EUR 850.00 For Business Accounts Only

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

ENN Energy Holdings is a privately owned gas utility company in China engaged primarily in distributing and retailing natural gas. We are confident that ENN will generate returns above its cost of capital over the next decade, supporting our narrow moat rating.We believe China’s goal to reduce pollution by increasing gas usage to 10% of the country’s energy sources by 2020, from 6% currently, will sustain long-term demand growth for gas. Furthermore, the government remains committed to market-oriented reform of natural gas pricing, which should promote natural gas consumption. We think the establishment of the Shanghai Petroleum and Natural Gas Exchange and the gradual opening of gas pipelines to third-party access will help to accomplish this. We therefore estimate ENN’s natural gas sales volume to grow at more than a 15% CAGR during 2017-21.Meanwhile, the firm’s parent company, ENN Group, is building China’s first privately owned liquefied natural gas, or LNG, receiving terminal in Zhejiang Province. The first phase of the terminal was commissioned in mid-2018, with 3 million tons of annual capacity. ENN Group has signed long-term gas supply deals with Chevron, Total, and Origin to supply 1.5 million tons of LNG annually for 10 years. In our view, this will help ENN to secure its gas source at a more competitive price, and will reduce the risk of supply bottlenecks versus domestic alternatives.ENN is also actively looking into other businesses to become an integrated energy supplier. The firm is already involved in the asset-light wholesale gas business while exploring electricity sales in China. Given its established customer base, we see long-term potential for these businesses, but we do not expect meaningful contributions from these new ventures in the near term, given their small scale.