ENN Energy’s Q3 Operating Performance Largely in Line; Positive Read Across for Peers

ENN Energy’s third-quarter 2022 operating data was largely in line with our expectations, and we believe this indicates that other city gas distributors should be able to meet their key targets. After considering the weaker Chinese yuan and finetuning our assumptions, we lower ENN’s fair value estimate to HKD 135 per share from HKD 140. Due to concerns on lower dollar margins and slower new residential connections, the sector has taken a hit, but we think ENN, China Gas Holdings, and China Resources Gas are all undervalued currently. We believe the sector will be rerated if the dominant players can deliver their guidance in 2022. China Gas Holdings will announce its first-half fiscal 2023 (ending March) results in late November 2022, and this should be closely watched. Our preferred pick is ENN given the firm’s ability to source liquefied natural gas at competitive prices and its potential in the fast-growing integrated energy business.