20180911-招商证券_香港_-新奥能源-02688.HK-Key_takeaways_from_post_1H18_result_Shenzhen_NDR_7页_949kb

ENN ENERGY (2688 HK) Summary

Core Content

ENN Energy is a leading player in the integrated energy solutions sector, with a strong focus on natural gas and related services. The company has demonstrated resilience in its gas sales and profitability despite the economic slowdown, and is maintaining its growth guidance for the year.

Main Points

• Gas Sales Growth: Management is confident in achieving a 20-25% YoY growth in gas sales volume for 2018, with strong performance in July and August (>20% YoY growth). This is attributed to the company's projects being located in economically vibrant regions such as Pearl River Delta, Yangtze River Delta, and Beijing-Tianjin-Hebei, and a diversified client base (single industry accounts for less than 7% of total sales).

• Margin Improvement: Despite a 20-40% increase in gas prices by PetroChina for the winter season, ENN Energy expects its gas dollar margin to improve from RMB0.62/cu m in 1H18 to RMB0.64/cu m in 2H18. This is due to earlier communication with C/I customers and cost savings from LNG imports.

• Integrated Energy Business: ENN Energy signed 131 new projects in 1H18 with a potential annual energy sales of 36bnkWh. The company aims to increase contracted energy sales to 100bnkWh/year by the end of 2018. The integrated energy business is projected to generate RMB30bn in revenue annually by 2021, with gross margin expected to rise to >10% by 2020.

• Capital Expenditure (Capex): In 2018, the company plans to spend RMB7bn on Capex, with 50% allocated to project expansion and acquisition, 35% for maintenance, 10% for gas storage facilities, and the remaining 5% for rural gas connections. The company expects sufficient internal cash flow to support this, without the need for equity financing.

• Financial Performance:

  • Revenue is projected to grow from RMB34,103mn in 2016 to RMB91,063mn in 2020.
  • Core profit is expected to increase from RMB3,212mn in 2017 to RMB5,666mn in 2020.
  • Recurring EPS is forecasted to rise from RMB2.76 in 2017 to RMB5.23 in 2020.
  • The core P/E ratio is projected to decline from 22.9 in 2016 to 12.1 in 2020, while P/B is expected to decrease from 4.6 to 2.5.
  • Dividend yield is expected to increase from 1.2% in 2016 to 2.9% in 2020.
  • ROE is projected to rise from 15.1% in 2016 to 22.5% in 2020.

• Investment Rating: The company is rated BUY, with a DCF-based target price of HK$88.0, which remains unchanged despite the 2019E P/E of 13.9x, near the 5-year historical average.

Key Information

• Valuation: The stock is currently undervalued based on the 2019E P/E ratio, which is near its 5-year average.
• Capital Structure: ENN Energy has a significant shareholding structure with ENN Group Intl Investment holding 32.8%, and has a net debt/equity ratio expected to decline from 52.0% in 2016 to 35.4% in 2020.
• Dividend Policy: Dividend payout ratio is expected to increase from 24.1% in 2016 to 35.4% in 2020.
• Catalysts: Stronger gas demand, cost savings from LNG imports, and faster development of the integrated energy business are key catalysts for the stock.
• Risks: Potential slowdown in gas demand, delays in project commissioning, and inability to pass through increased costs to end users are key downside risks.

Financial Highlights

Investment Outlook

• Target Price: Maintain BUY rating with a DCF-based target price of HK$88.0.
• Catalysts: Strong gas demand, cost savings from LNG imports, and accelerated development of the integrated energy business.
• Risks: Economic slowdown, project delays, and cost pass-through challenges.

Key Questions and Answers

1. Sustainability of Gas Demand: Management believes that the economic slowdown has not yet impacted gas demand from C/I customers, with strong growth in July and August. The company's focus on high-demand regions and diversified client base supports this outlook.

2. Gas Supply Shortage: Management expects the gas shortage problem in the winter of 2018 to be less severe than in 2017, due to improved supply from Middle Asia and better preparation by gas operators.

3. Gas Dollar Margin: Despite the price hike, the company expects to improve its gas dollar margin to RMB0.64/cu m in 2H18 due to cost savings and improved customer communication.

4. Integrated Energy Business: The business is growing rapidly, with 131 new projects signed in 1H18 and an expected revenue of RMB30bn by 2021. Gross margin is expected to increase to over 10% by 2020.

5. Connection Fee: Cancellation of connection fees is unlikely in the near term due to low gas penetration in China and the need for such fees to maintain operational efficiency.

6. Third-Party Connection: The government is cautious about allowing third-party entry into the last-mile connection business due to safety and operational concerns.

7. Capex Funding: The company has sufficient internal cash flow to fund its 2018 Capex of RMB7bn, with no immediate equity financing plan.

Summary

ENN Energy is well-positioned for growth in 2018, with strong gas sales volume and margin improvement expectations. The company's integrated energy solution business is expanding rapidly, and its diversified client base and focus on high-demand regions support its growth outlook. Despite potential risks such as economic slowdown and supply constraints, the company is maintaining its BUY rating and target price of HK$88.0, reflecting confidence in its financial performance and growth prospects.