EUR 850.00 For Business Accounts Only

Morningstar | ENN’s Strong First-Half 2018 Results Marred by One-Off Losses; Shares Undervalued. See Updated Analyst Note from 24 Aug 2018

Stripping out one-off items (mainly foreign exchange loss and fair value loss of convertible bonds) and amortization of share option expenses totaling CNY 607 million, narrow-moat-rated ENN’s first-half 2018 core net profit was up 25% year over year to CNY 2.39 billion, beating our forecast on the back of better cost control. After updating our valuation model, we raise our fair value estimate to HKD 83 from HKD 79. Given our positive outlook on China’s natural gas demand, we think ENN is currently undervalued after the recent share price pullback.

Excluding wholesale gas, ENN’s first-half natural gas sales volume rose 23% year over year, in line with management guidance but slightly below our previous full-year forecast of 25%. The deviation is mainly due to lower-than-expected demand at its vehicle gas refueling stations on competition from electric vehicles. Meanwhile, new residential connections also increased 13% to 1.08 million, broadly in line with our estimate. Management retained its 2018 targets for retail natural gas sales volume growth of more than 20% and new residential connections of 2.3 million.

For its piped gas segment, ENN’s first-half dollar margin on sales declined to CNY 0.62 per cubic meter from CNY 0.66 a year ago, mainly due to higher procurement costs during last winter on the back of gas shortages. On a positive note, ENN guided that 2018’s dollar margin should remain stable versus CNY 0.63 achieved in 2017, as the firm will benefit from the cheaper LNG imported through the newly opened Zhoushan LNG terminal. In addition, ENN has locked in onshore LNG supply with major suppliers and enhanced its gas storage capacity to ensure stable gas supply for the upcoming winter.

In our view, ENN’s earnings growth will be driven by favorable policies by the government to promote natural gas usage. We are projecting a CAGR of 19% for ENN’s natural gas sales volume growth (excluding wholesale business) for the next five years.

While we are seeing long term potential for the firm’s integrated energy business (revenue growth of 277% year over year in the first half), we think the relative scale is still small and we don’t expect significant earnings contribution in the near-term.