While ENN Energy’s 5% YoY drop in 2023 core earnings is in line with its guidance, the gross profits of all segments other than retail gas sales were below our forecasts. For 2024, the company guides for 10%+ YoY in core earnings of its domestic operations. However, it could be flat if sales of international LNG is included. The decline in ASP and margin of its integrated energy business is a negative trend.
We trim our earnings forecasts by 2% for 2024/25 and downgrade our call to HOLD. We need more clarity to take a more positive stance.
Key Factors for Rating
The company’s core earnings in 2023 were 12% above our forecast as it included RMB227m gain on repurchase of senior notes and bigger-than-expected realised hedging gain. We cannot really forecast the latter.
Its gross profit dropped 9% YoY in 2023, 5% below our forecast. Retail gas, wholesale gas and new connections all showed lower earnings. Retail gas volume dropped 3% YoY as the sales to C&I clients fell 4% YoY after losing the sales to a power plant. Its gross profit from gas wholesale plummeted 60% YoY after the bonanza of 2022 from the ultra high gas price in Europe. New residential connection fell 11% YoY as the decline in property investment hit demand.
While the energy sales of its integrated energy business surged 56% YoY in 2023, the implied 15% YoY fall of ASP is a concern. Gross margin of this business dropped from 14.2% in 2022 to 13.1% in 2023 as some new projects had not yet fully ramped up.
For 2024, the company guides for 5%+ YoY growth in retail gas sales. However, we are not sure how the company can achieve this as retail gas sales only edged up 1% YoY in 4Q23. We believe it will have to give concession in gas price and this is probably why the company does not give guidance on dollar margin but instead set a 10%+ YoY growth target for the gross profit of retail gas sales.
Key Risks for Rating
Faster-than-expected retail gas sales volume growth.
Higher-than-expected new connections.
Valuation
We lower our DCF valuation and hence target price from HK$69.12 to HK$67.19 to reflect the cuts in our earnings forecasts. Our new target price puts us at 9.1x 2024E core earnings.