Company Reports

We think the China city gas sector is currently undervalued, but our preferred pick is ENN Energy, given its well-diversified earnings supported by its integrated energy, or IE, segment and value-added business, or VAB. Following the in-line first-quarter operating data from ENN, we keep its fair value estimate at HKD 88 per share. We believe the data supports our view of a gradual recovery for the industry and should be a positive read across for China Gas Holdings, or CGH, and China Resources Gas, or CRG, where we maintain our fair value estimates of HKD 12.50 and HKD 30.00 per share, respectively.

Narrow-moat ENN Energy’s 2023 net profit of CNY 6.8 billion was below our expectation. That said, core net profit declined 5% year on year and was in line with management guidance. We cut ENN’s fair value estimate to HKD 88 per share from HKD 102 after factoring in slower growth for the integrated energy, or IE, and value-added, or VA, businesses. However, we believe the shares are currently undervalued. Although we don’t expect the firm to post strong earnings growth as the industry is maturing, trading at below 10 times 2024 P/E, we think ENN’s valuation is attractive with a three-year earnings CAGR of 8% and estimated 2024 dividend yield of more than 4%. The 2023 dividend payout ratio is 40% of core profit, and we expect the ratio will gradually increase to 50%. The firm also has prudent financial management with free cash flow of CNY 2.1 billion in 2023, and this should support its capital expenditure and dividend payment.

ENN Energy Holdings is a privately owned gas utility company in China engaged primarily in distributing and retailing natural gas. We are confident that ENN will generate returns above its cost of capital over the next decade, supporting our narrow moat rating.

China Gas Holdings’, or CGH’s, first-half fiscal 2024 (ending March) net profit was down 44% year on year to HKD 1.8 billion. Stripping out other losses of HKD 538 million, this is largely in line with our expectations. After fine-tuning our earnings forecasts, we keep our fair value estimate of HKD 12.60. While the shares remain attractive, we think CGH needs to deliver consistent results improvement before it deserves a rerating. CGH has lowered guidance for a few segments, but this is not surprising and is similar to peers ENN Energy and China Resources Gas, or CRG. That said, it is clear that the dollar margin recovery for gas utilities is on track and this should continue to support earnings growth. We think the city gas sector is undervalued currently and our preferred pick is ENN Energy given the firm’s share buyback plan and potential in the integrated energy and value-added businesses.

ENN Energy’s third-quarter 2023 operating data was largely in line with our expectations, but we see a softer outlook in certain segments which can be negative for peers. After reviewing our assumptions, we lower China Gas Holdings’, China Resources Gas’, and ENN Energy’s fair value estimates to HKD 12.60, HKD 31.00, and HKD 102.00 from HKD 13.70, HKD 32.00, and HKD 107.00, respectively. The reduced valuation largely reflects the lower gas sales forecasts and a slower-than-expected recovery in the real estate sector, which negatively affects new residential connections. After the recent selloff due to concerns about the growth outlook, we believe the sector is undervalued now. We think the sector will be rerated if the dominant players can deliver consistent improvements in earnings. China Gas Holdings will announce its first-half fiscal 2024 (ending March) results in late November 2023, and this should be closely watched. Our preferred pick is ENN Energy given the firm’s share buyback plan and potential in the integrated energy and value-added businesses.

ENN Energy Holdings is a privately owned gas utility company in China engaged primarily in distributing and retailing natural gas. We are confident that ENN will generate returns above its cost of capital over the next decade, supporting our narrow moat rating.

We cut ENN Energy’s 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.

ENN Energy Holdings is a privately owned gas utility company in China engaged primarily in distributing and retailing natural gas. We are confident that ENN will generate returns above its cost of capital over the next decade, supporting our narrow moat rating.

We think the gas utilities sector is undervalued, but our preferred pick is ENN Energy, given its well-diversified earnings and ability to source competitively priced gas. Although China Gas Holdings’ valuation is undemanding, we acknowledge that the firm will need to show consistent improvement in earnings before a rerating kicks in. Following CGH’s disappointing fiscal 2023 (ending March) results, we cut our fiscal 2024-25 earnings estimates by about 21% to reflect lower connections income.

Overall, we think the city gas sector is currently undervalued, but our preferred pick is ENN Energy, given its well-diversified earnings and ability to source competitively priced gas. Following first-quarter operating data from ENN, we keep ENN’s fair value estimate at HKD 130 and we think the shares are attractive now with key negatives largely priced in. We believe the data reaffirms a gradual recovery for the industry. ENN keeps its key guidance unchanged, and this also indicates better outlook for China Gas Holdings and China Resources Gas where we maintain our fair value estimates of HKD 16.30 and HKD 33.50, respectively, after reviewing our earnings forecasts. Taking into account weaker 2022 results from ENN and CRG, we think CGH will post a 22% fall in fiscal 2023 (ending March) earnings before recovering in fiscal 2024.

ENN Energy’s 2022 net profit of CNY 5.9 billion disappointed, largely attributable to a foreign-exchange loss of CNY 1.0 billion, higher input costs and COVID-19 disruptions. Meanwhile, core net profit rose 11% year on year to CNY 8.0 billion, aided by LNG trading gain but still below guidance of 12%-15% growth. We cut ENN’s fair value estimate to HKD 130 from HKD 135 after considering lower dollar margins and a weaker new residential connections outlook. However, we believe the shares are currently undervalued, with key negatives largely priced in. We think ENN’s earnings will be underpinned by growing contributions from integrated energy and value-added businesses.

ENN Energy Holdings is a privately owned gas utility company in China engaged primarily in distributing and retailing natural gas. We are confident that ENN will generate returns above its cost of capital over the next decade, supporting our narrow moat rating.

2022 has been a challenging year for China gas utilities given COVID-19 restrictions and the lackluster real estate market. However, we expect them to benefit from the reversal of China’s COVID-19 policies in 2023. Coupled with supportive measures for the property sector, gas utilities should see better gas sales volume and new residential connections. We keep our fair value estimates for China Gas Holdings, or CGH, China Resources Gas, or CRG, and ENN Energy, or ENN, at HKD 16.30, HKD 39.00 and HKD 135.00, respectively, after reviewing our earnings assumptions.

ENN Energy’s third-quarter 2022 operating data was largely in line with our expectations, and we believe this indicates that other city gas distributors should be able to meet their key targets. After considering the weaker Chinese yuan and finetuning our assumptions, we lower ENN’s fair value estimate to HKD 135 per share from HKD 140. Due to concerns on lower dollar margins and slower new residential connections, the sector has taken a hit, but we think ENN, China Gas Holdings, and China Resources Gas are all undervalued currently. We believe the sector will be rerated if the dominant players can deliver their guidance in 2022. China Gas Holdings will announce its first-half fiscal 2023 (ending March) results in late November 2022, and this should be closely watched. Our preferred pick is ENN given the firm’s ability to source liquefied natural gas at competitive prices and its potential in the fast-growing integrated energy business.

ENN Energy Holdings is a privately owned gas utility company in China engaged primarily in distributing and retailing natural gas. We are confident that ENN will generate returns above its cost of capital over the next decade, supporting our narrow moat rating.

While narrow-moat-rated ENN Energy’s first-half 2022 net profit was down 18% year on year, core profit (stripping out items such as other losses and share-based payment expenses) of CNY 4.1 billion was up 11% and beat our expectation.

ENN Energy Holdings is a privately owned gas utility company in China engaged primarily in distributing and retailing natural gas. We are confident that ENN will generate returns above its cost of capital over the next decade, supporting our narrow moat rating.

We keep narrow-moat ENN Energy’s fair value estimate at HKD 138 and we think the shares are attractive now with key negatives largely priced in. We believe ENN’s first-quarter 2022 operating data can help to ease investors’ concerns as to weaker dollar margins and a dimmer new connections outlook.

ENN Energy Holdings is a privately owned gas utility company in China engaged primarily in distributing and retailing natural gas. We are confident that ENN will generate returns above its cost of capital over the next decade, supporting our narrow moat rating.

Narrow-moat ENN Energy’s 2021 results were broadly within our expectation, with core net profit rising 15% year on year to CNY 7.2 billion. We lower ENN’s fair value estimate to HKD 138.00 from HKD 140.00 to factor in concerns on weaker dollar margins and a dimmer new connections outlook. However, we believe the shares are attractive now with key negatives largely priced in. We think ENN’s earnings will be underpinned by growing contributions from integrated energy, or IE, and value-added businesses, which mitigate the slowdown from the retail gas segment.