CICC maintains a "outperform" rating on ENN ENERGY (02688), with a target price of 70 Hong Kong dollars.

CICC released a research report stating that it maintains a "outperform industry" rating for ENN ENERGY (02688), with unchanged profit forecast for 2024/2025 and a target price of 70 Hong Kong dollars. ENN ENERGY announced on September 23 that the $100 million share purchase plan announced in September 2023 has been completed, with the company planning to use up to 3 billion Hong Kong dollars to continue repurchasing company stocks for employee incentives. In addition, the company plans to use up to 3 billion Hong Kong dollars to repurchase and cancel listed company stocks. CICC's key points are as follows: Continuing to carry out share repurchases sends a positive signal. In addition to the additional repurchase of up to 3 billion Hong Kong dollars for employee incentives, the company is implementing a cancellation-style repurchase for the first time with up to 3 billion Hong Kong dollars, which the bank believes shows management's positive attitude towards the company's long-term value. The 2024 dividend yield is attractive and there is still significant room for dividend capacity improvement in the medium to long term. With the current stock price, ENN ENERGY's 2024 dividend yield is approximately 5.9%, which the bank believes is attractive to long-term investors. In addition, based on the current development of the urban gas industry, the bank believes that in the medium to long term, the company's capital expenditure scale may be reduced to 50-60 billion yuan per year, and the improvement in capital expenditure scale and the profitability of natural gas retail business may increase the company's free cash flow to 60-70 billion yuan per year, providing significant room for the company's medium to long term dividend capacity improvement. The return to utility attributes and the improvement of dividend capacity may benefit the mid-to-long term industry valuation. The bank believes that starting from 2H21, the valuation of the urban gas industry has systematically decreased from 15-20x P/E to the current approximately 8-10x P/E due to market expectations: 1) Due to cost transmission difficulties, urban gas enterprises have enhanced their business models cyclically; 2) Distribution businesses will continue to be under pressure due to the downturn in the real estate cycle. At the current point in time, the bank believes that: 1) Due to the increase in the proportion of civil gas price parity and the natural gas price returning to a reasonable range, the utility attributes of gas companies are gradually returning. 2) With the real estate industry still under pressure, most gas companies have made strategic adjustments, by reducing expansionary capital expenditure scales and emphasizing the improvement of returns on existing projects, they are expected to steadily increase their free cash flow and dividend scale. In the medium term, the return to utility attributes and the improvement of dividend capacity are expected to drive the industry valuation of gas companies to recover to around 15x P/E.