While ENN’s gas sales to C&I clients resumed growth in 3Q23, it resulted in decline in dollar margin. New connections continued to drop and the company now targets to achieve the low end of its full- year guidance. It also guides down the profit from LNG trading. We trim our 2023-25 earnings forecasts by 5-6%. Despite all these, we reiterate our BUY call as many negatives are in the price and it still sees decent growth at integrated energy business. Its award share purchase should provide support to share price. We lower our target price to HK$83.60.
Key Factors for Rating
In 3Q23, ENN’s total retail gas sales was flat YoY. After falling 10% YoY in 1H23, the company gas sales to C&I clients grew 1% YoY in 3Q23. The growth accelerated to 6% YoY excluding the sales to power plants. However, the company achieved the growth through aggressive marketing, including regaining some lost clients with bigger price discounts at initial stage. As a result, the company’s dollar margin dropped from RMB0.60/m3 in 2Q23 to RMB0.49/m3 in 3Q23.
In 9M23, its new connections of residential clients dropped 11% to 1.36m HH.
It now looks to achieve the low-end of its full-year target of 1.8-2.0m HH. The newly installed capacity for C&I clients fell 14% YoY to 12.7m m3/day. Its full- year target of 20m m3/day looks a bit out of reach. The lack of new projects may a reason behind with only 4 small new city gas projects signed in 9M23.
On the positive side, the energy sales of its integrated energy segment surged 34% YoY in 9M23 mainly on the contributions from 60 new projects put into operations during the period, bringing the total projects in operations to 270.
The company’s share price dropped 31% in the past three months due to negative surprises in interim. We believe many negatives have been in the price. The purchase of its own shares under staff share award scheme introduced in mid-September has successfully stabilised share price. The company approved a total budget of US$100m in the buyback of shares and has bought 2.68m shares so far.
Key Risks for Rating
Slower-than-expected gas sales growth.
Lower-than-expected new connections.
Valuation
We reduce our DCF valuation and hence target price from HK$88.40 to HK$83.60 to reflect the changes in our earnings forecasts. This is equal to 12.3x 2023E P/E.