Friday, May 13, 2016

Beijing Enterprises Holdings - A Stub Trade

I first wrote about Beijing Enterprises Holdings (“BEHL”, 392.HK) last year here when the stock was trading around HKD$60. The stock is now at ~$39 HKD/share, a 36% drop. This is all despite very strong fundamentals. 2015 revenue and EPS were up 25% and 18%, respectively. 2016 results are also expected to be up double digits.

So why did the stock go down? First, it’s just a bad timing for a stock like BEHL. It’s China. It’s energy. Combine the two most hated features in this market and of course you get a lower multiple. The second reason is more concerning. There’s a risk of a tariff cut in the pipelines segment, perhaps coming in second half of 2016.

The stock is now ridiculously cheap. If you hedge out publicly traded subsidiaries Beijing Enterprises Water (371.HK) and China Gas (384.HK), that would leave you with the stub of natural gas segment, Yanjing Beer, and corporate (including waste treatment). This stub is trading at around 5x LTM earnings. Even in if you assume pipeline profits goes to 0, an extreme proposition, the stub is trading at <17x 2015 earnings.

Keep in mind natural gas usage is still set to grow in China over the next decade. LNG supplies coming online will push prices down, encourage adoption, and benefit distributors like BEHL. So I have gradually added to my positions in the past year. I suspect a tariff cut will actually be good for the stock, and that the stock will make a run after the bad news is flushed through.

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