Diversifying Into Smart Energy Solutions Will Strengthen Future Market Position

Key Takeaways

• Expansion into high ASP segments and value-added businesses increases potential for higher gross margins and net margin growth.
  
• Strategic adjustments in procurement and customer relationships aim to stabilize margins and expand market presence, driving potential revenue and earnings growth.
  
• Concerns about growth slowdown, pricing challenges, transparency issues, and investment impacts could affect ENN Energy's future revenue, profitability, and shareholder returns.

Catalysts

An investment holding company, engages in the investment, construction, operation, and management of gas pipeline infrastructure in the People’s Republic of China.

• ENN Energy's growth in integrated energy sales volume by 21.4% year-on-year provides a catalyst for future revenue growth due to diversification and expansion into higher ASP segments, suggesting the potential for increased gross margins.
  
• Expansion in the value-added business, which reached over 4.26 million customers, emphasizes new product segments such as smart cooking utensils and digitalized products, potentially boosting revenue and net margins by increasing high-margin sales.
  
• Strong growth in new connection business and high connection numbers highlight potential for future revenue growth, as securing more C&I and residential customers could drive retail gas volume sales and improve the company's earnings outlook.
  
• The company's strategic procurement and pricing adjustments in LNG and natural gas markets provide a basis for maintaining stable dollar margins and mitigating cost pressures, potentially enhancing net profit margins.
  
• Initiatives to strengthen relationships with 2B and power plant customers, including increased connection of new C&I customers, highlight efforts to solidify and expand market foothold, suggesting potential revenue growth and improved earnings performance.

ENN Energy Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ENN Energy Holdings's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 6.2% in 3 years time.
• Analysts expect earnings to reach CN¥8.3 billion (and earnings per share of CN¥7.36) by about December 2027, up from CN¥6.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥9.4 billion in earnings, and the most bearish expecting CN¥7.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.1x on those 2027 earnings, up from 10.0x today. This future PE is lower than the current PE for the HK Gas Utilities industry at 18.6x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.32%, as per the Simply Wall St company report.

ENN Energy Holdings Future Earnings Per Share Growth

Risks

• The slowdown in growth rates for the Integrated Energy (IE) segment raises concerns about its future growth prospects, impacting revenue projections.
  
• Concerns about winter seasonality impact and associated lower dollar margins could indicate margin pressures, affecting overall earnings and net margins.
  
• The reduction in ASP (average selling price) compared to the previous year, along with increased dollar margins, suggests potential pricing challenges that could impact revenue and profitability.
  
• The fact that much of the value-added business segments are not consolidated into financial statements raises transparency issues and could obscure the true state of revenue growth and margins.
  
• Lower 2024 CapEx than initially planned could indicate either a slowdown in investment needed to stimulate growth or the potential for cash being used suboptimally, impacting future revenue-generating capacities and shareholder returns.

Valuation

• The analysts have a consensus price target of CN¥68.14 for ENN Energy Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CN¥83.46, and the most bearish reporting a price target of just CN¥55.96.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥133.6 billion, earnings will come to CN¥8.3 billion, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 6.3%.
• Given the current share price of CN¥57.95, the analyst's price target of CN¥68.14 is 15.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.