After an expected small earnings decline in 2024, Enric will see decent earnings growth again starting from 2025. The revenue related to green energy transition of marine transport should see strong growth with improving margin. Its JVs with steel mills to convert coke oven gas into LNG and hydrogen will see meaningful contributions. It has also received orders for replacement of old vessels upon government subsidies. The recent top up of stake by parent is also a vote of confidence. While we trim our 2024-26 earnings forecasts by 3-9%, we reiterate our BUY call with target price lowered to HK$9.10.
　　Key Factors for Rating
　　Enric has seen strong growth in new orders for offshore clean energy products starting from 2023 as the green transition of global marine transport has resulted in strong demand for LNG bunkering vessels and equipment for LNG fuelled vessels. New orders for offshore clean energy products surged 58% YoY to RMB7.44bn in 9M24 whereas the order backlog jumped 91% YoY to RMB14.3bn by end-9M24. As the company delivers its products, it will translate into growth in turnover. The margin of these products should also improve in 2025 as more vessels after price hike are delivered.
　　Its JV with Angang to convert coke oven gas into LNG and hydrogen started operation in 4Q24. This is a good business as it generates demand for the company’s equipment in the construction stage. Its JV partner will provide raw materials as well as market for the products, hence generating relatively stable recurrent earnings for Enric. Enric will have two more similar JVs to start production in 2H25 and 2026. We estimate the net profit to Enric from these JVs to surge from RMB5m in 2024 to RMB280m in 2026.
　　Chinese Government encourages the trade-in of old vessels running in inland rivers or coastal areas by providing subsidies. Enric has recently received an order to build methanol power systems for 50 vessels. As the trade-in programme will last until the end of 2028, we believe more related new orders will come.
　　Key Risks for Rating
　　The recovery at chemical and environmental segment cannot last.
　　New orders for liquid food segment cannot pick up.
　　Valuation
　　We lower our target price from HK$9.27 to HK$9.10 to reflect the small cuts in our earnings forecasts. Our target valuation is still 0.7x 2024-26E PEG and the EPS CAGR accelerates from 21.4% to 22.6% under our new forecasts. This puts us at 13.7x 2024E core earnings.
　　Green Methanol Plant to Start Production in 2H25The company has formed a JV to produce green methanol from biomass in Zhanjiang, Guangdong Province with the capacity of 50k tpa for Phase 1. Production is scheduled to start in 2H25 and the company has signed offtake agreements with international shipping companies for the green methanol produced.
　　The green methanol JV is another move by Enric to invest in green energy related business. These ventures will provide more recurrent earnings for Enric, reducing its earnings volatility over time.
　　Top Up by Parent
　　Enric’s parent CIMC (2039 HK/000039 CH, NR) has started to buy the shares of Enric in the market from late September 2024 as it saw value in Enric’s shares over the longer term. Up to 7 January 2025, CIMC has bought 50m shares in total with an average price of HK$6.81. This lifted its stake in Enric from 67.6% to 70.06%.
　　Changes in Earnings Forecasts
　　We reduce our forecasts on revenue and profit of liquid food segment as the negative impact of the delay in big order was bigger than expected and the new orders in 9M24 were weak (down 33% YoY in value). We also reduce our margin assumptions for the chemical and environmental segment by 0.9ppt to make it more realistic based on the 9M24 results of CIMC Safeway Technologies (301559 CH/NR). In addition, we lower our gross margin assumption for the clean energy segment by 0.3ppt for 2024 to be conservative. We also reduce the contributions from the JVs with Hexagon Purus (HPUR NO/NR) given the slow progress in the development of hydrogen fuel cell vehicles in China. On the other hand, we include the earnings from the green methanol JV for the first time.
　　Overall, we trim our earnings forecasts by 5%/9%/3% for 2024/25/26.