(Long Post) AAG 3Q 2022 Results Thoughts

 

(530-Pipeline Accident. 

Fortunately, no one died but this has resulted in one of the routes that allow the company to transport gas to Henan being cut off)

AAG Energy released its results on 27 September 2022. Along with the poor market conditions, the share price declined as well.

Taking a look at the surface, profits for the first 3 quarters are up 91% year on year.

3Q 2022 turns out to be the best quarter this year and possibly in the history of AAG Energy as well.

This is a shock as revenue of 559 million in Q3 is much lower than 1Q of 733 million Q1 and 596 million of Q2. This revenue fall probably explains the affected volume production

With profits coming in at 410 million RMB in 3Q 2022 alone, which has beat the profit levels of 375 million in Q1 2022 and 363 million in Q2 2022.

However, on a closer look after breaking it down, the cost was very weird as Q3 cost was abnormally low (As seen in the image below).

 

After contacting the IR of the company, they were kind enough to reveal that the reason was due to foreign exchange gains being accounted as deduction of operating cost in China Accounting Standards. Also, they said that the reduction in operating cost is mainly due to the foreign exchange gains.

Whereas in Hong Kong Accounting Standards, this would appear as foreign exchange gain.

Therefore, the company’s 1Q and 3Q results are in China Accounting Standards while 1H and Full Year are in Hong Kong Accounting Standards.

This got me to look back at the annual report to find out if foreign exchange had played a part and which part of the company’s accounts. After all, in 2021 the exchange gains were negligible and in 2022 1H it was only 47 million against a Profit of 739 million (around 6-7% of profit).

This got me to realize that this exchange gains are a result of receivables and payables being denominated in USA and translated to functional currency as RMB.

As a result of a 5.34% appreciation of USD against RMB in 1H 2022, the exchange gains resulted in 47 million. In 3Q 2022 alone, the appreciation of USD against RMB was 6.26%.

This alone has made calculating whether the company has recovered from the 530-pipeline accident difficult as the exact costing structure is now unknown.

This appreciation and depreciation of USD and RMB is not exactly ideal either. Since the company trades in HKD Currency which is pegged to USD while its balance sheet is in RMB, a devaluation of RMB against USD will lead to lower equity value and earnings when translated back to HKD but in turn this will allow for exchange gains on balance sheet. The vice versa applies.

Nevertheless, I anticipated a 30% production loss in its gas field that was affected by the pipeline accident and after running my figures, my estimation was that the revenue fall was probably around 18-20% in Q3 instead of the 30% revenue fall that I calculated.

Secondly, I had anticipated 300 million profits based on what I have read , felt and inferred on the half year results. I believe that this amount was somewhat close to the real profit (not accounting the exchange gain)

When the full year results come out, I will be able to tell the impact of the pipeline accident more clearly. Higher Exchange Gains means that the margins were lower and the impact of the accident is more severe. Personally i hope that the exchange gains is on the lower side.

After running my own simple extrapolation predictions, I believe the exchange gain is around 52 to 102 million. I will come back to review this to see if its true when the full year results come out. But I am still learning and trying to get things right.

Short Term – Price is likely to fall slightly as Covid 19 would dampen LNG prices. A more serious Covid 19 outbreak and lockdown would likely affect business activities. Having said that, the sale price of the gas to their partners are far below the market price of LNG. It is estimated to be around 50-60% of the market price.

Mid Term – How well does the Panzhuang Well Preservation goes, Mabi Well Target for 2023, General Gas Price Trend in terms of renewing the prices that are set periodically

Lingering Issues -  Top Shareholder's intention for the company is unknown. Currently the top shareholder (Xinjiang Xintai Natural Gas Co Ltd)  holds 57.04% of the company while the second shareholder (An Individual) holds 17.83%. Therefore privatization is rather difficult unless the second shareholder agrees.

The last time the major shareholder added was in June 2021 at a price of 1.25 HKD while the second shareholder acquired the 17.83% of shares at 1.07 HKD in 2020. 

Counting in Dividends, both are sitting at some gain.