ENN Energy Earnings: Disappointing Results With Mixed Operating Statistics; Shares Undervalued

We cut ENN Energy’s 02688 fair value estimate to HKD 107 from HKD 130, after considering its disappointing first-half results and the depreciation of the Chinese yuan. Core profit of CNY 3.9 billion was down 5% year on year largely due to lower-than-expected retail gas sales. We reduce our 2023-25 earnings forecasts by 11%-16% to factor in the weak results. We think the current share price looks attractive with most negatives largely priced in, although China’s real estate sector concerns would weigh on near-term share price performance. We expect ENN to deliver five-year adjusted EPS CAGR of 9.3%, supported by integrated energy and value-added businesses.

The key highlights of the results are the lower guidance for retail gas sales volume and core profit growth. ENN now expects 2023 retail gas sales volume to decline 5% year on year, from 10% growth. Consequently, 2023 core profit is guided to fall 5%, from more than 10% growth. On a positive note, the firm increased its 2023 dollar margin guidance to CNY 0.51 per cubic meter from CNY 0.50. Other 2023 key guidance—such as more than 40% revenue growth for the integrated energy business, 30% increase in gross profit for the value-added business, and new residential connections of 1.8 million to 2.0 million—remains intact.

First-half retail gas sales volume fell 6.9% year on year, mainly due to weak industrial gas volume, which declined 11.7%. The drop is due to falling demand from real estate-related industries, and ENN’s decision to reduce lower-margin sales to gas-fired power plants. Despite the slowdown, the firm is seeing signs of recovery, with July retail gas sales volume turning to flattish growth year on year, while August was up 3.9%. We reduce our 2023 retail gas sales volume forecast to a drop of 4.8% from growth of 10.2%. We expect growth to rebound to 7.6% in 2024, underpinned by the firm’s efforts to grow demand from emerging industries and gradual improvement in real estate demand through 2025.