 and the recently commissioned LNG regas
terminals (Tangshan, Tianjin FLNG) provide additional
flexibility to cater to swing demand

Source: NDRC, PetroChina, Macquarie Research, March 2014 Source: WMAC, Macquarie Research, March 2014
To cater to swing demand in Beijing, Tianjin and Hebei, currently there are two gas
storage facilities (Dagang and Huabei) with a combined 5bcm working storage capacity
at end- 2013, or 28% of annual gas demand. For perspective, storage typically accounts
for 10-20% of demand in most developed gas markets. However in 2013, only 2.3bcm of
gas was supplied to these provinces from storage (mainly from Dagang), or 13% of
annual demand. In turn the main reason for the apparent underutilization of storage was
that Huabeis Suqiao expansion project was only commissioned towards the end of the
gas injection season. Further, over the next two years we expect another ~5bcm of
storage capacity to be added in Huabei (Suqiao phase-2, Daxingli phase 1-2) taking total
gas storage capacity to 10bcm by 2015e. Assuming an average 70% utilization rate
for these gas storage facilities, we estimate volumes supplied via storage to
Beijing, Tianjin and Hebei would account for ~20% of annual demand.
In addition we note that the Tangshan and Tianjin LNG regas terminals that started in
Nov-13 should also help cater to swing demand in these provinces.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2012 2013
(bcm)
Beijing, Tianjin, Hebei avg monthly gas demand
Winter (mid-Nov to mid-Mar) Other Months
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
2
4
6
8
10
12
2012 2013 2014e 2015e
(bcm)
Gas storage working capacity
Dagang Huabei Utilization (RHS)
Apparent fall in 2013, due
to commissioning of
Huabei twds end of the
gas injection season
0%
5%
10%
15%
20%
25%
0
1
2
3
4
5
6
7
8
2012 2013 2014e 2015e
(bcm)
Gas storage working capacity
Gas supplied from storage % of BTH gas dmd (RHS)
Gas supplied from storage
should increase to 20% of
annual dmd in 2014/15; in
line with the trend in
developed gas markets...
0%
5%
10%
15%
20%
25%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2012 2013 2014e 2015e
(bcm)
LNG regas volumes
Tangshan Tianjin % of BTH gas dmd
13 March 2014 18
Further, in Jan-14, the NEA published a circular calling for more active management and
increased supervision over local gas supply. In Feb-14, the NEA said that it would
monitor fair/open access to the oil and gas pipeline network and storage facilities
in order to ensure stable supply to the market. To this end the NEA has also set up
six regional supervisory bureaus in North China. In our view open access (if implemented
properly) would be a major positive, since it would provide further gas supply visibility.
Implications for coal demand
Based on the forecast switch from coal-fired boilers to gas, and simultaneous decline in
market share for coal-fired powergen, we forecast coal demand from Beijing, Tianjin and
Hebei to cumulatively decline by 70mt by 2020e (target 63mt by 2017), equivalent to 22% of
coal demand from these provinces. Our base case assumptions imply that Beijing and Tianjin
would largely meet annual coal consumption targets by 2017 solely from increasing the share
of gas in the energy mix, whilst gas would only partly help Hebei wean off its obsession with
coal.
Fig 37 Annual coal demand destruction of 70mt, or 2% of total China demand

Source: CEIC, NDRC, Macquarie Research, March 2014
We estimate that coal consumption in Beijing, Tianjin and Hebei were around 21.5mnt,
50mnt, and 250mnt respectively in 2013. Cutting 63mnt coal consumption by the end of 2017
implies 20% decline from current levels. However, given the fact that the Beijing-Tianjin-Hebei
region only accounted for 8.3% of Chinas total coal consumption in 2013, the impact on coal
demand is not large from a national perspective, and is in line with our forecast that Chinas
coal demand growth will slow down to 2-3% in the next few years.
Oversupply in 2014/15e and mid-term price fluctuation at cost curve: despite slower
demand growth, oversupply may remain in the mid-term due to high capacity growth in
Shanxi. According to Shanxi Coal Mine Safety Supervision, 524 mines are under construction
in the province. Including these, Shanxi has a capacity of 1.2bnt (vs. 910mnt output in 2012).
80 of the 524 mines may start to contribute by 2013 y/e (70-80mnt capacity), with the majority
being coking coal. Under the current weak prices/strict safety rules, there may be delays in
construction; yet these extra capacities should put a ceiling on coal prices, especially coking
coal prices. Mid-term price is likely to fluctuate around the cost curve at Rmb 550-600/t.
Cost curve to drop further in mid-term: Industry consultants CCTD and Fenwei believe
there is room for cost cuts, especially admin costs. Production costs may still be cut by
RMB30-50/t in 2014-15F. Railway bottlenecks are likely to be solved by end-2015, when
major new railways are due to be completed. Resources tax may have limited impact on
thermal coal but the impact may be big for coking coal, likely around 3-5% of mine-mouth
price. However, the government will probably clear up other fees and levies by the end of this
year, so the incremental burden might be limited to ~Rmb 5/t for thermal coal per CCTD and
China Coal. Again, the impact to coking coal may be much bigger.
0%
5%
10%
15%
20%
25%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
2013 2014 2015 2016 2017 2018 2019 2020
(mt)
Cumulative coal demand destruction
Beijing Tianjin Hebei Provincial Target (absolute cut) % of BTH coal dmd (RHS)
13 March 2014 19
Cautious on thermal coal and bearish on coking coal: Taking into account the oversupply
in 2014-15E with large capacity growth in Shanxi restructured mines, Indonesia output growth
and only 2-3% pa demand growth, we maintain our cautious view on the thermal coal sector
and are bearish on coking coal. We see thermal coal fluctuating at the cost curve at
RMB580/t in 2014 (relatively stable y-y) and RMB550/t in 2015, while we cut the China HCC
price by 10-15% for 14/15. We keep our Neutral rating for Shenhua (1088 HK, HK$19.30, TP:
HK$27.00) and China Coal (1898 HK, HK$3.78, TP: HK$4.20), and maintain Yanzhou (1171
HK, HK$5.00, TP: HK$5.00), Fushan (639 HK, HK$2.19, TP: HK$2.10) and Hidili (1393 HK,
HK$0.89, TP: HK$0.60) as Underperform, given our bearish view on HCC, with large
earnings declines forecast in 14-15 (6-53%).
Fig 38 Thermal Coal Cost Curve marginal costs have come down to RMB550-600/t post government initiative
to lower fees & levies on coal and also lower charges

Source: SXCoal, CCTD, Macquarie Research, March 2014

0
100
200
300
400
500
600
700
Shenhua
China Coal
Yanzhou
Hebei small
mines trucked
Other Shanxi
SOE
Shanxi small
mine rail
Inner Mongolia
rail
Inner Mongolia
trucked
Shanxi small
mine trucked
VAT
Transportation
cost
Tax, fees and
others
Cash cost
RMB/t
mnt
13 March 2014 20
Gas supply rising fast but faces midstream
constraints
At present the Kunlun Energy/Beijing Enterprises-operated Shaanjing or Shaanxi-
Beijing gas pipelines cater to more than 90% of gas demand in Beijing, Tianjin and
Hebei. Even with Keqi coal-to-gas, Tangshan and Tianjin LNG regas terminals, these
pipelines would remain the major conduit of supply (70%+) to these provinces until the
end of this decade.
The major sources of gas supply to the Shaanjing pipelines are local production from the
Ordos basin, and gas volumes via the West-East pipelines (in turn supplied by
Turkmen imports and the Tarim basin).
Based only on existing and confirmed new capacity we expect total available gas supply
to these provinces to grow an impressive 17% pa to 53bcm by 2020e.
Our analysis indicates that the gas supply to these provinces could easily increase by at
least another 25bcm (i.e. taking total supply to ~80bcm), if new midstream capacity gets
commissioned.
In 2013, 92% of Beijing-Tianjin-Hebeis combined 18.2bcm gas demand was supplied via the
Kunlun Energy/Beijing Enterprises-operated Shaanjing or Shaanxi-Beijing gas pipelines
(three lines with a current combined 35bcm capacity). The main source of gas supply to the
Shaanjing pipelines is the PetroChina-operated Changqing gas fields in the Ordos basin, with
the remaining volumes sourced from the West-East pipelines (in turn supplied by Turkmen
imports and the Tarim basin). In addition to gas volumes via the Shaanjing pipelines, these
provinces are also served by three small local gas fields (Dagang, Jidong, and Huabei all
operated by PetroChina), Datangs Keqi coal-to-gas (CTG) plant (started in Dec-13),
PetroChinas Tangshan LNG regas terminal (started in Nov-13), and CNOOCs Tianjin
floating LNG regas terminal (started in Dec-13). In fig 39 we summarize the gas supply
outlook for the key fields, LNG regas terminals, CTG plants, supplying Beijing, Tianjin, Hebei.
Fig 39 Beijing, Tianjin and Hebei Gas supply from existing sources and
projects confirmed under construction Shaanjing pipeline volumes dominate

Source: WMAC, Macquarie Research, March 2014

0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
2010 2013 2015 2020
(bcm)
Gas Supply (existing + under construction)
Tianjin LNG (Sinopec)
Tianjin FLNG
(CNOOC)
Tangshan LNG
Local fields (Dagang,
Jidong, Huabei)
Keqi coal-to-gas
Turkmen Imports
(Shaanjing/WEP)
Tarim
(Shaanjing/WEP)
Ordos (via Shaanjing)
Demand Target
Via Shaanjing
Pipelines
13 March 2014 21
The Shaanjing pipelines and J ingbian
Jingbian in Shaanxi province is a major gas transmission hub in China. Gas from the Tarim
basin (Xinjiang, NW China), the Ordos basin (Shaanxi, NW China), and pipe imports from
Turkmenistan via the West-East pipeline (WEP) all converge in Jingbian before reaching the
designated end-markets. Jingbian is also the starting point for the major Shaanjing or
Shaanxi-Beijing pipelines that supply gas to Beijing, Tianjin and Hebei (BTH). Apart from the
BTH market, the Shaanjing pipelines also supply gas to Jiangsu and Shandong, via a spur-
line from Anping in Hebei. While the Ordos basin will likely continue to supply the bulk of
Shaanjings gas volumes, we note that increasingly gas from the Tarim basin and pipe
imports via the West-East pipeline (Shanghai, Guangdong primary end-markets) would also
flow via the Shaanjing pipeline.
Fig 40 Gas supply options for Beijing-Tianjin-Hebei

Source: Wood Mackenzie, Macquarie Research, March 2014. Note: Shaanjing pipelines also known as Shaanxi-Beijing pipelines
Existing sources of gas supply
1) PetroChina Ordos basin (Changqing gas fields) via Shaanjing pipelines
Nearly two-thirds of overall Shaanjing pipeline volumes flow to Beijing, Tianjin and
Hebei; with the remainder flowing to Jiangsu and Shandong. In turn, Ordos basin gas
is responsible currently responsible for nearly two-thirds of gas supply to the
Shaanjing pipeline, however this should decline to ~50% by 2020 as the share of
Tarim and Turkmen imports rises.
Turkmen gas imports and
indigenous production from
Tarim basin flows via the West-
East pipelines to Jingbian
Jingbian (Shaanxi) is a major gas hub
from where gas could be sent to
Beijing-Tianjin-Hebei via the
Shaanxi-Beijing pipeline; Shanghai
via WEP1; Guangdong via WEP2
Shaanjing pipelines
Ordos Basin
Ordos basin gas production
flows to Jingbian
Tangshan, Tianjin,
Dalian LNG
Ordos as % of 2014e supply
Ordos
66%
13 March 2014 22
Fig 41 A closer look at Shaanjing pipelines

Source: Wood Mackenzie, Macquarie Research, March 2014
Over the past three years, the Changqing gas fields in the Ordos basin (Shaanxi
province, North-West China) have witnessed a 1.6x rise in gas production and have
been responsible for a bulk of overall Chinese gas production growth. Gas production
from Changqing is dominated by the Sulige field Chinas largest onshore gas field
(20bcm in 2013) although there are many other gas discoveries in the basin
awaiting development, e.g. South Sulige (PetroChina/Total).
We estimate that, at present, nearly two-thirds of gas from the Ordos basin flows via
the Shaanjing pipelines (fig 43), with the remaining gas catering to local demand in
Shaanxi and neighbouring Ningxia. Gas from Changqing could also serve Shanghai
and Guangdong via the West-East 1 and 2 pipelines, respectively.
In 2013, gas production from Changqing grew 20% y/y to reach 34bcm. We expect
PetroChina to focus the bulk of its upstream gas capex towards further developing its
flagship Changqing gas fields (770bcm remaining 2P reserves) and forecast 9% pa
production growth over the next two years, to 40.7bcm by 2015e (PetroChina
targets 41.5bcm by 2015).
Overall, Shaanxi province expects local gas production (Changqing and others) to
reach 45bcm in 2015, of which 15bcm is planned for local use and the remaining
30bcm for sale to other provinces, mainly via Shaanjing.
Fig 42 Shaanjing volumes by end-markets: a majority
of volumes flows to Beijing, Tianjin, Hebei

Fig 43 Shaanjing volumes by source: Ordos basin
and gas via the West-East pipelines matter most

Source: WMAC, NDRC, Macquarie Research, March 2014 Source: WMAC, NDRC, Macquarie Research, March 2014
Gas from West-
East Pipelines
(Tarim, Turkmen
Imports)
Ordos Basin Gas
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(bcm)
Shaanjing Pipeline Vols by End-Market
Beijing, Tianjin, Hebei Jiangsu Shandong
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(bcm)
Shaanjing Pipeline Vols by Gas Source
Ordos Basin WEP (Imports, Tarim basin)
Tangshan LNG regas Unrisked additional WEP vols
Capacity
Line 4 start-up
13 March 2014 23
Fig 44 Nearly two-thirds of gas volumes from Ordos
sold via Shaanjing pipelines
Fig 45 Ordos basin gas production to rise 8% pa over
the next two years driven by start-up of new fields

2) PetroChina-operated gas fields in Tianjin, Hebei
Dagang and Huabei oilfields in Tianjin and Hebei provinces respectively have been
producing oil for nearly 40 years, with associated gas production from the field
catering to local demand. The gas produced from the Dagang field caters to demand
in Cangzhou (via the Banqiao-Cangzhou pipelines), while that from Huabei flows to
Beijing via two 70km pipelines. We forecast gas production from these fields to
remain broadly flat at 1.2bcm until 2015, and thereafter decline at c.5% pa. At
present Huabei has 3bcm of gas storage capacity (7.3bcm by 2015e), and a 180km
pipeline links the Shaanjing pipelines to gas storage in Dagang (2.2bcm today rising
to 2.7bcm by 2015e).
Jidong gas field in Tianjin has seen 15% pa production growth over the past three
years to 0.7bcm in 2013. We expect production to decline at c.2% pa from current
levels.
3) Keqi coal-to-gas from Inner Mongolia via the new Keqi-Beijing pipelines
Datang Powers Keqi coal to gas (CTG) project was the first large-scale project
(US$4.2bn cost) to be approved by the NDRC, with commercial operations starting in
Dec-13. The Keqi project is split into three phases with 1.2bcm/yr to be supplied in
phase-1 (planned capacity 4bcm) via a newly constructed 490km pipeline running
from Keqi to Beijing. At the time of commissioning the Keqi plant, Datang also signed
a 30-year gas off-take agreement with PetroChina. Under this agreement,
PetroChina will sell the gas, likely via Beijing Enterprises, to end-customers in
Beijing, and in return Datang will get a fixed tariff of Rmb2.75/cu.m till 2016, and a
market price thereafter.
4) LNG Tangshan (PetroChina), Tianjin FLNG (CNOOC)
Tangshan/Caofeidian LNG (3.5mtpa/4.8bcm, start-up Nov-2013, PetroChina
51%, Beijing Enterprises 49%). The Tangshan LNG regas terminal in Hebei
province started up in Nov-13, with first volumes flowing from Qatar. PetroChina
operates the terminal, but as was the case with the Rudong and Dalian LNG
terminals, we expect the Tangshan terminal to be injected to Kunlun Energy; albeit
this would likely be done at a fair market valuation rather than 1x book, as was the
case in the past. Associated with the regas terminal are a 9bcm/129km trunk line and
a 3.5bcm/28km spur line to feed Hebei and Tianjin. There are plans to increase
terminal capacity to 6.5mtpa (8.8bcm), and eventually to 10mtpa (13.5bcm), but
PetroChina has made no firm investment decision on these expansion projects as
yet.
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2010a 2013a 2015e 2020e
(bcm)
Ordos (Changqing) gas by end-market
Vols via Shaanjing to BTH, Other Local use in Shaanxi
0.0
10.0
20.0
30.0
40.0
50.0
60.0
bcm
Ordos (Changqing) gas production outlook
Sulige South Sulige Jingbian/Yulin/Mizhi Changbei Others
Local fields (% of 2014 supply)
Local
Fields
5%
Keqi CTG (% of 2014 supply)
Keqi
3%
LNG regas (% of 2014 supply)
LNG
regas
13%
13 March 2014 24
Tianjin FLNG - CNOOC (2.2mtpa/3.0bcm, start-up Dec-13, CNOOC 100%).
CNOOC commissioned Chinas first floating LNG receiving and storage facility
(FSRU) in Dec-13. CNOOC plans to expand capacity at the terminal to over 6mtpa
(8.1bcm), but this would likely come in 2018+. The terminal would supply gas to an
integrated petchems and industrial park (Lingang Economic Zone) and residential
customers in Tianjin.
Fig 46 LNG regas terminals supplying Beijing-Tianjin-Hebei

Source: Wood Mackenzie, Macquarie Research, March 2014
Potential incremental sources of gas supply
1) West-East pipelines (Tarim basin, Turkmen imports) feeding Shaanjing pipelines
The West-East pipelines (WEP) already supply c.8bcm of gas via the Shaanjing
pipelines, with 6bcm going to Jiangsu and 2bcm to Shandong. WEP is the backbone of
Chinas gas transmission network, and at present there are two lines operational: WEP-1
(15bcm capacity, started 2004) transports gas from Lunnan in Xinjiang (NW China) to
Shanghai on the east coast 4000km away, also serving Anhui, Henan, Jiangsu, and
Zhejiang en route; WEP-2 (30bcm capacity, started 2009) transports gas from Horgos
(Xinjiang) on Chinas border with Kazakhstan to Guangdong (South China). A third line,
WEP-3 (35bcm from Xinjiang to Fujian), is under construction with first volumes expected
in 2015. While Beijing, Tianjin and Hebei are not the main designated end-markets for
WEP, it is important to note that these provinces still receive gas from WEP via the
connection in Jingbian (starting point of the Shaanjing pipelines). The main sources of
gas for WEP are: a) local production in the Tarim and Junggar basins, and
b) pipe imports from Turkmenistan (fig 47).
WEP (% of 2014 supply)
WEP - Tarim,
Turkmen
Imports
13%
13 March 2014 25
The Tarim basin is already the largest contributor of domestic gas, and will supply a
major portion of the West-East pipelines throughput in the coming years. PetroChina
is the main operator in Tarim and has three large fields, including, Kela-2, Dabei-1,
and Keshen. We forecast Tarim gas production grow 12% pa over the next two years
to 25.8bcm in 2015, mainly driven by the ramp-up in Dabei-1 and Keshen gas fields.
Gas from the Tarim basin is consumed locally in Xinjiang as well as sent to its end-
markets on Chinas east coast via the WEP.
Gas imports from Turkmenistan. China imported 25bcm of gas from
Turkmenistan in 2013, equal to 15% of overall Chinese gas supply. We expect
imports from Turkmenistan to increase by 5bcm pa to reach 65bcm by 2020 as the
Galkynysh gas field ramps up. As we noted for gas production from Tarim, pipe
imports from Turkmenistan could also flow to Beijing, Tianjin and Hebei via the
Shaanjing pipelines.
Fig 47 West-East pipelines (WEP) supplied by gas
from Tarim basin and Turkmen imports
Fig 48 Gas via WEP flows to multiple end-markets,
including potentially Beijing, Tianjin, Hebei

2) Sinopec Daniudi gas field (Ordos basin)
The Daniudi gas field in Inner Mongolia has been producing gas since 2005 and is
Sinopecs third-largest gas field behind Puguang and Yuanba (both in Sichuan).
Production from Daniudi has grown 19% cagr over the past three years, to 3.4bcm in
2013. We note that production was particularly strong in 2013 following the start of
horizontal drilling by Sinopec in this field. Gas from Daniudi mainly caters to demand
in Shandong via the 1045km Yulin-Jinan pipeline operated by Sinopec. However,
with the National Energy Administration (NEA) starting to implement pipeline open
access, gas from Daniudi, in theory at least, could flow to Beijing from Yulin via the
Shaanjing pipelines. Further, in 2013 Sinopec signed an agreement with Hebei
province to build three new off-take pipelines with a combined 8bcm capacity.
3) LNG Tianjin (Sinopec, 2017+), Dalian (Kunlun)
Tianjin LNG - Sinopec (3.0mtpa/4.1bcm, expected start-up 2017, Sinopec
100%). Sinopec started construction of its 3mtpa Tianjin LNG regas terminal in Sept-
13, with an expected start-up in early 2017. Associated with the terminal, Sinopec
also plans to construct 700km of pipelines to supply the BTH region as well as
Shandong. There are preliminary plans to expand capacity of this terminal to 10mtpa.
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(bcm)
West-East pipeline volumes by gas source
Tarim Basin (Kela, Dena, Dabei etc) Pipe Imports (Turkmenistan, K'stan)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
2013 2014 2015 2016 2017 2018 2019 2020
bcm
West-East Pipeline Vols by Province
Remaining available
Jiangxi
Hunan
Gansu
Anhui
Hubei
Ningxia
Shanxi
Shaanxi
Fujian
Guangxi
Zhejiang
Shanghai
Shandong
Henan
Guangdong
Jiangsu
Vols that could be
diverted to other
demand centers (eg.
Beijing, Tianjin,
Hebei)
13 March 2014 26
Dalian LNG (3.0mtpa/4.1bcm, start-up Nov-11, Kunlun 75%, Dalian Port/Others
25%). The Dalian LNG regas terminal started up in Nov-11, with a majority of the
LNG supplied coming from Qatar. At present all the re-gassified LNG flows via a
389km pipeline to residential and industrial customers in Liaoning province (Anshan,
Benxi, Fushun, Liaoyang, Shenyang). While there are no flows from the Dalian
terminal to Beijing at the moment, conceivably some of the LNG arriving at Dalian
could be used to cater to swing demand in the region. There are preliminary plans to
double capacity to 6mtpa, but this is still subject to approvals.
4) Russia (2018+)?
China could/may formalize its MoU with Gazprom (re-signed Mar-13) for 38bcm
of gas supply from Russias East Siberia gas fields, with first gas 2018+. While
Russia-China gas discussions have been ongoing since 2006, with Gazprom
increasingly facing competition from Qatari LNG to supply a stagnant European gas
market, its only now that things appear to be moving ahead with the resigning of the
MoU in Mar-13, agreement on technical specs in Sept-13, and discussion on pricing
are still underway.
5) Coal bed methane (CBM)?
China has been trying to commercialize CBM since the late-1990s, yet in 2012 CBM
production was an insignificant 1.7bcm or 1.5% of overall domestic supply due to
multiple unresolved challenges, including heavy faulting, low permeability, brittle coal
seams, regulatory issues, and an unreliable state partner in CUCBM). CBM
production in China is concentrated around Shanxi and Henan, and the blocks are
operated by the small independents (Green Dragon Gas, Asian American Gas, Sino
Gas & Energy, etc) as well as PetroChina.
Despite policy support (CBM subsidy increased to Rmb0.4/cu.m, no VAT on
equipment imports, four ODPs awarded over the past two years), and CNOOC taking
a 70% stake in CUCBM, we forecast actual gas production to fall short of
government and PetroChina targets. We forecast 3bcm/8bcm in 2015/20e versus the
government target of 16.0bcm production capacity by 2015 and PetroChinas target
of 5bcm.
At present the CBM produced is mainly used locally in Shanxi and Henan provinces.
However, if CBM production does ramp up per government expectations, then the
gas could be tied into the Shaanjing pipeline system, via Yulin or Jingbian, and sold
to Beijing, Tianjin and Hebei.
6) Sinopec Xinjiang coal-to-gas (2017+)?
Sinopec has received approvals for its 30bcm Zhudong coal-to-gas plant in Xinjiang
(US$30bn planned capex), and associated Xinjiang to Zhejiang 30bcm pipeline and
4.5bcm gas storage facilities. This new pipeline would essentially complement
Sinopecs existing Sichuan-East pipelines. While at present there are no plans to
direct gas volumes from this project to the BTH market, conceivably a spur line could
be commissioned if demand in these provinces ramps up above the provincial
targets.
7) Sinopec shale gas?
Following the recent success in the Fuling block (Chongqing), in Dec-13, Sinopec
increased its shale gas production target to 3.3bcm in 2015, from 1.7bcm. However,
while the governments 6.5bcm shale gas production target for 2015 may be
achievable, we think its still too early to get excited about the governments 60-
100bcm target for 2020 (MQe 10-15bcm). Separately, we note that a majority of
Sinopecs gas acreage in Chongqing would be used locally as well as sold via
Sinopecs Sichuan-East pipeline system that is at present not connected to the
Beijing-Tianjin-Hebei market. For full details on our outlook for Chinese shale gas,
see pages 39-46 in Chinas Gas Choices - Light My Fire

13 March 2014 27
The choices to achieve government targets
Putting our supply-demand work together, we conclude that Beijing, Tianjin and Hebei will
face a supply shortage of 13-31bcm or 23-37% of the government demand target
between 2017-20e.
The key bottleneck for these provinces is insufficient midstream infrastructure
(pipelines, LNG regas terminals, gas storage), rather than a lack of gas supply.
If Beijing, Tianjin and Hebei really want to improve air quality, via increased gas usage,
then in our view Shaanjing line 5 (on top of line 4 currently under construction) and LNG
regas expansion projects should break ground shortly.
Our forecast gas shortage dynamic structurally underpins gas volume growth for the
Shaanjing pipelines, and consequently for Kunlun Energy (Macquarie Marquee Buy
Idea) and Beijing Enterprises (not rated). In addition, we highlight that China Suntien
would directly benefit from its leveraged downstream gas exposure in Hebei.
Putting our demand and supply work for Beijing, Tianjin and Hebei in the previous sections
together, we forecast gas demand to grow 21% cagr to 70bcm by 2020 (provincial target
84bcm), while gas supply from existing sources rises 17% cagr to 53bcm, with the key
bottleneck being midstream infrastructure (pipelines, LNG regas terminals), rather than a lack
of gas supply. We conclude that unless new midstream projects are commissioned (e.g.
Shaanjing line 5, 15bcm) these provinces will face a supply shortage of 13-31bcm or 23-37%
of the government demand target between 2017-20e (fig 50).
Fig 49 Beijing, Tianjin, Hebei Gas Supply-Demand:
rising demand meets constrained supply due to
infrastructure bottlenecks
Fig 50 leading to an implied gas shortage of more
than one-third of the govt demand target a lot of new
infrastructure has to be commissioned soon!

Beijing, Tianjin and Hebeis gas choices
In order for Beijing, Tianjin and Hebei to realize gas demand targets, and consequently
PM2.5 and coal demand destruction targets, we think the following has to happen:
1. Shaanjing pipeline line-5 is commissioned (+15bcm)
At present the Shaanjing pipeline has 35bcm capacity running at ~70% utilization
rates. Construction on Line-4 for Shaanjing is under way and would add 15bcm
capacity by 2H15E. In our base case we model overall volumes flowing via
Shaanjing to ramp up from 25bcm in 2013 (of which ~70% to Beijing, Tianjin, Hebei)
to 49bcm in 2020e, implying 97% utilization rates in 2020e. While the prospects of
Shaanjing line-5 (another 15bcm) have always been on the cards, as of now no firm
investment decision has been taken.
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(bcm)
Beijing, Tianjin, Hebei Demand-Supply Summary
Supply: existing + confirmed MQe Dmd
Govt Dmd Targets
A widening gap due to midstream
infrastructure bottlenecks, rather
than lack of supply...
-35.0
-30.0
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
2014 2015 2016 2017 2018 2019 2020
(bcm) Implied Gas Excess/(Shortfall)
MacQ Govt Targets
Shaanjing line 4 and line 5, LNG
regas expansions, Keqi CTG
expansion (?), Russia (?) all need to
be considered (soon!) to bridge the
widening gap...
13 March 2014 28
In our view, if Beijing, Tianjin and Hebei want to meet their PM2.5 and gas demand
targets then we think Shaanjing line-5 has to happen. In Fig 51, we show the
potential ramp-up in Shaanjing pipeline capacity and the available gas supply
options. As we noted in the supply section on page 25, after factoring in the local
demand/supply targets for the other major provinces that source gas from WEP, we
see an average 20bcm of gas volumes that could be diverted from WEP to the
Shaanjing pipelines between 2015-20e. Consequently assuming a majority of this
20bcm available gas supply from WEP gets allocated to Shaanjing, we think line-5 if
commissioned in 2018 could ramp up to 90%+ utilization rates by 2020, and Beijing-
Tianjin-Hebeis 31bcm supply shortfall in our base case would reduce to
15bcm.

Fig 51 If Shaanjing line-5 gets commissioned
Fig 52 then, Beijing, Tianjin, Hebeis implied gas
shortfall could be halved versus the base case

Source: WMAC, Macquarie Research, March 2014 Source: WMAC, Macquarie Research, March 2014
Will the gas volume slowdown experienced by Shaanjing in 2013 likely persist?
Gas volumes in Shaanjing grew by ~5% y/y in 2013, against consensus expectations
of 15-20% y/y volume growth at the start of the year. In our view this was mainly due
to the limited incentive for PetroChina to raise gas supply ahead of the much-
anticipated gas price hike announcement. In our view the impact of slower gas
volume growth will likely not persist, given that:
o A) Notwithstanding the new sources of supply to Beijing, Tianjin and Hebei (see
pa 21-26), the Shaanjing pipelines will remain the major source of gas
supply to the region. So if these provinces are indeed going to do something
about their pollution problems, then gas volumes via Shaanjing simply have to
ramp up.
o B) There is a strong top-down directive from Chinas NDRC and NEA (National
Energy Administration) to ensure the SOE oil companies adhere to their
volume commitments. In Jan-14, the NEA published a circular calling for more
active management and increased supervision over local gas supply. In Nov-13,
the NDRC directed the SOEs to run all their gas fields at maximum capacity and
also accelerate new gas field development.
o C) Further, in February the NEA said that it would monitor fair/open access to
the oil and gas pipeline network and storage facilities in order to ensure
stable supply to the market. To this end the NEA has also set up six regional
supervisory bureaus in North China. In our view open access (if implemented
properly) would be a major positive since it would provide further gas supply
visibility. For instance, open access would imply that Sinopec, CNOOC, and the
other smaller independent producers (eg. CBM in Shanxi, Henan) would be able
to monetize their gas via the Shaanjing pipelines, assuming there is spare
capacity.
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(bcm)
Capacity
Line 4: confirmed and
under construction
Assuming Line 5
gets commissioned
-35.0
-30.0
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
2014 2015 2016 2017 2018 2019 2020
(bcm)
MQ base case MQ base + Shaanjing Line-5
Shaanjing Line-5 has to
be built if the provincial
dmd targets are to be
met, in our view
13 March 2014 29
Stock Implications: Our forecast gas shortage structurally underpins gas volume
growth for the Shaanjing pipelines at least until the end of this decade and
consequently for Kunlun Energy (Macquarie Marquee Buy Idea). We raise our
price target to HK$22.0/sh, as we increase our 2015e EPS forecasts by 4% and
target 2015 PE to 15.8x (from 15x prior). We note that our 2015e EPS forecasts for
Kunlun are 20% above consensus and the highest on the street, and incremental
potential pipeline volumes would represent further earnings upside for Kunlun (gas
pipelines ~50% of group EPS). In the downstream, we highlight that China Suntien
would directly benefit from its leveraged exposure to the Hebei gas market; also
China Resources Gas would benefit from higher volumes to Tianjin.
2. LNG regas terminal expansion projects all go ahead (9bcm)
At present, the two existing LNG regas terminals (Tangshan and Tianjin FLNG)
serving the Beijing-Tianjin-Hebei market have a combined capacity of 7.7bcm
(5.7mtpa), and Sinopecs Tianjin LNG terminal that is currently under construction
would add another 4bcm in 2017. Our base case gas supply shortfall of 31bcm in
2020 assumes all these regas terminals ramp up to full capacity. At present,
PetroChina has tentative plans (no FID or government go-ahead as yet) to increase
the capacity at Tangshan to 8.8bcm (6.5mtpa), and CNOOC plans to increase
capacity at Tianjin FLNG to 8.1bcm (6mtpa). If all these capacity additions actually
go ahead and ramp up to full capacity by 2020, they would add 9bcm of gas supply
to Beijing, Tianjin and Hebei. Consequently, if we put these LNG regas terminal
expansions together with Shaanjing line-5, then our forecast 31bcm shortfall in the
base case could be largely bridged.
Separately, Macquaries global LNG analyst Adrian Wood notes that a complete
reliance on LNG imports to bridge 31bcm shortfall appears unlikely for a number of
reasons. Significant expansion of regas capacity (beyond existing facilities and
current expansion proposals) would be required. Furthermore, regas capacity is
unlikely to run a 100% utilisation, as some capacity is likely to be preserved for swing
loads during winter. While pricing remains the major hurdle regarding the China-
Russia pipeline deal, with North Asian spot LNG pricing reaching >U$19/mmbtu over
last winter, a growing reliance on LNG could see these negotiations accelerated.
Finally, authorities are unlikely to want to lock in 20-year plus high cost LNG off-take
agreements for what appears to be a temporary shortfall and the global LNG spot
market is unlikely to have sufficient depth to absorb such a large requirement (given
we estimate this would represent ~25% of total spot volumes by 2020).
Stock implications: In our view, as was the case with the Rudong and Dalian LNG
terminals, we expect the Tangshan terminal to be injected to Kunlun Energy at some
stage. Consequently we see potential upside to our regas volume assumptions for
Kunlun. Also the dynamic of rising LNG needs could justify the signing of further
LNG contracts by PetroChina (formalize 2.7bcm Qatargas-4 MoU, Yamal LNG,
Vladivostok LNG? etc), while CNOOC (terminals operated by the parent) still has
adequate LNG options to cater to its existing confirmed projects.
Fig 53 PetroChina regas volumes vs contracts one
new LNG contract likely to be signed
Fig 54 CNOOC regas volumes vs contracts lots of
options still available

0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
2013 2014 2015 2016 2017 2018 2019 2020
(bcm) PetroChina regas vols vs contracts
Qatargas 4 Gorgon
Qatargas 4 (MoU) Est. Regas Vols
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
2013 2014 2015 2016 2017 2018 2019 2020
CNOOC regas vols vs contracts
North West Shelf Qatargas-3
Qatargas-2 Tangguh
Yemen LNG QCLNG
Qatargas-3 - MOU Est. Regas Vols
Risked Regas vols (incl proposed)
13 March 2014 30
Fig 55 If the 31 bcm shortfall was filled via LNG, this
would fill 36% of the expected Chinese LNG demand by
2020
Fig 56 But these provinces simply could not reply on
the spot market to fill what appears to be a temporary
gap

3. Russia standalone could balance the market, but negotiations on pricing still the
major hurdle.
A formalization of the Chinas agreement with Russia on its own would completely
solve the implied gas shortage for these provinces. If China formalizes its MoU with
Gazprom (re-signed Mar-13) for 38bcm of gas supply from Russias East Siberia gas
fields, we could expect first gas 2018+. While newsflow over the past year would
suggest that Russia-China discussions are finally moving ahead (after nearly a
decade), with the resigning of the MoU in Mar-13, agreement on technical specs in
Sept-13, we note that pricing still remains the major hurdle to finalizing any deal.
Stock Implications: In our base case we assume zero pipe imports from Russia till
the end of this decade. If this deal were to be finalized, then in our view it would likely
be PetroChina which spends the bulk of the pipeline capex, despite its new-found
enthusiasm for mixed ownership reform and social investors. Consequently a
Russian gas deal would likely serve as another headwind to PetroChinas
precariously poised stretched free cash flow, balance sheet and ROCE
situation for several years. Even if and when such gas started flowing, it could still
be loss-making in 2018 unless city gate gas prices rise ~60% from current levels.
4. Better utilization of existing and new storage facilities to cater to winter demand
As we noted on pages 16-18, we expect the amount of gas supplied to these
provinces via storage to increase to 7bcm by 2015e, or 20% of annual demand, as
the utilization of newly commissioned storage facilities ramps-up. For perspective,
storage typically accounts for 10-20% of demand in most developed gas markets. In
addition we note that the Tangshan and Tianjin LNG regas terminals that started in
Nov-13, should also help cater to swing demand in these provinces. Further, we think
the recent announcement by the NEA (Chinas energy watchdog) to monitor
fair/open access to the oil and gas pipeline network and storage facilities is a major
positive, since it should provide further gas supply visibility.
Stock Implications: We expect a ramp-up in utilization rates at the newly
commissioned gas storage facilities and LNG regas terminals should increasingly
help alleviate concerns around winter gas shortages for companies operating in
these provinces, such as Great Wall Motors.
0
20
40
60
80
100
120
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0
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2
0
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0
Chinese LNG demand
Implied shortfall from Beijing, Tianjin & Hebei bcm
0%
5%
10%
15%
20%
25%
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2016 2017 2018 2019 2020
Implied shortfall (LHS) % of Global spot LNG market (RHS)
bcm
bcm

M
a
c
q
u
a
r
i
e

R
e
s
e
a
r
c
h

C
h
i
n
a
s

G
a
s

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o
i
c
e
s

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3

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a
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0
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4

3
1

Fig 57 Beijing, Tianjin and Hebei Gas Demand Summary Outlook

Source: NDRC, WMAC, Interfax, C1 Energy, Macquarie Research, March 2014. Macquarie Estimates 2014+
BEIJING 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2013-20
CAGR
Comments
Industrial (bcm) 0.3 0.4 0.5 0.7 0.7 0.9 0.9 1.5 2.9 3.7 4.4 5.1 5.6 6.1 6.7 7.4 14% Ban coal boilers 4th ring road 2014; 6th ring road 2015
NGVs (bcm) 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.4 0.6 0.9 1.2 1.4 1.7 1.9 2.2 28% Half of target 200K new energy vehicles gas-based
Others (bcm) 1.4 1.3 1.3 1.6 1.7 1.8 1.7 1.9 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6
Beijing Gas Demand (bcm) 3.1 3.8 3.9 5.2 6.1 6.8 6.9 8.4 9.6 12.0 15.3 17.2 18.6 20.8 22.9 25.1 15%
Y/Y growth % 25% 2% 33% 16% 12% 1% 22% 14% 25% 28% 13% 8% 12% 10% 10%
Gas Dmd Targets/Research Institute Ests (bcm) 9.6 11.5 20.0 24.0 30.0
of which winter (Nov-Mar) gas dmd ests (bcm) 4.7 5.3 6.6 7.8 9.9 12.1 16.3 50%+ annual dmd in winter months mid-Nov to mid-Mar
Overall coal dmd destruction target 2012-17 (mt) 13.0 Target 3mt cut in 2014; 13mt between 2012-17e
TIANJIN 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2013-20
CAGR
Comments
Industrial (bcm) 0.4 0.5 0.7 0.9 0.9 1.3 1.5 1.7 2.2 2.9 3.6 4.6 5.0 5.5 6.1 6.7 17% Conv of 163 boilers to gas & GDP led organic growth
Others (bcm) 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Tianjin Gas Demand (bcm) 0.9 1.1 1.4 1.7 1.8 2.3 2.6 2.8 3.4 6.1 9.1 11.7 13.3 14.8 16.8 19.3 28%
Y/Y growth % 24% 27% 18% 8% 27% 11% 10% 21% 79% 50% 28% 14% 11% 14% 15%
Gas Dmd Targets/Research Institute Ests (bcm) 3.4 12.3 16.8 23.6
of which winter (Nov-Mar) gas dmd ests (bcm) 1.0 1.2 3.2 4.7 6.8
Overall coal dmd destruction target 2012-17 (mt) 10.0 Target 10mt cut between 2012-17e
HEBEI 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2013-20
CAGR
Comments
Industrial (bcm) 0.8 1.0 1.1 1.5 1.7 2.1 2.5 2.8 3.2 4.4 5.5 6.6 7.9 9.3 10.9 12.6 22% Conv of ~1000 remaining boilers to gas by 2017e
Others (bcm) 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Hebei Gas Demand (bcm) 0.9 1.1 1.2 1.7 2.3 2.9 3.5 4.6 5.2 6.8 9.3 12.4 15.0 18.7 22.2 26.1 26%
Y/Y growth % 20% 10% 42% 35% 28% 19% 30% 15% 30% 36% 34% 21% 25% 19% 17%
Gas Dmd Targets/Research Institute Ests (bcm) 5.2 15.0 30.0
Overall coal dmd destruction target 2012-17 (mt) 21% 21% 40.0 Target 8mt reduction in 2014; 40mt between 2012-17e (incl wind)
BEIJING, TIANJIN, HEBEI 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2013-20
CAGR
Comments
Total Demand (bcm) 4.9 6.1 6.6 8.6 10.2 12.0 12.9 15.8 18.2 24.8 33.7 41.3 47.0 54.3 62.0 70.5 21%
Incremental demand y/y (bcm) 1.2 0.5 2.0 1.6 1.9 0.9 2.8 2.4 6.7 8.8 7.6 5.7 7.3 7.6 8.6 Avg 7.5bcm pa incremental gas dmd growth
Y/Y growth % 24% 8% 31% 18% 18% 7% 22% 15% 37% 35% 23% 14% 16% 14% 14%
% of overall China gas demand 10% 11% 9% 11% 11% 11% 10% 11% 11% 13% 15% 17% 17% 17% 18% 18%
Gas Dmd Targets/Research Institute Ests (bcm) 4.9 6.1 6.6 8.6 10.2 12.0 12.9 15.8 18.2 25.2 32.3 44.1 55.8 65.1 74.3 83.6 MQe lower due to conservative industry/power assumptions
Cumulative Coal Dmd Destruction (mt) 9.3 17.4 29.8 39.4 45.3 54.5 61.9 69.5
% of total Beijing-Tianjin-Hebei coal dmd 2% 5% 8% 11% 13% 16% 19% 22%
Overall coal dmd destruction target 2012-17 (mt) 63.0
Total risked supply to Beijing-Tianjin-Hebei (bcm) 12.0 12.9 15.8 18.2 28.1 36.0 39.4 42.8 46.2 49.7 53.1 17%
MacQ - Implied gas excess/(shortfall) (bcm) 0.0 0.0 0.0 0.0 3.3 2.3 -1.9 -4.2 -8.1 -12.3 -17.4 Excess implies gas diverted to other provinces
Govt Targets - Implied gas excess/(shortfall) (bcm) 0.0 0.0 0.0 0.0 2.9 3.7 -4.7 -13.0 -18.9 -24.7 -30.5
Gas to play a major role towards achieving coal dmd destruction
targets

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Fig 58 Beijing, Tianjin and Hebei Gas Supply Summary Outlook

Source: WMAC, Interfax, C1 Energy, Macquarie Research, March 2014

Gas Source Key Supply Sources Operators
Remaining
2P Reserves
(bcm)
2010a
Supply
(bcm)
2013e
Supply
(bcm)
2015e
Supply
(bcm)
2020e
Supply
(bcm)
Gas processing
facilities
Offtake Pipelines;
Regas Terminals
Midstream Operators
Pipeline, Regas
Capacity (bcm)
End-markets
Beijing-Tianjin-
Hebei key end-
markets?
EXISTING +UNDER CONSTRUCTION
Ordos Basin P'China (Shaanxi)
Sulige, South Sulige,
Jingbian, Yulin, Changbei
PetroChina 773 21.0 34.3 40.7 51.9 37bcm processing capacity Shaanjing Pipelines
Kunlun Energy, Beijing
Enterprises
35bcm; line-4 15bcm (end-
15); line-5 15bcm 2017(?*)
Beijing, Tianjin, Hebei,
Shaanxi, Ningxia
Yes
Dagang (Hebei) Dagang PetroChina 8 0.4 0.4 0.4 0.3 Banqiao processing facils Banqiao-Cangzhou PetroChina 0.4 bcm gas storage Cangzhou, Tianjin Yes
Jidong (Tianjin) Jidong, Nanpu PetroChina 11 0.4 0.6 0.5 0.4 na Local network PetroChina na Tianjin Yes
Huabei (Hebei) Huabei PetroChina 4 0.4 0.4 0.3 0.3 na Local network PetroChina 2.7 bcm gas storage Beijing Yes
Caofeidian (Taangshan) LNG -
phase 1
P'China LNG portfolio
(Qatargas-4, Gorgon)
PetroChina nmf 0.0 0.0 4.7 4.7 4.7 bcm regas capacity
Langfang-Tangshan-
Qinhuangdao
PetroChina, Beijing
Enterprises
9bcm trunklines; 3.5bcm
spurlines
Hebei, Tianjin, Beijing Yes
Keqi CTG Coal-to-gas Keqi Datang nmf 0.0 0.0 2.5 4.0 4bcm plant capacity Keqi-Beijing PetroChina na Beijing Yes
Tianjin FLNG - phase 1
CNOOC LNG portfolio
(QCLNG, NWS)
CNOOC nmf 0.0 0.0 3.0 3.0 3.0 bcm regas capacity Local network CNOOC na Tianjin Yes
Ordos Basin Sinopec, Shaanxi Daniudi, Zhenjing Sinopec 40 2.3 2.8 6.0 10.0 na
Yulin-Jinan; Shaanxi-
Beijing
Sinopec, PetroChina
3bcm Yulin-Jinan; 8bcm
under const
Shandong, Inner Mongolia,
Hebei
No
Tianjin LNG - Sinopec
Sinopec LNG portfolio
(APLNG, PNG LNG)
Sinopec nmf 0.0 0.0 0.0 4.0 4.0 bcm regas
8bcm/700km pipelines
under construction
Sinopec na Tianjin, Hebei, Beijing Yes
Unattributed Total Supply from Existing Sources 24.5 38.5 58.1 78.6
...of which, supply to Beijing, Tianjin, Hebei 12.0 18.2 32.4 42.8
POTENTIAL INCREMENTAL VOLS FROM WEST-EAST PIPELINES
Turkmen imports
Galkynysh, Sag Kenar,
Karachaganak
Turkmengaz,
CNPC/PetroChina
2800 2.5 20.1 40.0 65.0
Tarim basin (ex local use) Dabei, Keshen, Kela PetroChina 245 19.5 22.1 25.8 34.8
West-East Pipelines (Total) PetroChina 22.0 42.2 65.8 99.8
WEP vols available after allocation to main end-markets 17.9 25.6
of which, supply to Beijing, Tianjin, Hebei 3.6 10.2
POTENTIAL NEW SUPPLY SOURCES
Caofeidian (Taangshan) LNG -
phase 2 (?*)
P'China LNG portfolio
PetroChina nmf 0.0 0.0 0.0 4.1 Phase 2 expn +3bcm
Langfang-Tangshan-
Qinhuangdao
PetroChina, Beijing
Enterprises
9bcm trunklines; 3.5bcm
spurlines
Hebei, Tianjin, Beijing Yes
Tianjin FLNG - phase 2 (?*)
CNOOC LNG portfolio
(QCLNG, NWS)
CNOOC nmf 0.0 0.0 0.0 4.1 Phase 2 expn +3bcm Local network CNOOC na Tianjin Yes
Tarim Basin Sinopec, Xinjiang
(?*)
Yakela Sinopec 8 1.0 1.1 1.0 0.6 na
Local network; spur line to
WEP
Sinopec, PetroChina na
Xinjiang; Beijing/Shanghai
(?*)
No
Qaidam, Qinghai (?*) Sebei PetroChina 108 5.0 6.0 6.2 6.0 na
Sebei-Lanzhou 1-2; Sebei-
Golmud
PetroChina 8bcm
Qinghai, Gansu, Beijing
(?*)
No
CBM (Shanxi) Panzhuang, GSS, etc.
Independents,
PetroChina
1500bcm
prospective
0.3 2.0 3.0 8.0 na Duanshi - BoAi PetroChina, Sinopec na Henan, Beijing No
Zhongyuan (Henan) Zhongyuan Sinopec 2 0.8 0.6 0.5 0.1 na
Three small offtake
pipelines
Sinopec na Henan, Cangzhou (Tianjin) No
Dalian LNG
PetroChina LNG portfolio
PetroChina nmf 0.0 2.5 4.0 4.0 4.0 bcm regas capacity Local network in Liaoning PetroChina na Liaoning, Beijing (?*) No
Russia (2018+ ?*)
East Siberia gas fields
(Kovykta)
Gazprom 2000 0.0 0.0 0.0 38.0 na East Route 2018+ PetroChina 38bcm Beijing, Inner Mongolia Yes
Xinjiang CTG (?*) Zhudong Sinopec
213bn tons of
coal
0.0 0.0 0.0 17.0 30.0 bcm plant capacity
Xinjiang-
Zhejiang/Shandong
Sinopec
30bcm pipeline; 4.5bcm
storage
Guangdong, Zhejiang,
Shandong, Beijing (?*)
No
Un-risked Total Supply from Potential Sources 7.1 12.3 14.7 81.8
of which, risked supply available to Beijing-Tianjin-Hebei 0.7 4.1
Risked Existing + Potential Supply to Beijing-Tianjin-Hebei 12.0 18.2 36.7 57.2
Provincial Dmd targets 12.0 18.2 32.3 83.6
Implied (Shortfall)/Excess 0.0 0.0 4.4 -26.4
No
Main mkts: Shanghai,
Guangdong, Henan,
Jiangsu, Shandong,
Zhejiang. Can serve
Beijing, Tianjin, Hebei via
Shaanjing
Upstream Supply (bcm) Midstream End-markets
30bcm processing facil in
Lunnan; Horgos
WEP1 /2 have 3/8
branchlines; Tarim
connected to WEP via
Lunnan - West-East
pipelines
PetroChina
50bcm WEP 1+2; 30bcm
WEP 3 in 2014e

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Fig 59 Gas value chain comparables valuation

Source: Bloomberg, Macquarie Research, March 2014. Priced as on 11-March close
Macquarie Research
Valuation, Performance and Operational Metrics
Company B'berg Local Reco. Mcap Price
Price
Target
TSR
Upside
P/B Ratio
EV/EBITD
A Ratio
Dividend
Yield
Code Curr (US$ bn) (local) (local) (PT + DY) 2014E 2015E 2014E 2015E 2014E 2014E 2014E 2014E 2015E 2014E 2015E 2014E 2015E
HANG SENG INDEX 22,012 10.0 x 10.0 x
China Large-Cap Oil & Gas 349.1 +14% 7.7 x 7.0 x 7.8 x 7.4 x 1.0 x 3.7 x 4.5% 1% 4% 11% 11% 26% 25%
PetroChina 857 HK HKD Neutral 183.4 7.83 8.00 +7% 8.7 x 7.9 x 8.6 x 8.2 x 0.9 x 3.8 x 5.2% 1% 4% 9% 9% 26% 26%
Sinopec 386 HK HKD Underperform 98.5 6.72 5.00 -21% 8.4 x 7.6 x 8.2 x 7.7 x 1.0 x 4.0 x 4.2% -3% 0% 9% 9% 32% 34%
CNOOC 883 HK HKD Outperform 67.2 11.82 18.00 +56% 6.0 x 5.5 x 6.8 x 6.3 x 1.0 x 3.3 x 4.1% 4% 10% 14% 14% 21% 16%
HK/China Mid & Downstream Gas 74.3 +25% 18.5 x 15.3 x 19.7 x 17.0 x 2.8 x 12.0 x 1.5% 3% 5% 12% 13% 20% 15%
Hong Kong & China Gas 3 HK HKD Outperform 19.7 16.46 20.00 +24% 19.7 x 18.0 x 20.8 x 19.2 x 2.9 x 14.6 x 2.1% 1% 2% 11% 11% 21% 18%
Kunlun 135 HK HKD Outperform 14.4 13.72 22.00 +63% 11.9 x 9.9 x 13.5 x 11.9 x 1.9 x 5.1 x 2.3% 5% 8% 14% 15% 25% 23%
China Resources Gas 1193 HK HKD Outperform 7.3 25.70 30.00 +18% 20.1 x 14.8 x 21.1 x 17.8 x 3.5 x 9.9 x 1.0% 4% 2% 12% 14% 2% -2%
ENN 2688 HK HKD Outperform 7.2 51.45 62.70 +23% 18.6 x 15.6 x 20.2 x 17.1 x 3.7 x 8.5 x 1.3% 5% 7% 15% 16% 15% 1%
China Gas 384 HK HKD Outperform 7.9 12.50 12.20 -1% 21.5 x 17.0 x 24.6 x 21.0 x 4.1 x 13.4 x 1.0% 0% 5% 12% 13% 42% 35%
Towngas China 1083 HK HKD Neutral 3.3 9.90 8.00 -18% 19.3 x 16.6 x 20.2 x 17.5 x 1.9 x 11.8 x 1.0% 4% 6% 8% 8% 18% 17%
NewOcean Energy Holdings Ltd. 342 HK HKD Outperform 1.4 7.49 11.00 +48% 10.2 x 8.1 x 11.4 x 9.2 x 2.1 x 7.9 x 1.3% -7% 5% 12% 13% 18% 10%
China Suntien Green Energy 956 HK HKD Outperform 1.5 3.41 4.75 +40% 14.8 x 12.4 x 14.6 x 12.1 x 1.3 x 7.5 x 1.0% -19% -14% 8% 8% 50% 53%
Beijing Enterprise 392 HK HKD Not Rated 11.8 71.90 nmf nmf nmf nmf 17.7 x 14.8 x 1.9 x 21.0 x 1.5%
LNG/CNG Equipment 8.6 +13% 48.4 x 22.9 x 32.4 x 19.9 x 3.0 x 11.9 x 0.2% -7% -6% -11% -6% 4% 15%
Westport Innovations WPRT US USD Outperform 1.1 17.40 24.00 +38% nmf nmf nmf nmf 5.1 x nmf 0.0% -11% -4% -30% -16% -12% 11%
Clean Energy Fuels CLNE US USD Underperform 1.5 9.25 7.50 -19% nmf nmf nmf nmf 2.3 x nmf 0.0% -12% -15% -6% -5% 51% 61%
Fuel Systems Solutions FSYS US USD Neutral 0.3 12.59 15.00 +19% 48.4 x 22.9 x 54.5 x 25.4 x 0.8 x 6.9 x 0.0% 1% 1% 2% 3% -27% -27%
CIMC Enric 3899 HK HKD Not Rated 3.1 12.90 nmf nmf nmf nmf 16.6 x 14.0 x 3.8 x 13.8 x 0.8%
Chart Industries GTLS US USD Not Rated 2.6 85.07 nmf nmf nmf nmf 26.0 x 20.1 x 3.3 x 15.0 x 0.0%
Renewable Energy 26.2 +11% 16.8 x 10.9 x 17.0 x 11.2 x 1.8 x 11.3 x 1.5% -14% -10% 8% 9% 50% 49%
GCL-Poly Energy 3800 HK HKD Neutral 6.0 2.91 2.56 -11% 33.2 x 17.1 x 29.5 x 15.4 x 2.8 x 11.7 x 0.6% -9% -3% 7% 9% 66% 63%
Singyes Solar 750 HK HKD Outperform 1.0 11.98 9.60 -18% 10.6 x 8.5 x 9.8 x 8.6 x 2.2 x 8.6 x 1.4% -17% 3% 15% 16% 47% 34%
Comtec Solar Systems 712 HK HKD Outperform 0.3 1.54 1.65 +9% 15.8 x 9.8 x 21.4 x 9.7 x 0.9 x 11.2 x 1.6% 4% 0% 6% 8% -19% -13%
China Datang Renewable Power 1798 HK HKD Outperform 1.4 1.51 1.90 +28% 11.9 x 7.6 x 12.6 x 8.8 x 0.9 x 10.6 x 2.5% -27% -24% 6% 6% 79% 79%
China Longyuan Power 916 HK HKD Outperform 9.6 9.65 12.00 +26% 14.2 x 11.8 x 16.0 x 13.1 x 1.7 x 11.1 x 1.4% -10% -10% 7% 8% 59% 59%
Huaneng Renewables 958 HK HKD Outperform 3.9 3.69 4.80 +31% 15.2 x 10.8 x 16.9 x 12.9 x 1.6 x 11.5 x 1.3% -24% -26% 7% 8% 68% 70%
Beijing Jingneng 579 HK HKD Not Rated 3.9 4.73 nmf nmf nmf nmf 12.6 x 10.1 x 2.2 x 14.2 x 1.4%
Company B'berg B'berg Price
Price
Target
TSR
Upside
Cons.
Code Code (local) (local) (PT + DY) 1 M 3 M 6 M YTD 2013E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E TP
HANG SENG INDEX 22,012.10 +1% -5% -3% -4%
China Large-Cap Oil & Gas +14% +4% -9% -8% -6% +5% +11% +2% +6% -12%
PetroChina 857 HK HKD 7.83 8.00 +7% +1% -10% -8% -7% 0.67 0.71 0.78 +6% +10% 0.72 0.76 -1% +3% 9.8 -18%
Sinopec 386 HK HKD 6.72 5.00 -21% +17% +6% +12% +9% 0.58 0.63 0.69 +8% +11% 0.65 0.69 -4% -0% 7.7 -35%
CNOOC 883 HK HKD 11.82 18.00 +56% -7% -24% -27% -18% 1.51 1.53 1.69 +1% +11% 1.38 1.48 +10% +14% 15.5 16%
HK/China Mid & Downstream Gas +22% +8% +10% +32% +2% +27% +19% +7% +9% 13%
Hong Kong & China Gas 3 HK HKD 16.46 20.00 +24% +6% -7% -8% -7% 0.79 0.84 0.92 +6% +10% 0.79 0.86 +6% +7% 18.7 7%
Kunlun 135 HK HKD 13.72 22.00 +63% +3% -4% +23% +0% 0.93 1.16 1.38 +25% +19% 1.03 1.16 +13% +19% 15.0 46%
China Resources Gas 1193 HK HKD 25.70 30.00 +18% +10% +6% +42% -2% 0.97 1.26 1.71 +30% +35% 1.22 1.44 +4% +19% 25.9 16%
ENN 2688 HK HKD 51.45 62.70 +23% +3% -2% +30% -10% 1.72 2.05 2.05 +19% +0% 2.02 2.38 +2% -14% 54.4 15%
China Gas 384 HK HKD 12.50 12.20 -1% +15% +22% +61% +11% 0.39 0.57 0.72 +45% +27% 0.51 0.60 +12% +22% 11.8 4%
Towngas China 1083 HK HKD 9.90 8.00 -18% +15% +15% +41% +12% 0.41 0.51 0.59 +24% +16% 0.49 0.57 +4% +5% 9.3 -14%
NewOcean Energy Holdings Ltd. 342 HK HKD 7.49 11.00 +48% +3% +39% +36% +12% 0.50 0.70 0.88 +41% +26% 0.66 0.82 +6% +8% 9.5 15%
China Suntien Green Energy 956 HK HKD 3.41 4.75 +40% +11% +31% +59% +25% 0.18 0.19 0.23 +6% +16% 0.18 0.22 +5% +1% 3.9 22%
Beijing Enterprise 392 HK HKD 71.90 NR NR +11% -0% +36% -4% NA NA NA +41% +20% 4.05 4.86 75.2
P/E Ratio (MacQ) Gearing (ND/ND&E)
P/E Ratio (B'berg
Cons)
FCF Yield
11 March 14
Absolute Performance MQ EPS (local) EPS growth Cons EPS (local) MQ vs. Cons
MQ vs.
Cons.
ROACE

Macquarie Research China's Gas Choices

13 March 2014 34
HONG KONG

135 HK Outperform
Price (at 08:01, 11 Mar 2014 GMT) HK$13.72

Valuation HK$ 23.71
- DCF (WACC 7.6%, beta 0.9, ERP 5.5%, RFR 4.5%, TGR 3.0%)
12-month target HK$ 22.00
Upside/Downside % +60.3
12-month TSR % +62.9
Volatility Index Low/Medium
GICS sector Energy
Market cap HK$m 110,617
Market cap US$m 14,252
Free float % 19
30-day avg turnover US$m 17.0
Number shares on issue m 8,062

Investment fundamentals
Year end 31 Dec 2012A 2013E 2014E 2015E
Revenue m 32,136 44,208 63,826 78,564
EBIT m 10,665 13,352 16,831 20,503
EBIT growth % 34.8 25.2 26.1 21.8
Reported profit m 6,518 7,489 9,314 11,182
Adjusted profit m 6,518 7,489 9,314 11,182
EPS rep HK$ 0.83 0.93 1.16 1.39
EPS rep growth % 5.8 11.7 24.4 20.1
EPS adj HK$ 0.84 0.93 1.16 1.39
EPS adj growth % 6.2 11.3 24.4 20.1
PER rep x 16.5 14.8 11.9 9.9
PER adj x 16.4 14.8 11.9 9.9
Total DPS HK$ 0.23 0.26 0.32 0.38
Total div yield % 1.7 1.9 2.3 2.8
ROA % 11.1 11.8 13.9 15.6
ROE % 17.4 15.8 16.9 17.1
EV/EBITDA x 6.9 6.1 4.9 4.2
Net debt/equity % 19.4 34.3 32.8 28.8
P/BV x 2.5 2.2 1.8 1.6

135 HK rel HSI performance, & rec
history

Note: Recommendation timeline - if not a continuous line, then there was no
Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, March 2014
(all figures in HKD unless noted)

Analyst(s)
Aditya Suresh, CFA
James Hubbard, CFA

13 March 2014
Kunlun Energy
Structural gas growth at a discount
Event
In tandem with Chinas Gas Choices Beijing, Tianjin, Hebei Burgeoning
demand faces midstream bottlenecks published today, we are raising our
Kunlun price target by 10% to HK$22/sh, on higher gas transmission volume
assumptions and a higher implied target PE. Kunlun is a Marquee Buy Idea
with 63% potential total shareholder return on a one-year horizon.
Impact
Following our detailed work on gas supply-demand outlook for Beijing, Tianjin,
Hebei, we now model 31.0/36.3bcm gas volumes (vs. 30/35bcm prior) for
Kunluns Shaanjing pipelines in 2014/15e, implying 24%/17% y/y gas
transmission volume growth (above consensus of ~10-15% y/y growth).
Further we foresee an implied gas shortage of c.30bcm or one-third the
provincial gas demand targets in Beijing, Tianjin, Hebei by 2020e, with
lack of midstream infrastructure being the key bottleneck.
In our view, this implied gas shortage dynamic is a major structural tailwind for
the Kunlun investment case since it: 1) underpins gas volume growth for
the Shaanjing pipelines at least until the end of this decade, and warrants
a PE de-risking; 2) in addition, if Beijing, Tianjin, Hebei wants to improve its air
quality then, in our view, Kunluns 15bcm Shaanjing line-5 (on top of the
15bcm line-4 under construction), should be commissioned soon; 3) in an
environment where these provinces are short midstream infrastructure, in our
view, the risks related to a potential negative change to the existing tariff
mechanism further recedes. See Kunlun Energy - Pacifying the bears
Earnings and target price revision
We raise our 2014/15e EPS forecasts by 4% on higher gas transmission
volume assumptions. Our EPS forecasts, already the highest on the street,
now stand 15%/20% above consensus. Our new HK$22 PT (previously
HK$20) implies 15.8x 2015e PE (from 15x prior), still a 10% disc to the
HK/China gas sector.
Price catalyst
12-month price target: HK$22.00 based on a PER methodology.
Catalyst: FY13 results 20-March; ramp-up in gas transmission volumes (open
access to pipelines would be a +ve); ramp-up in LNG sales to truck/bus fleets.
Action and recommendation
We continue to think the risk-reward for Kunlun is compelling with potential
60-85% base-bull fair value upside (largely on a return to normal scenario in
terms of market sentiment towards Kunlun) versus 20% downside in a low
probability bear scenario. Our HK$22 price target implies Kunlun closes the
12M fwd PE gap vs. the HK/China gas sector from the current 40% to 10%.

13 March 2014 35
Kunlun Raising the bar, again
Fig 1 Kunlun still offers a compelling risk-reward valuation skew

Base: HK$22.0/sh @ 15.8x base HK$1.40/sh 2015e EPS, 60% TSR
upside
Gas transmission: 24%/17% y/y gas transmission vol growth in
2014/15e, and flat EBITDA margins
Natural gas sales (incl LNG): 38%/20% y/y gas sales volume
growth, and a rebound in EBITDA margins to Rmb0.42/cu.m in
2014/15 (from Rmb0.34/cu.m)
E&P: $106/109/bbl realized oil prices in 2014/15e
LNG regas: 95% utilization rates, backed by take-or-pay contracts
Target 15.8x 2015 PE, 10% disc to HK/China gas sector, backed by
DCF.
Bull: HK$26.8/sh @ 18x bull target PE, 95% upside
Assuming no valuation gap to the HK/China gas sector.
Bear: HK$10.9/sh @ 7.8x bear target PE, 20% TSR downside
Pipelines sold at acquisition cost; further PE suppression related to
senior exec investigations.
Pipeline tariff cuts; inability to pass on rising upstream gas costs;
higher than forecast capex would imply higher DD&A and a delay in
achieving +ve FCFs.

In tandem with Chinas Gas Choices Beijing, Tianjin, Hebei Burgeoning demand faces midstream
bottlenecks published today, we are raising our Kunlun price target by 10% to HK$22/sh, on higher
gas transmission volume assumptions and a higher implied target PE. Kunlun is a Marquee Buy Idea
with 60% potential total shareholder return on a one-year horizon. In our recent note Kunlun
Energy - EPS upgrade cycle beckons, we go through in detail the assumptions underpinning our
base case earnings forecasts and valuation. The key changes since are:
1) Raising 2014-15 EPS forecasts by avg 4% on higher gas transmission volume
assumptions.
We now assume 31.0/36.3bcm volumes (vs. 30/35bcm prior) for Kunluns Shaanjing pipelines
in 2014/15e, implying 24%/17% y/y volume growth respectively (above consensus estimates
of ~10-15% y/y growth). A majority of this forecast transmission volume growth for Shaanjing
comes from Beijing, Tianjin, Hebei, where we expect volumes to grow 30% cagr 2013-15e to
27.7bcm in 2015e, while volumes to Jiangsu and Shandong remain essentially flat at 8.6bcm.
Our EPS forecasts now stand 15%/20% above Bloomberg consensus.
Fig 2 Shaanjing volumes by end-markets: a majority of
volumes flows to Beijing, Tianjin, Hebei
Fig 3 Shaanjing volumes by source: Ordos basin and
gas via the West-East pipelines matter most

6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
28.0
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HK$/sh
Bull
Base
Bear
3-year peak
3-year trough
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(bcm)
Shaanjing Pipeline Vols by End-Market
Beijing, Tianjin, Hebei Jiangsu Shandong
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(bcm)
Capacity
Line 4 start-up
13 March 2014 36
Fig 4 Kunlun - Path to 2015E EPS transmission volume assumptions drives a bulk of the forecast growth

Source: Macquarie Research, March 2014
Fig 5 2014E EPS Sensitivity Fig 6 2015E EPS Sensitivity

Source: Macquarie Research, March 2014 Source: Macquarie Research, March 2014
2) Increasing price target to HK$22/sh (from HK$20), based on implied 15.8x 2015E target PE
Following our bottom up work on the supply-demand outlook in Chinas Gas Choices, we are
now more confident on the outlook for Kunluns Shaanjing pipeline. Our forecast 30bcm gas
shortage in Beijing, Tianjin, Hebei (more than one-third the provincial gas demand targets by
2020e) is a major structural tailwind for the Kunlun investment case since in our view it:
1) Underpins gas volume growth for the Shaanjing pipelines at least until the end of this
decade, and warrants a PE de-risking;
2) Further, if Beijing, Tianjin, Hebei want to improve air quality then we believe the 15bcm
Shaanjing line-5 (on top of the 15bcm line-4 under construction) should break ground
shortly;
3) In an environment where the Beijing, Tianjin, Hebei area is short midstream
infrastructure, the risks related to a retroactive negative change to the existing tariff
mechanism further recedes. Also see Kunlun Energy - Pacifying the bears
Our HK$22 PT implies 15.8x 2015e PE (from 15x prior), still a 10% disc to the HK/China gas
sector. Our price target is backed up by DCF of HK$22.6/sh.
Our HK$22 price target implies Kunlun closes the 12M fwd PE gap vs. the HK/China gas
sector from the current 40% to 10%.
0.84
0.93
1.16
1.39
0.11
0.08
0.03
0.00
0.10
0.10
0.04
-0.02
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
2012A 2013E Pipelines Gas
Distribution
LNG E&P,
Others
2014E Pipelines LNG Gas
Distribution
E&P,
Others
2015E
HK$/sh
Kunlun - Path to 2015E EPS
higher vols;
flat margins
higher vols
& margins
ramp-up in
LNG vols;
flat margins
higher vols;
flat margins
ramp-up in
LNG vols;
flat margins
higher vols;
margins flat
over 2014
E&P pdtn
declines
Cons FY14
Cons FY15
-12.0%
-8.0%
-4.0%
0.0%
4.0%
8.0%
12.0%
-20% -10% 0% 10% 20%
%

c
h
a
n
g
e

i
n

2
0
1
4

E
P
S
Change over base case assumptions
2014E EPS Sensitivity
Gas Pipeline Vols/Margins LNG margins
Oil Price Gas Distrib Vols/Margins
-12.0%
-8.0%
-4.0%
0.0%
4.0%
8.0%
12.0%
-20% -10% 0% 10% 20%
%

c
h
a
n
g
e

i
n

2
0
1
5

E
P
S
Change over base case assumptions
2015E EPS Sensitivity
Gas Pipeline Vols/Margins LNG margins
Oil Price Gas Distrib Vols/Margins
13 March 2014 37
Fig 7 Kunlun earnings outlook gas to increasingly
take share from E&P
Fig 8 and expect a justified PE re-rating for Kunlun
as its gas businesses ramp up

Source: Company data, Macquarie Research, March 2014 Source: Company data, Macquarie Research, March 2014
Fig 9 An attractive risk reward for Kunlun: 60-90% potential base-bull fair value upside against 20% downside in
a low probability bear scenario

0
5,000
10,000
15,000
20,000
25,000
30,000
2009A 2011A 2013E 2015E 2017E 2019E
HK$, mn
EBT (incl associates, ex minorities)
E&P Gas Transmission Gas Distribution
LNG for transport LNG regas/micro-LNG
8.0
10.0
12.0
14.0
16.0
18.0
0%
20%
40%
60%
80%
100%
2010A 2012A 2014E 2016E 2018E 2020E
Justified PE
EPS
contribution
Gas (Pipelines/LNG/CGD) Oil (E&P) Justified Target PE
11.0
22.0
26.7
1.2
2.7
4.0
3.2
8.4
2.5
4.0
0.7
0.0
3.0
6.0
9.0
12.0
15.0
18.0
21.0
24.0
27.0
E&P (4x) Gas
Distribution
(15x)
LNG (15x) Gas Pipelines
Sold
Bear Fair
Value (8x
2015e PE)
Gas Pipelines
- Base (17x)
LNG, Others -
Base (22x)
Price Target
(15x 2015e
PE)
Gas Pipelines
- Bull (21x)
LNG - Bull
(25x)
Bull Fair Value
(18x 2015e
PE)
HK$/sh
Current Share Price
Pipeline sold
at 2010 acq
cost of
US$3bn
<5%
probability
20%
probability
13 March 2014 38
Fig 10 Kunlun Financial Summary


Kunlun Energy (135 HK)
Outperform
Profit & Loss (HK$ mn) 2011A 2012A 2013E 2014E 2015E Assumptions 2011A 2012A 2013E 2014E 2015E
Net Revenues 25,915 32,953 44,208 63,826 78,564 Upstream
less COGS 13,688 17,365 25,870 40,718 51,238 Brent - MacQ Est. ($/bbl) 109 110 108 113 116
EBITDA 12,227 15,588 18,338 23,108 27,327 Oil Price Realization ($/boe) 105 104 100 106 109
less D&A 4,090 4,434 4,522 5,664 6,154 Oil & Gas Production (kboe/d) 46.7 48.0 48.2 47.4 46.6
E&P 2,065 2,185 1,808 1,747 1,587 Mid/Downstream gas
Gas Transmission 4,335 6,088 7,843 9,967 11,851 Volumes (bcm)
Gas Distribution (incl LNG & CNG) 1,182 1,731 2,356 4,240 5,142 City Gas Distribution 3.6 4.2 5.6 7.3 8.8
Regas Terminal & Plants 258 565 1,345 877 1,923 LNG for transport 0.1 0.4 1.6 2.6 3.3
EBIT 7,910 10,665 13,352 16,831 20,503 Gas Distribution (bcm) 3.7 4.6 7.2 9.9 12.0
less Total finance costs 227 489 463 613 670 Y/Y growth 68% 23% 56% 38% 21%
Share of Associate Profit, Others 2,577 2,641 2,175 2,150 2,100
Pretax Profit 10,487 13,306 15,527 18,981 22,603 Gas Transmission (bcm) 20.8 23.8 25.0 31.0 36.3
less Tax Expense 2,291 3,392 3,999 4,745 5,651 Y/Y growth 18% 15% 5% 24% 17%
Profit after tax 8,196 9,914 11,528 14,236 16,952
Minorities -2,575 -3,396 -4,039 -4,922 -5,770 LNG Regas (bcm) 1.6 5.1 7.4 8.1 11.4
Basic Net Income 5,621 6,518 7,489 9,314 11,182 Y/Y growth - 240% 46% 10% 40%
Basic EPS (HK Cents/sh) 78.6 83.5 93.0 115.6 138.8 EBITDA Margins (Rmb/cu.m)
Diluted EPS (HK Cents/sh) 77.7 83.1 92.3 114.4 137.3 City Gas distribution 0.35 0.40 0.30 0.35 0.35
DPS (HK Cents/sh) 22.0 23.0 25.6 31.8 38.2 LNG for transport 0.81 0.64 0.50 0.60 0.60
LNG Regas 0.24 0.21 0.24 0.24 0.24
Cashflows (HK$ mn) 2011A 2012A 2013E 2014E 2015E Gas transmission 0.27 0.28 0.31 0.31 0.31
Net Income 5,621 6,518 7,489 9,314 11,182
DD&A 4,090 4,434 4,522 5,664 6,154
Changes in working capital -1,539 -3,265 -2,005 2,818 2,802
Other 1,426 2,376 5,097 3,384 4,340
Operating Cashflow 9,598 10,063 15,103 21,181 24,478
Acquisitions -3,090 -579 0 0 0
Capex -13,507 -15,391 -19,922 -14,798 -15,060
Other 2,312 3,099 2,377 1,958 1,935
Investing Cashflow -14,285 -12,871 -17,546 -12,840 -13,125
Dividends Paid -1,933 -5,845 -6,101 -7,486 -8,849
Debt Raised 17,580 8,346 0 0 0
Other -7,731 7,924 -508 -1,638 -1,638
Financial Cashflow 7,916 10,425 -6,609 -9,124 -10,487
Net exchange difference 321 257 147 0 0 Valuation Multiples 2011A 2012A 2013E 2014E 2015E
Net Change in Cash 3,550 7,874 -8,904 -784 866 EV/EBITDA 8.3 7.3 7.1 5.7 4.7
P/E 15.7 16.2 14.9 12.0 10.0
Balance Sheet (HK$ mn) 2011A 2012A 2013E 2014E 2015E P/B 2.9 2.4 2.2 1.9 1.6
Cash & Cash eqv. 11,718 19,592 10,688 9,904 10,770 FCF yield -2% -2% -2% 3% 5%
Current assets 16,611 27,251 20,324 20,168 21,893 Dividend yield 2% 2% 2% 2% 3%
Fixed assets 56,677 69,225 84,006 93,139 102,046
Total assets 84,207 108,542 116,926 125,903 136,534 DCF (HK$ mn) 2014E 2015E 2016E 2017E 2018E
Current liabilities 12,572 18,363 29,048 32,493 36,155 EBIT 16,831 20,503 23,213 25,837 27,801
Non-Current liabilities 25,977 28,001 20,069 20,069 20,069 NOPLAT 12,624 15,377 17,410 19,377 20,851
Shareholder equity 30,383 44,422 50,498 59,812 70,994 DD&A 5,664 6,154 6,882 6,967 7,484
CFI -14,798 -15,060 -15,425 -15,536 -15,729
Ratio Analysis 2011A 2012A 2013E 2014E 2015E FCF to enterprise 718 2,801 4,571 5,871 7,079
Gearing (ND/ND&E) 34% 21% 32% 29% 25%
Interest cover 54 32 40 38 41 PV explicit period 39,927 Cost of Debt 5%
Dividend payout ratio 28% 28% 28% 28% 28% PV terminal EV 174,352 Cost of Equity 9%
Effective tax rate 22% 25% 26% 25% 25% Net (debt)/cash -23,249 Target Gearing 30%
ROACE 10% 10% 9% 10% 11% Equity value 191,029 WACC 8%
ROE 19% 15% 15% 16% 16%
EBITDA margin 47% 47% 41% 36% 35% Shares o/s (mn) 8,056
EBIT margin 31% 34% 31% 27% 27% Value per share (HK$) 23.7
Target Price HK$22.0
0
5,000
10,000
15,000
20,000
25,000
30,000
2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
HK$, mn
EBIT (incl associates, ex minorities)
E&P Gas Transmission Gas Distribution LNG for transport LNG regas/micro-LNG
13 March 2014 39

Kunlun Energy (135 HK, Outperform, Target Price: HK$22.00)
Interim Results 1H/13A 2H/13E 1H/14E 2H/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue m 19,427 24,781 31,419 32,407 Revenue m 32,136 44,208 63,826 78,564
Gross Profit m 11,039 14,081 17,853 18,415 Gross Profit m 19,224 25,120 36,268 44,643
Cost of Goods Sold m 8,388 10,700 13,566 13,992 Cost of Goods Sold m 12,912 19,088 27,558 33,922
EBITDA m 8,973 9,364 11,366 11,742 EBITDA m 15,588 18,338 23,108 27,327
Depreciation m 2,383 2,602 3,116 3,161 Depreciation m 4,923 4,986 6,277 6,824
Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0
Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0
EBIT m 6,590 6,762 8,249 8,582 EBIT m 10,665 13,352 16,831 20,503
Net Interest Income m -205 -258 -284 -328 Net Interest Income m -489 -463 -613 -670
Associates m 1,125 1,050 1,075 1,075 Associates m 2,641 2,175 2,150 2,100
Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0
Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0
Other Pre-Tax Income m 205 258 284 328 Other Pre-Tax Income m 489 463 613 670
Pre-Tax Profit m 7,715 7,812 9,324 9,657 Pre-Tax Profit m 13,306 15,527 18,981 22,603
Tax Expense m -2,046 -1,953 -2,331 -2,414 Tax Expense m -3,392 -3,999 -4,745 -5,651
Net Profit m 5,669 5,859 6,993 7,243 Net Profit m 9,914 11,528 14,236 16,952
Minority Interests m -1,989 -2,050 -2,461 -2,461 Minority Interests m -3,396 -4,039 -4,922 -5,770

Reported Earnings m 3,680 3,809 4,532 4,782 Reported Earnings m 6,518 7,489 9,314 11,182
Adjusted Earnings m 3,680 3,809 4,532 4,782 Adjusted Earnings m 6,518 7,489 9,314 11,182

EPS (rep) 0.46 0.47 0.56 0.59 EPS (rep) 0.83 0.93 1.16 1.39
EPS (adj) 0.46 0.47 0.56 0.59 EPS (adj) 0.84 0.93 1.16 1.39
EPS Growth yoy (adj) % -1.3 26.9 23.2 25.5 EPS Growth (adj) % 6.2 11.3 24.4 20.1
PE (rep) x 19.4 14.7 11.9 9.9
PE (adj) x 19.4 14.7 11.9 9.9

EBITDA Margin % 46.2 37.8 36.2 36.2 Total DPS 0.23 0.26 0.32 0.38
EBIT Margin % 33.9 27.3 26.3 26.5 Total Div Yield % 1.4 1.9 2.3 2.8
Earnings Split % 49.1 50.9 48.7 51.3 Weighted Average Shares m 7,831 8,056 8,056 8,056
Revenue Growth % 24.5 49.9 61.7 30.8 Period End Shares m 8,101 8,056 8,056 8,056
EBIT Growth % 26.6 23.9 25.2 26.9

Profit and Loss Ratios 2012A 2013E 2014E 2015E Cashflow Analysis 2012A 2013E 2014E 2015E

Revenue Growth % 24.0 37.6 44.4 23.1 EBITDA m 15,588 18,338 23,108 27,327
EBITDA Growth % 27.5 17.6 26.0 18.3 Tax Paid m -1,639 -3,999 -4,745 -5,651
EBIT Growth % 34.8 25.2 26.1 21.8 Chgs in Working Cap m -1,718 2,005 -2,818 -2,802
Gross Profit Margin % 59.8 56.8 56.8 56.8 Net Interest Paid m 312 463 613 670
EBITDA Margin % 48.5 41.5 36.2 34.8 Other m -2,480 -1,704 5,023 4,934
EBIT Margin % 33.2 30.2 26.4 26.1 Operating Cashflow m 10,063 15,103 21,181 24,478
Net Profit Margin % 20.3 16.9 14.6 14.2 Acquisitions m -579 0 0 0
Payout Ratio % 27.5 27.5 27.5 27.5 Capex m -15,391 -19,922 -14,798 -15,060
EV/EBITDA x 8.0 6.1 4.9 4.2 Asset Sales m 0 0 0 0
EV/EBIT x 10.9 8.0 6.6 5.5 Other m 3,099 2,377 1,958 1,935
Investing Cashflow m -12,871 -17,546 -12,840 -13,125
Balance Sheet Ratios Dividend (Ordinary) m -5,845 -6,101 -7,486 -8,849
ROE % 17.4 15.8 16.9 17.1 Equity Raised m 10,605 0 0 0
ROA % 11.1 11.8 13.9 15.6 Debt Movements m 3,834 0 0 0
ROIC % 12.9 13.3 13.9 15.8 Other m 1,831 -508 -1,638 -1,638
Net Debt/Equity % 19.4 34.3 32.8 28.8 Financing Cashflow m 10,425 -6,609 -9,124 -10,487
Interest Cover x 21.8 28.8 27.5 30.6
Price/Book x 3.0 2.2 1.8 1.6 Net Chg in Cash/Debt m 7,874 -8,904 -784 866
Book Value per Share 5.5 6.3 7.4 8.8
Free Cashflow m -5,328 -4,819 6,383 9,418

Balance Sheet 2012A 2013E 2014E 2015E

Cash m 19,592 10,688 9,904 10,770
Receivables m 3,566 4,308 4,709 5,274
Inventories m 717 1,046 1,273 1,567
Investments m 173 122 122 122
Fixed Assets m 69,225 84,006 93,139 102,046
Intangibles m 2,360 3,318 3,318 3,318
Other Assets m 12,909 13,438 13,438 13,438
Total Assets m 108,542 116,926 125,903 136,534
Payables m 12,438 12,410 15,855 19,517
Short Term Debt m 5,111 15,562 15,562 15,562
Long Term Debt m 26,562 18,375 18,375 18,375
Provisions m 0 0 0 0
Other Liabilities m 2,253 2,770 2,770 2,770
Total Liabilities m 46,364 49,117 52,562 56,224
Shareholders' Funds m 44,422 50,498 59,812 70,994
Minority Interests m 17,756 17,311 13,528 9,317
Other m 0 0 0 0
Total S/H Equity m 62,178 67,809 73,341 80,311
Total Liab & S/H Funds m 108,542 116,926 125,903 136,534

All figures in HKD unless noted.


13 March 2014 40
HONG KONG

956 HK Outperform

Valuation HK$ 4.75
Volatility Index High
GICS sector Energy
Free float % 50

Year end 31 Dec 2012A 2013E 2014E 2015E
Revenue m 3,702.1 4,753.0 5,692.4 6,917.7
EBIT m 1,067.1 1,239.2 1,527.5 1,931.1
EBIT growth % 22.2 16.1 23.3 26.4
Reported profit m 549.7 559.6 703.4 865.6
Adjusted profit m 549.7 559.6 703.4 865.6
EPS rep Rmb 0.17 0.17 0.20 0.23
EPS rep growth % 22.5 1.8 13.2 19.1
EPS adj Rmb 0.17 0.17 0.20 0.23
EPS adj growth % 22.5 1.8 13.3 19.0
PER rep x 17.0 16.7 14.8 12.4
PER adj x 17.0 16.7 14.7 12.4
Total DPS Rmb 0.02 0.03 0.03 0.03
Total div yield % 0.7 0.9 1.0 1.2
ROA % 7.3 7.6 7.8 8.1
ROE % 10.2 9.7 10.3 10.7
EV/EBITDA x 9.8 8.5 7.6 6.1
Net debt/equity % 101.8 112.6 99.3 107.9
P/BV x 1.7 1.6 1.4 1.3

history

(all figures in Rmb unless noted)

Analyst(s)
Patrick Dai
+852 3922 1295 patrick.dai@macquarie.com
Gary Chiu, CFA
+852 3922 1435 gary.chiu@macquarie.com

13 March 2014

China Suntien
Valuation gap should close from
stronger gas/wind demand in Hebei
Event
In tandem with Chinas Gas Choices Beijing, Tianjin, Hebei Burgeoning
demand faces midstream bottlenecks published today, we are raising our
Suntien price target by 36% to HK$4.75 (the highest target price on the
Street), on higher gas distribution volume assumptions in the long term in
Hebei, which provides ~30% upside from current share price.
Impact
Reiterate the best play in coal substitution in Hebei. Hebei is the largest
consumer of coal in China, and unsurprisingly its air-quality problems are
worse than those of Beijing and Tianjin. In 2013, Hebei announced a multi-
pronged strategy to cut PM2.5 emissions by at least 25% and annual coal
consumption by 40mt by 2017. Based on our bottom-up work, we model
15.0/26.1bcm in 2017/20e, implying 26% CAGR between 2013-20e. We
estimate the switch from coal to gas alone would cut Hebeis annual coal
consumption by 20mt by 2017. With 27% gas sales market share in Hebei, we
believe Suntien would be the key beneficiary, and that this could deliver 16%
earnings CAGR in 2012-17. China Suntien - not only a wind company.
Cost pass-through not an issue. In 2013, most investors discussions were
focused on how much of the gas price hike could be passed on. It turned out
that Suntien ultimately maintained the gross profit per cu.m. In anticipation of
the further gas price hike in 2014 expected by consensus, we believe that
concerns over cost pass-through should be minimal and will be less likely to
prevent the stock from re-rating, given the stronger visibility of gas demand
growth in Hebei.
Wind capacity expansion to take off from 2014. As another contributor to
coal substitution in Hebei, we expect Suntien to install 400MW or more wind
power capacity pa in 2014/15, accounting for two-thirds of the EBIT. After the
issuance of new shares (overhang removed) has been completed, we expect
Suntien to reduce its net gearing to 100% while increasing the wind capacity
by ~30% pa. Trading at 12x 2015PE, the stock still look cheap compared with
gas distributors.
We raise our 2014/15 EPS estimates by 1%-3% on higher gas sales volume
with 14.7% dilution from the placement factored in, 3%-5% higher than
consensus. We are lowering 2013EPS by 6% to factor in possible provisions
for CDM receivables.
Price catalyst
12-month price target: HK$4.75 based on a DCF methodology.
Catalyst: updated management guidance during 2013 result briefing.
Our HK$4.75 price target implies 16.1x 2015e PE that closes the 12M fwd PE
gap vs. the HK/China gas sector from the current 30% to 10% and increase
the premium to HK/China wind sector from current 0% to 30%.
13 March 2014 41
Suntien Closing the valuation gap from strong gas/wind demand in Hebei
Fig 1 Suntiens risk-reward valuation shows limited downside

Base: HK$4.75/sh, 30% TSR upside, gas market share in Hebei falls
to 15% in 2020 from 27% in 2012
Natural gas sales: 16%/17% y/y gas sales volume growth in
2014/15e, average ASP increase by 3% pa, and gross margins
rebound to Rmb0.48-0.49/cu.m in 2014/15 (from Rmb0.47/cu.m),
gas sales vol CAGR 15% in 2014-2020.
Wind power sales: 21%/26% y/y wind power revenue growth, new
capacity addition 400MW pa in 2014/15 (up from 150MW-250MW
pa) , and 85%/86% EBITDA margins in 2014/15
TP from DCF implies 16.1x 2015 PE, 10% disc to HK/China gas
sector (from 30% disc), 17% prem to valuation derived from sum-of-
the-parts.
Bull: HK$6.15/sh, 70% upside, gas market share falls to 20% in 2020
Implies 20.9x 2015PE, 20% gas sales vol CAGR in 2014-2020.
Bear: HK$3.00/sh, 20% TSR downside, gas gross margin falls to
Rmb0.4/cu.m by 2020
Implies 10.6x 2014PE, assuming 70% cost hike pass-through.
Inability to pass on rising upstream gas costs; lower than forecast
receivable turnover imply a delay in achieving +ve FCFs.

In tandem with Chinas Gas Choices Beijing, Tianjin, Hebei Burgeoning demand faces midstream
bottlenecks published today, we are raising our Suntien price target by 36% to HK$4.75, on higher
gas distribution volume assumptions in the long term in Hebei. In our recent note China
Suntien - growth outlook intact in 2014, we highlight the key assumptions underpinning our base
case earnings forecasts and valuation. The key changes since are:
1) Raising 2014-15 EPS forecasts by 1-3% on higher gas sales volume assumptions.
We now assume 16%/17% gas sales volumes growth to 1.6/1.9bcm (vs. 14%/15% prior) in
2014/15e, slightly above consensus estimates of ~15-16% y/y growth), driven by a detailed
plan by Hebei government on increasing the gas consumption across major cities.
Compared with our projected 26% CAGR of gas demand growth in Hebei, our estimates of
Suntiens gas sales growth are lower mainly because we do not think the gas supply
constraints from PetroChina (Kunlun) have been removed. PetroChina could supply more gas
to its allies such as ENN in Hebei, while Suntien would have to diversify its gas supply
sources.
Our EPS forecasts stand 3%/5% above Bloomberg consensus.
Fig 2 Hebei gas demand to grow 5x by 2020e Fig 3 Hebei gas demand growth vs. Suntien sales

Source: Macquarie Research, March 2014 Source: Macquarie Research, March 2014
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HK$/sh
Bull
Base
Bear
3-year peak
3-year trough
0.0
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28.0
(bcm)
Hebei Gas Demand
NDRC
est
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28%
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0.0%
5.0%
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15.0%
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25.0%
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40.0%
45.0%
2013E 2014E 2015E 2016E 2017E
Hebei gas demand growth Suntien gas sales growth
13 March 2014 42
Fig 4 Suntien - Path to 2015E EPS both gas volume and wind capacity expansion drive the forecast growth

2) Increasing price target to HK$4.75/sh (from HK$3.5), derived from DCF and based on higher
gas sales volume assumptions in the long term
Hebei is the largest consumer of coal in China, and unsurprisingly its air quality problems are
worse than that in Beijing and Tianjin. In 2013, Hebei announced a multi-pronged strategy to
cut PM2.5 emissions by at least 25% and annual coal consumption by 40mt by 2017,
including: decommissioning cement and steel factories (see Environmental restrictions curb
North China Output, 6-Jan); retrofitting all coal-fired boilers in Shijiazhuang, Tangshan etc;
and bringing on stream new gas and wind power plants.
We believe Suntien is best positioned to benefit the strong gas/wind demand from Hebei for
the coal substitution, with a 2030% market share.
We raise the gas sales volume growth to 1316% in 201627 from previous 10% to
reflect the strong demand growth in Hebei. We think the assumptions are prudent, as
Suntiens implied market drops from the current 27% to 15% in 2020, which is less likely to
happen, in our view.
Our DCF-derived HK$4.75 PT implies 16.1x 2015e PE (from 12x prior), which is still a 10%
discount to the HK/China gas sector but a 17% premium to the valuation derived from sum-of-
the-parts. We believe our valuation can be justified by 21% earnings growth in 2015 and a
16% earnings CAGR in 2012-17.
Our HK$4.75 price target implies Suntien closes the 12M fwd PE gap vs. the HK/China gas
sector from the current 30% to 10% and increases the premium to the HK/China wind sector
from the current 0% to 30%.
Our price target implies 1.7x 2015E PB. We estimate that by 2020, Suntiens ROE should be
15%, driven by increasing returns from the wind power segment, assuming a growth rate of
3% and a cost of capital of 10.7%. Calculated through the PB-ROE formula: PB=(ROE-
g)/(COE-g), we derive a PB of 1.6x, justifying our valuation as fair.
0.17
0.17
0.18
0.22
0.01
0.03
0.01
0.03
0.01
0.03
0.00
0.16
2012A 2013E Gas volume
growth
Wind
capacity
growth
Others Dilution from
placement
2014E Gas volume
growth
Wind
capacity
growth
Others 2015E
Rmb/sh
13 March 2014 43
Fig 5 Suntiens EBIT outlook wind to outpace gas
(around 2:1)
Fig 6 while gas contributes 2/3 revenue, but both
driven by the coal substitution campaign in Hebei

Source: Company data, Macquarie Research, March 2014 Source: Company data, Macquarie Research, March 2014

Fig 7 DCF valuation summary
WACC Calculation 8.34% Sum of PV of FCF 5,417
Beta 0.95 Sum of PV of FCF (FY27E - FY42E) 10,725
Risk Free Rate 4.00% NPV of Terminal Value 8,606
Country Risk 1.00% EV 24,747
Equity Risk Premium 7.0% Add: Cash 2,126
Cost of Equity: 10.7% Less: Debt 11,366
Before Tax Cost of Debt 6.5% Less: Minority Interest 1,567
Marginal Tax Rate 25.0% Equity Value 13,941
Cost of Debt: 4.9% Number of shares 3,715
% Equity 60% Equity Value per Share - Rmb 3.8
% Debt 40% Rmb to HKD 1.3
Growth Rate in Perpetuity 3.0% Equity Value per Share - HKD 4.75
Implied 2014PE 19.8
Implied 2015PE 16.1
Implied 2014PB 1.8
Implied 2015PB 1.7

Fig 8 Cross-check with sum-of-the-parts
2014 2015
Wind EPS (Rmb) 0.12 0.15
Wind PER (sector average) 16.60 13.50
Fair value (HK$) 2.50 2.50

Gas EPS (Rmb) 0.06 0.08
Gas PER (sector average) 19.80 17.10
Fair value (HK$) 1.55 1.65

Sum-of-the-parts value (HK$) 4.05 4.15
We think it could be tricky to assign BETA to the DCF valuation because Suntiens share prices
seem highly volatile and uncorrelated to the HSI. We believe the volatility in the past five years was
caused mainly by poor wind utilization hours, unexpected announcement of placement and
uncertainty of cost pass-through. We expect in the long term, Suntiens share price could become
more stable like other utility companies when the installation base is significant with proven gas cost
pass-through. Therefore, we assign 0.95 as its BETA, in line with the average of utility companies.

-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Rmb m
Gas EBIT Wind EBIT
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Rmb m
Gas revenue Wind revenue
13 March 2014 44
Fig 9 BETA/gearing sensitivity to WACC
Gearing/BETA 0.90 0.95 1.00 1.05 1.10
60.0% 7.0% 7.2% 7.3% 7.5% 7.6%
50.0% 7.6% 7.8% 7.9% 8.1% 8.3%
40.0% 8.1% 8.3% 8.6% 8.8% 9.0%
30.0% 8.7% 8.9% 9.2% 9.4% 9.7%
20.0% 9.2% 9.5% 9.8% 10.1% 10.3%
10.0% 9.8% 10.1% 10.4% 10.7% 11.0%

Fig 10 WACC sensitivity to fair value
Gearing/BETA 0.90 0.95 1.00 1.05 1.10
60.0% 8.89 8.32 7.78 7.28 6.81
50.0% 6.87 6.31 5.80 5.32 4.88
40.0% 5.28 4.75 4.27 3.82 3.40
30.0% 4.00 3.50 3.05 2.63 2.24
20.0% 2.95 2.49 2.06 1.67 1.31
10.0% 2.08 1.64 1.24 0.88 0.54

Fig 11 A fair risk/reward for Suntien: 30-70% potential base-bull fair value upside against 20% downside in a low
probability bear scenario

We find Suntiens target price is sensitive to gas cost pass-through, gas volume growth and wind
receivable turnover. We test in different scenarios of the change in fair value and find an attractive
risk-reward skew.
(1) Bear scenario: we assume in the future only 70% of the gas price hike could be passed
through (least likely to occur) and gross margin falls to Rmb0.4/cu.m although in 2013
Suntien passed 100% cost through to the end customers. We also assume the gas sales
volume growth by ~12% pa by 2020. In this case, the fair value could be HK$3/sh, implying
only 20% downside from current price.
(2) Bull scenario: we assume gas sales growth to be 17% pa by 2020, and Suntien to maintain
20% market share instead of 15%. We also assume the receivable turnover improves by
50% given the support from government. We can calculate a fair value of HK$6.15/sh,
implying nearly 70% upside from current price.

3.00
4.75
6.15
1.34
0.41
0.63
0.77
0.00
3.00
6.00
9.00
Bear Fair Value (10.6x
2015e PE)
100% price hike pass
through
Gas market share 15%
by 2020
Price Target (16.1x
2015e PE)
Gas market share 20%
by 2020
Receivable turnover
down to 40 days by
50%
Bull Fair Value (20.9x
2015e PE)
Rmb/sh
Current Share Price
15%
probability
25%
probability

M
a
c
q
u
a
r
i
e

R
e
s
e
a
r
c
h

C
h
i
n
a
'
s

G
a
s

C
h
o
i
c
e
s
1
3

M
a
r
c
h

2
0
1
4

4
5
Fig 12 Comp sheet

B'berg

Local

Mcap
(US$ Price
Price
Target
TSR
Upside
(PT +

P/E Ratio
(MacQ)

P/E Ratio
(B'berg Cons)
P/B
Ratio
EV/
EBITDA
Ratio
Dividend
Yield

FCF Yield

ROACE

Gearing
(ND/ND&E)
Company Code Curr Reco. bn) (local) (local) DY) 2014E 2015E 2014E 2015E 2014E 2014E 2014E 2014E 2015E 2014E 2015E 2014E 2015E
HK/China Mid &
Downstream
Gas
74.3 +25% 18.5 x 15.3 x 19.7 x 17.0 x 2.8 x 12.0 x 1.5% 3% 5% 12% 13% 20% 15%
Hong Kong &
China Gas
3 HK HKD OP 19.7 16.46 20.00 +24% 19.7 x 18.0 x 20.8 x 19.2 x 2.9 x 14.6 x 2.1% 1% 2% 11% 11% 21% 18%
Kunlun 135 HK HKD OP 14.4 13.72 22.00 +63% 11.9 x 9.9 x 13.5 x 11.9 x 1.9 x 5.1 x 2.3% 5% 8% 14% 15% 25% 23%
China Resources
Gas
1193 HKHKD OP 7.3 25.70 30.00 +18% 20.1 x 14.8 x 21.1 x 17.8 x 3.5 x 9.9 x 1.0% 4% 2% 12% 14% 2% -2%
ENN 2688 HKHKD OP 7.2 51.45 62.70 +23% 18.6 x 15.6 x 20.2 x 17.1 x 3.7 x 8.5 x 1.3% 5% 7% 15% 16% 15% 1%
China Gas 384 HK HKD OP 7.9 12.50 12.20 -1% 21.5 x 17.0 x 24.6 x 21.0 x 4.1 x 13.4 x 1.0% 0% 5% 12% 13% 42% 35%
Towngas China 1083 HKHKD N 3.3 9.90 8.00 -18% 19.3 x 16.6 x 20.2 x 17.5 x 1.9 x 11.8 x 1.0% 4% 6% 8% 8% 18% 17%
NewOcean
Energy Holdings
342 HK HKD OP 1.4 7.49 11.00 +48% 10.2 x 8.1 x 11.4 x 9.2 x 2.1 x 7.9 x 1.3% -7% 5% 12% 13% 18% 10%
China Suntien 956 HK HKD OP 1.5 3.41 4.75 +40% 14.8 x 12.4 x 14.6 x 12.1 x 1.3 x 7.5 x 1.0% -19% -14% 8% 8% 50% 53%
Beijing Enterprise 392 HK HKD NR 11.8 71.90 nmf nmf nmf nmf 17.7 x 14.8 x 1.9 x 21.0 x 1.5%

Renewable
Energy
26.2 +11% 16.8 x 10.9 x 17.0 x 11.2 x 1.8 x 11.3 x 1.5% -14% -10% 8% 9% 50% 49%
GCL-Poly Energy 3800 HKHKD N 6.0 2.91 2.56 -11% 33.2 x 17.1 x 29.5 x 15.4 x 2.8 x 11.7 x 0.6% -9% -3% 7% 9% 66% 63%
Singyes Solar 750 HK HKD OP 1.0 11.98 9.60 -18% 10.6 x 8.5 x 9.8 x 8.6 x 2.2 x 8.6 x 1.4% -17% 3% 15% 16% 47% 34%
Comtec Solar
Systems
712 HK HKD OP 0.3 1.54 1.65 +9% 15.8 x 9.8 x 21.4 x 9.7 x 0.9 x 11.2 x 1.6% 4% 0% 6% 8% -19% -13%
China Datang
Renewable
Power
1798 HKHKD OP 1.4 1.51 1.90 +28% 11.9 x 7.6 x 12.6 x 8.8 x 0.9 x 10.6 x 2.5% -27% -24% 6% 6% 79% 79%
China Longyuan
Power
916 HK HKD OP 9.6 9.65 12.00 +26% 14.2 x 11.8 x 16.0 x 13.1 x 1.7 x 11.1 x 1.4% -10% -10% 7% 8% 59% 59%
Huaneng
Renewables
958 HK HKD OP 3.9 3.69 4.80 +31% 15.2 x 10.8 x 16.9 x 12.9 x 1.6 x 11.5 x 1.3% -24% -26% 7% 8% 68% 70%
Beijing J ingneng 579 HK HKD NR 3.9 4.73 nmf nmf nmf nmf 12.6 x 10.1 x 2.2 x 14.2 x 1.4%
Source: Bloomberg, Macquarie Research, March 2014, Priced as of March 11, 2014
13 March 2014 46

China Suntien Green Energy (956 HK, Outperform, Target Price: HK$4.75)

Gross Profit m 802 756 940 940 Gross Profit m 1,238 1,558 1,880 2,326
EBITDA m 990 801 1,094 1,094 EBITDA m 1,534 1,792 2,188 2,747
Depreciation m 272 281 330 330 Depreciation m 467 553 660 816
EBIT m 718 521 764 764 EBIT m 1,067 1,239 1,527 1,931
Net Interest Income m -185 -215 -221 -221 Net Interest Income m -354 -400 -442 -557
Associates m 22 68 45 45 Associates m 90 90 90 90
Pre-Tax Profit m 555 373 588 588 Pre-Tax Profit m 803 929 1,176 1,464
Tax Expense m -84 -57 -94 -94 Tax Expense m -7 -141 -189 -250
Net Profit m 472 316 493 493 Net Profit m 796 788 987 1,215
Minority Interests m -142 -86 -142 -142 Minority Interests m -246 -228 -283 -349

Reported Earnings m 330 230 352 352 Reported Earnings m 550 560 703 866
Adjusted Earnings m 330 230 352 352 Adjusted Earnings m 550 560 703 866

EPS (rep) fen 10.2 7.1 10.1 9.5 EPS (rep) fen 17.0 17.3 19.6 23.3
EPS (adj) fen 10.2 7.1 10.1 9.5 EPS (adj) fen 17.0 17.3 19.6 23.3
EPS Growth yoy (adj) % -8.6 21.5 -0.6 33.4 EPS Growth (adj) % 22.5 1.8 13.3 19.0
PE (rep) x 8.0 13.1 14.4 11.8
PE (adj) x 8.0 13.1 14.3 11.8

EBITDA Margin % 44.9 31.5 38.4 38.4 Total DPS fen 2.0 2.6 2.8 3.5
EBIT Growth % 14.9 17.9 6.3 46.7


EBITDA Growth % 23.5 16.8 22.1 25.6 Tax Paid m -7 -7 -143 -189
EBIT Growth % 22.2 16.1 23.3 26.4 Chgs in Working Cap m -494 -304 -325 -365
Gross Profit Margin % 33.5 32.8 33.0 33.6 Net Interest Paid m 0 0 0 0
EBITDA Margin % 41.4 37.7 38.4 39.7 Other m 196 -56 89 103
Net Profit Margin % 14.8 11.8 12.4 12.5 Acquisitions m 0 0 0 0
EV/EBIT x 9.5 10.5 10.5 8.3 Other m 200 706 14 20
Balance Sheet Ratios Dividend (Ordinary) m -188 -65 -84 -106
ROE % 10.2 9.7 10.3 10.7 Equity Raised m 0 0 0 0
ROA % 7.3 7.6 7.8 8.1 Debt Movements m 1,638 1,266 2,600 2,240
ROIC % 8.9 7.9 8.3 8.6 Other m -1,456 -787 -545 -679
Net Debt/Equity % 101.8 112.6 99.3 107.9 Financing Cashflow m -5 414 1,971 1,456
Interest Cover x 3.0 3.1 3.5 3.5
Price/Book x 0.8 1.2 1.3 1.2 Net Chg in Cash/Debt m -105 102 295 346
Free Cashflow m -299 -1,018 -1,691 -1,129


Cash m 758 596 2,126 2,473
Receivables m 2,241 2,480 2,694 2,973
Inventories m 30 39 46 56
Fixed Assets m 8,602 10,493 13,333 15,942
Intangibles m 0 0 0 0
Other Assets m 3,428 3,540 3,640 3,770
Total Assets m 15,263 17,351 22,043 25,417
Payables m 1,110 1,166 1,163 1,216
Short Term Debt m 971 1,135 1,472 1,762
Long Term Debt m 6,529 7,630 9,894 11,844
Other Liabilities m 29 165 211 272
Minority Interests m 1,055 1,283 1,567 1,916
Other m 0 0 0 0
Total S/H Equity m 6,623 7,254 9,303 10,323

All figures in Rmb unless noted.


13 March 2014 47
HONG KONG

857 HK Neutral

Valuation HK$ 6.11
12-month TSR % +5.4
Volatility Index Low
GICS sector Energy
Market cap HK$bn 1,461
Free float % 11

Year end 31 Dec 2012A 2013E 2014E 2015E
Revenue bn 2,195.3 2,177.1 2,065.9 2,155.4
EBIT bn 174.5 184.5 197.9 219.3
EBIT growth % -4.4 5.7 7.3 10.8
Reported profit bn 115.3 122.3 129.9 143.1
Adjusted profit bn 115.3 122.3 129.9 143.1
EPS rep Rmb 0.63 0.67 0.71 0.78
EPS rep growth % -13.3 6.1 6.2 10.2
EPS adj Rmb 0.63 0.67 0.71 0.78
EPS adj growth % -13.3 6.1 6.2 10.2
PER rep x 10.0 9.4 8.9 8.1
PER adj x 10.0 9.4 8.9 8.1
Total DPS Rmb 0.28 0.30 0.32 0.35
Total div yield % 4.5 4.8 5.1 5.6
ROA % 8.5 8.1 8.2 8.7
ROE % 11.2 11.3 11.3 11.5
EV/EBITDA x 4.6 4.2 3.9 3.6
Net debt/equity % 33.8 32.2 34.3 34.5
P/BV x 1.1 1.0 1.0 0.9

history


Analyst(s)
James Hubbard, CFA
Aditya Suresh, CFA

13 March 2014
PetroChina
Gas, PetroChina and Social Duty
Event
In our report Chinas Gas Choices Beijing, Tianjin, Hebei Burgeoning
demand faces midstream bottlenecks we highlight that PetroChina is likely to
continue to be responsible for the majority of the new upstream gas required
to satisfy Chinas rapidly growing gas demand. We believe this role has
destroyed shareholder value thus far, and we continue to see such work as
more social duty than value creation.
Impact
+ve: Local gas prices are rising this is a positive for the cash generation
of domestic gas production, which PetroChina is growing at c.10% p.a. from
key conventional and tight gas fields in Tarim, Ordos and Sichuan.
-ve: High cost imports are also rising domestic production growth is
nowhere near enough to meet demand so high cost, oil-linked gas imports
from Turkmenistan, Myanmar and LNG are also rising fast, and PetroChina
shareholders are burdened with effectively subsidizing the bulk of such
volumes today, and tomorrow.
-ve: Capex remains very high the gas imports need huge transcontinental
trunklines. US$60bn of related capex (with zero visibility on contract
tendering) has been deployed by PetroChina management since 2008. It
supports many CNPC jobs but also supports loss making imports and has
hence significantly reduced shareholder ROE. With West-East 3 under
construction and talk of West-East 4 and a Russia pipe we see no end in sight
to this ROE headwind.
-ve: Material downside risks for PetroChina shareholders include Russia
gas capex, more LNG and state enforced negative IRR shale gas
investments.
Neutral: Mixed ownership does little to help any of the above, although it
could lessen the cash capex burden.
No change.
Price catalyst
Catalyst: full year 2013 results March 20th.
PetroChinas ROE has halved over the last eight years and we believe this is,
in a large part, due to low return gas-related capex. Not surprisingly the
companys market PE multiple has also fallen and unless its free cash flow
generation and ROCE can be improved we see little fundamental justification
for a re-rating back to higher levels. We target a mid-cycle fwd PE of 8.1x
2015e PE and maintain our Neutral rating.

13 March 2014 48
Fig 1 PetroChina financial summary


PetroChina (857 HK) HK$8.0
Outperform
Profit & Loss (Rmb mn) 2013E 2014E 2015E 2016E Assumption 2013E 2014E 2015E 2016E
Net Revenues 2,177,068 2,065,890 2,155,442 2,149,997 Rmb/US$ 6.2 6.1 6.1 6.1
less COGS 1,530,388 1,434,697 1,487,065 1,474,300 HK$/US$ 7.8 7.8 7.8 7.8
less SG&A 75,317 70,607 73,184 72,556 Dubai ($/bbl) 104.3 109.0 113.0 112.0
less Other operating costs 182,574 140,000 138,849 137,580
EBITDAX 388,789 420,586 456,344 465,561 Group Realisations 2013E 2014E 2015E 2016E
less Exploration expense 29,231 30,012 31,046 31,870 Oil ($/bbl) 100.2 103.6 107.4 106.4
EBITDA 359,558 390,574 425,298 433,691 Gas ($/mscf) 5.6 6.3 6.6 6.7
less DD&A 177,571 192,659 206,014 203,231
EBIT 181,987 197,915 219,284 230,460 Production 2013E 2014E 2015E 2016E
E&P 196,926 207,567 211,849 205,086 Oil (kb/d) 2,556 2,574 2,583 2,538
Ref & Chems -28,715 -15,051 -10,586 -8,961 Gas (kboe/d) 1,258 1,341 1,467 1,608
Marketing 9,665 11,574 12,546 13,373 Group Production (kboe/d) 3,814 3,916 4,050 4,146
Natural gas and pipelines 22,969 5,826 17,475 32,961 Production Growth Y/Y % 4% 3% 3% 2%
Other -16,341 -12,000 -12,000 -12,000
less Total finance costs 19,536 17,624 19,899 23,552
Other income/(expense) 8,710 6,800 6,800 6,800
Pretax Profit 173,677 187,091 206,185 213,708
less Tax Expense 37,718 41,160 45,361 47,016
Income before Minorities 135,960 145,931 160,824 166,692
less Minority interests 13,611 16,052 17,691 18,336
Reported Net Income 122,349 129,879 143,134 148,356
Clean Net Income 106,330 129,879 143,134 148,356
Basic EPS (Rmb/sh) 0.67 0.71 0.78 0.81
Diluted EPS (Rmb/sh) 0.58 0.71 0.78 0.81
DPS declared (Rmb/sh) 0.30 0.32 0.35 0.36 Reserves 2013E 2014E 2015E 2016E
1P Reserves (mboe) 25,119 25,772 26,643 27,334
1P Reserve Life (yrs) 18.0 18.0 18.0 18.0
Cashflow Analysis (Rmb m) 2013E 2014E 2015E 2016E EV / 1P reserves ($/boe) 12.6 11.3 11.3 11.2
EBITDA 359,558 390,574 425,298 433,691
less Tax Paid 59,434 41,160 45,361 47,016 Per Barrel Statistics ($/boe) 2013E 2014E 2015E 2016E
less Chgs in Working Cap 4,281 -4,731 -5,255 -4,729 Realizations 77.8 80.6 82.4 80.3
add Other 4,435 4,541 3,974 5,412 Opex -12.9 -13.7 -14.4 -15.1
Operating Cashflow 300,278 358,686 389,167 396,816 Production Tax -3.9 -4.0 -4.1 -4.0
Acquisitions -6,509 0 0 0 Resource Tax -3.6 -3.6 -3.7 -3.7
Capex -355,000 -346,860 -346,860 -339,860 Windfall Tax -12.7 -13.1 -13.6 -13.1
Asset Sales 38,963 0 0 0 DD&A -11.9 -12.6 -13.3 -13.3
Other 86,589 11,335 9,660 9,207 Others -3.7 -3.7 -3.7 -3.7
Investing Cashflow -235,957 -335,525 -337,200 -330,653 EBIT 29.1 29.8 29.6 27.4
Dividends Paid -59,490 -56,827 -64,309 -68,538 Income Tax -5.5 -5.7 -5.6 -5.3
Equity Raised 0 0 0 0 Net Income 23.6 24.2 24.0 22.1
Debt Movements 91,275 -22,159 -2,759 74,041
Other 13,129 0 0 0 Valuation Multiples 2013E 2014E 2015E 2016E
Financial Cashflow 44,913 -78,986 -67,068 5,503 EV/EBITDA 5.0 4.3 4.0 4.0
EV/DACF 6.8 5.0 4.8 4.8
Net exchange difference -1,431 0 0 0 P/E 11.6 9.0 8.2 7.9
Net Chg in Cash/Debt 107,804 -55,826 -15,100 71,666 P/CEPS 5.1 3.4 3.1 3.1
Free cash flow (OpCF-capex) -61,231 11,826 42,307 56,956 P/B 1.3 1.0 0.9 0.8
FCF yield -3.8% -0.6% 1.1% 1.7%
Balance Sheet (Rmb mn) 2013E 2014E 2015E 2016E Dividend yield 3.9% 5.0% 5.5% 5.7%
Cash & Cash eqv. 151,167 95,341 80,241 151,907
Current assets 590,221 539,126 529,281 605,677 DCF 2014E 2015E 2016F 2017F
Fixed assets 1,788,418 1,928,617 2,054,977 2,176,736 EBIT 197,915 219,284 230,460 223,496
Total assets 2,378,639 2,467,743 2,584,259 2,782,413 NOPLAT 154,374 171,041 179,758 174,327
Current liabilities 663,125 667,743 670,845 672,067 DDA & exploration expense 222,671 237,060 235,101 247,139
Total liabilities 1,136,585 1,141,203 1,164,305 1,265,527 CFI -335,525 -337,200 -330,653 -328,503
Shareholder equity 1,242,054 1,326,540 1,419,954 1,516,886 FCF to enterprise 41,520 70,902 84,207 92,963
Net Debt 402,808 458,634 493,734 522,068
PV explicit period 237,370 WACC: 7.5%
Ratio Analysis 2013E 2014E 2015E 2016E PV terminal EV 1,120,433 based on EV/NOPLAT of 8.3x
Gearing (ND/ND&E) 24% 26% 26% 26% Net (debt)/cash -402,808
Interest cover 16.9 17.6 18.7 16.7 Minorities buy out -20,070
Dividend payout ratio 4% 5% 5% 6% Equity value 934,925
Effective tax rate 22% 22% 22% 22%
ROA 6% 6% 6% 6% Shares o/s (mn) 183,021
ROACE 9% 9% 9% 9% Value per share (Rmb) 5.1
ROE 11% 11% 11% 11% Value per share (HK$) 6.1
EBITDA margin 17% 19% 20% 20%
EBIT margin 8% 10% 10% 11%
Target Price
0%
7%
14%
21%
28%
35%
42%
0
700
1400
2100
2800
3500
4200
4900
2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
kboe/d
PetroChina Production Mix
Oil Gas % Gas (RHS)
13 March 2014 49

PetroChina (857 HK, Neutral, Target Price: HK$8.00)
Quarterly Results 3Q/13A 4Q/13E 1Q/14E 2Q/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue bn 582 494 516 513 Revenue bn 2,195 2,177 2,066 2,155
Gross Profit bn 170 154 156 154 Gross Profit bn 678 647 631 668
Cost of Goods Sold bn 411 341 360 359 Cost of Goods Sold bn 1,517 1,530 1,435 1,487
EBITDA bn 87 100 92 89 EBITDA bn 326 362 391 425
Depreciation bn 43 59 44 44 Depreciation bn 152 178 193 206
Amortisation of Goodwill bn 0 0 0 0 Amortisation of Goodwill bn 0 0 0 0
Other Amortisation bn 0 0 0 0 Other Amortisation bn 0 0 0 0
EBIT bn 44 41 47 45 EBIT bn 175 185 198 219
Net Interest Income bn -6 -3 -4 -4 Net Interest Income bn -16 -20 -18 -20
Associates bn 3 2 2 2 Associates bn 8 9 7 7
Exceptionals bn 0 0 0 0 Exceptionals bn 0 0 0 0
Forex Gains / Losses bn 1 0 0 0 Forex Gains / Losses bn 0 0 0 0
Other Pre-Tax Income bn 0 0 0 0 Other Pre-Tax Income bn 0 0 0 0
Pre-Tax Profit bn 41 39 45 43 Pre-Tax Profit bn 167 174 187 206
Tax Expense bn -8 -9 -10 -9 Tax Expense bn -36 -38 -41 -45
Net Profit bn 33 30 35 33 Net Profit bn 131 136 146 161
Minority Interests bn -3 -3 -4 -4 Minority Interests bn -15 -14 -16 -18

Reported Earnings bn 30 27 31 30 Reported Earnings bn 115 122 130 143
Adjusted Earnings bn 30 27 31 30 Adjusted Earnings bn 115 122 130 143

EPS (rep) 0.16 0.15 0.17 0.16 EPS (rep) 0.63 0.67 0.71 0.78
EPS (adj) 0.16 0.15 0.17 0.16 EPS (adj) 0.63 0.67 0.71 0.78
EPS Growth yoy (adj) % 19.4 -4.6 -13.8 0.1 EPS Growth (adj) % -13.3 6.1 6.2 10.2
PE (rep) x 14.0 9.9 8.7 7.7
PE (adj) x 14.0 9.9 8.7 7.7

Revenue Growth % 5.5 -17.2 -4.5 -8.5 Period End Shares m 183,021 183,021 183,021 183,021
EBIT Growth % 11.8 -8.7 -10.7 -3.3


Revenue Growth % 9.6 -0.8 -5.1 4.3 EBITDA bn 326 362 391 425
EBITDA Growth % 1.9 10.9 7.9 8.9 Tax Paid bn -42 -59 -41 -45
EBIT Growth % -4.4 5.7 7.3 10.8 Chgs in Working Cap bn 65 -4 5 5
Gross Profit Margin % 30.9 29.7 30.6 31.0 Net Interest Paid bn 0 0 0 0
EBITDA Margin % 14.9 16.6 18.9 19.7 Other bn -110 2 5 4
EBIT Margin % 7.9 8.5 9.6 10.2 Operating Cashflow bn 239 300 359 389
Net Profit Margin % 5.3 5.6 6.3 6.6 Acquisitions bn -15 -7 0 0
Payout Ratio % 45.0 45.0 45.0 45.0 Capex bn -312 -269 -347 -347
EV/EBITDA x 6.0 4.3 3.8 3.5 Asset Sales bn 1 39 0 0
EV/EBIT x 11.0 8.3 7.4 6.6 Other bn -6 1 11 10
Investing Cashflow bn -332 -236 -336 -337
Balance Sheet Ratios Dividend (Ordinary) bn -66 -59 -57 -64
ROE % 11.2 11.3 11.3 11.5 Equity Raised bn 0 0 0 0
ROA % 8.5 8.1 8.2 8.7 Debt Movements bn 107 91 -22 -3
ROIC % 10.2 9.1 9.4 9.6 Other bn 34 13 0 0
Net Debt/Equity % 33.8 32.2 34.3 34.5 Financing Cashflow bn 75 45 -79 -67
Interest Cover x 10.8 9.3 11.2 11.0
Price/Book x 1.5 1.1 0.9 0.9 Net Chg in Cash/Debt bn -18 108 -56 -15
Free Cashflow bn -72 31 12 42


Cash bn 46 155 99 84
Receivables bn 64 79 84 89
Inventories bn 214 217 217 217
Investments bn 12 17 17 17
Fixed Assets bn 1,570 1,559 1,699 1,825
Intangibles bn 42 44 44 44
Other Assets bn 221 308 308 308
Total Assets bn 2,169 2,379 2,468 2,584
Payables bn 365 421 426 429
Short Term Debt bn 151 203 203 203
Long Term Debt bn 294 351 351 371
Provisions bn 0 0 0 0
Other Liabilities bn 178 162 162 162
Total Liabilities bn 988 1,137 1,141 1,164
Shareholders' Funds bn 1,064 1,108 1,196 1,292
Minority Interests bn 117 134 131 128
Other bn 0 0 0 0
Total S/H Equity bn 1,181 1,242 1,327 1,420
Total Liab & S/H Funds bn 2,169 2,379 2,468 2,584



13 March 2014 50
ASIA EX JAPAN

Order of preference table
Coal sector stocks overview

Note: Shenhua, China Coal and Yitai Coal are Neutral-
rated; the others are UP-rated. Share price daa as of 11
March 2014.
Source: Bloomberg, Macquarie Research, March 2014

Analyst(s)
Matty Zhao
+852 3922 1293 matty.zhao@macquarie.com
David Ching
+852 3922 1160 david.ching@macquarie.com
Robbie Li
+852 3922 1283 robbie.li@macquarie.com

13 March 2014

China coal sector
Mild demand growth in 2014-15F
Event
In Chinas Gas Choices Beijing, Tianjin, Hebei Burgeoning demand faces
midstream bottlenecks we estimate annual coal consumption in Beijing,
Tianjin, Hebei to decline by 70mt by 2020F, or 20% of demand in these
provinces (coal consumption in Beijing, Tianjin and Hebei was c.21.5mnt,
50mnt, and 250mnt respectively in 2013). However, given the fact that
Beijing-Tianjin-Hebei region only accounted for 8% of Chinas total coal
consumption in 2013, the impact on coal demand is not large from a national
perspective, and is in line with our forecast that Chinas coal demand growth
will slow to 2-3% in the next few years.
Impact
Oversupply in 2014/15F and mid-term price fluctuation at cost curve:
despite slower demand growth, oversupply may remain in the mid-term due to
high capacity growth in Shanxi. According to Shanxi Coal Mine Safety
Supervision, there are 524 mines under construction in Shanxi. Including
these, Shanxi has a capacity of 1.2bnt (vs. 910mnt output in 2012). Eighty of
the 524 mines may start to contribute by 2013 y/e (70-80mnt capacity) with
the majority being coking coal. Under the current weak prices/strict safety
rules, there may be delays in construction; yet these extra capacities should
put a ceiling on coal prices, especially coking coal prices. Mid-term price is
likely to fluctuate around the cost curve at Rmb550-600/t.
Cost curve to drop further in mid-term: CCTD and Fenwei believe there is
room for cost cuts, especially admin costs. Production costs may still be cut
by Rmb30-50/t in 2014-15F. Railway bottlenecks are likely to be solved by
end-2015 when major new railways are due to be completed. Resources tax:
limited impact to thermal coal but impact may be big for coking coal: likely to
be around 3-5% of mine-mouth price. However, the government would
probably clear up other fees and levies by the end of this year so the
incremental burden might be limited to ~Rmb5/t for thermal coal per CCTD
and China Coal. The impact to coking coal may be much bigger.
Outlook
Cautious on thermal coal and bearish on coking coal: Taking into account
the oversupply in 2014-15E with large capacity growth in Shanxi restructured
mines, Indonesia output growth, and only 2-3% pa demand growth (with
downside risks due to the demand destruction in Beijing, Tianjin, Hebei), we
maintain our cautious view on thermal coal sector and are bearish on
coking coal. We see thermal coal fluctuating at the cost curve at Rmb580/t in
2014 (relatively stable y-y) and Rmb550/t in 2015. We keep our Neutral rating
for Shenhua and China Coal; and maintain Yanzhou Coal, Fushan and
Hidili as Underperform given our bearish view on HCC, with large earnings
declines forecast in 2014-15 (6-53%).

Company Ticker Mkt Cap Price Upside P/E (x)
Name USD $m Target (%) 2014E
Shenhua 1088 HK 50,843 27.00 36% 7.6
China Coal 1898 HK 6,492 4.20 11% 9.8
Yanzhou Coal 1171 HK 3,251 5.00 -3% 12.1
Yitai Coal 3948 HK 4,075 17.00 74% 4.4
Shougang Fushan 639 HK 1,525 2.10 -4% 16.7
Hidili Industry 1393 HK 240 0.60 -34% nmf
13 March 2014 51
Fig 1 Thermal Coal Cost Curve marginal costs have come down to Rmb550-600/t following the government
initiative to lower fees & levies on coal and also lower charges

Source: SXCoal, CCTD, Macquarie Research, March 2014

0
100
200
300
400
500
600
700
Shenhua
China Coal
Yanzhou
Hebei small
mines trucked
Other Shanxi
SOE
Shanxi small
mine rail
Inner Mongolia
rail
Inner Mongolia
trucked
Shanxi small
mine trucked
VAT
Transportation
cost
Tax, fees and
others
Cash cost
RMB/t
mnt


13 March 2014 52
HONG KONG

2333 HK Outperform

Valuation HK$ 53.00
- PER
Volatility Index Medium
GICS sector Automobiles &
Components
Free float % 45

Year end 31 Dec 2012A 2013E 2014E 2015E
Revenue m 43,160 55,361 71,698 93,302
EBIT m 6,558 9,685 12,285 16,729
EBIT growth % 64.4 47.7 26.8 36.2
Reported profit m 5,692 8,278 10,457 14,207
EPS rep Rmb 1.87 2.72 3.44 4.67
EPS rep growth % 53.7 45.4 26.3 35.9
PER rep x 13.7 9.4 7.5 5.5
Total DPS Rmb 0.57 0.82 1.03 1.40
Total div yield % 2.2 3.2 4.0 5.5
ROA % 17.3 20.7 21.3 22.7
ROE % 29.8 33.9 33.8 35.9
EV/EBITDA x 9.4 6.5 5.1 3.8
Net debt/equity % -29.3 -23.3 -26.1 -32.0
P/BV x 3.6 2.9 2.3 1.7

history


Analyst(s)
Janet Lewis, CFA
+852 3922 5417 janet.lewis@macquarie.com
Zhixuan Lin
+86 21 2412 9006 zhixuan.lin@macquarie.com
Leo Lin
+852 3922 1098 leo.lin@macquarie.com

14 March 2014
Great Wall Motor Company
Volumes constrained by gas shortage
Event
In December 2013 Great Wall Motor (GWM) reported a 7% decline in sales
volume as sedan volumes plunged 42% YoY. Volumes of the C30 sedan
were especially weak, declining 51% YoY to their lowest level since February
2011. The explanation from the company was that sales were impacted by the
shortage of natural gas (NG) caused by the pressure to switch from coal-fired
electric power to NG in the wake of record pollution levels in the Beijing-
Tianjin-Hebei area. Sedan volumes, especially the C30, remained low in
January and February, declining 35% and 21%, respectively.
Impact
Not a function of weak demand: Macquaries proprietary dealer survey
shows that discounts on sedans have fallen sharply. In the case of the C30
the discount peaked at 4.3% in July 2013 and fell to 0.8% in January 2014.
The discount on the C50 fell from 5.6% to 0.5% over the same period. This
highlights how the shortage of volumes has resulted in tighter pricing. Other
than the VW Golf, these are the lowest discounts for any sedan in the market
in China other than recent launches of new models.
Favour high margin products: Great Wall explained that it was favouring
production of its SUVs, which typically carry a gross margin of 30% or higher,
over sedans, which have a GPM of just 25% or so. Average monthly
shipments of the C30 sunk to 7,694 over Dec 2013-Feb 2014 vs 13,814 over
the same period a year ago and 10,036 over Sept-Nov 2013. We believe a
normal level is about 10k/month. The shortfall of C50s is more modest,
suggesting the gas problem is more an issue in Baoding than Tianjin.
NG critical to production: NG is used mainly for drying the vehicle body in
the paint shop as well as general heating in the factories and living areas.
GWM gets its gas from a local municipal NG distributor. Given GWMs
importance to the local economy and as a tax payer, we believe it will work
with the local supplier to ensure that storage is in place to ensure it does not
face a similar disruption in 2015. The procurement of truck-transported LNG
could be a backup plan though the cost is higher. Further as we note in
Chinas Gas Choices published today, we expect a ramp-up in utilization rates
at the newly commissioned gas storage facilities and LNG regas terminals
should increasingly help alleviate concerns around winter gas shortages.
No change.
Price catalyst
Catalyst: 21 March 2013 results; 24 March analyst meeting.
GWM is our top pick in the China auto sector. Although the main growth driver
remains its expanding line-up of SUVs, sedans are an important product for
first-time buyers. We expect overall in 2014 the company can beat its official
sales target of 890k (+18% YoY), achieving sales of 930k (+23% YoY). The
recent share price weakness offers a great entry point.
13 March 2014 53

Great Wall Motor Company (2333 HK, Outperform, Target Price: HK$53.00)

Gross Profit m 7,651 8,315 9,122 11,149 Gross Profit m 11,598 15,966 20,270 26,928
EBITDA m 5,376 5,446 6,176 7,548 EBITDA m 7,502 10,823 13,724 18,434
Depreciation m 506 576 618 755 Depreciation m 890 1,082 1,372 1,628
EBIT m 4,842 4,843 5,528 6,757 EBIT m 6,558 9,685 12,285 16,729
Net Interest Income m 30 39 32 39 Net Interest Income m 105 70 70 100
Associates m 0 0 0 0 Associates m 0 0 0 0
Pre-Tax Profit m 4,931 4,934 5,608 6,854 Pre-Tax Profit m 6,841 9,865 12,461 16,930
Tax Expense m -840 -739 -897 -1,097 Tax Expense m -1,119 -1,578 -1,994 -2,709
Net Profit m 4,092 4,195 4,710 5,757 Net Profit m 5,722 8,287 10,467 14,222
Minority Interests m -4 -4 -5 -6 Minority Interests m -30 -9 -10 -14

Reported Earnings m 4,087 4,191 4,706 5,751 Reported Earnings m 5,692 8,278 10,457 14,207
Adjusted Earnings m 4,087 4,191 4,706 5,751 Adjusted Earnings m 5,692 8,278 10,457 14,207

EPS (rep) 1.34 1.38 1.55 1.89 EPS (rep) 1.87 2.72 3.44 4.67
EPS (adj) 1.34 1.38 1.55 1.89 EPS (adj) 1.87 2.72 3.44 4.67
EPS Growth yoy (adj) % 73.7 25.5 15.1 37.2 EPS Growth (adj) % 53.3 45.4 26.3 35.9
PE (rep) x 10.5 12.3 7.3 5.2
PE (adj) x 10.5 12.3 7.3 5.2

EBIT Growth % 75.2 27.6 14.2 39.5


EBITDA Growth % 60.0 44.3 26.8 34.3 Tax Paid m -3,437 -4,650 -5,994 -8,009
EBIT Growth % 64.4 47.7 26.8 36.2 Chgs in Working Cap m 2,045 3,107 4,545 6,578
Gross Profit Margin % 26.9 28.8 28.3 28.9 Net Interest Paid m -1,774 -2,129 -2,555 -3,066
EBITDA Margin % 17.4 19.5 19.1 19.8 Other m 0 0 0 0
Net Profit Margin % 13.2 15.0 14.6 15.2 Acquisitions m -3 0 0 0
EV/EBIT x 8.0 9.7 5.6 4.0 Other m -12 -11 -11 -11
Balance Sheet Ratios Dividend (Ordinary) m -1,036 -1,794 -2,483 -3,137
ROE % 29.8 33.9 33.8 35.9 Equity Raised m 0 0 0 0
ROA % 17.3 20.7 21.3 22.7 Debt Movements m 341 59 59 59
ROIC % 55.3 53.2 49.2 54.8 Other m -409 -129 -129 -129
Net Debt/Equity % -29.3 -23.3 -26.1 -32.0 Financing Cashflow m -1,104 -1,863 -2,553 -3,206
Interest Cover x nmf nmf nmf nmf
Price/Book x 2.8 3.7 2.2 1.7 Net Chg in Cash/Debt m -711 790 2,670 5,234
Free Cashflow m -108 2,150 4,720 7,938


Cash m 6,337 6,386 9,056 14,291
Receivables m 16,728 21,479 27,820 36,202
Inventories m 2,695 2,189 2,857 3,687
Fixed Assets m 14,015 17,433 20,560 24,333
Intangibles m 2,216 2,661 3,095 3,617
Other Assets m 578 707 875 1,091
Total Assets m 42,569 50,854 64,263 83,221
Payables m 18,727 21,091 26,935 35,677
Short Term Debt m 0 0 0 0
Long Term Debt m 0 0 0 0
Other Liabilities m 2,199 2,415 2,652 2,913
Minority Interests m 129 40 48 58
Other m 0 0 0 0
Total S/H Equity m 21,643 27,349 34,677 44,632


13 March 2014 54
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand
Outperform return >3% in excess of benchmark return
Neutral return within 3% of benchmark return
Underperform return >3% below benchmark return

Benchmark return is determined by long term nominal
GDP growth plus 12 month forward market dividend
yield
Macquarie Asia/Europe
Outperform expected return >+10%
Neutral expected return from -10% to +10%
Underperform expected return <-10%
Macquarie First South - South Africa
Outperform expected return >+10%
Neutral expected return from -10% to +10%
Underperform expected return <-10%
Macquarie - Canada
Outperform return >5% in excess of benchmark return
Neutral return within 5% of benchmark return
Underperform return >5% below benchmark return
Macquarie - USA
Outperform (Buy) return >5% in excess of Russell
3000 index return
Neutral (Hold) return within 5% of Russell 3000 index
return
Underperform (Sell) return >5% below Russell 3000
index return

Volatility index definition*
This is calculated from the volatility of historical
price movements.

Very highhighest risk Stock should be
expected to move up or down 60100% in a year
investors should be aware this stock is highly
speculative.

High stock should be expected to move up or
down at least 4060% in a year investors should
be aware this stock could be speculative.

Medium stock should be expected to move up
or down at least 3040% in a year.

Lowmedium stock should be expected to
move up or down at least 2530% in a year.

Low stock should be expected to move up or
down at least 1525% in a year.
* Applicable to Asia/Australian/NZ/Canada stocks
only
Recommendations 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following
adjustments made:
Added back: goodwill amortisation, provision for
catastrophe reserves, IFRS derivatives & hedging,
IFRS impairments & IFRS interest expense
Excluded: non recurring items, asset revals, property
revals, appraisal value uplift, preference dividends &
minority interests

EPS = adjusted net profit / efpowa*
ROA = adjusted ebit / average total assets
ROA Banks/Insurance = adjusted net profit /average
total assets
ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
*equivalent fully paid ordinary weighted average
number of shares

All Reported numbers for Australian/NZ listed stocks
are modelled under IFRS (International Financial
Reporting Standards).

Recommendation proportions For quarter ending 31 December 2013
AU/NZ Asia RSA USA CA EUR
Outperform 47.89% 60.13% 37.97% 39.49% 59.64% 48.65% (for US coverage by MCUSA, 6.52% of stocks followed are investment banking clients)
Neutral 35.56% 22.65% 46.84% 54.50% 35.54% 32.43% (for US coverage by MCUSA, 4.35% of stocks followed are investment banking clients)
Underperform 16.55% 17.22% 15.19% 6.01% 4.82% 18.92% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients)

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