ENN delivered resilient performance and satisfactory results. FY20 core profit increased 18.2% YoY, in line with mgmt. guidance. We think ENN exhibited outstanding balance in maintaining stable earnings growth while pursuing its long-term ESG targets. We believe ENN’s IE business is a best fit with China’s energy transition towards carbon-neutral. Our FY21/22E earnings are largely unchanged, and we lift TP by 12.5% to HK$135 per share based on revised SOTP valuation. Trading at 15.4x forward P/E, however, we think ENN’s upside is largely priced in. Downgrade ENN to HOLD rating.
- Core profit surged 18.2% YoY. ENN recorded retail gas sales volume growth of 10% YoY, but suffered drags from connection and value added business in FY20 due to COVID-19. Revenue was largely flat at RMB71.6bn, and the Company had SG&A and finance costs controlled well with significant decline. Net profit read RMB6,278mn, up 10.7% YoY. Stripping out FX, hedging and share option impacts, core profit was RMB6,237mn, up 18.2% YoY, in line with mgmt. and consensus estimates. ENN declared final dividend of HK$2.1 and a special dividend of HK$0.32 to celebrate its 20 years listing. Aggregating both dividends, payout ratio reaches to 37%.
- Dollar margin increased slightly with stable outlook. Gas dollar margin increased slightly by RMB0.01 YoY to RMB0.60 on the back of ENN’s superior natural gas sourcing capability. Mgmt. disclosed about 24% of total gas supply was sourced from resource pool other than traditional piped gas. In view of 2021E, ENN expects retail gas volume to increase another 15% YoY, and gas dollar margin to remain stable at RMB0.60.
- Connection and VAS to resume normal. Since ENN could not perform indoor construction and direct interation with customers for a long period of time, residential connection declined 4.3% YoY to 2.29mn households, while VAS revnue declined by 15.2% YoY to RMB1,685mn. Mgmt. guided both business to resume normal in FY21E, with residential connetion target of 2.4mn households and VAS gross profit to increase 30%YoY.
Integrated Energy: a key mean towards carbon-neutral. IE business recorded rapid sale volume growth of 75.9% YoY to above 12bn kWh in 2020. IE also contributed a strong lift on gross profit of RMB903mn in FY20 to offset earnings impact for less residential connection. As China will have increasing discussion about carbon-neutral development, we think market will have increasing awareness of ENN’s strength in IE. We expect IE a key segment to boost ENN’s overall valuation.
