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ENN Energy (2688 HK) Summary Report

Core Content

ENN Energy is a leading player in the energy sector, with a strong focus on LNG (Liquefied Natural Gas) import and integrated energy solutions. The company has been actively expanding its infrastructure and leveraging its cost advantages to maintain a competitive edge in the market.

Key Projects and Developments

• Zhoushan LNG Terminal:

  • The terminal consists of three phases with a total capacity of 10mtpa.
  • Phase I (3mtpa) is 95% completed and is expected to start operations in late 2018.
  • The first LNG cargo is scheduled to be unloaded in August 2018.
  • Initially, LNG will be transported via LNG trailers and bunker vessels, targeting 500k tons of sales in 2H18.
  • Once the transmission pipeline is operational by late 2019/2020, LNG will be sent to Zhejiang provinces, helping to address the local gas shortage of around 1.6bn cu m in 2017.

• Integrated Energy Solution Project in Yuhang Economic and Technology Development Zone:

  • ENN Energy won the project against four major competitors, showcasing its strong project execution and efficiency.
  • The project includes three integrated energy stations in Phase I, with plans to expand to 14 stations in the long term.
  • The No. 3 station commenced operations in February 2018, replacing coal-fired boilers and providing steam to 145 customers.
  • The equity IRR of the project is estimated at over 12%, with a payback period of around 6 years.

Cost Advantages and Hedging Strategy

• ENN Energy has signed three long-term LNG contracts with Chevron, Origin, and Total, importing 1.44mtpa of LNG.
• The contracted price is pegged to oil prices with a floor of US$35/barrel and a ceiling of US$80/barrel.
• Based on oil prices of US$65-70/barrel and transmission costs, the company enjoys a cost saving of RMB0.1-0.29/cu m compared to Zhejiang city-gate gas prices.
• The company has hedged part of its LNG contracts at US$70/barrel, ensuring continued cost advantage even with oil price hikes.

Financial Performance

Revenue and Profit

Year	Revenue (RMB mn)	Gross Profit (RMB mn)	Net Profit (RMB mn)	Core Profit (RMB mn)
2016	34,103	7,350	2,151	3,212
2017	48,269	8,339	2,802	3,697
2018E	61,307	9,844	4,296	4,296
2019E	75,887	11,249	4,936	4,936
2020E	91,063	12,851	5,666	5,666

EPS and Valuation Metrics

Year	Core EPS (RMB)	Fully Diluted EPS (RMB)	P/E (x)	P/B (x)	Dividend Yield (%)
2016	2.76	2.76	22.1	4.4	1.2
2017	3.41	3.41	17.9	3.9	1.5
2018E	3.96	3.96	15.4	3.3	1.9
2019E	4.56	4.56	13.4	2.8	2.4
2020E	5.23	5.23	11.7	2.5	3.0

• The company maintains a BUY rating with a target price of HK$88.0, which is a 16.6% increase from the current price of HK$75.45.
• The stock is currently trading at 13.4x 2019E P/E, a 4% discount to its 5-year historical trading level.
• The company has a strong track record of increasing profitability, with a ROE of 22.5% in 2020E.

Investment Highlights

• LNG Sales and Distribution:

  • Before the pipeline is operational, LNG is transported by LNG trailers and bunker vessels.
  • The economical transportation radius is 400-500km, allowing coverage of Zhejiang, Jiangsu, Shanghai, and Anhui provinces.
  • The company is also exploring gas source switching with upstream players to enhance its market position.

• Infrastructure Development:

  • Three pipelines (total capacity 8bn cu m/year) are under development, including the Zhoushan, subsea, and Ningbo pipelines.
  • The subsea and Ningbo pipelines are expected to be completed in one and a half years.
  • The Zhoushan pipeline's route is still under discussion, with a likely decision by the end of June 2018.

• Project Efficiency:

  • The company's integrated energy solution project in Yuhang has a strong land-use efficiency and energy solution efficiency, giving it a competitive edge.
  • The project's cost pass-through mechanism allows for competitive pricing in the energy market.

Shareholding and Market Information

• 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%
  • Total shares outstanding: 1,085 million
  • Free float: 756 million

• Market Performance:

  • 12-month return: 77.3%
  • 52-week range: HK$42 - HK$81.75
  • Market cap: HK$81,871 million
  • Average daily trading volume: 2.91 million shares
  • BVPS (2018E): HK$18.45

Analyst Ratings and Outlook

• Company Rating: BUY
• Industry Rating: OVERWEIGHT
• The company is expected to outperform the market over the next 12 months, with a strong growth trajectory in revenue and profitability.

Conclusion

ENN Energy is well-positioned to capitalize on its cost advantages, efficient integrated energy solutions, and ongoing infrastructure development. The company's strong financial performance and strategic projects indicate a promising outlook for future earnings growth and shareholder returns. With a solid track record and expansion plans, ENN Energy is poised for continued success in the energy sector.