ENN counts on the internet to remake its old-technology gas distribution
ENN Energy, one of China’s largest city gas distributors, is pinning its hopes on a nascent Internet-enabled energy supply operation as a major growth driver to account for half its revenues in five years, according to its new chief executive.
The ambitious goal is unveiled at a time when the firm has seen gas distribution profit margins eroded in the year’s first half due to customer base change and competition from cheaper petroleum fuel and rising popularity of electric vehicles.
“What one needs to consider is the huge growth potential of natural gas as a cleaner replacement of coal,” Sean Wang Shaojian, who joined ENN in March, said in an interview. “Profit margin is only a small part of our business prospect.”
The Chinese government is aiming to raise gas’ contribution to energy consumption from 6.4 per cent last year to 10 per cent in 2020 and 15 per cent in 2030, which still lags the world average of 24 per cent.
“As coal is banned in new industrial parks while existing ones are under pressure from local governments to replace their coal-fired boilers with gas-fired ones, demand for cleaner, more efficient energy solutions will rise,” Wang said.
Having invested in 22 smart digital platforms and infrastructure projects that regulate the supply of heat, power, steam and cooling, to serve the multiple energy needs of commercial and industrial customers, ENN is building 12 more, and have signed contracts to build 14 more.
“Our projects involve a micro power grid operating through a digital platform, which distribute various forms of energy from local sources, such as solar, gas and biomass,” he said, adding they can help customers cut energy bills through more efficient generation and consumption of energy.
Each project requires investment of at least 50 million to 100 million yuan.
ENN has invested 270 million yuan (US$ 40 million) on the nascent business in the first half of this year, or 20 per cent of its total capital expenditure.
The estimated internal rate of return of these projects is 12 per cent, which chief financial officer Chau Tien Hsiang said are more lucrative than its core gas distribution projects that are earning ENN 7 per cent return on assets.
Although ENN has been making preparations to enter the business a decade ago and put its first project at Changsha’s Huanghua airport in Hunan province in 2012, the company has booked revenues of less than 98 million yuan - a drop in the bucket compared to its total revenue of 21.4 billion yuan - in the year’s first half.
Wang conceded that since it takes up to three years for a project to ramp up, revenues and profit from the nascent has been small so far.
ENN will separately report the business’ performance on its financial statements in March next year the earliest, he said.
The firm last Thursday posted a 15 per cent rise in underlying net profit to 1.91 billion yuan, as revenue grew 41.8 per cent. It is aiming for the same growth rate for the full year.
Profit margin for each cubic of gas sold fell 0.08 yuan to 0.66 yuan, of which 0.03 fen of the fall was attributed to greater sales to low margin customers like power generators and chemical makers.
Another 0.03 yuan decline was due to price cuts to lure customers to switch from coal to natural gas, and the remaining 0.02 yuan reduction was due to a 7 per cent fall in vehicular sales volume as gas struggled to compete with diesel and gasoline amid depressed crude oil prices.
ENN’s shares closed 1.9 per cent lower on Friday at HK$48.8 after the results. It has risen 53 per cent year to date, outperforming the Hang Seng Index’s 26.6 per cent gain.