HK/China small/mid-caps specialist

Pep So, CFA, CPA

Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/316" target="_blank" data-smartkarma-citation="entities:316:1">Energy Holdings Ltd (2688 HK)</a> (“ENN”) is the largest privately-owned gas distributor in China. Despite China’s determination to lower pollution levels by promoting the use of natural gas, ENN and other Chinese gas distributors experienced a year of underperformance in 2016 on the back of a series of negative industry regulations and stories. However, many of these concerns appear to be overdone and ENN’s long-term fundamentals remain rock solid:</p><ul><li>Strong financial track record and positive outlook: ENN has delivered strong financial performance during 2006-2015. It grew its revenue and profit every year and its revenue and profit CAGRs are 25% and 24% respectively over the period. The strong performance is expected to carry forward in 2016, as gas demand has picked up nicely since 2H16. Growth outlook stays positive as penetration rate remains low.</li><li>Underperformance overdone: As the government targets to boost natural gas consumption by making it more affordable, regulators have taken measures and looked at ways to reduce gas distributors’ tariffs and fees so that end-users can pay less. While many of them, if carried out, would hurt ENN’s margins, the overall impact on earnings is likely to be limited.</li><li>Cost leader in long run: ENN, as the only privately-owned sizable player, is committed to cost control. It has been active in lowering costs via streamlining organizational structure and reducing redundancy. On the other hand, thanks to its coastal presence, it has put through its plan to import cheaper fuels from overseas. The move should further put the company ahead of peers in terms of cost savings in long run.</li></ul><p>Now that ENN’s share price has almost halved from its peak level in 2014 and its valuation is currently at a multi-year low, long-term investors should seize the golden buying opportunity. ENN is a premium choice for “growth at a reasonable price” investment. We estimate ENN’s fair value to be HKD54.4 share, implying an upside of 52%. </p>

Energy Holdings Ltd (2688 HK) (“ENN”) is the largest privately-owned gas distributor in China. Despite China’s determination to lower pollution levels by promoting the use of natural gas, ENN and other Chinese gas distributors experienced a year of underperformance in 2016 on the back of a series of negative industry regulations and stories. However, many of these concerns appear to be overdone and ENN’s long-term fundamentals remain rock solid:Strong financial track record and positive outlook: ENN has delivered strong financial performance during 2006-2015. It grew its revenue and profit every year and its revenue and profit CAGRs are 25% and 24% respectively over the period. The strong performance is expected to carry forward in 2016, as gas demand has picked up nicely since 2H16. Growth outlook stays positive as penetration rate remains low.Underperformance overdone: As the government targets to boost natural gas consumption by making it more affordable, regulators have taken measures and looked at ways to reduce gas distributors’ tariffs and fees so that end-users can pay less. While many of them, if carried out, would hurt ENN’s margins, the overall impact on earnings is likely to be limited.Cost leader in long run: ENN, as the only privately-owned sizable player, is committed to cost control. It has been active in lowering costs via streamlining organizational structure and reducing redundancy. On the other hand, thanks to its coastal presence, it has put through its plan to import cheaper fuels from overseas. The move should further put the company ahead of peers in terms of cost savings in long run.Now that ENN’s share price has almost halved from its peak level in 2014 and its valuation is currently at a multi-year low, long-term investors should seize the golden buying opportunity. ENN is a premium choice for “growth at a reasonable price” investment. We estimate ENN’s fair value to be HKD54.4 share, implying an upside of 52%. 

ENN Energy: Golden Long-Term Opportunity as Top Chinese Gas Distributor Valuation Hit Multi-Year Low

Hong Kong

China Gas Holdings Ltd. invests in, operates and manages natural gas distribution pipelines.  The Company distributes and sells natural gas to residential, commercial and industrial users, and bottles and sells compressed natural gas.  China Gas also constructs and operates gas stations.

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China Gas Holdings (384 HK)

ENN Energy: Golden Long-Term Opportunity as Top Chinese Gas Distributor Valuation Hit Multi-Year Low

Energy Holdings Ltd (2688 HK) (“ENN”) is the largest privately-owned gas distributor in China. Despite China’s determination to lower pollution...

Pep So, CFA, CPA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

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