The net profit of ENN Energy dropped 23% YoY to RMB2,573m in 1H24, 11% below our forecast. The discrepancy mainly came from the lower- than-expected earnings from new connections and gas wholesale. However, we expect its earnings to surge 34% HoH in 2H24 on higher earnings from almost all operations. While we trim our 2024 earnings forecast by 8%, we upgrade our call from HOLD to BUY as the shares start to look appealing after losing 30% of its value in past three months. We lower our target price to HK$64.11.
Key Factors for Rating
The decline in net profit was mainly caused by the lower earnings from new connections and gas wholesales operations. The gross profit of the gas wholesale business plummeted 95% YoY to only RMB34m as the company no longer made any profit from international trading of imported LNG. While the company’s connection of new household users fell 22% YoY to 775k HH, the segmental gross profit fell 46% YoY to RMB824m on lower ASP and higher costs.
On the other hand, the gross profit of the retail gas business grew 7% YoY to RMB3,138m on 5% YoY increase in sales volume and improvement in dollar margin (from RMB0.52/m3 in 1H23 to RMB0.54/m3 in 1H24). The gross profit of its integrated energy business grew 17% YoY on contributions from new projects and that of its value-added business gained 23% YoY on increased sales to retail customers and bigger ticket per customer.
The company’s core earnings from its domestic operations grew 9% YoY to RMB3,080m in 1H24.
Looking ahead, we expect the company’s earnings to grow 34% HoH in 2H24. We expect 8% HoH growth in retail gas volume and 11% HoH growth in gross profit of integrated energy segment on contributions from new projects. The company usually sees much higher earnings for its value-added business in 2H of a year. In addition, we assume no more impairments in 2H24 (vs RMB296m in 1H24).
The company’s shares are now trading undemanding at 9.2x 2024E P/E and offer attractive dividend yield of 5.5-5.9% for 2024-26E after losing 30% of its share price in past three months.
Key Risks for Rating
Further sharp fall in new connections.
Lower-than-expected return of new projects of the integrated energy business.
Valuation
We lower our DCF valuation from HK$71.29 to HK$64.11 after post-result adjustments. This is equal to 9.4x 2024E core earnings.