20141030-美银美林-Light_asset_cooperative_franchise_US_business_plan_12页_643kb

Light Asset Cooperative Franchise US Business Plan Summary

Core Content

This document outlines the US business plan for ENN Energy Holdings Ltd, focusing on the expansion of LNG (Liquefied Natural Gas) refueling stations through a light asset business model and cooperative franchise agreements. The plan is based on the company's strategy to leverage its experience in the Chinese market and the growing demand for natural gas in the US heavy-duty transportation sector.

Main Points

• Acquisition Strategy: ENN plans to acquire LNG refueling station assets in the US and Canada at an acquisition price of US$200 million, which is 1.5x book value (PB), derived by using Clean Energy Fuels Corp (CLNE) as a benchmark. The average PB of CLNE over 90 days before September 30, 2014, was applied with a 20% discount.

• Business Model: ENN aims to build a light asset model by partnering with existing diesel station owners and backyard stations. It plans to construct up to 20 demo LNG stations in the US and 50 in Canada, with US$3-5 million investment per station for standalone stations and US$1.5 million per station for cooperative ones.

• Profitability Goals: ENN expects each station to generate US$1 million profit per year once it reaches a utilization rate of 30-40%. The company anticipates reducing losses in 2015, breakeven in 2016, and profitability in 2017 after the implementation of key factors such as federal tax reductions, mature vehicle conversion technology, and increased customer acceptance.

• Cost Structure: The cost of LNG per DGE is approximately US$0.60, while the average selling price (ASP) is US$2.75/DGE, resulting in an absolute margin of US$0.65/DGE, or over Rmb1 per cubic meter.

• Technology and Market Trends: ENN believes that the price gap between natural gas and gasoline is a key driver for profitability. It also highlights that vehicle conversion costs have dropped from US$50,000 to US$20,000, making LNG more cost-effective.

• Investment and Capex: ENN plans to add 3-5 demo LNG stations per year with an annual capex of US$3-5 million. It also aims to co-develop stations with existing diesel station operators, requiring US$1 million investment per station.

• Debt and Financials: ENN expects to assume minimal debt, with US$25 million annual capex. The net debt-to-equity ratio is expected to decrease from 47.3% in 2013 to -0.6% in 2016, indicating a potential improvement in financial structure.

Key Financial Highlights

Estimated Net Income (Adjusted - mn)

• 2012A: 1,482
• 2013A: 1,252
• 2014E: 2,123
• 2015E: 2,449
• 2016E: 2,764

EPS (Earnings Per Share)

• 2012A: 1.39
• 2013A: 1.17
• 2014E: 1.99
• 2015E: 2.30
• 2016E: 2.59

Free Cash Flow / Share

• 2012A: 2.17
• 2013A: 0.800
• 2014E: 0.710
• 2015E: 1.68
• 2016E: 2.91

Valuation Metrics

• P/E Ratio:
  • 2014E: 19.50x
  • 2015E: 16.91x
  • 2016E: 14.98x
• Dividend Yield:
  • 2014E: 1.28%
  • 2015E: 1.77%
  • 2016E: 2.34%
• EV / EBITDA:
  • 2014E: 11.68x
  • 2015E: 10.20x
  • 2016E: 8.87x
• Free Cash Flow Yield:
  • 2014E: 1.83%
  • 2015E: 4.33%
  • 2016E: 7.51%
• ROE (Return on Equity):
  • 2014E: 20.3%
  • 2015E: 19.8%
  • 2016E: 19.2%

Investment Thesis

• ENN's US$200 million acquisition price is justified by its light asset model and cooperative franchise strategy.
• The low network penetration rate in China and potential for growth in the city gas distribution sector are positive factors.
• Federal tax rebates and technological advancements in vehicle conversion are expected to significantly improve profitability and cost competitiveness.
• ENN has a leading position in the Chinese market with over 120 piped gas projects.

Key Metrics and Ratios

• Return On Capital Employed (ROCE): 9.7% (2012A), 9.5% (2013A), 10.1% (2014E), 10.0% (2015E), 10.0% (2016E)
• Return On Equity (ROE): 18.9% (2012A), 13.8% (2013A), 20.3% (2014E), 19.8% (2015E), 19.2% (2016E)
• Operating Margin: 15.9% (2012A), 14.5% (2013A), 13.1% (2014E), 12.7% (2015E), 12.2% (2016E)
• EBITDA Margin: 19.0% (2012A), 18.0% (2013A), 15.9% (2014E), 15.0% (2015E), 14.3% (2016E)
• Cash Realization Ratio: 3.7x (2012A), 3.2x (2013A), 1.8x (2014E), 2.0x (2015E), 2.1x (2016E)
• Asset Replacement Ratio: 6.4x (2012A), 5.5x (2013A), 5.2x (2014E), 5.1x (2015E), 3.9x (2016E)
• Interest Cover: 4.7x (2012A), 6.3x (2013A), 10.2x (2014E), 9.8x (2015E), 10.0x (2016E)

Valuation Matrix

BofAML Ticker	BBG Ticker	Company	Rating	Price Cncy	Curr. Price	Mkt Cap	PE 2014	PE 2015	PE 2016	PB 2014	PB 2015	PB 2016	EV/EBITDA 2014	EV/EBITDA 2015	EV/EBITDA 2016	Dividend Yield 2014	Dividend Yield 2015	Dividend Yield 2016	ROE 2014	ROE 2015	ROE 2016	FCF Yield 2014	FCF Yield 2015	FCF Yield 2016
CLPHF	2 HK	CLP HLDGS LTD	UNDER-PF	HKD 66.15	HKD 66.15	HKD 21,545	13.7	14.3	14.6	1.8	1.8	1.7	10.1	9.7	9.7	4.8	4.0	3.4	18.9	15.0	0.0	1.5	1.4	1.3
HOKCF	3 HK	HONG KGE CHINA GS	NEUTRAL	HKD 18.00	HKD 18.00	HKD 24,401	24.7	24.0	21.5	3.5	3.5	3.2	23.0	22.2	20.7	1.6	1.4	1.3	13.8	12.0	11.4	1.5	1.6	1.7
HGKGF	6 HK	POWER ASSETS HOL	UNDER-PF	HKD 74.40	HKD 74.40	HKD 20,470	2.5	16.8	19.9	2.3	1.7	1.6	36.9	36.8	29.4	1.2	1.5	1.6	15.7	16.4	12.8	1.1	1.3	1.6
XNGSF	2688 HK	ENN ENERGY HOLDLO	BUY	HKD 54.30	HKD 54.30	HKD 7,468	21.5	18.7	16.5	4.8	4.0	3.4	12.7	11.1	9.6	1.7	2.2	2.6	20.3	19.8	19.2	1.7	3.9	6.8

Key Risks and Considerations

• The acquisition price may be early compared to the expected profit contribution timeline.
• The utilization rate needs to increase from 10% to 30-40% for breakeven.
• The business model relies on cooperative franchise agreements, which may have associated risks.
• There is a potential conflict of interest due to BofA Merrill Lynch's investment activities with companies covered in its research.