beijing enterprises holdings (0392.hk,...

February 13, 2017

The Asia Stock Collection

Beijing Enterprises Holdings

(0392.HK, CL-Buy) Upside: 37% Equity Research

Good things come in threes

1) Sustainable growth; 2) Favorable risk-reward; 3) Attractive valuation

We believe integrated public utilities company BEHL is well positioned to benefit from secular demand growth for

natural gas in China, with the government targeting gas’ contribution to primary energy to reach c.10% in 2020 from

c.6% in 2016. With BEHL the market leader in solid waste management, China’s doubled investment budget in its 13th

5-yr plan (Rmb252bn) is another source of upside. BEHL offers a favorable risk-reward profile, with sustainable earnings

growth and attractive valuation, and we forecast 18% core net profit CAGR in 2016-18. Given the company consistently

generates positive free cash flow with improving ROE (9.7% in 2016 to 11.3% in 2018E), we see deep value in the stock.

Tariff cut downside risk already priced in

BEHL’s share price underperformed the Hang Seng Index in 2016 (-21%

vs. -0.6%) likely due to investor concerns on potential tariff cuts for its

gas pipeline, limited synergies and a full valuation for the EEW

acquisition. We believe the selloff is overdone and expect the

following to drive a rerating:

1. Lower-than-expected tariff cut for the gas pipeline if storage

facilities can be factored into the proposed 8% ROIC cap

calculation. The current share price already implies c.50% net profit

downside risk; even in our bear case BEHL would still deliver 11%/

8% yoy net profit growth in 2017/18E.

2. Value-accretive acquisition/s. As a conglomerate with a healthy

balance sheet (48% 2016E net gearing), we believe BEHL has the

firepower to undertake M&A.

Oil & Waste businesses offer more than meets the eye

While investors have raised various concerns about the recently

acquired oil business (VERK) and energy-from-waste company (EEW):

1. We believe the VERK acquisition is value accretive for BEHL

and expect a stable earnings/dividends payout trajectory for the

project due to low production costs and tax system; and

2. We do not believe EEW has a limited earnings growth outlook

and see synergies with BEHL’s existing business. We see

opportunities for EEW to gain market share in Germany and win

new projects in Europe, and believe BEHL can leverage EEW’s

technical know-how to improve operational efficiency in its China

plants.

Additionally, to address tariff concerns, we provide detailed scenario

analysis on the potential tariff cut for the transmission pipeline and

believe earnings downside risk is priced into valuation, with the stock

trading at trough P/E and P/B valuations.

Frank He +86(21)2401-8925 [email protected] Beijing Gao Hua Securities Company Limited

Price 12m Target Price

HK$40.20 HK$55.00

Market Cap 12m ADTV

US$6,355MN US$11.7MN

1.

2.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed bynon-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research

Curating analyst stock ideas around Asia with

a focus on differentiated views, liquidity and

drivers in 2017 addressing eight core issues:

1. Investment thesis

2. The path forward

3. Where we are different

4. Forecast drivers

5. Valuation

6. Cash flow & balance sheet

7. Risks & pushbacks

8. External share price factors

Check out the full series on GS360 portal.

February 13, 2017 China: Energy: Gas

Goldman Sachs Global Investment Research 2

Note: Pricing date of this report as of February 10, 2017, unless stated otherwise

Beijing Enterprises Holdings: Summary financials

Profit model (HK$ mn) 12/15 12/16E 12/17E 12/18E Balance sheet (HK$ mn) 12/15 12/16E 12/17E 12/18E

Total revenue 60,149.9 61,276.3 63,611.2 65,905.8 Cash & equivalents 13,693.8 9,231.1 10,316.1 12,653.6

Cost of goods sold (51,098.9) (50,246.5) (52,161.2) (54,042.7) Accounts receivable 3,544.5 3,898.9 4,288.8 4,717.7

SG&A (6,511.8) (6,227.1) (6,207.8) (6,433.8) Inventory 4,644.2 5,108.6 5,619.5 6,181.4

R&D -- -- -- -- Other current assets 11,755.6 12,343.4 12,960.5 13,608.6

Other operating profit/(expense) 3,454.1 1,300.0 1,365.0 1,433.3 Total current assets 33,638.1 30,582.0 33,184.9 37,161.2

EBITDA 5,993.3 6,102.6 6,607.2 6,862.5 Net PP&E 37,735.6 38,861.4 39,922.2 40,894.5

Depreciation & amortization (2,761.5) (2,529.0) (2,597.4) (2,690.6) Net intangibles 9,210.8 9,084.4 8,954.5 8,820.0

EBIT 3,231.8 3,573.6 4,009.8 4,171.9 Total investments 32,804.6 51,776.1 55,688.8 59,971.5

Interest income 163.0 163.0 109.9 122.8 Other long-term assets 11,377.0 11,984.8 12,626.9 13,305.4

Interest expense (1,301.9) (1,431.2) (1,572.7) (1,623.7) Total assets 124,766.0 142,288.6 150,377.4 160,152.6

Income/(loss) from uncons. subs. 4,707.9 4,775.1 6,571.1 7,120.9

Others (216.9) 100.0 (100.0) (100.0) Accounts payable 3,641.0 4,187.1 4,815.2 5,537.4

Pretax profits 6,637.9 6,980.5 9,018.1 9,692.0 Short-term debt 7,048.0 12,048.0 12,048.0 12,048.0

Income tax (682.0) (463.3) (484.2) (514.7) Other current liabilities 15,618.6 17,207.7 14,714.8 16,428.5

Minorities (288.5) (401.8) (452.1) (465.4) Total current liabilities 26,307.5 33,442.8 31,577.9 34,013.9

Long-term debt 27,707.6 32,707.6 35,707.6 35,707.6

Net income pre-preferred dividends 5,667.4 6,115.4 8,081.7 8,711.9 Other long-term liabilities 2,098.8 2,098.5 2,098.2 2,097.8

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 29,806.4 34,806.1 37,805.8 37,805.5

Net income (pre-exceptionals) 5,613.5 6,315.4 8,081.7 8,711.9 Total liabilities 56,113.9 68,248.9 69,383.7 71,819.4

Post-tax exceptionals 53.9 (200.0) 0.0 0.0

Net income 5,667.4 6,115.4 8,081.7 8,711.9 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 58,187.3 63,287.5 69,948.7 77,002.2

EPS (basic, pre-except) (HK$) 4.37 4.97 6.36 6.85 Minority interest 10,464.9 10,752.2 11,044.9 11,331.0

EPS (basic, post-except) (HK$) 4.41 4.81 6.36 6.85

EPS (diluted, post-except) (HK$) 4.41 4.81 6.36 6.85 Total liabilities & equity 124,766.0 142,288.6 150,377.4 160,152.6

DPS (HK$) 0.95 0.99 1.27 1.37

Dividend payout ratio (%) 21.5 20.7 20.0 20.0 BVPS (HK$) 45.32 49.79 55.04 60.58

Free cash flow yield (%) 12.3 6.1 6.6 7.0

Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E

Sales growth 25.5 1.9 3.8 3.6 CROCI (%) 8.8 8.7 8.0 7.7

EBITDA growth 4.2 1.8 8.3 3.9 ROE (%) 9.8 10.1 12.1 11.9

EBIT growth (3.0) 10.6 12.2 4.0 ROA (%) 4.6 4.6 5.5 5.6

Net income growth 17.3 7.9 32.2 7.8 ROACE (%) 7.5 7.9 8.7 8.8

EPS growth 16.9 9.0 32.2 7.8 Inventory days 35.8 35.4 37.5 39.9

Gross margin 15.0 18.0 18.0 18.0 Receivables days 26.9 22.2 23.5 24.9

EBITDA margin 10.0 10.0 10.4 10.4 Payable days 21.0 28.4 31.5 35.0

EBIT margin 5.4 5.8 6.3 6.3 Net debt/equity (%) 30.7 48.0 46.2 39.7

Interest cover - EBIT (X) 2.8 2.8 2.7 2.8

Cash flow statement (HK$ mn) 12/15 12/16E 12/17E 12/18E Valuation 12/15 12/16E 12/17E 12/18E

Net income pre-preferred dividends 5,667.4 6,115.4 8,081.7 8,711.9

D&A add-back 2,761.5 2,529.0 2,597.4 2,690.6 P/E (analyst) (X) 12.7 8.4 6.3 5.9

Minorities interests add-back 288.5 401.8 452.1 465.4 P/B (X) 1.2 0.8 0.7 0.7

Net (inc)/dec working capital 6,682.3 (272.7) (272.7) (268.6) EV/EBITDA (X) 17.3 16.0 15.1 14.2

Other operating cash flow (810.4) (1,670.3) (3,212.7) (3,682.7) EV/GCI (X) 1.0 0.8 0.7 0.7

Cash flow from operations 14,589.3 7,303.2 7,645.9 7,916.6 Dividend yield (%) 1.7 2.5 3.2 3.4

Capital expenditures (4,434.8) (3,528.4) (3,528.4) (3,528.4)

Acquisitions (300.5) 0.0 0.0 0.0

Divestitures 0.0 0.0 0.0 0.0

Others (1,665.9) (17,309.0) (4,904.6) (678.5)

Cash flow from investments (6,401.1) (20,837.4) (8,433.0) (4,206.9)

Dividends paid (common & pref) (1,181.6) (1,215.8) (1,420.6) (1,658.4)

Inc/(dec) in debt (7,370.7) 10,000.0 3,000.0 0.0

Common stock issuance (repurchase) (92.4) 0.0 0.0 0.0

Other financing cash flows 2,942.6 287.3 292.7 286.0

Cash flow from financing (5,702.1) 9,071.5 1,872.1 (1,372.3)

Total cash flow 2,486.1 (4,462.7) 1,085.0 2,337.4 Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.



Acquisition and organic growth drive 18% earnings CAGR in 16-18E

We forecast BEHL to deliver 18% core net profit CAGR in 2016-18, mainly driven by 16%

CAGR in the waste-to-energy division, 22% CAGR from China Gas, as well as full

contribution from the recently acquired oil E&P project in Russia (VERK). We discuss the

three key growth drivers below:

Exhibit 1: We expect waste-to-energy, oil E&P and Chinas Gas to be the main earnings

growth drivers for BEHL Revenue and EBIT breakdown

Note: Core earnings is net profit excluding one-off gains/loss.

Source: Company data, Gao Hua Securities Research.

1) Gas distribution: shifting growth driver from power to gas boiler

2017E Net profit: 22% and NAV, 21%; Net profit CAGR in 2016-18, 11%.

The rollout of the four gas power plants over 2013- 2016 is the key growth driver for BEHL’s

gas distribution business and we estimate it represented 81%/74%/57% of the incremental

gas sales in 2014/15/16E.

Going forward, we believe the drivers of gas demand growth are: 1) the shift from gas

power to gas fired heating, and 2) replacing coal boilers with gas boilers for industrial

customers. Beijing municipal government plans to replace coal consumption with natural

gas and renewable energy over time and is targeting a reduction in coal demand from

15mn tonnes in 2015 to 9mn tonnes in 2020, vs. 88mn tonnes coal equivalent total energy

demand in 2020. The 6mn tonnes reduction in coal implies 4.5bn m3 of gas demand, which

supports our base case assumption of a gas sales volume increase for BEHL from 13.1bn

m3 in 2015 to 18.1bn m3 in 2020, implying a 5% CAGR.

We believe coal to gas replacement will require increases in heating area and phasing out

of coal boilers with gas boilers. Beijing municipal government targets a 50% increase yoy

in Beijing’s natural gas heating area to 646mn m2 in 2020 (including 402mn m2 in urban

districts and 243mn m2 suburban areas) from 430mn m2 in 2015, implying 8% CAGR.

Additionally, Beijing Gas is also active in converting coal fired boilers to gas for industrial

customers. In 2017, Beijing Gas intends to upgrade and replace all coal fired boilers with

capacity of less than 10 steam tonnes/hour with gas boilers in the city.

2012 2013 2014 2015 2016E 2017E 2018E CAGRRevenue (HK$ mn) 2016-18Gas distribution 20,645 25,159 32,438 43,946 41,224 43,059 45,070 5%Brewery 14,443 16,837 15,151 14,069 14,136 14,144 14,569 2%Waste to energy and others 482 364 346 2,134 5,916 6,408 6,267 3%Total 35,570 42,361 47,936 60,150 61,276 63,611 65,906 4%

EBITGas distribution 1,256 1,707 1,965 2,086 2,082 2,216 2,359 6%Brewery 1,236 1,377 1,359 761 848 919 947 6%Waste to energy and others 610 614 8 201 644 875 866 16%Total 3,102 3,698 3,331 3,049 3,574 4,010 4,172 8%

Associate incomeGas transmission 1,369 1,756 2,364 2,730 2,783 2,954 3,154 6%Beijing Enterprises Water 331 540 792 1,077 1,327 1,529 1,678 12%China Gas 596 665 895 984 22%Oil E&P 1,194 1,305 N/AOthers 349 447 651 304 - - - N/ATotal 2,049 2,743 3,807 4,708 4,775 6,571 7,121 22%

Core Net profit 2,856 3,577 4,757 5,614 6,315 8,082 8,712 17%Yoy 25% 33% 18% 13% 28% 8%ROE 8.2% 7.7% 8.5% 9.7% 9.7% 11.6% 11.3%



Exhibit 2: We forecast 5% gas sales volume CAGR for

Beijing Gas in 2016-20E Beijing’s natural gas consumption by user

Exhibit 3: We expect heating, public and industrial sector

to be the key gas sales volume driver in 2016-20E yoy sales growth by end user



2) VERK: Oil & E&P: stable cost and production profile


BEHL completed the acquisition of a 20% stake in VERK on 22 Dec 2016, financed by

internal resources and bank loans. We believe widening exposure within the value chain

by investing in an offshore upstream Oil & Gas E&P business is a complementary move for

BEHL as it becomes more vertically integrated and enables the company to source low

cost gas from overseas to supply its domestic city gas projects in the long-run. We

expect a full-year earnings contribution in 2017E.

We currently forecast VERK to generate HK$1,194mn/HK$1,305mn of attributable profit to

BEHL in 2017/18E, mainly due to higher oil prices and stable production volumes and costs.

Exhibit 4: We expect VERK to contribute around HK$1,194mn net profit, 15% of BEH’s total

profit in 2017E with the contribution remaining steady over our forecast period Earnings forecast for VERK project


-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Heating Power Household Public Sector and industrial Others

(mn m3)

15% CAGR 2010-15

7% CAGR 2015-20

6% 7%

29%

5%

17%

2%0%

6%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2011-2016 2016-2020

Heating Power Household Public Sector and industrial

E&P 2014 2015 2016E 2017E 2018EProduction (mn barrel) 62.3 73.3 69.6 66.0Selling price (US$/bbl) 99.5 53.6 45.3 57.4 58.0Production cost (US$/bbl) (2.8) (2.8) (2.8) (2.8) (2.8) EBIT per barrel (US$) 96.7 50.8 42.5 54.6 55.2Tax rate 82% 77% 78% 80% 77%Profit after tax (US$/bbl) 17.3 12.2 9.3 11.1 12.8 Net profit to BEHL (HK$ mn) 1,347 1,186 1,053 1,194 1,305 Yoy -12% -11% 13% 9%



3) Waste-to-Energy: driven by organic growth and acquisitions


Developing the solid waste treatment industry has become more of a focus and China

plans to increase its solid waste treatment capacity from 0.76mn tonnes in 2015 to

1.1mn tonnes by 2020. In the 13th 5 year plan, the related infrastructure investment budget

doubled from to Rmb252bn vs. Rmb129bn in the prior plan. BEHL became the No.1 waste

energy company in China in terms of processing capacity after the acquisition of EEW in

2016.

BEHL is ramping up its exposure in the waste-to-energy business through organic

growth (with capacity additions by its associate Beijing Development, 50% holding, and its

subsidiary Beijing Enterprises Holdings Environment Technology, 100% stake) and

acquisitions (EEW Energy).

Due to acquisition related administrative cost hikes, we expect EEW’s EBIT margin in 2016

to be lower than 2015. But we expect EEW’s profitability to recover. Also, EEW contributed

10 months of earnings in 2016 given the acquisition was completed in March, 2016. See

page 11 for additional details.

Exhibit 5: We expect 257%/35% yoy earnings growth for BEHL’s waste-to-energy division Earnings forecast for solid waste division


2015 2016E 2017E 2018E 2019E 2020ETotal treatment capacity (tonne/day) 20,555 21,675 22,797 24,420 27,044 28,670 Total waste treatment volume (tonne/day) 16,898 19,675 21,097 22,520 24,744 26,170 EEW average processing fee (EUR/tonne) 81 82 83 84 85 85 Revenue (HK$ mn)Beijing Enterprise Environment 1,247 1,410 1,462 1,511 1,574 1,638 BEHET 393 434 482 524 644 704 EEW 4,072 3,720 3,527 3,484 3,554 Total 1,640 5,916 6,408 6,267 6,399 6,607

yoy % 260.8% 8.3% -2.2% 2.1% 3.3%EBIT (HK$ mn)Beijing Enterprise Environment 88 99 102 106 110 115 BEHET 95 95 106 115 142 155 EEW 460 676 654 658 683 Total 183 654 885 875 909 952

yoy % 256.7% 35.3% -1.1% 4.0% 4.7%



Attractive valuation with pipeline tariff cut risk already priced in

We use an EV/GCI vs. CROCI/WACC based valuation method to value BEHL, given its

strong cash flow generation capability. By applying the China gas utility sector’s average

multiple of 1.1x to our 2017 estimates for BEH, we arrive at a 12-month target price of

HK$55.0.

Exhibit 6: Valuation methodology EV/GCI vs. CROCI/WACC valuation framework

Exhibit 7: 12m Target price derivation for BEHL

Note: Key downside risks: transmission pipeline tariff cut and additional accounts receivable impairment in gas sales

Source: Bloomberg, Gao Hua Securities Research.

Source: Bloomberg, Gao Hua Securities Research.

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

0.0x 0.5x 1.0x 1.5x 2.0x

2017

E E

V/G

CI

2017E CROCI/WACC

China Gas

BEHL

ENN EnergySuntien

Towngas

HK&China GasCR Gas

EV/GCI vs. CORCI/WACC BEHLCROCI (2017E) 8.0%WACC 10%Average CROCI/WACC (X) 0.80xSector cash return ratio 1.1xValuation premium/discount adjustment 0%Adjusted Valratio (Y) 1.10xTarget EV/GCI (=X*Y) 0.88xGCI (pricing currency mn, 2017E) 134,061Target EV (HK$ mn) 118,437Less: Net debt (2017E) (37,447) Less: Off-balance sheet debt (2017E) - Less: Minority interest (2017E) (11,045) Implied equity value (HK$ mn) 69,945Number of shares (mn) 1,27112-m target price (HK$) 55.00Current price (HK$) - as of Feb 10, 2017 40.20Potential upside / (downside) 37%



Cross check with SOTP-based valuation methodology

We cross check BEH’s valuation using an SOTP-based valuation method. The stock is now

trading at a 46% 2017E NAV discount, well below its mid-cycle of 26%. Moreover, we note

the stub, referring to its non-listed assets value, is trading at an 83% discount and 1.0x

forward P/E, again well below historical level (Exhibits 8-10).

Exhibit 8: BEHL is currently trading at 46% NAV discount, vs. mid-cycle of 26% SOTP based valuation method


Exhibit 9: Stub is trading at 83% discount vs mid-cycle of

44% Historical NAV discount chart

Exhibit 10: Stub is trading at 1.0x P/E vs mid-cycle 8.0x

Implied stub P/E

Source: Company data, Datastream, Gao Hua Securities Research.

Source: Company data, Datastream, Gao Hua Securities Research.

2016E 2017EAttributable Valuation 2016E per share EV 2017E per share EV

stake (%) methodology HK$mn (HK$) (%) HK$mn (HK$) (%)GasBeijing city gas distribution 100% DCF: WACC @ 10% 30,483 23.98 22 31,460 24.75 21 Beijing gas pipeline 40% DCF: WACC @ 10% 36,435 28.67 26 39,336 30.95 27 China Gas (0384.HK) 23% 12m TP = HK$11.5 12,617 9.93 9 12,818 10.08 9

79,535 62.58 57 83,614 65.79 57 WaterBeijing Enterprises Water (371.HK) 44% 12m TP = HK$7.1 21,648 17.03 16 27,114 21.33 18

21,648 17.03 16 27,114 21.33 18 Solid wasteBeijing Enterprise Environment (154.HK) 50% Current market cap 1,074 0.85 1 1,074 0.85 1 BEHET 100% 10x EV/ EBITDA 1,301 1.02 1 1,445 1.14 1 EEW Energy 100% DCF @ 6% WACC 13,634 10.73 10 12,228 9.62 8

16,009 12.60 12 14,748 11.60 10 Oil E&PVerkhnechonskneftegaz (VCNG) 20% Investment cost 8,525 6.71 6 8,525 6.71 6

8,525 6.71 6 8,525 6.71 6 BreweryYanjing Brewery (000729.SZ) 46% Current market cap 10,622 8.36 8 10,622 8.36 7

10,622 8.36 8 10,622 8.36 7 Other investmentsBiosino Bio-Tech and Science Inc (8247.HK) 21% Current market cap 76 0.06 0 76 0.06 0 Blue Sky Power (6828.HK) 35% Current market cap 2,047 1.61 1 2,047 1.61 1

2,123 1.67 2 2,123 1.67 1

Total enterprise value 138,461 108.9 100 146,746 115.5 100

Net debt at headquarter (53,000) (41.70) (53,000) (41.70) Total net asset value (NAV) 85,461 67.24 93,746 73.76 Share price 40.20 40.20 Premium /(discount) to NAV (%) (40.2) (45.5) China Gas: Valuation methodology: EV/GCI vs. CROCI/WACC, Risks: (upside) coal to gas conversion; (downside) dollar margin squeeze

BE Water: Valuation methodology: 2020E earnings and an exit multiple of 19.5X. Risks: (downside) project delays, (downside) further margin pressure

*Last close as of Feb 7, 2017

-110%

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Jan-

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Stub discount to NAV Total discount to entire company NAV

Average stub disc -44%

Average total disc -26%

-2X

0X

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18X

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(X)

Historial average stub P/E: 8.0x

+1 Standard deviation

-1 Standard deviation



Tariff cut scenario analysis

The proposed tariff cut for the gas transmission pipeline (Shaanxi-Beijing pipeline) has

been a key area of focus for BEHL’s earnings outlook in 2017 and is a primary overhang

that is hampering a rerating, in our view. We undertake scenario analysis to assess how

much downside risk has been factored into the share price.

Our Base and Bear case assess the impact of the implementation of the 8% ROIC cap. In

our Bull case we assess upside potential from factoring in demand growth required to

achieve the gas targets laid out the government’s 13th 5 Year plan.

Base case: we do not assume any transmission tariff cut yet due to lack of official

guidance on timing, and magnitude of reduction.

Bear case: Tariff cut to achieve proposed 8% ROIC cap: we assume the transmission

tariff for BEHL’s pipeline will be reduced to meet regulator’s 8% return requirement.

We estimate the Shaanxi-Beijing (S-J) pipeline generates 17% ROE and 13% ROA in 2016E,

and see a gas transmission tariff for the pipeline as likely in 2017. It will take time to assess

and define the regulated assets that will be subject to the regulation and we believe the

implementation of the tariff adjustment could be in 2H17.

If the 8% ROIC cap is implemented, our scenario implies:

46%/47% net profit decline for the pipeline in 2017E/18E from our base case;

16% total net profit decline for BEHL in 2017E/18E from our base case; and

19% decline in NAV from our base case as Shaanxi-Beijing pipeline’s attributable

2017E NAV to BEHL would decline from HK$40.7bn in our base case

(HK$31.0/share) to HK$21.4bn (HK$16.8/share), leading to a decline in BEHL’s

overall NAV from HK$73.8/share to HK$59.6/share.

However, even after factoring in the potential tariff cut, BEHL would still deliver 11% and

8% yoy net profit growth in 2017/18E.



Exhibit 11: Applying the proposed 8% ROIC cap on the S-J pipeline asset base implies a

16%/19% decline in BEH’s 2017E earnings and NAV vs. our base case Scenario analysis for potential tariff cut

Assumptions:

1. We estimate the total asset size of the pipeline is HK$62.7bn in 2017E, including the capex for the

No.4 pipeline’s phase 1 (the 4th pipeline in S-J pipeline), which will commence operation before the

end of 2017. By applying a 8% ROIC, we derive an allowed net profit for the entire pipeline company of

HK$5,017mn.

2. We then estimate the allowed net profit per cubic meter. Since our asset base includes the new No.4

pipeline’s phase 1 contribution that is still in the early ramp-up stage, NDRC’s regulation states we

must assume a 75% utilization rate to calculate the new transmission pipeline’s sales volume.

Applying the 75% utilization for the designed capacity of phase 1 No.4 pipeline’ equals 15bn m3, plus

the actual transmission volume of No.1-3 pipelines, equates to a total transmission volume of 47.4bn

m3 in 2017 as the denominator to estimate the net dollar margin.

3. As a result, the implied regulated dollar margin arrives at HK$0.11/m3, vs. the HK$0.21/m3 reported

in 1H16.

Source: Company data, Gao Hua Securities Research

Base Tariff cut %case case change

S-J pipieline total assets (HK$ mn) 62,708 Regulated ROIC 8%

Tariff cut - profit (HK$ mn) 5,017 Calculated sales volume 2017E (mn m3) 47,434 Calculated sales volume 2018E (mn m3) 49,246

Regulated dollar margin (HK$/m3) 0.11 Current dollar margin (HK$/m3) 0.20

Potential tariff cut (HK$/m3) 0.10 Net profit impacted 2017E (HK$ mn) 1,307 Net profit impacted 2018E (HK$ mn) 1,434

Pipeline profit 2017E (HK$ mn) 2,838 1,531 -46.1%Pipeline profit 2018E (HK$ mn) 3,041 1,607 -47.1%

Core profit 2016E (HK$ mn) 6,315 6,315 Core profit 2017E (HK$ mn) 8,082 6,775 -16.2%Core profit 2018E (HK$ mn) 8,712 7,278 -16.5%

2017E yoy % 28% 7.3%2018E yoy % 7.8% 7.4%

NAV (HK$) 73.76 59.61 -19.2%Current price (HK$) 40.20 40.20 NAV discount -45% -33%*Price as of Feb 10, 2017



Bull case: accelerated gas sales. The NDRC is targeting natural gas as percentage of

total primary energy consumption to reach between 8.3% and 10% in 2020, vs. 5.9% in

2015 in the recent 13th 5 year plan. This implies 12-15% gas demand CAGR in 2015-20, vs.

our base case assumption of 7%, on our calculations. Our bull case assumes no tariff cuts,

in line with our base case.

We see ample room for replacing coal consumption with gas in the coming decades

through gas power and gas heating applications, if the natural gas price becomes more

competitive than competing fuels. We factor in more bullish gas sales volumes (11%/10%

CAGR for BEHL’s downstream distribution and midstream pipeline business vs base case

of 6%/5%), respectively and calculate 4%/7% net profit upside for 2017/18 and 5%

upside to 2017E NAV vs. base case assumption.

Exhibit 12: Our bull case implies 4/7% net profit upside in 2017/18E and 5% upside to

2017E NAV, assuming demand growth implied by the natural gas 13th 5 year plan

Scenario analysis on more optimistic gas sales volume assumptions


Downstream (mn m3)) 2015 2016 2017E 2018E CAGRBull case 13,060 14,831 16,491 18,255 11%

Base case 13,060 14,831 15,758 16,584 6%Difference 0% 0% 5% 10%

Pipeline (mn m3)Bull case 32,930 34,318 37,857 41,686 10%


Net profit (HK$ mn)Bull case 5,614 6,315 8,359 9,371 22%


2017E NAV (HK$)Bull case 77.38

Base case 73.48Difference 5%



Healthy gearing and cash flow; upside to dividends

Net debt

As at June 2016, BEHL had net debt of HK$38bn, with net gearing standing at 55%, slightly

below the gas utilities sector average of 60%. The company has demonstrated stable

operating cashflow in the past, due to solid cashflow from Beijing Gas and Yanjing, as

well as dividends received from Beijing Enterprises Water and China Gas.

Capex

We project capex will reach a peak of HK$20.8bn in 2016, mainly due to the acquisition of

EEW and VERK, as well as capacity expansions of the No.4 of Shaanxi-Beijing. Given a

healthy balance sheet and strong cash generation ability, BEHL enjoys low funding cost.

For example, the company’s interest rate for the EEW Euro bridge loan is below 2%.

Dividends

BEHL’s dividend payout ratio has declined from the peak of 55% in 2006 to 22% in 2015, vs.

historical average of 33%. We expect BEHL to turn free cashflow positive in 2018, thus

paving the way for BEHL to increase its payout ratio in the coming years. We believe an

increase in the dividend payout ratio would support share price performance.

Exhibit 13: BEHL’s dividend payout ratio reached a

historical low level in 2015 Dividend and payout ratio for BEHL

Exhibit 14: We expect BEHL to turn to free cashflow

positive from 2018 Operating cashflow and free cashflow trend



0%

10%

20%

30%

40%

50%

60%

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

199

819

99

200

020

01

200

220

03

200

420

05

200

620

07

200

820

09

201

020

11

201

220

13

201

420

15

20

16E

20

17E

20

18E

Dividend per share Dividend payout ratio (RHS)

(HK$)

Historical average payout 33%

(25,000)

(20,000)

(15,000)

(10,000)

(5,000)

-

5,000

10,000

15,000

20,000

Operating cashflow Investment cashflow Free cashflow

(HK$ mn)



Tariff cut could be lower, opportunities for EEW/VERK

Key investor concerns center around three areas:

1) Tariff cut will significantly impact earnings/valuation.

BEHL’s management believes there is still some leeway in redefining the total asset base

as the pipeline company is also responsible for building the underground gas storage

facility, which could be counted in the total asset base calculation. If the gas storage

facility is included in the total asset calculation, it would help lower the pipeline’s

returns profile and reduce the magnitude of earnings cut risk.

We provide sensitivity analysis in Exhibit 15 to assess the required net profit and dollar

margin for the pipeline, based on the potential asset base increase from including gas

storage facilities. We assume no increase in assets from the gas storage facility for case 1

(bear case), HK$5bn for case 2, HK$10bn for case 3 and HK$15bn for case 4 (bull case).

The company has not given guidance on the cost of storage facilities, however, given

storage assets generally require heavy capex (with large scale underground construction

works required), we believe a HK$10bn assumption is reasonable for our base case. We

note that PetroChina invested Rmb11bn and Rmb14bn to build two gas storage facilities in

Xinjiang Hutubi and Chongqing Xiangguosi.

Exhibit 15: We believe a higher total asset base from potential inclusion of gas storage

related facility would ease the earnings downside risk for BEHL Scenario analysis on different total asset base


2) Oil E&P biz (VERK) is cyclical with low earnings visibility.

VERK (BEHL has a 20% shareholding) is quite a profitable asset and unlike most oil field

projects, VERK’s earnings and cashflow is not sensitive to oil price volatility, thanks to its

low production cost and tax system (see our note Update on oil field acquisition: low cost,

cash/earnings accretive, published January 3 for details). BEHL indicated net profit in 1H16

was US$350mn, vs. US$762mn in FY2015, although the average Brent oil price declined

from US$41.5/bbl in 1H16 from US$53.6/bbl in 2015. Our Russia energy team estimates

the production cost for VERK is less than US$3/bbl, while around 70-80% of the pre-tax

profit is paid as taxes to the Russian government (including mineral extraction tax, income

tax, export duties, property tax, etc). Given the tax changes align with oil price moves, it

helps smooth earnings volatility. Moreover, VERK has no debt and budgets US$200mn

capex per year in 2017-2019, suggesting strong free cash flow. VERK has agreed with BEHL

to distribute 100% of its free cash flow or net income as dividends to shareholders.

Case 1 Case 2 Case 3 Case 4Total asset 62,708 67,708 72,708 77,708

Regulated 2017E net profit 5,017 5,417 5,817 6,217 Implied 2017E dollar margin (HK$) 0.106 0.114 0.123 0.131 Net profit on actual sales (HK$ mn) 1,531 1,653 1,775 1,897

Downside from base case (Hk$ mn) (1,307) (1,185) (1,063) (941) As % of total BEHL's profit -16% -15% -13% -12%

(HK$ mn)



3) EEW offers limited synergies and lacks growth opportunities.

BEHL acquired 100% of market-leading energy-from-waste company in Germany, EEW

Energy in 2016. We see potential synergies from EEW’s technical know-how and the

extensive operating experience in BEHL’s existing solid waste business in China, providing

scope to improve its operating efficiency. In 1H16, the new contracted capacity of waste

disposal jumped to 13,000 tons/day, up from 1,600tonnes/day in 2015, mainly driven by the

EEW acquisition. However, BEHL is currently in the process of divesting 45-55% ownership

in EEW to Silk Road Fund, a government sponsored fund established under the One Belt

and Road Initiative.

We see growth opportunities for EEW in European countries. Germany has entered

into a mature stage in the solid waste business amid muted population growth. However,

we expect EEW to gain market share in Germany, since its cost structure is 20-30% lower

than the average waste processing cost for municipal plants. EEW is in the process of

securing some service management contracts from municipal government-owned-plants.

We also expect EEW to build new plants in neighboring countries. UK applies a landfill

tax and has increased the tax by 15% in 2015. According to the company, EEW plans to

invest EUR70mn in the Netherlands to expand its waste processing capacity by 192,000

tonnes per annum from 2019. The project has secured a 10-year contract with Shanks, a UK

waste company, for 1mn tonnes annual treatment volume. In addition, EEW operates one

more plant outside of Germany in Luxembourg. We expect EEW to achieve growth in these

regions with low incineration capacity.



Tariff cuts and FX volatility key to share price

While the prospect of tariff cuts has weighed on the share price recently, and remains the

key driver of the share price in the short term, we note that another key driver of the share

price is the company’s exposure to foreign currency denominated debt, but we believe the

impact and risk is misunderstood.

As at June 2016, BEHL had total debt of HK$50.7bn, HK$43.9bn of which is foreign debts,

including HK$10.5bn, US$2bn senior notes, as well as 2.2bn Euro bridging loans and

guaranteed bonds. HK$ and US$ denominated loans represent 51% of total debts.

In the light of the recent Renminbi exchange rate volatility against US dollar and HK dollar,

we undertake sensitivity analysis below. We estimate 5% RMB depreciation will bring

about HK$1.3bn fair value change for BEHL’s total debt, which represents 21% of its 2016E

net profit.

However, BEHL indicated the fair value change arising from exchange rate movement

will not be booked in the consolidated income statement, but through the

comprehensive income statement and is deducted from the reserve account.

Exhibit 16: Sensitivity analysis of our estimates vs. changes in FX

Source: Company data, Bloomberg, Gao Hua Securities Research.

1% 5% 10%FX sensitivity analysis Scenario Scenario ScenarioTotal debt 50,722 50,722 50,722

HKD debt (HK$mn) 10,500 10,500 10,500 USD debt (US$ mn) 2,000 2,000 2,000 Other debt (HK$ mn) 24,703 24,703 24,703

Change in FX 1% 5% 10%Change in total debt (HK$ mn) 260 1,301 2,602 Core net profit (HK$ mn) 6,315 6,315 6,315 Impact on P&L 4% 21% 41%Booking type: comprehensive income statement



Appendix I

Exhibit 17: Annual income statement


Income statements 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Total sales/revenues 19,704 24,208 27,613 30,472 35,570 42,361 47,936 60,150 61,276 63,611 65,906 yoy % 76% 23% 14% 10% 17% 19% 13% 25% 2% 4% 4%

COGS (15,199) (18,390) (21,214) (23,738) (28,208) (34,023) (39,360) (51,099) (50,247) (52,161) (54,043) Others - - - - - - - -

Total COGS (15,199) (18,390) (21,214) (23,738) (28,208) (34,023) (39,360) (51,099) (50,247) (52,161) (54,043)

Gross profit 4,505 5,819 6,399 6,734 7,362 8,337 8,576 9,051 11,030 11,450 11,863 yoy % 33% 29% 10% 5% 9% 13% 3% 6% 22% 4% 4%

SG&A (2,601) (3,154) (3,771) (4,642) (5,440) (5,957) (6,004) (6,512) (6,227) (6,208) (6,434) Other operating income/(expense) 792 221 175 1,130 1,180 1,318 759 693 1,300 1,365 1,433

Total operating expense (1,808) (2,934) (3,595) (3,512) (4,260) (4,639) (5,245) (5,819) (4,927) (4,843) (5,001) EBITDA 4,019 4,294 4,320 5,028 4,999 6,025 5,751 5,993 6,103 6,607 6,863

yoy % 65% 7% 1% 16% (1%) 21% (5%) 4% 2% 8% 4%

Depreciation (1,208) (1,300) (1,383) (1,669) (1,800) (2,240) (2,299) (2,574) (2,403) (2,468) (2,556) Amortization (114) (109) (133) (137) (96) (88) (121) (188) (126) (130) (135)

Depreciation & amortization (1,322) (1,409) (1,516) (1,806) (1,896) (2,328) (2,419) (2,761) (2,529) (2,597) (2,691) EBIT (operating profit) 2,697 2,885 2,804 3,222 3,102 3,698 3,331 3,232 3,574 4,010 4,172

yoy % 78% 7% (3%) 15% (4%) 19% (10%) (3%) 11% 12% 4%

Interest income 107 90 92 151 250 180 164 163 163 110 123 Interest expense (407) (364) (374) (647) (997) (1,134) (1,172) (1,302) (1,431) (1,573) (1,624)

Net interest income/expense (300) (274) (282) (496) (747) (954) (1,008) (1,139) (1,268) (1,463) (1,501) Profit/loss on disposal of assets (pre-tax) - - - - - - - - - - - Foreign exchange gain/(loss) - - - - - - - - - - - Net income from associates (147) (8) 196 373 2,049 2,743 3,807 4,708 4,775 6,571 7,121 Share of results in jointly controlled entities 913 1,092 1,169 1,300 (0) (6) 5 (0) - - - Other non-operating income/expense (107) (90) (92) (151) (250) (180) (164) (163) (100) (100) (100) Non-operating income/(loss) 359 721 991 1,027 1,053 1,603 2,639 3,406 3,407 5,008 5,520 Pre-tax profit (income before tax) 3,056 3,605 3,795 4,249 4,155 5,301 5,970 6,638 6,981 9,018 9,692

yoy % 45% 18% 5% 12% (2%) 28% 13% 11% 5% 29% 7%

Income taxes (359) (559) (685) (583) (557) (545) (565) (682) (463) (484) (515) Minority interest (414) (648) (470) (889) (363) (572) (574) (289) (402) (452) (465) Preferred dividends - - - - - - - - Extraordinary gain/(loss) - - 152 82 379 607 74 54 (200) Net income 2,282 2,399 2,639 2,776 3,235 4,184 4,832 5,667 6,115 8,082 8,712

yoy % 54% 5% 10% 5% 17% 29% 15% 17% 8% 32% 8%

Core profit 2,282 2,399 2,487 2,694 2,856 3,577 4,757 5,614 6,315 8,082 8,712 54% 5% 4% 8% 6% 25% 33% 18% 13% 28% 8%



Exhibit 18: Annual balance sheet


Exhibit 19: Annual cash flow statement


Balance sheets 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Cash and equivalents 6,731 9,486 14,447 12,579 12,237 10,795 11,208 13,694 9,231 10,316 12,654 Net receivables 1,056 1,098 1,347 1,586 2,403 4,393 5,321 3,544 3,899 4,289 4,718 Inventory/stocks 3,067 2,995 3,727 5,286 5,914 5,661 5,393 4,644 5,109 5,619 6,181 Other current assets 2,101 2,598 2,260 4,046 6,738 5,357 11,324 11,756 12,343 12,961 13,609 Current assets 12,956 16,177 21,780 23,498 27,292 26,207 33,246 33,638 30,582 33,185 37,161 Gross PP&E/Fixed assets 24,405 26,564 31,146 36,888 45,177 53,609 56,231 57,220 60,748 64,277 67,805 Less accumulated depreciation (6,218) (7,519) (8,902) (10,571) (12,372) (14,612) (16,910) (19,484) (21,887) (24,354) (26,910) Net PP&E/Fixed assets 18,187 19,045 22,244 26,317 32,805 38,997 39,321 37,736 38,861 39,922 40,895 Gross intangibles 9,229 9,434 8,178 8,532 8,720 8,962 10,429 10,757 10,757 10,757 10,757 Accumulated amortization (676) (785) (918) (1,055) (1,151) (1,238) (1,359) (1,547) (1,673) (1,803) (1,937) Net intantigibles 8,553 8,649 7,260 7,477 7,569 7,724 9,070 9,211 9,084 8,954 8,820 Total investments 5,311 6,297 9,212 12,785 15,257 29,402 33,506 31,792 50,764 54,676 58,959 Other long-term assets 6,690 8,937 6,532 7,278 6,575 7,293 8,922 12,390 12,997 13,639 14,318 Total assets 51,697 59,105 67,029 77,355 89,499 109,622 124,064 124,766 142,289 150,377 160,153 Accounts payable 1,190 1,408 4,554 1,905 2,616 2,383 2,238 3,641 4,187 4,815 5,537 Short-term debt and current portion of long-term debt 3,173 3,038 2,320 5,705 6,277 6,617 17,691 7,048 12,048 12,048 12,048 Other current liabilities 5,617 6,439 7,917 8,677 11,434 16,904 15,188 15,619 17,208 14,715 16,429 Current liabilities 9,979 10,885 14,791 16,287 20,327 25,904 35,118 26,307 33,443 31,578 34,014 Long-term debt 4,411 7,986 9,878 14,481 20,338 18,479 19,439 27,708 32,708 35,708 35,708 Other long-term liabilities/creditors 996 1,218 1,424 1,391 1,166 1,170 1,456 2,099 2,098 2,098 2,098 Total long-term liabilities 5,407 9,203 11,302 15,872 21,504 19,650 20,895 29,806 34,806 37,806 37,805 Total liabilities 15,386 20,088 26,093 32,159 41,831 45,554 56,013 56,114 68,249 69,384 71,819 Preferred shares - - - - - - - - - - - Common stock (includes par value, capital surplus, and 114 114 114 114 114 127 - - - - - Treasury stock - - - - - - - - - - - Retained earnings 3,574 - - - - - - - 5,052 11,518 18,487 Other common equity 25,944 31,191 34,154 37,496 39,524 53,894 57,176 58,187 58,235 58,431 58,515 Total common equity 29,632 31,305 34,268 37,610 39,637 54,021 57,176 58,187 63,288 69,949 77,002 Minority interest (balance sheet) 6,679 7,712 6,668 7,587 8,030 10,047 10,875 10,465 10,752 11,045 11,331 Total shareholders funds/equity 36,310 39,017 40,936 45,197 47,668 64,068 68,051 68,652 74,040 80,994 88,333 Total liabilities and equity 51,697 59,105 67,029 77,355 89,499 109,622 124,064 124,766 142,289 150,377 160,153

Cash flow statements 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Income pre-preferred share dividends 2,282 2,399 2,639 2,776 3,235 4,184 4,832 5,667 6,315 8,082 8,712 Minority interest add-back 414 648 470 889 363 572 574 289 402 452 465 Depreciation and amortization add-back 1,322 1,409 1,516 1,806 1,896 2,328 2,419 2,761 2,529 2,597 2,691 Net income from associates and jointly controlled entitie (766) (1,084) (1,365) (1,674) (2,049) (2,737) (3,812) (4,708) (4,775) (6,571) (7,121) Net loss/(gain) on asset sales - - - - - - - - - - - Dividend from JCE and associates 497 884 1,780 307 1,368 1,026 3,067 2,466 3,105 3,358 3,438 (Increase)/decrease in working capital : (1,517) (1,640) 1,429 (4,511) 363 908 (6,938) 6,682 (273) (273) (269)

Accounts receivable (354) (390) (429) Inventory (464) (511) (562) Accounts payable 546 628 722

Other operating cash flow items (241) 479 471 (519) 569 781 713 1,432 Cash flow from operations 1,992 3,093 6,941 (926) 5,744 7,061 854 14,589 7,303 7,646 7,917 Capital expenditure (2,575) (2,317) (3,867) (4,346) (8,234) (8,000) (3,661) (4,435) (3,528) (3,528) (3,528) (Acquisitions)/divestitures (801) (800) (3,673) (3,583) (2,221) (494) (6,210) (300) (16,701) (4,263) - Investments (402) - (611) (8) - - - - - - - Other investment cash flow items 243 (1,111) (684) 1,104 1,086 1,768 1,739 (1,666) (608) (642) (679) Cash flow from investing (3,534) (4,228) (8,835) (6,833) (9,370) (6,725) (8,132) (6,401) (20,837) (8,433) (4,207)

Dividends paid (common and preferred) (683) (739) (796) (796) (796) (864) (1,123) (1,182) (1,216) (1,421) (1,658) Share repurchase/issue (change In common stock) (52) - - (1) - - (69) (92) Increase/(decrease) in short-term debt - - - - - - - - 5,000 Increase/(decrease) in long-term debt 46 3,340 7,285 7,595 6,560 285 11,331 (7,371) 5,000 3,000 Increase/(decrease) in preferred shares - - - - - - - - Change in minority interest - - - - - - (92) (306) 287 293 286 Other financing cash flow items 184 104 (272) (948) (1,337) (501) (1,481) 4,206 Cash flow from financing (505) 2,705 6,217 5,850 4,427 (1,080) 8,565 (4,745) 9,071 1,872 (1,372) Effect of foreign exchange rate changes 575 1,184 638 41 (1,143) (698) (874) (957) - - -

Total cash flow (1,473) 2,755 4,961 (1,867) (342) (1,441) 412 2,486 (4,463) 1,085 2,337



Exhibit 20: Valuation comparison table

Source: Bloomberg, Reuters, Company data, Goldman Sachs Investment Research, Gao Hua Securities Research.

Exhibit 21: Interim forecast for BEHL


Global gas pipelines valuation analysisMarket 2016

Price Pricing Target cap Net debt/

Companies Ticker Rating 10-Feb Currency Price (US$mn) 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E equity (%) 2017E 2018EAsia PacificHong KongENN Energy 2688.HK Neutral 39.05 HKD 42.00 5,260 11.4 10.7 2.0 1.8 6.5 6.0 19% 18% 2% 2% 44% 14% 14%Kunlun Energy Co. 0135.HK Neutral 6.06 HKD 6.80 6,824 9.1 7.7 0.9 0.9 5.5 5.0 11% 12% 3% 3% 31% 5% 5%China Resources Gas 1193.HK Buy 25.20 HKD 28.50 6,699 14.0 13.2 2.4 2.2 7.2 6.6 18% 18% 2% 2% 22% 14% 14%Beijing Enterprises 0392.HK Buy* 39.05 HKD 55.00 6,585 6.1 5.7 0.7 0.6 7.6 7.0 12% 12% 3% 3% 48% 4% 4%China Gas (a) 0384.HK Neutral 11.40 HKD 11.50 7,214 12.8 12.5 2.4 2.3 9.8 8.9 20% 19% 2% 2% 69% 10% 10%Towngas China 1083.HK Sell 4.25 HKD 4.00 1,462 9.3 8.9 0.7 0.7 8.1 7.4 8% 8% 2% 2% 46% 3% 3%China Suntien 0956.HK Neutral 1.26 HKD 1.10 618 10.0 8.8 0.5 0.5 11.2 10.8 5% 6% 3% 4% 189% 3% 3%Hong Kong and China Gas 0003.HK Sell 14.82 HKD 11.80 24,457 25.1 24.9 3.2 3.1 19.2 18.6 13% 13% 3% 3% 37% 8% 8%China Oil and Gas 603.HK NC 0.63 HKD N/A 496 9.0 8.1 1.0 0.9 N/A N/A 13% 13% N/A N/A N/A N/A N/AH-share average 11.5 10.7 1.5 1.4 9.0 8.4 13% 13% 2% 3% 60% 7% 7%A-shareShaanxi Natural Gas 002267.SZ NC 9.56 CNY N/A 1,560 17.1 13.0 N/A N/A 9.4 8.5 12% 12% N/A N/A N/A N/A N/AChangchun Gas 600333.SS NC 7.92 CNY N/A 612 37.7 28.3 N/A N/A N/A N/A 5% 7% N/A N/A N/A N/A N/AShenzhen Gas 601139.SS NC 8.86 CNY N/A 2,852 18.7 15.9 2.2 2.0 11.3 9.7 12% 13% N/A N/A N/A N/A N/AShenergy Company 600642.SS NC 6.15 CNY N/A 4,136 14.0 12.3 1.0 1.0 N/A N/A 8% 8% N/A N/A N/A N/A N/AA-share average 21.9 17.4 1.6 1.5 N/A N/A 9% 10% N/A N/A N/A N/A N/AOther Asia PacficGAIL (a) GAIL.BO Neutral 483.05 INR 420 9,166 13.5 12.3 1.7 1.6 8.4 8.8 13% 13% 2% 2% 10% 8% 10%Gujarat State Petronet (a) GSPT.BO Neutral 156.20 INR 158 1,374 12.9 11.4 1.8 1.6 6.8 5.8 15% 15% 1% 2% 0% 11% 11%Petronet LNG (a) PLNG.BO Neutral 387.80 INR 344 4,276 14.5 13.5 3.4 3.0 8.6 7.6 26% 24% 2% 3% 1% 15% 16%Tokyo Gas (a) 9531.T Neutral 527.00 JPY 470 11,211 27.1 23.2 1.1 1.1 8.2 7.7 4% 5% 2% 2% 23% 1% 1%Osaka Gas (a) 9532.T Neutral 443.30 JPY 450 8,049 17.8 15.7 1.0 0.9 8.0 7.6 5% 6% 2% 2% 36% 2% 2%Asia Pacific average 14.5 13.3 1.6 1.5 8.9 8.2 12% 12% 2% 3% 43% 7% 8%AmericasAtmos Energy ATO Neutral 75.45 USD 67.00 7,767 21.9 20.8 2.1 2.0 10.7 10.3 10% 10% 2% 3% 91% 4% 4%NiSource, Inc. NI Neutral 22.41 USD 23.00 7,233 19.0 18.4 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/APiedmont Natural Gas PNY NC 59.98 USD N/A N/A 28.2 25.3 2.8 2.5 N/A N/A 11% 10% N/A N/A N/A N/A N/AAmericas average 23.0 21.5 2.5 2.2 10.7 10.3 10% 10% 2% 3% 91% 4% 4%EuropeCentrica CNA.L Sell 234.00 GBP 218.00 14,793 13.2 12.7 6.3 5.7 6.4 6.3 51% 47% 6% 6% 192% 5% 5%Enagas ENAG.MC Neutral 23.22 EUR 26.00 5,888 13.4 12.9 2.2 2.1 7.9 7.5 16% 17% 6% 7% 197% 4% 4%Gas Natural GAS.MC Neutral 18.06 EUR 21.00 19,194 13.0 11.8 1.2 1.1 7.3 7.0 9% 10% 5% 5% 76% 4% 4%Snam SPA SRG.MI Neutral 3.77 EUR 4.00 14,001 14.1 13.2 1.8 1.7 11.1 10.9 12% 13% 6% 6% 147% 3% 3%Europe average 13.4 12.6 2.8 2.7 8.2 7.9 22% 22% 6% 6% 153% 4% 4%

* The stock is on our Conviction List. EV/EBITDA for HK comps adjusted to include associate income(a) Fiscal year-ended March. All valuation metrics have been adjusted to reflect calendar year end.NC=Not Covered, N/A=Not available. Estimates for NC companies are Bloomberg consensusOur target prices are based on a 12-month timeframe

ROIC (%)P/E (X) P/B (X) EV/EBITDA (X) ROE (%) Dividend yield (%)

(HK$ mn) 1H16 2H16E 1H17E 2H17ERevenue 28,417 32,859 29,500 31,776 EBIT 2,619 955 2,938 635 Net profit 3,423 2,692 4,524 1,591 EPS (HK$) 2.69 2.12 3.56 2.80

yoy % 32% 32%



Exhibit 22: BEHL is currently trading below -1 STDEV P/E

Exhibit 23: BEHL is currently trading below -1 STDEV P/B



Key downside risks: transmission pipeline tariff cut and additional accounts receivable

impairment in gas sales.

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Disclosure Appendix

Reg AC

We, Frank He and Vincent Yang, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject

company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to

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Disclosures

Coverage group(s) of stocks by primary analyst(s)

Frank He: A-share Gas and Solar Energy, China Gas and Solar Energy.

A-share Gas and Solar Energy: Longi Silicon Materials, Shenzhen Clou Electronics Co., Sungrow Power Supply Co., Xinjiang Goldwind (A).

China Gas and Solar Energy: Beijing Easpring Material Tech, Beijing Enterprises Holdings, Canadian Solar Inc., Cangzhou Mingzhu Plastic Co., China

Gas Holdings, China Resources Gas Group, China Suntien Green Energy, ENN Energy Holdings, GCL-Poly Energy Holdings, GEM Co., JinkoSolar

Holding, Kunlun Energy Co., Singyes Solar, Sinopec Kantons, Tianhe Chemicals Group, Towngas China, Trina Solar, Xinjiang Goldwind (H), Xinyi

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Holdings (HK$40.20)

Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Beijing Enterprises

Holdings (HK$40.20)

Goldman Sachs had a non-securities services client relationship during the past 12 months with: Beijing Enterprises Holdings (HK$40.20)

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Buy Hold Sell Buy Hold Sell

Global 32% 54% 14% 64% 60% 51%

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Price target and rating history chart(s)

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70.769.6

72 70

58.1

5660

5664.1

4952

54.2 53

6,0007,0008,0009,00010,00011,00012,00013,00014,00015,00016,000

3035404550556065707580

Beijing Enterprises Holdings (0392.HK)

Goldman Sachs rating and stock price target history

Stock Price Currency : Hong Kong Dollar

Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2016.

The price targets show n should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.

Rating

Price target

Price target at removal

Covered by Frank He

Not covered by current analyst

Hang Seng China Ent. Index

Inde

xPr

ice

Sto

ckPr

ice Nov 12

NF

BM A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

2014 2015 2016



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