EUR 850.00 For Business Accounts Only

Morningstar | ENN’s Robust 2018 Results Hit by One-off Items; Shares Still Undervalued

Narrow moat-rated ENN Energy’s 2018 net profit of CNY 2.8 billion was flat year over the year. Stripping out one-off items amounting to CNY 1.7 billion (including foreign exchange and hedging losses), the firm’s core profit was up 20% year over year and beat our expectations. We raise ENN Energy’s fair value estimate slightly to HKD 90.00, from HKD 88.00, after fine-tuning our earnings model. We think ENN remains undervalued at the current price level, given the firm’s robust earnings growth outlook.

ENN’s 2018 operating statistics were decent, with retail natural gas sales volume surging by 20% year over the year, underpinned by strong sales to residential, commercial and industrial customers. On the other hand, new residential household connections of 2.3 million was in line with management guidance. Meanwhile, the dollar margin declined to CNY 0.61 per cubic meter, from CNY 0.63, a year earlier, largely due to delays in cost pass-through and higher sales to lower margin residential households.

At the 2018 results briefing, management predicted that retail natural gas sales volumes would grow 15%-20% year over year in 2019, while new residential connections are expected to be stable at about 2.3 million. ENN also expects the dollar margin to be steady in 2019. In our view, these targets are achievable, given ENN’s penetration rate is still low at 58.8% and the government is committed to reducing pollution. Further, we think ENN should be able to better manage its margin compared with peers, given savings derived from its self-import LNG. We would like to highlight that while ENN reported an LNG hedging loss of CNY 745 million because of a sharp fall in oil price in the fourth quarter of 2018, the firm expects a gain now as the oil price has recovered.

We also see great potential for the firm’s integrated energy business because China is developing a clean and highly efficient energy system. Revenue for this business more than doubled to CNY 1 billion, from CNY 294 million a year ago, while gross profit for this segment also jumped sharply to CNY 143 million, from CNY 15 million ago. We anticipate this division will contribute more than 10% of ENN’s total gross profit by 2020.