CHINA GAS

AUGUST 20, 2015

ENN ENERGY

| 2688 HK
Waiting for a re-rating
Entry point likely to emerge in late 2015F

Neutral (maintained)

Core earnings grew 18% YoY, in line

Current price:

Entry point to emerge in late 2015F. We believe ENN will

continue to face weaker gas volume risk amid Chinas slower IP
activity and consistently lower global oil prices. Gas demand risk
has yet to ease in 2H15F despite the possibility of a September 2015
announcement of a city gate price cut of over RMB0.40/m3 that
would be effective October 2015. Assuming gas operators need oneto-two months to pass through lower costs to end users, we see
volume picking up as early as 1H16F. Late 2015F may offer a better
entry point provided demand visibility improves. On the back of
slower secular gas volume growth and stronger connection figures,
we fine tune our 2016F-2018F earnings forecasts by -3% to +1%
and cut our DCF-based target price from HK$52.00 to HK$46.00.
In our view, the stock would deserve a re-rating if demand surprised
on the upside in late 2015F.
September-December likely the key to full-year performance.
From July to early-August 2015, Chinas gas operators have not
seen a pickup in gas demand from industrial customers. ENN is not
immune to this trend. This leads us to believe that volume has to be
backend loaded in the last four months of 2015F if the company is
to achieve 10-15% ex-wholesale volume growth for 2015F.
Residential and vehicle gas will continue to post faster growth in
2015F while C&I demand remains the swing factor for gas sales
earnings.
1H15 results in line. Headline profit rose a mere 1% to
RMB1.2b. Stripping out non-core items, core profit grew 18% YoY,
in line with our full-year earnings growth rate forecast. Piped gas
sales gross margin expanded a slight 0.4ppt thanks to lower blended
procurement cost. Piped gas and natural gas sales volume rose
10.7% and 10.5%, respectively. Excluding wholesale gas, city gas
volume climbed 8% YoY, just below our expectation. New
household connections came in better-than-expected after growing
22% YoY to 792k in 1H15.

FORECAST AND VALUATION

Year to 31 December
Revenue (RMB m)
YoY (%)
Net profit (RMB m)
YoY (%)
Fully diluted EPS (RMB)
YoY (%)
P/E (x)
DPS (RMB)
Dividend yield (%)
P/B (x)
ROAE (%)
Net debt/equity (%)

2013
22,966
27.4
1,252
-15.5
1.16
-16.2
28.8
0.38
1.1
3.8
13.8
56.2

Target:

42.05

HK$

(as at 20 August 2015)

46.00

HK$

(down from HK$52.00)

TRADING DATA
52-week range
Market capitalization (m)
Shares outstanding (m)
Free float (%)
3M average daily T/O (m share)
3M average daily T/O (US$ m)
Expected return (%) 12 month

HK$40.05 59.95
HK$45,543/US$5,874
1,083
70
3
17
9

Source: Bloomberg, CCBIS

PRICE VS HSCEI
(HK$)
88
80
72
64

56
48
40
32
Aug-14

Oct-14

Dec-14

Feb-15

Apr-15

ENN Energy (2688 HK)

Jun-15

Aug-15

HSCEI

Source: Bloomberg

STOCK PERFORMANCE
2014
29,087
26.7
2,968
137.1
2.06
78.5
16.2
0.66
2.0
3.0
27.4
32.5

2015F
31,559
8.5
2,767
-6.8
2.38
15.3
14.8
0.78
2.2
2.7
21.2
45.7

2016F
35,866
13.6
3,155
14.0
2.91
22.5
12.3
0.89
2.5
2.4
20.9
30.3

2017F
40,483
12.9
3,418
8.3
3.16
8.3
11.4
0.96
2.7
2.1
19.6
15.9

Performance over
Absolute
Relative (%) to HSCEI

1M
-12
-2

3M
-27
-2

12M
-27
-23

Source: Bloomberg

Christeen So
(852) 3911 8242
christso@ccbintl.com

Felix Lam
(852) 3911 8245
felixlam@ccbintl.com

Source: Bloomberg, CCBIS

Analyst certifications and other important disclosures on last page

ENN Energy (2688 HK)

August 20, 2015

FURTHER DETAILS FROM THE ANALYST BRIEFING

Gas volume. ENN targets 10-15% ex-wholesale gas volume growth in 2015F,
down from 15-20% planned earlier this year. Given 1H15 city gas volume
grew 8% YoY, we estimate the company has to post 12-22% YoY growth in
2H15F in order to meet its full-year target. Management believes this can
be achieved by (1) adding more new customers, (2) directly supplying
more LNG to coastal industrial customers, (3) safeguarding existing C&I
customers, and (4) developing micro-grid and distributed gas projects.

New household connections. The company raised its 2015F new household
connection target from 1.4m to 1.5m-1.6m. It will strive to connect more
old buildings to mitigate the risk of a weaker new residential housing
market. Connection cost is approximately RMB200 per household higher
for old buildings, which resulted in lower gas connection gross margin in
1H15.

Gas refilling stations roll-out plan revised. In 1H15, eleven CNG and eight
LNG stations were constructed and commenced operations. At the
current run rate, the company maintains its 20 new CNG station addition
target but lowers its 2015F LNG station addition target from 50 to 30.

North America refilling business loss-making till 2017F. Gas volume from
North American LNG refilling stations rose 38% YoY to 2.58m DGE (diesel
gallon equivalent), putting the company on track to meet its 2015F 5.0m
DGE target. However, the projects are still making a RMB21m loss at the
gross profit level in 1H15. Management maintains its goal of narrowing its
net loss to no more than US$25m in 2015F. We believe the company will not
be able to engineer a profit turnaround before 2H16F.

Impact of renminbi depreciation. About 79% and 21% of ENNs current

debt is denominated in US dollars and renminbi. Management estimates
that every 1% of renminbi depreciation against the US dollar will translate
to RMB3.79m in additional interest cost for the year. The company does
not have plans to hedge long-term currency rate changes but will
consider securing more onshore loans when appropriate.

Capex. Excluding the RMB4.0b investment in the Sinopec marketing

division, ENNs capex for 1H15 came to RMB1.13b. The company has
budgeted for capex of RMB3.0b in 2015F, with 20% of the total spent on
refilling stations.

ENN Energy (2688 HK)

August 20, 2015

ENN ENERGY INTERIM RESULTS SNAPSHOT

1H14
(RMB m)

1H15
(RMB m)

1H15
YoY (%)

2,122
9,070
1,810
1,139
27
47
136
14,351
-11,413
2,938

2,557
9,625
1,959
1,553
37
58
98
15,887
-12,644
3,243

20.5
6.1
8.2
36.3
37.0
23.4
-27.9
10.7
10.8
10.4

20.5

20.4

-0.1ppt

170
-200
-890
2,018

42
-240
-990
2,055

-75
20
11
2

14.1

12.9

-1.1ppt

Finance costs
Share of results of associates
Share of results of JCEs
Pretax profit
Taxation
Net profit for the year
Minority interest
Net profit attributable to shareholders
Net margin (%)

-204
45
228
2,087
-554
1,533
-319
1,214
8.5

-264
42
297
2,130
-572
1,558
-331
1,227
7.7

29
-7
30
2
3
2
4
1.1
-.0.7ppt

Core earnings
Core margin (%)

1,178
8.2

1,388
8.7

18
+0.5ppt

Basic EPS (RMB)

Diluted EPS (RMB)
DPS (RMB)

1.12
1.00
-

1.13
1.13
-

1
13
N/A

Effective tax rate (%)

Annualized effective interest rate (%)
Net D/E (%)
Opex to sales (%)
MI ratio

26.5
3.4
47.0
7.6
20.8

26.9
3.7
63.3
7.7
21.2

+0.3ppt
+0.3ppt
+16.4ppt
+0.1ppt
+0.4ppt

P&L
Gas connection
Sales of piped gas
Gas refilling stations
Wholesale of gas
Distribution of bottled LPG
Sales of gas appliances
Sales of materials
Turnover
Cost of sales
Gross profit
Gross margin (%)
Other revenue and gains
Selling and distribution expenses
Administrative expenses
Operating profit
Operating margin (%)

Source: Company data, CCBIS

ENN Energy (2688 HK)

August 20, 2015

CHINA GAS UTILITIES PEER VALUATIONS

Company

Stock
code

Market
Share
cap
price
P/E (x)
EPS growth (%)
(US$ b) (local ccy)* 2015F 2016F 2017F 2015F 2016F 2017F

P/B
(x)
2015F

Yield
(x)
ROE (x)
2015F 2015F 2016F 2017F

Hong Kong
Beijing Enterprises

392 HK

8.1

48.95

11.4

9.9

8.5

14.2

15.5

16.1

1.0

2.5

9.3

10.1

10.9

China Gas**

384 HK

8.1

12.68

14.8

12.7

10.9

30.7

17.0

16.0

3.0

1.7

21.9

21.7

21.3

CR Gas

1193 HK

6.0

21.00

16.0

13.9

11.9

15.2

15.2

16.1

2.5

1.4

17.0

17.2

17.4

ENN Energy

2688 HK

5.9

42.05

14.8

12.3

11.4

9.8

20.1

8.3

2.7

2.2

21.2

20.9

19.6

Kunlun Energy

135 HK

6.6

6.37

12.1

8.9

8.4

-24.5

36.6

5.7

0.9

2.4

7.8

10.0

9.8

Tianjin Jinran

1265 HK

0.2

0.99

17.8

12.8

10.5

3.6

39.7

21.7

0.8

4.8

6.3

7.2

Tianlun Gas

1600 HK

0.9

7.08

17.5

14.9

13.8

21.8

17.9

7.5

3.3

20.8

20.2

18.0

Towngas China

1083 HK

2.0

5.87

11.8

10.4

9.6

23.9

13.4

8.5

1.1

2.1

9.5

10.0

10.1

Zhongyu Gas

3633 HK

0.6

1.82

12.1

10.1

9.1

16.7

20.0

11.1

N/A

N/A

15.9

14.9

14.5

Suchuang Gas

1430 HK

0.3

2.40

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Binhai Investment

2886 HK

0.4

2.79

8.6

6.9

5.4

80.6

24.6

27.2

2.3

5.6

29.9

29.6

29.2

13.7

11.3

10.0

19.2

22.0

13.8

2.0

2.0

15.8

16.1

15.8

Sector Average
China
Shenzhen Gas

601139 CH

3.6

10.53

25.6

21.8

18.5

14.2

17.5

17.6

3.5

1.4

14.5

15.9

17.1

Shaanxi Gas

002267 CH

2.9

16.38

26.4

19.3

N/A

25.9

37.1

N/A

N/A

N/A

N/A

N/A

N/A

Chongqing Gas

600917 CH

3.2

13.14

N/A

43.8

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Guanghui Energy 600256 CH

7.1

8.74

28.2

24.8

20.2

-1.2

13.9

22.4

3.1

0.4

10.1

11.4

13.4

Changchun Gas 600333 CH

0.7

9.03

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Datong Gas

000593 CH

2.9

41.80

29.9

25.9

21.5

17.6

15.5

20.0

4.4

0.6

14.7

14.8

14.8

Shenergy

600642 CH

6.5

9.09

16.7

16.3

17.5

19.9

2.6

-6.6

1.7

2.2

10.9

9.6

7.8

25.4

25.3

19.4

15.3

17.3

13.3

3.2

1.2

12.6

12.9

13.3

Sector Average
* Price as at close on 19 August 2015
** FYE 31 March, adjusted for CY
Source: Bloomberg, CCBIS estimates

ENN Energy (2688 HK)

August 20, 2015

ENN ENERGY | 2688 HK FINANCIAL SUMMARY

PROFIT AND LOSS
FYE 31 December (RMB m)
Gas connection fee
Sales of piped gas
Distribution of bottled LPG
Sales of gas appliances
Sales of materials
Revenue
COGS
Gross profit
Other income
Operating expenses
EBIT

BALANCE SHEET
2013
2014
2015F
2016F
2017F
3,843
4,403
5,032
5,118
5,442
18,738 24,232 26,095 30,279 34,540
61
54
67
81
94
108
110
135
157
177
216
288
230
230
230
22,966 29,087 31,559 35,866 40,483
(17,502) (23,018) (25,023) (28,635) (32,644)
5,464
6,069
6,536
7,231
7,839
166
146
155
165
176
(2,818) (1,792) (2,616) (2,842) (3,137)
2,812
4,423
4,075
4,554
4,877

Net financial income (exp.)

JVs & associates
Profit before tax
Tax
Total profit

(495)
443
2,760
(960)
1,800

(305)
629
4,747
(1,127)
3,620

(376)
742
4,441
(1,110)
3,331

(396)
879
5,037
(1,247)
3,790

(390)
962
5,449
(1,346)
4,103

Minority interest
Net profit attributable to
shareholders
Core profit

(548)
1,252

(652)
2,968

(564)
2,767

(634)
3,155

(685)
3,418

1,937

2,343

2,767

3,155

3,418

1.46
1.16
1.79
411
0.38

3.21
2.06
2.01
715
0.66

2.85
2.38
2.38
844
0.78

3.42
2.91
2.91
963
0.89

3.70
3.16
3.16
1,043
0.96

FYE 31 December (RMB m)

Profit before tax
Amortization & depreciation
Net financial charge adj.
Non-cash items adjusted
Change in working capital
Tax paid
Other
Operating cash flow

2013
2,760
729
495
558
928
(1,001)
(985)
3,484

2014
4,747
843
305
(732)
1,686
(1,137)
(981)
4,731

2015F
4,441
938
376

1,601
(1,120)
(1,139)
5,098

2016F
5,037
990
396

1,385
(1,258)
(1,358)
5,191

2017F
5,449
1,028
390

1,256
(1,358)
(1,497)
5,268

Disposal of fixed assets

Capex
Investment
Net interest received (paid)
Other
Investment cash flow

35
(2,941)
(375)
123
(8)
(3,166)

54
(2,507)
(229)
334
(509)
(2,857)

421
(3,000)
(4,000)
241

(6,337)

462
(3,000)

288

(2,250)

493
(2,500)

316

(1,691)

Change in borrowings
Equity issues
Amount due
Dividend paid
Other
Financing cash flow
Change in cash flow

582

389
(362)
(218)
391
709

2,631

131
(414)
(534)
1,814
3,688

498

(715)
(534)
(751)
(1,990)

500

(844)
(600)
(944)
1,997

(200)

(963)
(648)
(1,810)
1,767

Cash & equivalents, begin

Forex
Cash & equivalents, end

6,156
(43)
6,822

6,822
(7)
10,503

10,503

8,513

8,513

10,510

10,510

12,276

543

2,224

2,098

2,191

2,768

Reported EPS (HK$)

Diluted EPS (RMB)
Core EPS (RMB)
Dividend (RMB m)
DPS (RMB)

CASH FLOW

Free cash flow

FYE 31 December (RMB m)

Cash & equivalents
Pledge dep., restricted cash
Receivables
Assets held for sale
Inventory
Other current assets
Total current assets
Property, plant & equipment
Intangible assets
JVs & associates
Other non-current assets
Total non-current assets
Total assets

2013
6,822
260
2,829

419
767
11,097
17,531
1,500
3,802
1,975
24,808
35,905

2014
10,503
71
2,883
66
510
969
15,002
19,441
1,993
4,318
2,281
28,033
43,035

2015F
8,513
71
4,075

554
1,366
14,579
21,590
1,931
4,818
2,263
30,602
45,181

2016F
10,510
71
4,738

634
1,381
17,335
23,685
1,871
5,410
2,263
33,228
50,563

2017F
12,276
71
5,672

723
1,423
20,166
25,237
1,815
6,056
2,263
35,370
55,536

Short-term borrowings
Trade & bills payable
Other current liabilities
Total current liabilities
Long-term borrowings
Other non-current liabilities
Total non-current liabilities
Total liabilities

921
6,166
3,782
10,869
11,522
1,622
13,144
24,013

1,530
7,262
4,748
13,540
12,970
1,984
14,954
28,494

1,784
6,344
4,356
12,484
13,214
2,990
16,203
28,687

2,039
8,117
4,239
14,395
13,459
3,989
17,448
31,843

2,293
9,617
4,446
16,356
13,005
5,043
18,047
34,404

113
9,430

113
11,985

113
13,908

113
16,100

113
18,476

9,543
2,349
11,892
35,905

12,098
2,443
14,541
43,035

14,021
2,473
16,494
45,181

16,213
2,507
18,721
50,563

18,589
2,544
21,133
55,536

2013

2014

2015F

2016F

2017F

27.4
(3.2)
(6.8)
(15.5)
21.9

26.7
48.7
57.3
137.1
21.0

8.5
(4.8)
(7.9)
(6.8)
18.1

13.6
10.6
11.7
14.0
14.0

12.9
6.5
7.1
8.3
8.3

23.8
15.4
12.2
5.5
8.4
34.8

20.9
18.1
15.2
10.2
8.1
23.7

20.7
15.9
12.9
8.8
8.8
25.0

20.2
15.5
12.7
8.8
8.8
24.8

19.4
14.6
12.0
8.4
8.4
24.7

8
39
88

7
36
84

8
40
79

8
45
74

8
47
80

3.7
13.8
56.2

7.5
27.4
32.5

6.3
21.2
45.7

6.6
20.9
30.3

6.4
19.6
15.9

1.0
1.0

1.1
1.1

1.2
1.1

1.2
1.2

1.2
1.2

Share capital
Reserves and retained
profits
Shareholders' equity
Minority interest
Total equity
Total equity and liabilities

RATIOS
FYE 31 December
Growth (%)
Revenue
EBITDA
EBIT
Net profit
Core net profit
Profitability (%)
Gross margin
EBITDA margin
EBIT margin
Net margin
Core net margin
Tax rate
Efficiency (days)
Inventory turnover
Trade receivables
Trade payables
Returns & leverage (%)
ROAA
ROAE
Net debt (cash)/equity
Liquidity (x)
Current ratio
Quick ratio

Source: Company data, CCBIS estimates

ENN Energy (2688 HK)

August 20, 2015

Rating definitions:
Outperform (O) expected return > 10% over the next twelve months
Neutral (N) expected return between -10% and 10% over the next twelve months
Underperform (U) expected return < -10% over the next twelve months

Analyst certification:
The author(s) of this document, hereby declare that: (i) all of the views expressed in this document accurately reflect his personal
views about any and all of the subject securities or issuers and were prepared in an independent manner; and (ii) no part of any of
his compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this
document; and (iii) he receives no insider information/non-public price-sensitive information in relation to the subject securities or
issuers which may influence the recommendations made by him. The author(s) of this document further confirm that (i) neither he
nor his respective associate(s) (as defined in the Code of Conduct for Persons Licensed by or Registered with the Securities and
Futures Commission issued by the Hong Kong Securities and Futures Commission) has dealt in or traded in the securities covered in
this document within 30 calendar days prior to the date of issue of this document or will so deal in or trade such securities within 3
business days (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) after the date of issue of
this document; (ii) neither he nor his respective associate(s) serves as an officer of any of the companies covered in this document;
and (iii) neither he nor his respective associate(s) has any financial interests in the securities covered in this document.

Disclaimers:
This document is prepared by CCB International Securities Limited. CCB International Securities Limited is a wholly-owned subsidiary
of CCB International (Holdings) Limited (CCBIH) and China Construction Bank Corporation (CCB). Information herein has been
obtained from sources believed to be reliable but CCB International Securities Limited, its affiliates and/or subsidiaries (collectively
CCBIS) do not guarantee, represent and warrant (either express or implied) its completeness or accuracy or appropriateness for
any purpose or any person whatsoever. Opinions and estimates constitute our judgment as of the date of this document and are
subject to change without notice. CCBIS seeks to update its research as appropriate, but various regulations may prevent it from
doing so. Besides certain industry reports published on a periodic basis, the large majority of reports are published at irregular
intervals as appropriate according to the analyst's judgment. Forecasts, projections and valuations are inherently speculative in
nature and may be based on a number of contingencies. Readers should not regard the inclusion of any forecasts, projections and
valuations in this document as a representation or warranty by or on behalf of CCBIS that these forecasts, projections or valuations
or their underlying assumptions will be achieved. Investment involves risk and past performance is not indicative of future results.
Information in this document is not intended to constitute or be construed as legal, financial, accounting, business, investment, tax
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ENN Energy (2688 HK)

August 20, 2015

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