Broker Name and Report Date
- Broker: UOB Kay Hian Private Limited
- Date: October 28, 2024
Company Overview
Description:
ENN Energy Holdings is one of China’s largest natural gas distributors, managing 187 city gas projects. The company is strategically involved in the LNG import market, allowing it to bypass higher-priced gas from major oil companies. Its Zhoushan LNG terminal is pivotal for market supply, and the company has been actively developing the integrated energy sector.
Stock Data
- Ticker: 2688 HK (Bloomberg)
- Sector: Utilities
- Share Price: HK$57.90
- Target Price: HK$58.40
- Market Cap: HK$65,497.9 million (US$8,429.2 million)
- 3-Month Average Daily Turnover: US$44.5 million
- 52-Week High/Low: HK$77.03/HK$44.80
- Major Shareholder: ENN Group holds 33.3%
Key Performance Indicators
- Net Asset Value (NAV) per Share FY24: RMB 41.07
- Net Debt per Share FY24: RMB 11.94
- Dollar Margin: RMB 0.54 per cubic meter (maintained for FY24 guidance)
3Q24 Operational Highlights
Retail Gas Sales:
In the first nine months of 2024, ENN’s retail gas sales volume reached 18,819 million cubic meters, growing by 4.8% year-over-year (YoY). Growth primarily came from commercial and industrial (C&I) customers, with a sales volume of 14,843 million cubic meters (+5.7% YoY). Sales to residential customers increased by 3.4% YoY, reaching 3,748 million cubic meters.
Integrated Energy Sales:
The integrated energy segment reported 21.4% YoY growth in sales volume over the same period, with a slight dip to 13.3% growth in 3Q24 due to seasonality and shifts in sales structure. The company’s focus on higher-margin segments led to reduced contributions from lower-margin power generation.
Installation Pace:
The pace of new installations slowed, with newly-developed residential households down by 19.2% YoY, totaling 1.1 million units. Designed daily capacity installations for C&I customers also decreased by 12.6% YoY to 11,133,000 cubic meters.
Financial Highlights
| Year |
Net Turnover (RMB million) |
EBITDA (RMB million) |
Net Profit (RMB million) |
EPS (RMB) |
P/E Ratio |
Dividend Yield (%) |
| 2023 Actual |
113,858 |
12,219 |
6,816 |
6.0 |
8.8 |
0.1 |
| 2024 Forecast |
114,379 |
12,015 |
6,742 |
6.0 |
8.9 |
0.0 |
| 2025 Forecast |
122,776 |
13,766 |
7,682 |
6.8 |
7.8 |
0.1 |
| 2026 Forecast |
131,348 |
15,102 |
8,404 |
7.4 |
7.1 |
0.1 |
Key Strategies and Developments
Margin Stability and Gas Supply:
ENN maintained its dollar margin guidance at RMB 0.54 per cubic meter for FY24, supported by a mild winter forecast and a steady gas supply. Management anticipates lower gas procurement costs, primarily due to lower oil prices and favorable contracts with suppliers like PetroChina and Sinopec.
Cost Pass-Through and LNG Trading Gains:
The company has completed cost pass-through on 59% of its residential projects (by sales volume) and aims to increase this to 80% by year-end, with ongoing approvals in core cities. Pre-tax LNG trading gains for 9M24 stood at RMB 280 million, aligning with the annual target of RMB 300 million, though significantly lower than the previous year’s RMB 1.5 billion.
Capital Expenditure and Share Buybacks:
With a capex budget of RMB 8 billion for the year, ENN plans to redirect unspent funds toward debt repayment, share buybacks, and potentially dividend distributions, pending board approval. The ongoing US$100 million share repurchase program has been completed for the employee share scheme, with remaining shares intended for cancellation.
Challenges and Risks
- Economic Conditions: Slower industrial activity and subdued new installations in the residential and C&I segments reflect challenges tied to the broader economic environment.
- Competitive LNG Trading: Lower LNG trading gains could impact ENN’s earnings, with management highlighting that domestic operations remain the focus, while overseas opportunities are pursued selectively.
Outlook and Recommendation
Target Price and Rating:
The report maintains a “HOLD” recommendation, with a target price of HK$58.40, based on a DCF valuation model (WACC at 10%, terminal growth at 3%). Key growth areas include expanding the C&I customer base and integrated energy operations, while a gradual increase in cost pass-through rates is expected to stabilize dollar margins.
Catalysts:
Potential growth drivers include stronger-than-expected gas demand, successful share buybacks, and increased operational efficiencies.
