ENN Energy (2688 HK) Summary Report
Core Content
This report from China Merchants Securities (HK) Co., Ltd. provides an analysis of ENN Energy's recent acquisition of EUEN and its implications for the company's financial and strategic performance. The report highlights the company's ongoing transformation into an energy provider and maintains a "BUY" rating with a target price of HK$88.0.
Key Information
Acquisition Details
- Acquisition of EUEN: ENN Energy acquired 100% equity interest in EUEN from its chairman's family for RMB2.6bn.
- Payment Method: The acquisition was fully funded by the issuance of 39.9 million new shares at HK$80/share.
- Share Dilution: The new shares represent 3.6% of the enlarged issued share capital of ENN Energy.
- EUEN Overview: EUEN is a leading technology service provider for integrated energy projects, with core technological know-how in planning, designing, and operating such projects.
- Project Experience: EUEN has participated in 225 integrated energy projects and served government institutions and energy companies.
- Strategic Shift: Post-acquisition, EUEN will focus on serving ENN Energy's integrated energy projects, enhancing the company's project bidding and operational efficiency.
Financial Impact
- EPS Adjustment: Assuming the deal is completed by the end of August 2018, ENN Energy's EPS will be affected by -1% in 2018E and +2% in 2019E.
- Earnings Contribution: The acquisition is expected to contribute RMB280mn to ENN Energy's earnings in 2018-19E.
- Cost Savings: ENN Energy will save RMB200mn in service fees paid to EUEN in 2017.
Mid-Long Term Value
- The acquisition is seen as value-accretive in the mid-long term due to its alignment with the development of China's energy structure and the transformation of ENN Energy into an energy provider.
Financial Highlights
Revenue
| Year |
2016 |
2017 |
2018E |
2019E |
2020E |
| Revenue (RMB mn) |
34,103 |
48,269 |
61,307 |
75,887 |
91,063 |
Gross Profit
| Year |
2016 |
2017 |
2018E |
2019E |
2020E |
| Gross Profit (RMB mn) |
7,350 |
8,339 |
9,844 |
11,249 |
12,851 |
Net Profit
| Year |
2016 |
2017 |
2018E |
2019E |
2020E |
| Net Profit (RMB mn) |
2,151 |
2,802 |
4,296 |
4,936 |
5,666 |
EPS (RMB)
| Year |
2016 |
2017 |
2018E |
2019E |
2020E |
| Basic EPS |
1.99 |
2.59 |
3.96 |
4.56 |
5.23 |
| Fully Diluted EPS |
2.76 |
3.41 |
3.96 |
4.56 |
5.23 |
Core P/E Ratio
| Year |
2016 |
2017 |
2018E |
2019E |
2020E |
| Core P/E (x) |
24.2 |
19.6 |
16.9 |
14.7 |
12.8 |
P/B Ratio
| Year |
2016 |
2017 |
2018E |
2019E |
2020E |
| P/B (x) |
4.8 |
4.3 |
3.6 |
3.1 |
2.7 |
Dividend Yield
| Year |
2016 |
2017 |
2018E |
2019E |
2020E |
| Dividend Yield (%) |
1.1 |
1.3 |
1.7 |
2.2 |
2.8 |
ROE
| Year |
2016 |
2017 |
2018E |
2019E |
2020E |
| ROE (%) |
15.1 |
17.6 |
23.3 |
22.8 |
22.5 |
Financial Ratios
YoY Growth Rates
| Metric |
2016 |
2017 |
2018E |
2019E |
2020E |
| Turnover |
6.4% |
41.5% |
27.0% |
23.8% |
20.0% |
| EBITDA |
9.2% |
13.0% |
20.4% |
17.0% |
15.3% |
| Operating Profit |
11.0% |
14.7% |
20.6% |
16.5% |
15.6% |
| Core Profit |
17.4% |
15.1% |
16.2% |
14.9% |
14.8% |
Margins
| Metric |
2016 |
2017 |
2018E |
2019E |
2020E |
| Gross Margin (%) |
21.6% |
17.3% |
16.1% |
14.8% |
14.1% |
| EBITDA Margin (%) |
16.5% |
13.1% |
12.5% |
11.8% |
11.3% |
| EBIT Margin (%) |
13.6% |
11.0% |
10.5% |
9.9% |
9.5% |
| Net Margin (Core Profit) (%) |
9.4% |
7.7% |
7.0% |
6.5% |
6.2% |
Net Debt / Equity
| Year |
2016 |
2017 |
2018E |
2019E |
2020E |
| Net Debt / Equity (%) |
52.0 |
48.7 |
45.5 |
40.8 |
35.4 |
Other Key Metrics
- Effective Tax Rate (%): 36.1 (2016), 33.3 (2017), 27.8 (2018E), 27.8 (2019E), 27.8 (2020E)
- Total Opex as % of Rev: 7.9 (2016), 6.2 (2017), 5.6 (2018E), 5.0 (2019E), 4.6 (2020E)
- Interest Coverage (x): 10.2 (2016), 16.1 (2017), 17.2 (2018E), 16.6 (2019E), 21.2 (2020E)
- Dividend Payout (%): 24.1 (2016), 26.4 (2017), 29.4 (2018E), 32.4 (2019E), 35.4 (2020E)
- ROIC (%): 12.4 (2016), 13.6 (2017), 18.2 (2018E), 18.5 (2019E), 19.0 (2020E)
Shareholding and Market Data
Shareholding Structure
- ENN Group Intl Investment: 30.34%
- Capital Group Companies Inc: 11.96%
- Commonwealth Bank of Australia: 6.68%
- Wellington Management Group LLP: 5.03%
- No. of shares outstanding (mn): 1,085
- Free float (mn): 756
Key Market Data
- 52-week range (HK$): 45.25 - 83.8
- Market Cap (HK$ mn): 89,684
- Avg. Daily Volume (mn): 2.73
- BVPS (HK$) (2018E): 18.45
- Price (2018/06/25): HK$82.65
- 12-month Target Price: HK$88.0 (6.5% upside)
Investment Ratings
- Industry Rating: OVERWEIGHT (expect sector to outperform the market)
- Company Rating: BUY (expect stock to generate 10%+ return over the next 12 months)
Analyst and Regulatory Disclosures
- The analysts responsible for the report certify that the views expressed reflect their personal opinions and that no compensation was directly or indirectly linked to the recommendations.
- The report contains important regulatory disclosures, including that it is not directed at the general public and is intended for "relevant persons" only.
- CMS HK is not registered as a broker-dealer in the United States and its products and services are not available to U.S. persons except as permitted under SEC Rule 15a-6.
- The document is for information purposes only and should not be relied upon as advice or an offer to buy/sell any security.
Conclusion
The acquisition of EUEN is a strategic move that enhances ENN Energy's capabilities in integrated energy projects and supports its transformation into an energy provider. The report maintains a "BUY" rating with a target price of HK$88.0, citing the mid-long term value-accrual potential and improved operational efficiency. Financial metrics show consistent growth and a declining P/E ratio, suggesting a favorable valuation trend. The report also highlights the company's strong balance sheet and growing dividend yield, reinforcing its investment appeal.
