20181123-招商证券_香港_-新奥能源-02688.HK-Gas_sales_growth_remains_strong_in_Jul-Oct_2018_6页_926kb

ENN ENERGY (2688 HK) Company Report Summary

Core Content

ENN Energy (2688 HK) continues to show strong performance in its gas sales and integrated energy business. The report highlights the company's ability to maintain growth despite economic challenges, supported by diversified customer bases, competitive pricing, and government initiatives. The management remains confident in achieving its full year growth guidance and is optimistic about future performance.

Main Points

• Gas Sales Growth:

  • Gas sales volume in Jul-Oct 2018 recorded a 20-25% YoY increase, driven by residential usage (>25%) and C/I customers (20-25%).
  • Management is confident in achieving the 2018E gas sales volume growth guidance of 20-25% and expects ~20% YoY growth for 2019-20E.
  • The company aims to roll out 2.3 million new gas connections in 2018, with 70% from new buildings, 20% from old buildings, and 10% from rural areas.

• Margin Improvement:

  • The gas sales dollar margin is expected to rebound to RMB0.64/cu m in 2H18 from RMB0.62/cu m in 1H18.
  • The improvement is attributed to:
    1. Agreements with ~90% of C/I customers for cost hikes during winter.
    2. Use of imported LNG for the remaining 10% of C/I customers, which offers a cost advantage of RMB417-717/ton.
    3. A high cost base in 1H18 due to the purchase of expensive spot LNG.

• Integrated Energy Business Expansion:

  • As of Oct 2018, the company secured 80bnkWh/year in contracted energy sales, reaching 80% of its full year target.
  • 15 additional projects are expected to commence operations in 2H18.
  • The integrated energy segment is projected to contribute 20-30% of revenue in 2020 and achieve a ~15% margin once projects mature.

• Investment Recommendation:

  • The rating is maintained as BUY, with a revised DCF-based target price of HK$88.4 from HK$88.0.
  • The adjustment considers RMB depreciation, valuation roll-over, and an increased WACC assumption from 8.5% to 8.8%.
  • The stock is trading at a 2019E P/E of 13.4x, near its 5-year historical average of 13.7x.
  • The recurrent EPS CAGR is expected to be 15% over 2018-20E, with a valuation deemed undemanding.

Key Financial Highlights (2016-2020E)

Catalysts and Risks

Upward Catalysts:

• Stronger gas demand.
• More cost savings from LNG import.
• Faster development of integrated energy projects.

Downside Risks:

• Slowdown in gas demand.
• Delays in greenfield projects.
• Inability to pass through increased costs to end users during winter.

Financial Ratios (2016-2020E)

Investment Ratings

• Industry Rating: OVERWEIGHT (expect the sector to outperform the market over the next 12 months).
• Company Rating: BUY (expect the stock to generate 10%+ return over the next 12 months).

Conclusion

ENN Energy is expected to maintain strong growth in gas sales and improve its margins through cost-effective LNG sourcing and a diversified customer base. The integrated energy segment is on track for significant revenue and margin contributions in the coming years. The company's financials and valuation suggest a BUY recommendation with a revised target price of HK$88.4. The stock is undervalued relative to its historical P/E ratio, and the company is well-positioned for continued growth.