1Q24 operational data largely on track
ENN Energy posted 29% YoY growth in energy sales for integrate energy business, 3% YoY growth in retail gas sales and 18% YoY fall in new connections in 1Q24. All these are on track with its full-year guidance. Looking ahead, we expect faster gas sales growth in 2Q24 given the low base last year. We trim our 2024 earnings forecast by 2% to factor in lower profit from international LNG trading. We reiterate our HOLD as we expect slow growth in the next two years after the earnings decline in 2024. Its dividend yield is also not attractive enough.
Key Factors for Rating
Within its retail gas sales, the gas sold to commercial & industrial (C&I) clients grew 3% YoY in 1Q24. The growth rate accelerated from 0.8% YoY in 4Q23. The company has stepped up effort to boost sales to C&I clients after losing a power plant client in 2Q23.
The connections of new residential clients dropped 18% YoY to 343k HHs in 1Q24. The company is on track to meeting its full-year target of 1.4-1.6m HHs, representing 14-24% YoY decline.
Its dollar margin improved RMB0.02/m3 to RMB0.48/m3 in 1Q24. This is also in line with its guidance of RMB0.02-0.03/m3 YoY improvement for the full-year.
As for the integrated energy segment, the volume of energy sales surged 29% YoY in 1Q24. This is also in-line with its full-year guidance of 20-30% YoY growth.
Looking ahead, we expect its retail gas sales to grow at faster rate in 2Q24 on low base. Its retail gas sales fell 18% YoY in 2Q23 after losing a power plant client to a more competitive supplier.
However, its profit from international sales of LNG was only RMB24m in 1Q24. We cut our forecast for full-year profit for LNG international trading from RMB970m to RMB330m, down 78% YoY. Hence, the company has to fill an earnings gap of about RMB1.2bn by its domestic operations in 2024. It will be difficult for the company to avoid earnings decline in 2024.
Key Risks for Rating
Faster-than-expected retail gas sales growth.
Higher-than-expected dollar margin.
Valuation
We increase our DCF valuation and hence target price from HK$67.19 to HK$71.29 after updating our model with the company's operational data and annual report. The increase in valuation mainly comes from lower than expected net debt. This puts us at 10.6x 2024E core earnings.