20180824-招商证券_香港_-新奥能源-02688.HK-Strong_growth_momentum_continues_8页_1mb

ENN ENERGY (2688 HK) Summary

Core Content

ENN Energy (2688 HK) demonstrated strong growth momentum in the first half of 2018 (1H18), with its core earnings increasing by 25% YoY to RMB2.4bn, exceeding market and forecast estimates of RMB2.3bn. The company's performance was driven by margin improvement in the wholesale gas segment and higher dividend income from Sinopec Marketing Co. Ltd (SMCL).

Main Points

• Retail Gas Sales: Retail gas sales volume surged by 23% YoY to 8.5bn cu m, with significant growth in commercial, industrial, and residential users. This exceeded management's full year growth target of ≥20% YoY, leading to an updated guidance of 20-25% YoY for the full year.
• Dollar Margin Recovery: Gas dollar margin rebounded to RMB0.62/cu m in 1H18, up from RMB0.66/cu m in 1H17. Management expects a stable margin of RMB0.63/cu m for the full year 2018, supported by LNG imports and gas storage facilities.
• Integrated Energy Business: The integrated energy segment saw rapid expansion, with 15 new projects starting operations in 1H18, bringing the total to 46 projects. The segment's revenue increased by 277% YoY, and gross profit turned positive at RMB28mn. The company also signed 131 new projects with potential energy sales of 36bnkWh/year.
• Financial Performance:
  • Revenue: Increased by 23.8% YoY to RMB26,530mn.
  • Gross Profit: Rose by 20.4% YoY to RMB4,662mn.
  • Net Profit: Grew by 8.1% YoY to RMB1,782mn.
  • Recurring Net Profit: Remained at RMB4,296mn for 1H18.
  • EPS: Recurring EPS increased by 24.7% YoY to RMB3.96.
• Valuation: The company maintains a BUY rating with a DCF-based target price of HK$88.0. The 2019E P/E ratio is at 13.1x, which is a 6% discount to its 5-year historical average of 13.9x.

Key Financial Highlights

• Debt Structure: As of 30 Jun 2018, ENN Energy's total debt was RMB17bn, with 56% short-term and 44% long-term. The use of short-term debt helped reduce average interest rates to 3.9% in 1H18.
• Capital Expenditure (Capex): ENN Energy spent RMB3.3bn in 1H18, with RMB1.8bn allocated to city gas projects and RMB0.7bn to integrated energy projects. Management revised its full year capex guidance from RMB6bn to RMB7bn.
• Financial Ratios:
  • EBITDA Margin: Improved to 12.5% in 1H18 from 13.1% in 1H17.
  • Net Debt/Equity: Decreased to 45.5% in 1H18 from 48.7% in 1H17.
  • Dividend Yield: Increased to 1.9% in 1H18 from 1.5% in 1H17.
  • ROE: Rose to 23.3% in 1H18 from 17.6% in 1H17.
• Balance Sheet:
  • Total Assets: Grew to RMB63,279mn in 1H18.
  • Total Liabilities: Increased to RMB39,729mn in 1H18.
  • Shareholder's Equity: Rose to RMB19,986mn in 1H18.
  • BVPS: Increased to RMB18.48 in 1H18.

Key Risks and Catalysts

• Catalysts:
  • Stronger-than-expected gas demand.
  • More cost savings from LNG imports, reducing the gas dollar margin squeeze.
  • Faster-than-expected growth in the integrated energy business.
• Risks:
  • Slowdown in gas demand.
  • Delays in the commissioning of greenfield projects.
  • Inability to pass through increased costs to end users during the winter season.

Shareholding and Market Data

• Shareholding Structure:
  • ENN Group Intl Investment: 32.8%
  • Capital Group Companies Inc.: 15.6%
  • Commonwealth Bank of Australia: 5.6%
  • Wellington Management Group LLP: 4.9%
• Market Performance:
  • 1H2018 Price Performance: ENN Energy's share price declined by 11.9% in 1 month, while the Hang Seng Index (HSI) fell by 3.5%.
  • Market Cap: RMB83,051mn.
  • Avg. Daily Volume: 3.13mn shares.
  • 52-Week Range: HK$48.3 to HK$92.35.

Analyst Comments

• Gas Connection Business: Management maintained its full year targets for gas connections at 2.3mn households and 18mn cu m capacity for C/I customers.
• Integrated Energy Business: Continued expansion is expected to drive earnings growth in the mid to long term.
• Valuation: The company's valuation is considered attractive, with a 13.1x P/E ratio for 2019, and the analyst maintains a BUY rating with a target price of HK$88.0.