China pollution

ENN firmly on the acquisition trail as smaller gas distributers continue to be bitten hard by rising finance costs

18-month campaign to clamp down on shadow-banking market shrinks available credit for struggling operators

PUBLISHED : Friday, 24 August, 2018, 10:35pm
UPDATED : Friday, 24 August, 2018, 11:02pm

ENN Energy Holdings, one of China's largest natural gas distributors, is in talks to buy smaller rivals being squeezed by rising finance costs, as it raises its imported gas supply and builds storage facilitates to avoid getting caught out again by ferocious demand for cleaning fuel this winter, amid Beijing’s ongoing war on air pollution.

“There are ample acquisition opportunities and we will consider moving on some of them,” executive director Wang Dongzhi said, the day after the firm unveiled interim profits in line with expectations.

“Our average financing cost of 3.9 per cent in the first half was well below those of small and medium-sized players.

“The players we are in discussion with have poor returns due to rising financing costs ... they also lack our competitive advantages of having sealed stable long-term gas supply and logistics deals.”

The players we are in discussion with have poor returns due to rising financing costs ... they also lack our competitive advantages of having sealed stable long-term gas supply and logistics deals
Wang Dongzhi, ENN Energy Holdings executive director

Wang said small and medium-sized companies, many of which are in Sichuan and Shandong provinces, have a total share of no more than 20 per cent of the mainland’s gas distribution market.

An 18-month campaign by Beijing to clamp down on the shadow-banking market has seen a shrinking in available credit to smaller operators, are has also raised their financing costs.

Wang predicted a round of industry consolidation is imminent, but added negotiations will be time-consuming as its potential targets tend to have projects in multiple cities, which can make any acquisition approval process complicated.

“Execution of such acquisitions will probably take one to two years,” he added.

ENN posted an 8.1 per cent year-on-year rise in interim net profit to 1.78 billion yuan (US$260 million) on Thursday, which would have grown 25.3 per cent if non-recurring gains and losses were excluded.

Gas sales grew 22.7 per cent to 8.49 billion cubic metres. The company is aiming for 20 to 25 per cent of full-year growth.

Beijing’s campaign to eliminate coal-fired boilers at factories and millions of stoves in homes across the country, and replace them with cleaner burning gas-fired units saw mainland gas consumption jump 17.5 per cent year-on-year in first half-year, up from 15.3 per cent last year compared with 2016.

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Major gas shortage during cold snaps last winter saw distributors scrambling to buy high-cost gas on the spot market, squeezing profit margins that are normally protected, thanks to state-guided procurement and sales prices.

To better cope with this winter’s demand, Wang said ENN has recently completed a 12 million cubic metres storage facility in Hebei province which has raised its total capacity to 58 million cubic metres.

Also helping to boost supply is the introduction of longer-term contract pricing from five to 10 years signed with international oil and gas suppliers Chevron, Total and Origin, which supply together 1.44 million tonnes (2 billion cubic metres) of imported liquefied natural gas to China annually.

They will now be delivered via ENN’s parent ENN Group’s new LNG receiving terminal in Zhoushan, Zhejiang province, which started operating earlier this month.

ENN shares Friday closed 2.8 per cent higher at HK$73.85.