ENN Energy’s 2022 Operating Statistics Trail Expectations

ENN Energy’s 02688 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 gains but still below guidance of 12%-15% growth. We cut our 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.

We think key highlights from the results are the guidance of around CNY 1.5 billion LNG trading gain for 2023 (versus about CNY 2.0 billion in 2022) and the expectation for more policy support to facilitate cost pass-through. We believe the LNG trading gain shows ENN’s ability to flexibly allocate its resources and maximize value for the firm. Meanwhile, a better cost pass-through mechanism should help the firm to achieve stable dollar margin.

In 2023, ENN guides retail gas sales volume growth of about 10% year on year, while dollar margin should be around CNY 0.50 per cubic meter, and new residential connections to be around 1.8 million-2 million. With China’s reopening and the recovery in the domestic economy, we think there are upsides to the targets. In our forecasts, we assume average dollar margin of CNY 0.51 during 2023-25, lower than the average of CNY 0.53 during 2020-22, and annual new residential connections to remain flat at about 2.0 million during 2023-27, taking into account gradual recovery in the property market.

Management expects 2023 core profit to grow more than 10% year on year. Besides the LNG trading gain and stronger retail gas sales, the firm will focus on improving efficiency and expanding its integrated energy and value-added businesses to achieve the target.