8 Dec 2020

CMB International Securities | Equity Research | Sector Initiation

China Gas Sector

City Gas 3.0: Differentiating Growth Paths OUTPERFORM (Initiation)

City gas in China is entering phase 3.0, with 8-10% gas national gas consumption growth in 2020-25E, increasing competition from direct supply, and accelerating China Gas Distributor LNG import, in our view. We think natural gas’ role will be crucial to China’s carbon-neutral target, and abundant global LNG supply will likely to boost gas Robin Xiao consumption in China. We expect city gas distributors to maintain rapid earnings (852) 3900 0849 growth, led by CGH and ENN. We initiate the gas distributing sector at [email protected] OUTPERFORM rating, and initiate coverage on ENN and CRG at BUY and HOLD rating respectively. Our pecking order in the sector is CGH>ENN>TLG>CRG. 2019-22E Earnings CAGR CGH – 384 HK 19.0%  City gas 3.0 era. City gas business is entering phase 3.0, with decent gas ENN – 2688 HK 16.2% sales volume growth, slower residential connection pace, higher competition TLG – 1600 HK 15.5% pressures from direct supply, and differentiating future growth path for more CRG – 1193 HK 10.1% Source: CMBIS estimates sophisticated natural gas applications. We expect gas distributors will seek new growth opportunities such as integrated energy services to facility gas City Gas volume growth (2021E) users’ energy transformation, expanding service coverage from city to CGH – 384 HK 22.3% township and village, and exploring value-added services potential through ENN – 2688 HK 14.6% residential customers’ consumer market value development. TLG – 1600 HK 22.5% CRG – 1193 HK 10.3%  Natural gas will be critical to carbon-neutral. We think natural gas is critical Source: CMBIS estimates

for China to realize its carbon-neutral target by 2060, with 33%-50% carbon emission saving from replacing coal boilers and coal-based power generation. PB-ROE Status Other than that, we think natural gas also makes strong contribution to air P/B 3.5 CGH quality improvement and serving as flexible peak shaving gas power ENN 3 generating units to support renewable energy development. CRG 2.5  Enriching LNG import to support gas consumption growth. LNG import 2 had become an important supply to China since 2017. We see continuous 1.5 TLG LNG receiving capability growth and enriching global LNG supply to boost gas 1 consumption in China. Based on conservative assumption, we estimate LNG 0.5 processing capacity in China to increase with a CARG of 20.1% from 0 ROE 70.4mtpa in 2020E to 176.0mtpa in 2025E. In the long run, if all 47 LNG 0% 5% 10% 15% 20% 25% terminals are fully ramped up, we expect it will bring more than 350bcm natural Source: Bloomberg gas supply to China. ROE benchmark  14th FYP: we expect gas consumption CAGR at 8-10%. Our base case 30% assumption is a consumption CAGR at 9%, bringing 177bcm additional gas 25% consumption, with import dependency increases slightly to 45.1%, and makes 20% natural gas 12.2% in primary energy mix by 2025E. We think energy safety concern is a major obstacle. As oil majors in China are increasing natural gas 15% production growth with accelerating CAPEX plan from 2019 – 25E, we are not 10% too concerned about energy safety. We also expect abundant global LNG 5% supply to sustain competitive import pricing and healthy consumption growth 0% in China. CRG ENN CGH TLG Peers valuation Source: Bloomberg Closing Mkt cap Rating TP PER PB Ratio Price Company Ticker (HK$) (HK$mn) (HK$) FY0 FY1 FY2 FY0 FY1 FY2 Cross-regional gas distributor CHINA GAS HOLDIN 384 HK 28.60 149,074 BUY 37.12 15.93 13.84 12.11 3.34 3.11 2.62 ENN ENERGY 2688 HK 102.80 115,940 BUY 120.00 19.42 16.09 13.80 3.65 3.22 2.75 CHINA RES GAS 1193 HK 38.20 88,395 HOLD 42.00 18.53 17.16 15.12 2.87 2.62 2.37 KUNLUN ENERGY 135 HK 5.92 51,260 NR N/A 8.99 7.61 6.51 0.86 0.83 0.78 TOWNGAS CHINA 1083 HK 3.46 10,273 NR N/A 8.76 7.16 6.41 0.55 0.51 0.48 TIAN LUN GAS 1600 HK 6.40 6,423 BUY 8.31 7.02 6.09 5.34 1.30 1.17 0.99 Average 13.1 11.3 9.9 2.1 1.9 1.7 Source: Bloomberg, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 1 MORE REPORTS FROM BLOOMBERG: RESP CMBR AND http://www.cmbi.com.hk 8 Dec 2020

 2019-22E earnings CAGR at 10.1%-19.0%, led by CGH. We project CGH, ENN, TLG and CRG to have 19.0%/16.2%/15.2%/10.1% earnings CARG in 2019-22E, respectively. Considering earnings growth, ROE, earnings quality, ESG, company scale and management incentives, we think ENN is best in overall quality, followed by CGH, CRG and TLG.  CGH is our sector top pick. We initiate China Gas Distribution at OUTPERFORM rating, based on optimistic natural gas consumption outlook and decent earnings growth projection. HK listed cross regional gas distributors in China are trading at forward PER range 5.7x-14.6x with average PER of 10.0x. Market exhibited a preference for company scale with significant valuation premium. Based on comprehensive consideration for earnings growth, quality, valuation upside, and market liquidity requirement, our top pick for the sector is CGH. Our pecking order for the sector is CGH > ENN > TLG > CRG.  Initiate BUY on ENN. Supported by outstanding industrial client base, rapid growing integrated-energy business, and accelerating LNG trading volume, we expect ENN’s core profit CARG to reach 19.7% in 2019-22E, leading among gas distributing peers. We initiate ENN with BUY rating, and our TP for ENN is HK$120, reflecting 19.0x/15.9x PER in FY20/21E.  Initiate HOLD on CRG. We project CRG’s operations to suffer drag from COVID-19 impacts in 2020E, especially from commercial gas sales and residential connections. We estimate CRG to have slower 3-yr earnings CAGR comparing with peers. We derive CRG’s TP based on DCF valuation at HK$42.00. Our TP reflects 20.0x/16.4x PER in FY20/21E.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2 8 Dec 2020

Contents

City gas business is entering 3.0 era ...... 4 City gas distributors take differentiating growth strategies ...... 6 Natural gas is critical to carbon emission saving and air quality improvement ...... 10 Enriching LNG import supports gas consumption growth in China . 12 14th FYP: we expect China to have natural gas consumption CAGR at 8-10%...... 16 Earnings benchmark, valuation and stock pick ...... 19 China Gas Holdings (384 HK) ...... 23 Focus Charts ...... 24 Outstanding 1HFY20 performance ...... 25 Enforcing residential gas connection strategy ...... 26 Valuation ...... 28 Financial Summary ...... 31 ENN Energy (2688 HK) ...... 32 Focus Chart ...... 33 Investment Thesis ...... 34 Pan-Energy: to make ENN from good to great ...... 42 Operating forecast ...... 50 Financial analysis ...... 54 Financial Summary ...... 58 Valuation ...... 59 Risk factors ...... 61 Tian Lun Gas (1600 HK) ...... 62 Focus chats ...... 63 Valuation ...... 64 Financial Summary ...... 65 China Resource Gas (1193 HK) ...... 66 Focus Chart ...... 67 Investment Thesis ...... 68 Operating forecasts ...... 75 Financial analysis ...... 79 Valuation ...... 82 Risk factors ...... 84 Financial Summary ...... 85

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 3 8 Dec 2020

City gas business is entering 3.0 era

Tracing back city gas development history in China during the past 20 years, we think the business can be divided into 2 phases, namely 1) City Gas 1.0 and 2) City Gas 2.0 period, with growth drivers from the establishment of city gas distributing infrastructures and policy support to promote natural gas consumption, respectively. Entering 14th FYP period, we think city gas distributors are moving towards 3.0 era, with decent gas sales volume growth, slower residential connection pace, higher competition pressures from direct supply, and differentiating future growth path for more sophisticated natural gas applications.

 City Gas 1.0 period covered 2000 – 2015. In this period, China established natural gas market supply framework, and made massive investments in national gas transmission backbone, import pipelines, as well as LNG receiving terminals. Supported by increasing infrastructures, natural gas supply was significantly enriched, which encouraged city gas distributors’ development, and end user market was generally carved up through through project concessions bidding and M&As. 4 major cross regional city gas groups were formed during this period, namely China Resources Gas Group Limited (CRG, 1193 HK), ENN Energy Holding Limited (ENN, 2688 HK), China Gas Holdings Limited (CGH, 384 HK), and Towngas China Company Limited (TCCL, 1083 HK). During City Gas 1.0 period, natural gas consumption volume CAGR reached 14.8%.

 City Gas 2.0 period covered the 13th Five Year Period. City gas distributors mostly focus on business organic growth through rapid gas connection to new residential and C&I users, while Chinese government’s enforcing coal-to-gas switch from 2017 boosted gas consumption volume back to high double digit growth. City residential gas penetration was boosted significantly. During City Gas 2.0 period, we estimate natural gas consumption volume CAGR to reach 11.2% in 2015-2020E.

Figure 1: We expect natural gas distribution business to enter phase 3.0 from 2020

Source: Wind, CMBIS estimates Note: Growth projection in 2021-25E based on 9% CAGR in the 14th FYP period.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 4 8 Dec 2020

In City Gas 3.0 era, we expect natural gas consumption growth to maintain high at 8-10% CAGR in 2020-2025E, while we think the sector will likely to transform from rapid project expansion towards quality development. We summarize several key trends which would likely change city gas distributors’ business dynamic.

1) City residential connection to slow down Residential connection business used to be strong earnings growth driver during gas distributors’ rapid expansion period. However, as gas distribution market is largely carved up by major players, and major distributors’ city residential gas penetration rate had raised from low 30% to ~60% (except CRG, at 53.8% by 1H20), we think residential connection’s golden era had passed. Residential connection pace deems to slow down, while the connection business itself is facing increasing regulatory control. We believe both trends will force smaller players relying heavily on connection income to cash out from project disposal, which will likely to boost M&A activities and favour large players with rich funding support and economies of scale.

2) Opening up infrastructure will bring both challenges and opportunities PipeChina’s establishment has marked a milestone of China’s gas market reform. As the first batch of gas pipeline and LNG receiving terminal assets were injected to PipeChina on 30 Sep 2020, we think China had a huge step forward in enabling third party access to gas transmission infrastructures. We think market reform will bring implications in different stages. In the short run, we think oil majors will suffer earnings impact from taking out those high profitable mid-stream business, which will force them to go downstream and compete for end user market expansion to leverage their upstream resources. We expect competition to become fierce in the direct supply market for industrial gas users, as oil majors (as new entrants) are aggressively seeking to tap into existing market. In the long run, we think market has expectation for intermediate costs reduction through market oriented access to PipeChina’s facilities, but we also expect it will take time for China to establish a transparent and effective market mechanism.

3) Seeking for new growth opportunities Under backdrop of slowing connection and increasing industrial gas sales competition, major gas distributors have differentiated paths to explore new growth opportunities and defence for existing concession operations. Key means include 1) developing integrated energy to increase industrial users’ stickiness and breakthrough restrictions of concession operating areas; 2) moving down to the lower tier market and expanding to township and villages through coal-to-gas switch projects and distributed LPG micro pipe network; and 3) exploring various value added services to extract users value. We think integrated energy are leading natural gas applications towards sophisticated distributed energy system, which make boundary between gas and electricity distributors harder to define. Township coal-to-gas switch, LPG micro pipe network and value added services are aiming at developing consumer market and services upgrade. We think both new growth directions are attractive and have huge new growth potential.

4) Upstream capability will be critical to sustain profitability of existing business We expect major gas distributors to place strategic focus on sourcing various gas supply, since oil majors are turning from gas suppliers in the upstream of the supply chain to now competitors in the downstream. Given abundant global LNG supply with increasing LNG receiving capacity in China, we think developing LNG trading and receiving capability will be critical to support gas distributors’ competitiveness as well as sustaining their gas dollar margin.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 5 8 Dec 2020

City gas distributors take differentiating growth strategies

We believe major players are taking differentiating growth strategies with significant variances in customer selections, market focus, and expansion regions. We pick 3 major gas distributing listcos with track record in delivering outstanding earnings growth in the past few years for comparison in this report, namely ENN, CGH, CRG, and we also take a smaller player Tianlun Gas (TLG, 1600 HK) for separate observation.

ENN: place straegic focus on industrial users and integrated energy We think ENN has been developing gas distribution services focus on industrial users. Compared with CGH and CRG, ENN had fewest C&I customer number but the highest average C&I customer gas sales volume in 2011-19. ENN had placed strategic focus on growing its C&I gas users, and had the highest C&I gas mix in its city gas sales. Looking forward, we think ENN is going to enhance its industrial customer focus, and facilitate customer energy consumption transformation through its newly developed integrated energy (IE) business. We estimate potential market size of IE business could reach trillion RMB, and we believe ENN has well prepared long term planning in this market.

Figure 2: ENN had the fewest C&I users among peers Figure 3: …but had the highest average C&I account’s gas consumption volume

Source: Company data, CMBIS Source: Company data, CMBIS Note: CGH’s 2019 data is based on FY20 data ended in Mar 2020. Note: CGH’s 2019 data is based on FY20 data ended in Mar 2020.

Figure 4: ENN had placed strategic focus on growing Figure 5: ENN also had the highest C&I gas C&I users number proportion in city gas sales mix

Source: Company data, CMBIS Source: Company data, CMBIS Note: CGH’s 2019 data is based on FY20 data ended in Mar 2020. Note: CGH’s 2019 data is based on FY20 data ended in Mar 2020.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 6 8 Dec 2020

CGH: diving down into lower tier market and developing users’ consumer market value We believe CGH places bet on the residential gas market and realized fastest growth in residential user number in 2011-19. In 2017-19, CGH made aggressive investments in developing township gas users through coal-to-gas switch projects, which brought significant earnings growth through high margin gas connection business. Looking forward, we think CGH intends to enforce its residential focus, and has new project development focus shifting to residential heating in Central and Eastern China, as well as LPG smart grid in villages in Southern China. We expect CGH to maintain significantly higher than peers’ residential connection pace at ~6mn households per year.

Rapid growing residential user number and population coverage enables CGH to leverage its value-added services network for more sales and expanding merchandise from gas boilers and appliances to agricultural products as well as daily necessities. We believe CGH intends to capture the potential higher-than-average income growth in the lower tier market as well as township and village residents’ consumption upgrade.

Figure 6: CGH’s residential connection outpaced Figure 7: CGH placed strategic focus on growing peers in 2017-19 residential customer number in 2011-19

Source: Company data, CMBIS Source: Company data, CMBIS Note: CGH’s 2019 data is based on FY20 data ended in Mar 2020. Note: CGH’s 2019 data is based on FY20 data ended in Mar 2020.

Figure 8: CGH had significant higher residential gas Figure 9: CGH had the fastest residential gas sales sales than peers in city gas sales mix since 2018 CAGR than peers in 2011-19

Source: Company data, CMBIS Source: Company data, CMBIS Note: CGH’s 2019 data is based on FY20 data ended in Mar 2020. Note: CGH’s 2019 data is based on FY20 data ended in Mar 2020.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 7 8 Dec 2020

CRG: specific preference for large scale project CRG’s development history shows a preference for project scale. CRG is the largest city gas distributor in China in terms of overall city gas sales volume and population coverage. In 2019, CRG realized 28bcm retails gas sales and had services coverage for over 264mn population in China. Leveraging its SOE identity and cross-industry supports from China Resources Holdings, CRG was able to participate in various city gas equity reform projects in population centers such as Zhengzhou, Chongqing and Tianjin. In 2020-21E, CRG intends to continue its expansion path through participating in large scale equity reform projects for significant equity stakes in Ningbo and Taiyuan city gas projects. We expect CRG to maintain its specific preference for large scale city gas projects’ equity reform in the coming few years.

Figure 10: CRG has the largest gas city gas sales Figure 11: CRG has also been leading in average volume among peers project gas sales volume

Source: Company data, CMBIS Source: Company data, CMBIS Note: CGH’s 2019 data is based on FY20 data ended in Mar 2020. Note: CGH’s 2019 data is based on FY20 data ended in Mar 2020.

Figure 12: CRG has the largest population coverage Figure 13: CRG has the highest average project than peers population density

Source: Company data, CMBIS Source: Company data, CMBIS Note: CRG didn’t disclose population coverage in 2011-12. Note: CRG didn’t disclose population coverage in 2011-12. CGH’s 2019 data is based on FY20 data ended in Mar 2020. CGH’s 2019 data is based on FY20 data ended in Mar 2020..

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 8 8 Dec 2020

TLG: making breakthrough through strategic acquisition and CTG connections TLG, originally a small regional gas distributor in Henan Province, had explored a successful path to realize business breakthrough via strategic project acquisitions. TLG made various small scale project acquisitions in urban-rural fringe areas for each year, and successfully caught industrial migration wave from city center areas to sub-urban townships, which significantly grew TLG’s C&I and residential customer number, and boosted its retail gas sales. In 2011-19, TLG realized retails gas sales CRGR of 32.2%, faster than those big players in our observation list.

In 2018, TLG started coal-to-gas switch connection business in Henan through a well- established fund with affiliates of Henan Department of Finance. TLG then accelerated its residential connection pace and boosted its earnings performance through rapid expansion in its high margin connection business.

We think TLG is going to maintain its course in regional sub-urban project acquisition, and has potential to expand its successful CTG business model to other provinces.

Figure 14: TLG realized outstanding retail gas sales Figure 15: Project acquisition made strong CAGR of 32.2% in 2011-19 contribution to TLG’s C&I customer growth

Source: Company data, CMBIS Source: Company data, CMBIS

Figure 16: Project acquisition also had significant Figure 17: Township connections accounts for more contribution to residential customer growth than 60% of TLG’s total residential connection

Source: Company data, CMBIS Source: Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 9 8 Dec 2020

Natural gas is critical to carbon emission saving and air quality improvement

Market has been actively discussing China’s path towards carbon-neutral, after President Xi made a commitment setting net-zero target by 2060. We think market is quite certain about wind and solar power’s position in China’s pathway towards carbon neutrality but has concerns about natural gas’ future due to its fossil fuel property. We think market is over concerned about natural gas, as we believe natural gas is critical to carbon emission saving and air quality improvement in China. It is because 1) natural gas has significantly lower carbon emission in both heat and power generation; 2) we think China will pursue further coal-to-gas switch to enhance air quality improvement; and 3) we believe gas-fired power will be a strong support to increase renewables energy mix (i.e. wind and solar power) in China due to its flexibility.

We expect natural gas will be a key measure to carbon emission cut in China for the next 10 years. For a longer term outlook, we see various technologies evolving to reduce natural gas’ carbon intensity, such as blending with hydrogen gas and carbon capture, utilization and storage(CCUS) technologies. We are positive on natural gas’s role in net zero.

33-50% lower carbon intensity Natural gas-fired boiler and turbine generally have higher energy efficiency than coal-fired boiler and turbine. In terms of system efficiency, gas-fired energy system can reach as high as 56-80%, while the highest coal-fired cogeneration unit can only reach 48%. Higher system efficiency will generally bring along carbon emission saving, but market may also have concerns about the methane leakage during natural gas extraction and storage processes. According to IEA’s research based on full lifecycle emissions of global coal and gas, natural gas can bring along 33%/50% emission saving in heat and electricity generation (Fig 19 and 20).

High flexibility to support peak shaving Flexibility is another key competitive edge of gas-fired energy system, due to its short response time for dispatch from power grid. Gas-fired power will have better peak-shaving performance, which could be critical to support China to turn to high renewable energy (mostly unstable wind and solar power) mix in the coming 10-20 years.

Figrue 18: Natural gas-fired energy system has higher efficiency Energy type System Efficiency Coal-fired power Subcritical coal-fired power generation (<300MW) 35-38% Supercritical coal-fired power generation (600MW) 40% Ultral-supercritical coal-fired power generation (1000MW) 42% Cogeneration 48%

Gas fired power Simply cycle gas turbine 35-42% Combineed-cycle gas-fired plant (CCGT) 56-60% Combined cold, heat & power (CCHP) 80%

ENN's Pan Energy system Target Combination of various gas turbine, waste heat steam 85%* boiler, gas steam boilers

ENN's project demostrations Guangdong Haofeng ENN Ubiquitous Energy Station 80% Sino-German Eco Park 81% Source: CMBIS Note: * Pan-Energy system efficiency target is extracted from ENN’s 2017 ESG report

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 10 8 Dec 2020

Figure 19: Coal-to-gas switch reduces carbon Figure 20: Coal-to-gas switch reduces carbon emission by 33% when providing heat emission by 50% when producing electricity

Source: IEA Source: IEA Note: Full lifecycle emissions intensity of global coal and gas supply Note: IEA, Full lifecycle emissions intensity of global coal and gas for heat generation, 2018, IEA, Paris supply for power generation, 2018, IEA, Paris https://www.iea.org/data-and-statistics/charts/full-lifecycle-emissions- https://www.iea.org/data-and-statistics/charts/full-lifecycle-emissions- intensity-of-global-coal-and-gas-supply-for-heat-generation-2018 intensity-of-global-coal-and-gas-supply-for-power-generation-2018

Great contribution to air quality improvement As China enforced “Air Pollution Control Plan (大气污染防治计划)” and “Three-Year Action Plan for Blue Sky (打赢蓝天保卫战三年行动计划), coal-to-gas switch had become a key mean to realize air quality control targets by 2020. In the past few years, the country had converted ~18mn household from bulk coal heating to natural gas heating, and phased out more than 230k small coal-fired boilers. National PM2.5 density had declined 20% in 2019 compared with 2015. In the most polluted 2+26 cities, PM2.5 density declined 28% from 2015 to 2019, and the heavy pollution days also declined by 45% during the same period. We think coal-to-gas switch had proven its effectiveness in combating air pollution in Northern China, and IEA’s graphic had presented a more intuitive relationship for natural gas’ contribution to air quality improvement.

Figure: 21 Coal-to-gas switch had bring significant air quality improvement in China

Source: IEA Note: Range of air quality measurements for the "2+26" cities and Chinese monthly gas consumption, 2014-2018, IEA, Paris https://www.iea.org/data-and-statistics/charts/range-of-air-quality-measurements-for-the-226-cities- and-chinese-monthly-gas-consumption-2014-2018

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 11 8 Dec 2020

Enriching LNG import supports gas consumption growth in China

LNG receiving terminals are playing increasingly important role LNG import volume had surpassed piped gas import volume in 2017, and become one of the key natural gas supply growth in China to support the country rapid natural gas demand growth. According to our estimate, proportion of LNG import accounting for overall gas consumption in China surged from 14.2% in 2015 to 27.5% in 2019, while import volume also surged with a CAGR of 32.3% during the period. Other than strong gas demand growth, we think the key drivers boosting LNG import were 1) increasing LNG receiving capacities and 2) enriching global LNG supply. Looking ahead to the coming few years, we are foreseeing another round significant boost in LNG terminal constructions in China, and we expect affluent global LNG supply. We expect LNG import will account for at least 40% of incremental supply by 2025E in China, and we think enriching LNG import will also support natural gas distributors’ gas volume growth.

China has well prepared LNG terminal development plan China has ambitious goal in developing its LNG terminals. According to our information summary of LNG terminal project development plans in the country, there are 47 LNG receiving terminal projects in the country’s medium term development plan. By end-2020, we expect there will be 21 in operations, 13 under constructions, and another 13 pending for construction or approval (details see Fig. 25-27). Taking conservative assumptions and adding up those high certainty projects and expansion plans only, we estimate LNG processing capacity will be boosted from 70.4mtpa in 2020E to 176.0mtpa in 2025E, reflecting a capacity CAGR of 20.1%. We believe there will be abundant LNG receiving capacity from 2023E, together with PipeChina’s opening up of several major LNG receiving facilities, we expect city gas distributors to have increasing LNG import with potential decline in processing fees, which will likely help boost gas distributors’ overall gas dollar margin and profitability.

In the longer term outlook, based on total capacity of those 47 LNG terminal in China, there will be more than 250mtpa LNG receiving capacity, translating to more than 350bcm of natural gas import capability, well enough to cover current natural total gas consumption demand by 2020E (329bcm, according to our estimates).

Figure 22: LNG receiving capacity in China to expand Figure 23: LNG import is playing an increasing at 20.1% CAGR in 2020 – 25E important role in China

Source: CMBIS estimates Source: Wind, CMBIS Note: LNG imported is converted based on 1tonnes LNG = 1,400cbm natural gas

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 12 8 Dec 2020

Figure 24: China has plenty LNG receiving termial in coastal areas

Source: CMBIS

Gas distributors are embracing partnerships for LNG receiving facilities We think utilizing LNG import is becoming a must for gas distributors to secure natural gas supply and sustain business profitability. After PipeChina’s establishment, oil majors in China will transform their business identities from upstream natural gas suppliers to enter downstream, to become gas distributors, which will likely to bring fierce competitions as those oil majors control abundant gas resources. Therefore, it will be critical for gas distributors to expand gas supply sources, and LNG receiving facility will be a key, in our view. We’ve observed gas distributors are forming strategic partnerships to reach those LNG receiving resources.

 ENN is leading in the wave through ENN Group’s Zhoushan LNG Terminal (500mtpa by 2021E), a facility based in Zhejiang, which is the 3rd largest province in terms of gas sales volume.  CGH chooses to form partnership with CNOOC Gas & Power Group to utilize LNG resources and explore business opportunities in Fujian Province. We expect the cooperation will likely to expand to other areas through CNOOC’s LNG receiving facilities.  Towngas China (TCCL, 1083 HK, NR) intends to form partnership with Shenergy through cross investments of 25% shares in Shanghai Gas Co., Ltd and TCCL. TCCL and its parent company, Towngas (3 HK, NR) will be able to utilize Shenergy’s two LNG terminals based in Shanghai with total processing capacity of 4.5mtpa.  CRG seems a bit lagging behind in the race of establishing LNG receiving capabilities, but we think the Company will take part in the wave.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 13 8 Dec 2020

Figure: 25 LNG receiving terminals in operation Capacity No. Province Project Name Operator Design capcity COD 2020E mn tonnes mn tonnes 1 Liaoning Dalian PipeChina 6.8 Dec-2011 6.0 2 Hebei Jing Tang LNG PetroChina 10.0 Nov-2013 6.5 3 Tianjin Nanjiang FSRU LNG PipeChina 6.0 Nov-2013 2.2 4 Tianjin Nangang LNG Sinopec 10.0 Feb-2018 3.0 5 Shandong Qingdao Dongjiakou Sinopec 10.0 Nov-2014 3.0 6 Jiangsu Rudong LNG PetroChina 6.5 May-2011 6.5 7 Jiangsu Qidong LNG Guanghui Energy 2.4 Jun-2017 1.2 8 Shanghai Yangshan Shenergy 3.0 Oct-2009 3.0 9 Shanghai Wuhaogou Shenergy 1.5 Nov-2008 1.5 10 Zhejiang Zhoushan LNG ENN Group 10.0 Aug-2018 3.0 11 Zhejiang Ningbo LNG CNOOC 6.0 Aug-2013 3.0 12 Fujian Putian LNG CNOOC 6.3 Feb-2009 6.3 13 Guangdong Yuedong Jieyang LNG PipeChina 4.0 May-2017 2.0 14 Guangdong Dongguan Jiufeng Jovo Group 1.5 Jun-2012 1.5 15 Guangdong Zhuhai Jinw an CNOOC 3.5 Nov-2014 3.5 16 Guangdong Dapeng LNG CNOOC 6.8 Jun-2006 6.8 17 Guangdong Diefu LNG PipeChina 6.0 Aug-2018 4.0 18 Guangdong Shenzhen Peak Shaving Shenzhen Gas 0.8 Aug-2019 0.8 19 Guangxi Beihai PipeChina 6.0 Apr-2016 3.0 20 Guangxi Fangcheng Gang PipeChina 0.6 Jan-2019 0.6 21 Hainan Yangpu LNG PipeChina 3.0 Jan-2016 3.0 Total 110.65 70.35 Source: CMBIS

Figure 26: 13 LNG receiving terminals under construction

No. Province Project Name Operator Design capcity mn tonnes 1 Hebei Tangshan LNG Suntien Green Energy 10.0 2 Shandong Weihai PetroChina 3.0 3 Shandong Longkou Nanshan PipeChina 20.0 4 Jiangsu Binhai LNG CNOOC 6.0 5 Jiangsu Jiangyin LNG SAM Group 2.0 6 Zhejiang Wenzhou Sinopec 10.0 7 Zhejiang Wenzhou Huagang LNG Peak Shaving Huafeng Group 10.0 8 Zhejiang Hangzhou Pinghu Hangzhou Natural Gas 1.0 9 Fujian Zhangzhou PipeChina 3.0 10 Guangdong Chaozhou Zhongtian Huafeng JV 8.0 11 Guangdong Yangjiang Peak Shaving Yudean Group/ 6.0 12 Guangdong Chaozhou Huaying LNG Huaying Natural Gas 6.0 13 Guangdong Guangzhou Nansha Guangzhou Gas 1.0 Total 86.0 Source: CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 14 8 Dec 2020

Figure 27: 13 LNG receiving terminals pending for construction/approval

No. Province Project Name Operator Design capcity Status mn tonnes 1 Liaoning Yingkou Hubei Energy Group 3.0 PC 2 Liaoning Dongdaihe Bestsun Energy Co 5.0 PC 3 Shandong Binzhou LNG Hubei Energy Group 2.0 PA 4 Shandong Rizhao Pacific Oil&Gas 2.0 PC 5 Shandong Penglai Baota PetroChemical Group 3.0 PC 6 Shandong Yantai LNG GCL Group 10.0 PC 7 Jiangsu Lianyungang LNG Sinopec 3.0 PC 8 Jiangsu Lianyungang Ganyu Huadian Group 6.0 PC 9 Jiangsu Nantong GCL Group 3.0 PC 10 Fujian Fuqing PetroChina 3.0 PC 11 Fujian Hanas Putian Hanas 3.0 PC 12 Guangdong Shantou LNG Yudean Group 6.0 PC 13 Guangdong Zhuhao Huangmao Island Hanas 6.0 PC Total 55.0 Source: CMBIS Note: For status, PC = pending for construction; PA = pending for approval.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 15 8 Dec 2020

14th FYP: we expect China to have natural gas consumption CAGR at 8-10%

We think market didn’t expect much on natural gas consumption growth in 2021-25E, due to major concerns on 1) natural gas’ carbon emission impacts, and 2) rapid increasing import dependency leading to questions about energy safety issues. Based on our previous discussions about natural gas vital role in carbon neutrality and air quality control, and optimistic outlook on global LNG supply-demand balance, however, we think natural gas consumption in China will likely to maintain rapid growth at 8-10% CAGR in the 14th FYP period. Our base case assumption is a gas consumption CAGR at 9%, bringing 177bcm additional gas consumption potential, with slight increase in import dependency rate by 2.6ppt to 45.1%, and making natural gas 12.2% in the country’s primary energy mix in 2025E. With reference to city gas distributors’ track record comparing with national average consumption growth, we expect major gas distributors to maintain mid-teen growth in city gas sales volume.

Natural gas mix in primary energy will likely a key target in 14th FYP China had successfully lifted natural gas consumption in primary energy from 4.4% to 5.9% in 2010-15, and accelerated the pace to 8.8% in 2020E, according to our estimates. Chinese government had designed long term energy roadmap towards 2030 through “Energy Production and Consumption Revolution Strategy 2016-2030(“能源生产和消费革 命 战 略 2016-2030”), setting 15% by 2030E as a long term target for natural gas consumption in the country’s primary energy mix. Given natural gas’ role in carbon emission saving as well as its contribution in air quality control, we expect Chinese government to maintain its long term strategic direction, and setting appropriate natural gas mix target for the upcoming 14th FYP.

Energy safety issues will be a main obstacle We think the country had largely fulfilled its major targets for natural gas development in 13th FYP. One exception which deviates from the 13th FYP is domestic gas production, mainly due to oil price tumble during the period. Import dependence of natural gas increased rapidly by 10.8ppt from 31.8% in 2015 to 42.6% in 2020E. Rapid increase of import dependence had raised concerns for energy safety, especially in a global environment with increasing trade dispute, which we think had slowed China’s pace for coal-to-gas switch from 2019.

Figure 28: Summary of key targets and results in 12/13th FYP 12TH FYP 13TH FYP 2010 2015 2010-15 CAGR 2019A 2020T 2020E 2015-20E CAGR Key items Unit 2015 vs.2010 2015 vs.2020E Total Energy Consumption bn tce 3.61 4.30 3.6% 4.86 <5.0 4.85 2.4% Accumulated proved reserves trillion cbm 9.1 13 7.4% 16.3 16 17.3 5.9% Domestic production bcm 95.2 135 7.2% 177.3 207 189 7.0% Consumption bcm 107.5 193.1 12.4% 306.7 312-360 329 11.2% Primary energy mix % 4.4 5.9 6.0% 8.3 8.3-10 8.8 2.9ppt Import volume bcm 17 61.4 29.3% 132.2 N/A 140 17.9% Import dependence % 15.8% 31.8% +16.0ppt 43.1% N/A 42.6% +10.8ppt Source: NDRC, CMBI estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 16 8 Dec 2020

Figure 29: We expect 14th FYP natural gas consumption to grow with 9.0% CAGR 14TH FYP 2020-25E CAGR 2025E base case Key items Bear Base Bull 2025E vs. 2020E Total Energy Consumption 5.50 5.50 5.50 2.5% Domestic production 265 278 291 8.0% 2020-25 CAGR assumption 7.0% 8.0% 9.0% n/a

Consumption 483 506 530 9.0% 2020-25 CAGR assumption 8.0% 9.0% 10.0% n/a

Primary energy mix 11.7 12.2 12.8 3.4ppt

Import volume 218 229 239 10.3% Import dependence 45.2% 45.1% 45.1% +2.6ppt Source: NDRC, CMBI estimates

Oil majors are accelerating E&P to ease energy safety concerns In view of increasing energy safety concerns, Chinese government had directed oil majors made “Seven Year Action Plan (2019 – 2025)” to increase oil & gas E&P spending. We’ve observed boosting domestic natural gas production growth from PetroChina (857 HK, 601857 CH, NR) and CNOOC (883 HK, NR) and we expect Sinopec (386 HK, 600028 CH, NR) to also catch up the pace with increasing E&P expenditures. Looking back from 12th and 13th FYP, domestic natural gas production increased with CARG of 7.2%/7.0%, respectively. Supported by accelerating E&P investment, we expect domestic natural gas output growth CARG to reach 7-9% CAGR in the 14th FYP period. Comparing with our natural gas consumption growth projection, we think the import dependence rate can be contained at ~45% by 2025E, which we think will be well acceptable below 50%. Moreover, as we think domestic natural gas production growth still has upside potential, we expect natural gas consumption growth to have increasing potentials without triggering further energy safety considerations.

Supply-demand environment is in favor of increasing natural gas consumption Based on our base case projection of natural gas consumption CAGR at 9% in 14th FYP period, we expect natural gas import will increase 89bcm by 2025E, of which 35bcm will likely source from Russian-China gas pipeline commenced in Dec 2019, and the remaining 54bcm will be sourced from LNG import. IEA projected a strong uptick in LNG liquefaction projects to add up to 120 bcm/y of export capacity in between 2020 and 2025 – or an increase of 20%, while LNG trade is expected to increase at a slower rate than liquefaction capacity additions. Such a situation would exacerbate competition among suppliers – both in the context of renewal of expiring contracts and for the development of new markets in emerging regions. Therefore, we think LNG price will likely to be competitive in the coming few years, which will be in favor to boost natural gas import.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 17 8 Dec 2020

Figure 30: Oil majors in China are accelerating Figure 31: Japan arrival-based LNG index indicated domestic natural gas E&P, exhibited with increasing Asian LNG price at multi-year low domestic natural gas production growth

Source: Company data, CMBIS Source: Bloomberg, CMBIS

Gas distributors to maintain mid-teens city gas sales growth With reference to gas sales volume history for the past 9 years, major gas distributors’ city gas sales volume growths were substantially higher than national gas consumption volume growth. On the back of continuous market development as well as organic gas usage growth from residential and C&I users, we think the trajectory will continue. We expect major city gas distributors to maintain mid-teens gas sales growth volume in the 14th FYP period.

Figure 32: Major gas distributors had city gas volume growth faster than national average level in most of 2012-19

Source: Wind, CMBIS Note: CGH’s sales volume growth data was based on fisical year ended in Mar. 2019 growth rate reflects FY20’s data, which suffered substantial impacts due to pandamic lock down in China for Jan-Mar, 2020.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 18 8 Dec 2020

Earnings benchmark, valuation and stock pick

Earnings growth comparison We compare CRG, ENN, CGH and TLG’s earnings performance with reference to historical earnings data and our projections. As the largest city gas distributor in China, CRG in general has more stable earnings growth performance, while ENN, CGH and TLG’s performance are more fluctuate due to gas price adjustment, economic cycle, and company specific strategies such as LNG contract hedging for ENN, and CTG connection for CGH. CRG seems like a more defensive choice in sector downturn period, in our view. In a booming market outlook with expectations for economic activities recovery as well as abundant natural gas supply, however, we expect ENN, CGH and TLG’s earnings growth CAGR to outpace CRG. We estimate 2019-22E earnings CAGRs to rank by sequence of CGH, ENN, TLG and CRG at 19.0 %/16.2%/15.2%/10.1%, respectively. In terms of return efficiency projections, we think ENN and CGH both have higher ROE and ROA in 2020- 22E.

Figure 33: Earings growth comparison

Source: Company data, CMBIS estimates Note: CGH’s data for 2011 – 2022E is based on FY12 – FY23E.

Figure 34: ROE comparison Figure 35: ROA comparison

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates Note: CGH’s data for 2011 – 2022E is based on FY12 – FY23E. Note: CGH’s data for 2011 – 2022E is based on FY12 – FY23E.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 19 8 Dec 2020

Earnings quality comparison We think CRG and ENN have higher earnings quality, exhibited by relatively more stable 1) aggregating rate of receivables and contract assets as percentage to total revenue, and 2) more stable aggregating rate of payables and contract liabilities as percentage to total revenue. We think both CRG and ENN tend to adopt more conservative revenue recognition method, while CGH and TLG both experienced significant receivables and contract assets surge with increasing coal-to-gas switch connections. In terms of contract liabilities and payables outlook, we think ENN has lower ratio with strict payables and customer advanced payment collection policy, which is likely to make higher quality in overall cash flow performance. For CRG, due to its larger project scale and population coverage, we think CRG receives higher advanced payment through residential connection business, which reveals relatively high visibility for future residential connection revenue.

Figure 36: Receivables + contract assets as % to total Figure 37: Payables + contract liabilities as % to revenue total revenue

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates Note: 1) CGH’s data for 2011 – 2022E is based on FY12 – FY23E. Note: 1) CGH’s data for 2011 – 2022E is based on FY12 – FY23E. 2) We group amount due from customer for customer contract work 2) We group amount due to customer for contract work before 2018 before 2018 into contract asset in this graphic presentation. into contract liabilities in this graphic presentation

ESG benchmark In terms of ESG measures, we noticed that investors are paying more attention to gas distributors overall ESP performance (especially for environmental performance) and building in their investment decisions. According to Bloomberg data from various sources, ENN and CGH have ESG rating/score above average at MSCI BBB rating; CRG has MSCI BB rating; while TLG has not yet obtained any ESG rating/score yet.

Figure 38: ESG scores and rating BBG ESG RobecoSAM MSCI ISS Quality score Rank Rating Score CGH 51.7 38 BBB 3 ENN 50.8 26 BBB 2 CRG 38.4 16 BB 8

TLG Not ranked/rated Source: Bloomberg, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 20 8 Dec 2020

ENN is the best in overall quality, followed by CGH ENN is leading in our overall investment score card measured by earnings growth, ROE, earnings quality, ESG rating, company scale, and incentive scheme. We think ENN’s long term vision in facilitating industrial energy transformation will sustain its earnings and ESG measures to outperform peers. We also prefer CGH in overall quality for its well-planned growth path through township and village customer development, as well as its well- designed incentive schemes.

Figure 39: Radar chart for overall company quality Figure 40: Score details for radar chart ranking assessment ENN CRG CGH TLG Earnings Growth in FY2 5.0 3.3 5.0 5.0 ROE 5.0 4.0 5.0 5.0 Earnings quality 4.5 4.5 3.5 3.5 ESG 4.5 3.5 4.0 3.0 Scale 5.0 5.0 5.0 3.0 Incentives 4.0 3.0 5.0 3.5

Total 28.0 23.3 27.5 23.0 Source: CMBIS

Source: CMBIS

PB-ROE & Peers valuation Cross regional gas distributors listed in HK are trading at forward PER range from 5.3x to 15.1x, and forward P/B range from 0.5x to 2.7x, according to Bloomberg consensus data. We think market exhibited significant preference for company and business scale, since top 3 gas distributors, namely CGH, ENN and CRG have substantial valuation premium over the smaller players.

In terms of 3-yr earnings CAGR, Bloomberg consensus indicate CGH, TLG and ENN are leading in the peers group. For PB-ROE status, we think market had largely factored in growth and scale consideration for CGH, ENN and CRG, but undervalued TLG in a 1-yr forward based (2020E) valuation. On a 2-yr forward based (2021E), however, we think CGH and TLG are still undervalued.

Figure 41: PB-ROE status indicated market preference for scale and TLG is significantly undervalued

Source: Bloomberg, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 21 8 Dec 2020

Figure 42: Peers’ valuation Closing Mkt cap Rating TP EPS 19-21E PER PB Ratio Price Company Ticker (HK$) (HK$mn) (HK$) 19A 20E 21E CAGR FY0 FY1 FY2 19A 20E 21E Cross-regional gas distributor CHINA GAS HOLDIN 384 HK 28.60 149,074 BUY 37.12 1.76 2.07 2.36 15.8% 15.9 13.8 12.1 3.3 3.1 2.6 ENN ENERGY 2688 HK 102.80 115,940 BUY 120.00 5.05 5.38 6.27 11.4% 19.4 16.1 13.8 3.7 3.2 2.7 CHINA RES GAS 1193 HK 38.20 88,395 HOLD 42.00 2.32 2.23 2.53 4.3% 18.5 17.2 15.1 2.9 2.6 2.4 KUNLUN ENERGY 135 HK 5.92 51,260 NR N/A 0.67 0.66 0.77 7.2% 9.0 7.6 6.5 0.9 0.8 0.8 TOWNGAS CHINA 1083 HK 3.46 10,273 NR N/A 0.46 0.48 0.54 8.3% 8.8 7.2 6.4 0.6 0.5 0.5 TIAN LUN GAS 1600 HK 6.40 6,423 BUY 8.31 0.80 0.89 1.01 12.3% 7.0 6.1 5.3 1.3 1.2 1.0 Average 13.1 11.3 9.9 2.1 1.9 1.7 Source: Bloomberg, CMBIS

CGH is our sector top pick

We are optimistic on the gas distributing sector in the 14th FYP period. Our sector call is OUTPERFORM. We initiate coverage on ENN/CRG with BUY/HOLD rating respectively in this report. Based on our comprehensive comparison for earnings growth, quality, valuation upside, and market liquidity requirement, our top pick for the sector is CGH. Our pecking order for the sector is CGH > ENN > TLG > CRG.

Our rating and TP for our coverages are listed below - CGH (384 HK), maintain BUY, TP: HK$37.12; - ENN (2688 HK), Initiate BUY, TP: HK$120.00; - TLG (1600 HK), maintain BUY, TP: HK$8.31; and - CRG (1193 HK), Initiate HOLD, TP: HK$42.00.

Initiate BUY on ENN. ENN places strategic focus on industrial clients. The Company is facilitating downstream users in energy transformation towards integrated energy solutions with lower costs, higher efficiencies, and lower carbon emissions. Despite the impacts from the pandemic, we expect ENN to maintain high growth in city gas sales at 11.4% in 2020E. Supported by outstanding industrial client base, rapid growing integrated-energy business, and accelerating LNG trading volume, we expect ENN’s core profit CARG to reach 19.7% in 2019-22E. We initiate ENN with BUY rating, and our TP for ENN is HK$120.

Initiate HOLD on CRG. CRG has the best project quality among the top 3 gas distributors in China. Supported by CRG’s SOE background and parent company CR Holding’s resources, CRG has edges in participating in large scale equity reform projects such as Ningbo and Taiyuan as a highlight in 2020/21E. In 2020E, however, we project CRG’s operations to suffer drag from COVID-19, especially from commercial gas sales and residential connections. We expect CRG to have slower 3-yr earnings CAGR comparing with peers. We derive CRG’s TP based on DCF valuation at HK$42.00. Our TP reflects 20.0x/16.4x PER in FY20/21E.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 22 8 Dec 2020 CMB International Securities | Equity Research | Company Update

China Gas Holdings (384 HK)

Enforcing residential gas connection strategy BUY (Maintain)

Target Price HK$37.12 CGH places strategic focus on residential user development. The Company had (Previous TP HK$37.12) realized fastest residential user number CAGR of 23.3% in FY12-20E, while Up/Downside +29.8% residential gas sales mix had exceeded peer in 2018-19, as CGH accelerated Current Price HK$28.60 township coal-to-gas connection. Market may has doubt on the sustainability of CGH’s township and village user development, but we expect the Company to China Gas Distributor enforce its residential focus strategy through various means. We also expect CGH to accelerate VAS business development through rapid expanding Robin Xiao residential customer base. We maintain BUY on CGH with TP unchanged at (852) 3900 0849 HK$37.12. [email protected]

 Outstanding 1HFY21 results. CGH delivered earnings growth of 3.7% in Stock Data 1HFY21 though operating environment was extremely challenging due to Mkt Cap (HK$ mn) 149,074 pandemic impacts. Stripping out non-recurring items, core earnings was Avg 3 mths t/o (HK$ mn) 206.5 HK$5,193mn, up 5.5% YoY. Retail gas volume increased 10.5%, while 52w High/Low (HK$) 32.14/20.50 residential connection maintained largely flat at 2.83mn households. Mgmt. Total Issued Shares (mn) 5,212 Source: Bloomberg maintained full year guidance unchanged, and we expect CGH’s gas sales and connection to accelerate in 2HFY21. Shareholding Structure Beijing Enterprise 23.7%  Enforcing residential gas connection strategy. CGH had township Liu Minghui 20.9% connection declined by 42.5% YoY in 1HFY20. We think CGH has no intention Chiu Tat Jung 18.8% to slow down its residential gas connection development, as CGH has various Free float 36.6% application scenarios to implement its residential focus strategy, such as coal- Source: HKEx to-gas switch users in Northern and Northeast China, LGP smart grid users in Share Performance Southern China, and gas heating users in Central and Eastern China. Absolute Relative  Accelerating VAS sales with increasing customer base. We are optimistic 1-mth 6.1% 3.7% on CGH’s VAS business development, as the Company is leading in 3-mth 27.7% 19.5% 6-mth 5.8% -0.3% residential value development. By FY20, we estimate effective ARPU of CGH 12-mth 0.5% 1.2% was HK$309, and we observed robust ARPU growth in 1HFY21. We think Source: Bloomberg CGH will continue to deliver outstanding VAS performance on the back of rapid increasing customer base and increasing consumption power. 12-mth Price Performance (RMB)  Maintain BUY with TP unchanged at HK$37.12. We project CGH to have 0384.HK HSI.HI (rebased) 35.0 earnings CAGR of 19.0% in FY20-23E, and has net profit to exceed 30.0 HK$15.4bn in FY23E, meeting its option exercise condition in incentive 25.0 scheme. We saw free cash flow turning positive in 1HFY21 a catalyst to boost 20.0 market confidence on the Company’s robust growth momentum. Our DCF TP is maintained unchanged at HK37.12, reflecting 18.2x/14.7x PER in FY21/22E. 15.0 We reiterate BUY rating and select CGH as our sector top pick given its 10.0 valuation status and growth potential. 5.0 0.0 Dec-19 Mar-20 Jun-20 Sep-20 Earnings Summary Source: Wind (YE 31 Mar) FY19A FY20A FY21E FY22E FY23E Revenue (HK$ mn) 59,386 59,540 66,471 79,360 92,248 Auditor: Deloitte YoY growth (%) 12.4 0.3 11.6 19.4 16.2 Net income (HK$ mn) 8,224 9,188 10,620 13,140 15,486 Related Reports EPS (HK$ ) 1.63 1.76 2.04 2.52 2.91 1. China Gas Holdings (384 HK， YoY growth (%) 32.7 8.1 15.6 23.7 15.6 initiation) – Outstanding 1HFY21 performance– 30 Nov 2020 Consensus EPS (HK$) n/a n/a 2.06 2.38 2.65 2. China Gas Holdings (384 HK， P/E (x) 17.6 16.2 14.1 11.4 9.8 initiation) – LPG micro grid: a new P/B (x) 4.2 3.8 3.1 2.6 2.2 growth engine– 29 Jun 2020 Yield (%) 1.5 1.7 2.0 2.5 2.9 ROE (%) 24.1 23.2 22.3 22.9 22.9 Net gearing (%) 69.1 81.5 69.7 46.3 28.8 Source: Company data, Bloomberg, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE MORE REPORTS FROM BLOOMBERG: CMBR AND http://www.cmbi.com.hk 23 8 Dec 2020

Focus Charts

Figure 43: CGH had track record in delivering rapid Figure 44: We expect CGH to have slight growth in earnings growth annual residential connection

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 45: We expect residential gas sales to Figure 46: Retail industrial gas sales volume to accelerate as rural users’ consumption potential maintain rapid growth in FY20-22E releases

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 47: Commercial gas sales volume growth, Figure 48: We expect CGH to deliver 19.0% although slightly slower than industrial, but still earnings CARG in FY20-22E maintain mid-high teens growth rate

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 24 8 Dec 2020

Outstanding 1HFY21 performance Outstanding 1HFY21 results. CGH managed to delivered earnings growth of 3.7% though operating environment was extremely challenging due to pandemic impacts. Stripping out non-recurring items, core earnings was HK$5,193mn, up 5.5% YoY. Adding back period FX depreciation, earnings growth could accelerate to 7.8% YoY. The Company declared HK$10 cents interim dividend, flat as last year.

Retail gas sales to accelerate in 2HFY21. City gas/wholesale gas sales volume increased 10.5%/5.4% YoY to 7,595/5,232mcbm, respectively. Residential gas volume recorded a strong jump by 19.7% YoY, followed by industrial gas volume growth of 9.8%. Commercial gas was in a relatively sluggish recovery pace due to pandemic control. Looking ahead in 2HFY21, mgmt. expect gas sales volume growth to reach above 1.7bcm, through 1) 0.7bcm contribution from new CTG users; 2) 0.3bcm from NE China market; and 3) 0.7-0.9bcm organic gas volume growth from existing projects. We think CGH has high visibility to reach its 15% city gas volume growth.

Shifting residential connection structure. CGH adjusted CTG connection pace due to its cash flow drag impacts caused by receivable collection delay. 1HFY20 township connection declined 42.5% YoY to 0.7mn household only, but largely offset by city residential connection growth of 23.7% to 2.1mn household. We are not too concerned about the structural change, as mgmt. confirmed LPG Smart Micro Grid projects in Southeast China would replace CTG projects in Northern China, with lighter investments and significant better cash flow performance. CGH maintained FY21E residential connection at 5.5-6.0mn households.

VAS maintained strong momentum. VAS revenue surged 53.1% YoY to HK$3.38bn, with GP surging even faster at 65.4% to HK$1.36bn. The segment contributed HK$1bn operating profit to CGH, accounting for 15.6% of the total OP of the Company. In terms of residential user value development, we estimate 1HFY21 ARPU of HK$89.1, up 31.6% YoY.

Free cash flow turned positive. Free cash flow read HK$3.8bn during 1HFY21, driven by strong operating cash flow growth of HK$2.6bn and CAPEX declined from less PPE and M&A investment. CTG receivables were collected at HK$3.45bn in 1HFY20 (vs. HK$4.9bn in FY20). As CGH had another 1.5mn households ignited piped gas operation, mgmt. maintained full year CTG receivable collection of HK$8-9bn unchanged with high confidence. Supported by strong cash flow performance in 1HFY21 and accelerating receivable collections, we think it won’t be difficult to maintain positive free cash flow for FY21E, and we expect that will boost market sentiment on CGH.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 25 8 Dec 2020

Enforcing residential gas connection strategy Strategic focus on residential clients CGH places strategic focus on residential user development. Comparing with CRG and ENN, CGH had the fastest growth in residential consumer number, with a CAGR of 23.3% in FY12-20. Supported by rapid user number expansion, CGH also had residential gas expanded at the fastest pace with 27.8% CARG in FY12- 20, and had the highest residential gas sales proportion in 2018-19. By FY20, CGH had residential gas penetration rate increased to 61%, but we think CGH has no intention to slow down its residential gas connection development. Looking forward, we expect CGH to maintain its strategic focus on growing residential customer number.

Figure 49: CGH’s annual residential connection pace Figure 50: CGH places strategic focus on growing accelerated in 2018-19 residential customer number

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 51: Residential gas sale CAGR was the Figure 52: CGH has the highest residential gas highest among peers in 2011-19 proportion in retail gas sales mix

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 26 8 Dec 2020

Village and township connection a mid-long term play Market may consider CGH’s township coal-to-gas connection a short term business emerged with China government’s air pollution control policies, but we take a different view and believe township and village connection is a mid-long term play. We think CGH had well planned 3-tiers of customer value development, including

1) Gas connection and appliances sales revenue in short term; 2) Gas consumption value in the coming 10-20 years from winter heating and daily usage from utility consumption upgrade; and 3) Value adding services provision to township and village users as with their increasing consumption power.

In view of those residential user value, we think CGH will continuously pursue growth in residential customer number, such as coal-to-gas switch users in Northern and Northeast China, LGP smart grid users in Southern China, and gas heating users in Central and Eastern China. We think CGH has various application scenarios to implement its residential focus strategy.

Figure 53: We expect LPG Smart Grid connection to Figure 54: We expect connection revenue to sustain CGH’s residential connection growth maintain slight growth in FY21-23E

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Accelerating VAS sales with increasing customer base CGH is leading in residential customer value development. Based on effective user number estimates (consolidated residential and township users only), we estimate effective ARPU value of HK$309 in FY20, leading ahead of peers. We think key drivers for outstanding VAS performance included 1) CGH realized higher average product value through gas heating boilers and appliances sales via township connection project, and 2) CGH has been actively exploring new merchandise such as daily necessities and agricultural products to increase VAS sales. Supporting from CGH’s increasing, township and village projects, we think CGH has healthy growing customer base for developing VAS. Township and village customers, in turn, could provide agricultural products to CGH for city users, which could also boost city users’ VAS value.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 27 8 Dec 2020

Figure 55: CGH’s effective ARPU through VAS sales Figure 56: We expect VAS revenue and gross profit is leading ahead of peers to maintain rapid growth while GPM to remain stable

Source: CMBIS estimates Source: Company data, CMBIS estimates

Valuation SOTP TP at HK$37.12

We adopt DCF valuation for CGH’s organic business and its growth potential except the future growth proportion from NE business. Our earnings projection as well as DCF valuation had not yet factored in those massive growth potential in China NE market. Based on our DCF valuation for organic business proportion, we derive a per share value of HK$32.28.

We use DCF valuation to evaluate CGH’s NE business for its massive growth potential with supports from Russia-China gas pipeline. We derive initial per share value of HK$6.05 for CGH’s NE business. Though our DCF valuation is made based on prudent assumptions, we still apply a 20% discount for business uncertainties on our DCF valuation for CGH’s NE business. We believe CGH’s NE business worth HK$4.84 per share.

Adding up both part, our SOTP TP for CGH is HK$37.12. Our TP reflects 18.2x/14.7x FY21/22E PER. We maintain BUY recommendation on CGH.

Figure 57: SOTP valuation for CGH SOTP valuation (HK$) Organic gas distribution 32.28 NE business value@20% discount 4.84 Our target price for CGH 37.12

Implying PER multiples (x) FY21E 18.2 FY22E 14.7

Source: CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 28 8 Dec 2020

Figure 58: DCF valuation for organic gas distribution business DCF Valuation FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E Key operating forecasts Annual gas sales volume (mcbm) 33,160 37,991 42,882 47,170 51,888 57,076 62,784 69,062 75,969 YoY change (%) 16.2% 14.6% 12.9% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Annual residential connection 5.9 6.1 6.3 5.7 5.3 4.9 4.6 4.3 4.1 YoY change (%) 14.2% 2.8% 3.3% -9.2% -8.1% -7.2% -6.4% -5.7% -5.1% City residential (mn HH) 3.25 3.22 3.12 2.96 2.81 2.67 2.54 2.41 2.29 Rural coal to gas conversion (mn HH) 1.70 1.70 1.70 1.28 0.96 0.72 0.54 0.40 0.30 LPG micro grid (mn HH) 1.00 1.20 1.50 1.50 1.50 1.50 1.50 1.50 1.50 Accumulated residential customer 46.3 52.4 58.7 64.4 69.7 74.6 79.2 83.5 87.6

Turnover (HK$ mn) 79,360 92,248 103,245 114,521 125,883 136,484 146,613 156,028 158,368 Turnover grow th (%) 19.4% 16.2% 11.9% 10.9% 9.9% 8.4% 7.4% 6.4% 1.5% EBIT (HK$ mn) 19,618 22,794 25,254 27,554 29,784 30,303 30,414 30,092 28,234 EBIT margin 24.7% 24.7% 24.5% 24.1% 23.7% 22.2% 20.7% 19.3% 17.8% Tax rate 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Depreciation - (HK$ mn) 2,203 2,495 2,785 3,090 3,396 3,682 3,956 4,210 4,273 CAPEX (HK$ mn) -10,912 -10,889 -10,859 -10,697 -10,536 -10,378 -10,222 -10,069 -9,918 Invest in w orking capital 4,587 2,851 2,505 -2,255 -2,272 -2,120 -2,026 -1,883 -468 Free cash flow 11,573 12,692 14,634 12,181 14,415 15,426 16,038 16,331 16,474

Years 1 2 3 4 5 6 7 8 9 Discount factor 0.92 0.85 0.78 0.71 0.66 0.60 0.55 0.51 0.47 Discount free cash flow 10,638 10,725 11,367 8,698 9,462 9,307 8,895 8,326 7,721 Terminal value 264,113 Terminal perpetual growth 2% Terminal EV/EBITDA 8.12

Valuations （HK$ mn） WACC Calculations Terminal value 264,113 Cost of debt 4.2% Terminal perpetual growth 2.0% Tax rate 22.0% Terminal EV/EBITDA 8.12 After tax cost of debt 3.3% Total discount FCF 85,140 Cost of equity 14.3% Discount terminal value 123,780 Adjusted beta 0.85 Firm value 208,920 Market risk premium 14.7% Discount FCF(% of total) 59.2% Risk free rate 1.8%

Terminal value (% of total) 40.8% % of debt financing 50.0% Add: Cash & cash equivalent 11,008 WACC 8.8% Less: Debt 44,130 Non-controlling interest 7,352 Equity Value - (HK$, mn) 168,447 Number of shares 5,219 Share fair value (HK$) 32.28 FY21E PER* 15.86 FY22E PER* 12.82 Source: CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 29 8 Dec 2020

Figure 59: DCF valuation for NE business (YE Mar 31) FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E Gas consumption and sales assumptions Northeast China Gas Consumption(bcm) 21.0 23.1 25.4 27.9 30.7 33.2 35.8 38.7 41.8 YoY diff (bcm) 2.4 2.1 2.3 2.5 2.8 2.5 2.7 2.9 3.1 YoY growth % 13.0% 10.0% 10.0% 10.0% 10.0% 8.0% 8.0% 8.0% 8.0% Oil field gas output 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 Gas consumption excl. oil field gas gas 17.0 19.1 21.4 23.9 26.7 29.2 31.8 34.7 37.8

CGH & Associates' Gas Sales (bcm) 3.6 4.6 5.7 6.8 7.8 8.7 9.6 10.6 11.6 YoY diff (bcm) 0.8 1.0 1.1 1.0 1.0 0.9 0.9 1.0 1.1 YoY Growth % 30.0% 28.0% 25.0% 18.0% 15.0% 12.0% 10.0% 10.0% 10.0% CGH's market shares in NE China 17.1% 19.9% 22.6% 24.3% 25.4% 26.3% 26.8% 27.3% 27.8% Market shares excl. self-use gas 21.1% 24.1% 26.9% 28.3% 29.2% 29.9% 30.2% 30.4% 30.7% NE projects's attributable profit rate 50% 50% 50% 50% 50% 50% 50% 50% 50%

Natural gas sales City gate price (RMB/cbm) 1.67 1.67 1.67 1.67 1.67 1.67 1.67 1.67 1.67 Averalge selling price 2.37 2.32 2.27 2.27 2.27 2.27 2.27 2.27 2.27 Sales revenue (RMB mn) 8,504 10,655 13,032 15,378 17,685 19,807 21,788 23,966 26,363 Sales revenue - Consolidation 4,252 5,328 6,516 7,689 8,842 9,903 10,894 11,983 13,181 Average dollar margin (RMB/cbm) 0.70 0.65 0.60 0.60 0.60 0.60 0.60 0.60 0.60 Total dollar margin - (RMB mn) 2,512 2,985 3,445 4,065 4,674 5,235 5,759 6,335 6,968 YoY change% 7.1% 18.9% 15.4% 18.0% 15.0% 12.0% 10.0% 10.0% 10.0% Gross profit margin 18.5% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% Gross profit per sqm 0.44 0.44 0.43 0.43 0.43 0.43 0.43 0.43 0.43 Implying gas distribution cost per sqm 0.26 0.21 0.17 0.17 0.17 0.17 0.17 0.17 0.17 Segment profit margin 14.5% 15.0% 15.0% 15.1% 15.2% 15.3% 15.4% 15.4% 15.5% Net profit (RMB mn) 1,233 1,593 1,959 2,324 2,686 3,025 3,344 3,698 4,089 Project net profit per sqm 0.34 0.35 0.34 0.34 0.34 0.35 0.35 0.35 0.35 Implying non-operating costs per sqm 0.095 0.094 0.090 0.088 0.086 0.085 0.083 0.081 0.079 Attributable profit to CGH (RMB mn) 617 796 979 1,162 1,343 1,512 1,672 1,849 2,044 YoY Growth % 26.6% 29.2% 23.0% 18.6% 15.6% 12.6% 10.6% 10.6% 10.6%

Residential gas connection Residential connection (hh) 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 Average residential connection fee (RMB/hh) 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 Residential connection revenue (RMB mn) 675.00 675.00 675.00 675.00 675.00 675.00 675.00 675.00 675.00 Gross profit margin 60% 60% 60% 60% 60% 60% 60% 60% 60% Gross profit (RMB mn) 405 405 405 405 405 405 405 405 405 Connection segment profit 1 1 1 1 1 1 1 1 1 Net profit (RMB mn) 338 338 338 338 338 338 338 338 338 Attributable profit to CGH (RMB mn) 169 169 169 169 169 169 169 169 169

Natural Gas Heating Residential connection (HH) 250,000 500,000 500,000 600,000 720,000 576,000 460,800 368,640 294,912 Construction service fee - RMB 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 Gas heating connection revenue -RMB mn 1,125 2,250 2,250 2,700 3,240 2,592 2,074 1,659 1,327 Gas heating connection margin 40% 40% 40% 40% 40% 40% 40% 40% 40% Net profit (RMB mn) 450 900 900 1,080 1,296 1,037 829 664 531 Consolidation rate 60% 60% 60% 60% 60% 60% 60% 60% 60% Attributable profit to CGH (RMB mn) 270 540 540 648 778 622 498 398 319

DCF Valuation Net profit from NE projects - (RMB mn) 1055 1505 1688 1979 2290 2303 2339 2416 2532 FX rate HKD/RMB 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 Net profit from NE projects - (HK$ mn) 1173 1672 1876 2198 2544 2559 2598 2684 2813 Free cash flow projection 828 1,298 1,608 1,929 2,308 2,446 2,489 2,560 2,680 YoY Growth % 1177.2% 56.8% 23.9% 19.9% 19.7% 6.0% 1.8% 2.9% 4.7%

Discount year 1 2 3 4 5 6 7 8 9 Discount factor 0.92 0.85 0.78 0.71 0.66 0.60 0.55 0.51 0.47 Discounted cash flow (HK$,mn) 761 1,097 1,249 1,378 1,515 1,476 1,380 1,305 1,256

Discounted Terminal value (HK$, mn) 20,133 Terminal growth 2.0% Terminal EV/EBITDA 5.16 Total discounted value (HK$, mn) 31,550 Share number (mn) 5,219 NE Business value (HK$/share) 6.05 NE Business value@20% discount (HK$/share) 4.84 Source: CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 30 8 Dec 2020

Financial Summary

Income statement Cash flow summary YE 31 Mar (HK$ mn) FY19A FY20A FY21E FY22E FY23E YE 31 Mar (HK$ mn) FY19A FY20A FY21E FY22E FY23E Revenue 59,386 59,540 66,471 79,360 92,248 Pre -tax profit 11,183 12,725 14,739 18,089 21,179 Costs of sales (45,327) (42,443) (47,349) (56,054) (65,262) Depreciation and 1,326 1,591 1,910 2,203 2,495 Gross profit 14,059 17,097 19,121 23,306 26,986 Changeamortization in working capital 7,038 (8,091) 1,161 4,587 2,851 Taxation (1,874) (2,245) (3,086) (3,306) (3,948) Other income 786 640 709 860 1,169 Others (7,556) (1,001) (84) (267) (172) Other gains and losses 295 (180) 50 50 50 Net cash from operating 10,117 2,979 14,640 21,306 22,405 Selling and distribution (1,820) (1,973) (2,170) (2,551) (2,919) activities Administrativecosts expenses (2,442) (2,447) (2,698) (3,182) (3,652) Capex & investments (11,816 (5,989) (12,228 (10,912 (10,889 Profit from associates 520 405 565 572 574 Others 784) (950) -) -) -) Profit from JVs 1,132 571 625 613 637 Net cash from investing (11,032 (6,939) (12,228 (10,912 (10,889 activities ) ) ) ) Share-based payments (63) - (50) (50) (50) Equity raised 3,785 - - - - EBIT 12,467 14,113 16,153 19,618 22,794 Change of Debts 5,526 1,790 4,158 2,755 2,288 Dividend paid (2,172) (2,937) (3,279) (3,836) (4,739) Finance costs (1,284) (1,388) (1,411) (1,529) (1,615) Others (804) (1,100) - - - Pre-tax profit 11,183 12,725 14,742 18,089 21,179 Net cash from financing 6,335 (2,246) 878 (1,081) (2,451) activities Income tax (2,198) (2,464) (2,948) (3,618) (4,236) Net change in cash 5,419 (6,207) 3,290 9,314 9,065 Less: Minority interests (760) (1,072) (1,173) (1,331) (1,457) Cash at the beginning 8,246 13,239 7,119 10,409 19,723 Net profit 8,224 9,188 10,620 13,140 15,486 Exchange difference (427) (450) - - - Cash at the end of the year 13,239 6,582 10,409 19,723 28,789

Cash at balance sheet 13,239 7,119 10,409 19,723 28,789

Balance sheet Key ratios YE 31 Mar (HK$ mn) FY19A FY20A FY21E FY22E FY23E YE 31 Mar FY19A FY20A FY21E FY22E FY23E Non-current assets 68,277 72,558 82,851 91,569 99,975 Sales mix (%) Investment properties 556 524 566 571 571 Sales of piped gas 45.6 45.4 49.1 50.1 51.1 PPE 42,965 46,128 55,163 62,291 69,114 Gas connection 21.0 23.0 21.3 18.7 16.4 Prepaid lease payments 2,148 2,458 2,673 2,958 3,215 Sales of LPG 26.8 23.1 17.8 17.7 16.9 Investment in associates 5,746 7,063 7,628 8,201 8,775 Value-added service 6.6 8.4 11.7 12.2 13.2 Investment in JVs 8,022 7,815 7,963 8,606 9,273 Others - - - 1.4 2.4 Others non-current assets 8,840 8,570 8,858 8,943 9,028 Total 100.0 100.0 100.0 100.0 100.0 P&L ratios (%) Current assets 41,603 39,509 44,388 53,443 63,096 Operating margin 21.0 23.7 24.3 24.7 24.7 Inventories 3,412 3,246 3,624 4,168 4,661 Pre-tax margin 18.8 21.4 22.2 22.8 23.0 Amount due from - - - - - Net margin 13.8 15.4 16.0 16.6 16.8 Contractcustomers assets 7,185 12,751 12,146 9,434 7,301 Effective tax rate 19.7 19.4 20.0 20.0 20.0 Trade receivables 10,061 9,893 11,565 13,497 15,689 Balance sheet ratios Bank balances and cash 13,239 7,119 10,409 19,723 28,789 Current ratio (x) 0.89 0.80 0.94 1.08 1.18 Other current assets 7,706 6,500 6,645 6,621 6,657 Quick ratio (x) 9.7 10.2 11.4 12.8 14.1 Cash ratio (x) 0.3 0.2 0.2 0.4 0.6 Current liabilities 46,644 49,347 47,085 49,647 53,350 Inventory turnover days 19.9 20.4 18.9 17.9 17.5 Trade and other payables 23,699 17,700 18,940 21,301 22,842 Receivable turnover days 58.6 61.2 58.9 57.6 57.7 Amount due to customers - - - - - Payable turnover days 152 178 141 131 123 Contract liabilities 5,168 5,998 6,753 7,736 8,684 Total debt / equity ratio (%) 92.9 87.2 80.4 70.9 62.3 Taxation 1,245 1,246 1,326 1,628 1,906 Net debt / equity ratio (%) 69.1 81.5 69.7 46.3 28.8 Bank and other borrowings 16,408 24,121 19,773 18,679 19,604 Returns (%) Other current liabilities 125 282 293 303 314 ROE 24.1 23.2 22.3 22.9 22.9 ROA 7.5 8.2 8.3 9.1 9.5 Non-current liabilities 22,453 16,936 25,273 29,182 30,605 Per share Borrowings 21,491 15,568 24,073 27,923 29,285 EPS (HK$) 1.63 1.76 2.03 2.52 2.91 Deferred income tax 962 1,368 1,200 1,260 1,320 DPS (HK$) 0.44 0.50 0.58 0.72 0.83 BVPS (HK$) 6.77 7.59 9.11 11.02 12.7 Total net assets 40,782 45,783 54,882 66,183 79,116 Minority Interest 5,461 6,178 7,352 8,683 10,140 Shareholders' equity 35,321 39,605 47,530 57,500 68,976 Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 31 9 8 Dec 2020

CMB International Securities | Equity Research | Company Initiation

ENN Energy (2688 HK) Leading the wave in energy transformation BUY (Initiation)

Target Price HK$120.0 ENN Energy (ENN) places strategic focus on industrial clients. The Company is Up/Downside +16.7% facilitating downstream users in energy transformation towards integrated energy Current Price HK$102.8 solutions with lower costs, higher efficiencies, and lower carbon emissions. Despite the impacts from the pandemic, we expect ENN to maintain high growth

in city gas sales at 11.4% in 2020E. Supported by outstanding industrial client China Gas Distributor base, rapid growing integrated-energy business, and accelerating LNG trading volume, we expect ENN’s core profit CARG to reach 19.7% in 2019-22E. We Robin Xiao initiate ENN with BUY rating, and our TP for ENN is HK$120. (852) 3900 0849 [email protected]  Strategic focus on industrial clients. ENN has the least C&I gas account among top 3 gas distributors, but has significant higher C&I gas volume proportion and average gas sales volume for each C&I gas account. We think Stock Data ENN has superior project layout in areas with developed industries, and high Mkt Cap (HK$ mn) 115,940 quality industrial users with considerable natural gas demand. Avg 3 mths t/o (HK$ mn) 204.2 52w High/Low (HK$) 110.4/59.33  LNG trading to enhance profitability. We believe ENN has accumulated Total Issued Shares (mn) 1,128 experience of wholesale gas as well as LNG trading through controlling Source: Bloomberg shareholder’s Zhoushan LNG terminal, which will sustains ENN’s retail gas Shareholding Structure dollar margin and overall profitability. By Aug 2020, the terminal had its subsea ENN Ecological 32.8% gas pipeline connected with Zhejiang gas pipe back bone, which we think will The Capital Group 14.0% further leverage ENN’s LNG sourcing capability to enlarge future gas dollar Free float 53.2% margin. Source: HKEx

 Pan-Energy: to make ENN from good to great. ENN runs the fastest and Share Performance farthest in integrated energy (IE) business servicing industrial customers’ Absolute Relative energy transition, in our view. The business is a key to help ENN break 1-mth 1.7% -0.6% through the boundary from a natrual gas supplier to become a comprehensive 3-mth 18.2% 10.7% 6-mth 10.7% 4.2% energy services provider. We estimate IE business has trillian RMB market 12-mth 28.7% 29.7% size, and expect IE earnings to have rapid growth and to contribute 11.1% of Source: Bloomberg ENN’s EBIT by 2022E. Based on DCF valuation on the IE business only, we estimate the segment has its own value of HK$36.78 per share. 12-mth Price Performance (RMB)  Core profit CAGR at 19.7% in FY19-22E. We expect ENN’s earnings to 2688.HK HSI.HI (rebased) 120.0 maintain decent growth despite impacts from pandenmic. We project core profit to increase to RMB6,272/ 7,473/ 9,023mn in FY20-22E, respectively, 100.0 refelecting 19.7% earnings CAGR in FY19-22E. 80.0 60.0  Initiate BUY with a TP of HK$120.0. We derive ENN’s TP based on 20% discount on IE business and DCF value of non-IE gas distribution business. 40.0 Our valuation reflects 15.9x/13.2x 2021/22E PER. 20.0 0.0  Risk factors: policy risks, corporate governance concerns; and gas shortage. Dec-19 Mar-20 Jun-20 Sep-20

Source: Wind Earnings Summary (YE Dec 31) FY18A FY19A FY20E FY21E FY22E Auditor: Deloitte Turnover (Rmb mn) 60,698 70,183 78,040 91,638 106,253 YoY growth (%) 25.75 15.63 11.20 17.42 15.95 Net Income (Rmb mn) 2,818 5,670 6,251 7,473 9,023

EPS (Rmb) 2.56 5.05 5.55 6.63 8.00

EPS CHG (%) -1.05 97.03 9.95 19.44 20.64

Consensus EPS（RMB） N/A N/A 5.36 6.25 7.14 PE (x) 35.30 17.92 16.29 13.64 11.31 PB (x) 4.75 3.94 3.34 2.86 2.42 Yield (%) 1.15 1.66 2.28 2.50 3.19 ROE (%) 13.5 22.0 20.5 21.0 21.4 Net gearing (%) 55 45 47 40 25 Source: Company data, Bloomberg, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 32 MORE REPORTS FROM BLOOMBERG: RESP CMBR AND http://www.cmbi.com.hk 8 Dec 2020

Focus Chart

Figure 60: ENN had placed strategic focus in growing Figure 61: The Company has highest C&I Gas sales C&I gas sales accounts during the past few years proportion in city gas sales mix

Source: Company data, CMBIS Source: Company data, CMBIS

Figure 62: ENN Group’s LNG terminal enhanced Figure 63: We expect IE business to have ENN’s wholesale gas capabilities and sustains significant EBIT contribution to ENN, with EBIT ENN’s future retail gas dollar margin margin at ~10.5% in 2020-22E

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 64: We expect 2019-22E core profit CAGR to Figure 65: We expect ENN to have room to lift reach 19.7% dividend pay-out ratio

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 33

8 Dec 2020

Investment Thesis Pioneer in industrial energy transition ENN Energy (2688 HK, ENN) is one of the leading clean energy distributors in China. The Company was firstly listed on HKEx GEM board in 2001, and transferred to main board with ticker 2688 HK. ENN is a constituent of the Hang Seng Composite Large Cap Index, the Hang Seng China Enterprises Index and the MSCI China Mid Cap Index.

The Company has major business focus on natural gas distribution, which includes investment, construction and operation of gas pipeline infrastructure, vehicle refueling stations. By 1H20, the Company had 229 city gas projects in China, covering 108mn population, and had an average gas penetration rate of 61.2%. The Company also conducts energy trading business (mainly LNG trading) as ancillary to support its gas distributing business. Other than gas distribution and trading, the Company has also kicked off business transformation to an integrated energy services provider dated back to 2017. After 3 years’ development, ENN had become a pioneer in servicing industrial energy transition in China. By 1H20, ENN had developed 108 integrated energy projects in 17 national/provincial industrial parks with total integrated energy supply capability equivalent to 34.4bn kWh.

Commercial and industrial services are deep in ENN’s DNA Highest C&I gas sales volume mix ENN had the least C&I customer accounts, but generated considerable C&I gas sales volume compared with CRG and CGH. ENN had the highest C&I gas sales proportion in its city gas sales volume mix at above 70% in 2011-19. In 2019, ENN’s C&I gas sales volume accounted for 76.8% of total city gas sales, highest among CRG’s 71.8% and CGH’s 62.1%.

Figure 66: ENN has less C&I gas accounts Figure 67: ENN had high C&I gas sales volume in compared with peers 2011-2019

Source: Company data, CMBIS Source: Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 34

8 Dec 2020

Business focus on C&I customers We think ENN had placed strategic focus on C&I clients, especially industrial clients, as we observed the Company had superior C&I customers’ quality, as well as rapid C&I customer account growth in 2011-2019. For C&I customer quality, ENN had the highest annual average gas sales volume per C&I gas user at more than 100k cbm/year, which was significantly higher than CRG’s 68k cbm/year and CGH’s 39k cbm/year in 2019. We think that’s the key reason leading to ENN’s high C&I gas sales volume with relatively less gas accounts.

Figure 68: ENN has highest annual average gas Figure 69: ENN also has the highest C&I gas sales sales volume per C&I gas account volume proportion in gas sales mix

Source: Company data, CMBIS Source: Company data, CMBIS

Other than C&I user quality, we also believe that ENN had its business development focus on C&I clients. In 2011-19, the Company recorded overall C&I account CAGR at 25.1%, which was significant faster than its residential accounts CAGR of 14.5% during the same period.

ENN had total project population coverage of 108mn people by 1H20, the lowest compared with CRG and CGH. ENN also has significantly lower average project population coverage than CRG but higher than CGH. Based on our observation, we think ENN has project layout in areas less densely populated but with developed industries, high quality industrial users with considerable natural gas demand. We believe C&I services are a core part in ENN’s business development.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 35

8 Dec 2020

Figure 70: ENN had rapid C&I account # growth in Figure 71: ENN’s C&I gas sales CAGR was 19.9% in 2011-19 with CAGR of 25.0% 2011-19

Source: Company data, CMBIS Source: Company data, CMBIS

Figure 72: ENN’s residential account growth was Figure 73: Average project population density: significantly slower than C&I account growth in ENN’s projects were located in less densely 2011-19 populated areas compared with CRG

Source: Company data, CMBIS Source: Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 36

8 Dec 2020

LNG trading to enhance profitability LNG trading is critical to sustain long term gas sales profitability The Company has accumulated experience of wholesale gas as well as LNG trading. With reference to ENN’s wholesale gas volume, ENN accelerated its wholesale gas sales from 2014, and exhibited rapid wholesale gas volume expansion at 54% CAGR in 2014-19, from 804mcbm to 7,039mcbm. Compared with retail gas sales, wholesale gas earns thin gross margin at only ~1-2% (vs. ~15% of retail gas), but we believe it is still critical to ENN’s overall gas sales business. ENN leverages its large scale downstream demand and customer network to facilitate its global LNG trading business. LNG trading helps ENN acquire more abundant upstream natural gas resources at low costs, which in turn sustains gas dollar margin of ENN’s retail gas sales, and enhances overall profitability. In 9M20, offshore LNG spot price was substantially lower than onshore natural gas city gate prices. We expect ENN to sustain and enhance its overall retail gas dollar margin blended with more LNG import volume.

Figure 74: ENN’s wholesale gas volume exhibited Figure 75: Wholesale gas GPM was low compared rapid growth CARG at 54% in 2014-19 with retail gas sales, but critical to sustain overall profitability

Source: Company data, CMBIS Source: Company data, CMBIS

Zhoushan LNG terminal to enhance ENN’s LNG trading capability In China, it used to be difficult for privately owned companies to import offshore low costs LNG resources, since all the LNG terminals were controlled by the three oil majors. In 2018, Zhoushan LNG terminal (Phase 1)’s commercial operation broke the monopoly of LNG terminal resources by those oil majors. The terminal is controlled by ENN Group, and has phase 1 capacity of 3mn tonnes processing volume per year. ENN group plans to have another 2mn tonnes capacity addition by Apr 2021. As the most important downstream gas distributing asset under ENN Group, we think ENN can take advantage of Zhoushan Terminal’s offloading windows to realize low cost LNG import.

In Aug 2020, Zhoushan LNG Terminal had its subsea gas pipeline commissioned and connected with Zhejiang provincial gas pipe from Ningbo. It was the eighth natural gas source to Zhejiang province with 8bcm annual gas supply capacity through gasification from the terminal. Zhejiang Province is the third largest natural gas sales province of ENN, and accounted for more than 11% of total gas volume in 2019. Leveraging its global LNG sourcing capability, ENN will be able to boost gas dollar margin through increasing LNG import, in our view.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 37

8 Dec 2020

Figure 76: First two phases of Zhoushan LNG Figure 77: Zhoushan LNG Terminal has a subsea Terminal will provide 5mtpa LNG receiving capacity pipeline connecting Zhejiang Provincial gas by 2021 backbone pipeline from Zhenhai, Ningbo. Commercial Capacity Project phases Unit operation /length date/plan Phase 1 3.00 mn tonnes Aug-2018 2 x storage tank 2 x 0.16 mcbm Aug-2018 1x multifunctional dock 2x LNG dock Aug-2018 1x Ro-Ro dock 14 x truck loading skid Subsea pipeline 82 km Aug-2020

Phase 2 2.00 mn tonnes 2 x storage tank 2 x 0.16 mcbm Apr-2021

Long-term plan 10.00 mn tonnes N/A Source: Company data, CMBIS Source: Google Map, CMBIS

ENN has established long term LNG supply agreement As one of the first movers in LNG trading among peers, ENN has signed 1.43mn tonnes per annum long term LNG purchasing agreements with Total, Chevron and Origin Energy for 10-years (5+5-yr with Origin Energy), and another 2-year contract for 0.3mn tonnes LNG per annum to offload through Guangdong Dapeng LNG Terminal. We estimate those long-term/short-term contract volumes can translate to 2bcm/0.4bcm, which could bring significant saving for ENN’s blended natural gas costs.

According to management, those long-term LNG procurements are not necessarily to offload through Zhoushan LNG terminal. ENN can also utilize other LNG terminals or swap with third party LNG resources to cover retail gas demand in broader areas than Zhejiang Province. As PipeChina is opening offloading windows for its LNG terminals, we think ENN will likely to find more distribution channels to fully release its import LNG value. Since retail gas sales has significantly higher margin than wholesale trading, the higher proportion ENN sells import LNG to retail gas clients, the higher value ENN could realize from its LNG import.

In 1H20, ENN imported 1.08mn tonnes LNG, making significant contribution to the gas dollar margin which expanded RMB3cents/cbm to RMB0.61/cbm. Looking forward in 2H20, management guided same LNG import volume as 1H20, and expected gas dollar margin to maintain expansion of RMB2-3 cents/cbm YoY, implying dollar margin to stay flat as 1H20, despite piped gas cost to increase during winter.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 38

8 Dec 2020

Figure 78: ENN & ENN Group’s LNG import contract Contract Contract Supply Company Remark volume Terms Start (mn tonnes) (year) ENN Energy (2688 HK) Total 0.50 10 2018 Chevron 0.65 10 2019 Origin Energy 0.28 5+5 2018 BP 0.30 2 2021 Offload to Guangdong Dapeng LNG Terminal Subtotal 1.73

ENN Group Mexico Pacific Ltd. 1.00 15 n/a NextDecade 1.00 20 2023 Venture Global 1.00 20 2024 Woodside 1.00 20 2025 Subtotal 4.00

ENN & ENN Group Total 5.73 Source: CMBIS summarized based on market news

Figure 79: PipeChina announced available capacity in Nov-Dec 2020 for the first batch of LNG terminal assets Remaining Remaining Remaining LNG Terminal Month Remarks receiving capacity Storage capacity transmission capacity Unit (k tonnes) (k tonnes) (k tonnes)

Nov 240.0 824.0 271.0 Transmission facilities include gasification, and tank truck Beihai Dec 240.0 824.0 271.0 transportation

Nov 102.0 396.8 610.7 Transmission facilities include gasification, and FSRU capacity in Tianjin Dec 84.8 379.6 625.2 Nov-Dec

Nov 501.7 123.4 730.2 Transmission facilities include gasification, and tank truck Shenzhen transportation; annual receiving/storage/transmission capacit Dec 501.7 44.6 714.3 are 6.8/14.6/9.1mn tonnes

Nov 25.5 5.0 58.0 Transmission facilities include gasification, and tank truck Fangchenggang Dec 25.5 5.0 58.0 transportation

Nov 300.0 70.0 70.0 Capacity: 6mn tonnes/yr receiving 0.83mn/mo storage; and Yuedong Dec 300.0 70.0 70.0 reserving 12% storage capacity for safety stock

Nov 218.5 487.7 267.9 Transmission facilities include gasification and tank truck Hainan transportation Dec 219.5 463.1 266.5 Source: PipeChina, CMBIS

Figrue 80: Domestic LNG spot price is at multi-year Figrue 81: Japan arrival-based spot LNG index also low in most of 2020 exhibited multi-year low LNG spot price

Source: Wind, CMBIS Source: Bloomberg, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 39

8 Dec 2020

Share restructuring may bring potential corporate governance concerns Turned secondary holding under ENN Group ENN Group’s recent shareholding restructure has raised market concerns in Aug- Oct. ENN’s controlling shareholder, Mr. Wang Yusuo (王玉锁), transferred his 32.78% shareholding of the Company at RMB70.0 per share to ENN Ecological (ENN EC, 600803 CH, NR), another company also controlled by Mr. Wang with business focus on energy upstream project. The transaction made ENN a secondary holding under ENN Group, and ENN’s financials are also consolidated to ENN EC.

The transaction had a total consideration of RMB25.8bn, of which Mr. Wang 1) received RMB5.5bn cash, 2) swapped upstream asset (9.97% shareholdings of Santos, an Australian energy company) with ENN EC for RMB7.08bn, and 3) subscribed 1.37bn new shares of ENN EC at RMB9.67 per share. Mr. Wang ‘s holding on ENN EC increased to 52.72%, implying Mr. Wang’s shareholding on ENN decreased from directly 32.78% to indirectly 17.28%.

Figrue 82: ENN turned to secondary holding under ENN Group after restructuring

Source: CMBIS

Share restructuring caused mixed market feeling We think market sentiment was a bit mixed on the shareholding restructure, as investors may have concerns that controlling shareholder Mr. Wang will shift business focus from downstream gas distributing utilities to mid-up stream ENN EC. Other than that, we think investors are also concerned about horizontal competition issue between ENN and ENN EC regarding LNG trading. ENN and ENN EC have relatively clear division in the natural gas business value chain, but still have overlap in LNG trading. We think market may have doubt on potential profit distribution mechanism between ENN and ENN EC, as both companies are obviously leveraging parent company ENN Group’s Zhoushan LNG Terminal to conduct LNG business, while ENN Group has significantly higher shareholding in ENN EC than ENN.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 40

8 Dec 2020

Further corporate governance actions to enhance investors’ confidence We think both ENN and ENN EC’s managements are well aware of investors’ concerns, and ENN itself has good track record in delivering trustable corporate governance. Standing from the perspective of the natural gas value chain, we still believe downstream energy distribution is the most valuable link which would maximize the gains from upstream LNG trading. Therefore, we expect ENN and ENN EC to have relatively clear cut in the LNG trading business, and formulate market base settlement rules for related transactions within various entities of ENN Group. We expect those additional corporate governance actions will enhance investors’ confidence, and market concerns will likely be short term.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 41

8 Dec 2020

Pan-Energy: to make ENN from good to great

If improving C&I services has helped ENN to become a good city gas distributor, we think integrated energy services, aka pan-energy, will be the stepping stone to make ENN from good to great. We believe pan-energy leverages ENN’s deep understanting of industrial energy consumptions, and it will help ENN break through the boundary from a natrual gas supplier to comprehensive energy services provider, taking care of customers’ various energy related demand for heat, cold and electricity simultaneously. The Company started its business transformation towards pan-energy since 2017, and by 1H20, ENN had already developed 131 pan energy projects (108 in operation and 23 under construction) with total energy consumption potential of 34.4TWh. Under the backdrop of energy structure transition in China, we think ENN runs the fastest and farthest in integrated energy business servicing industrial customers’ energy transition.

What is pan-energy? Pan-energy business is an integrated energy services, taking traditional energy/electricity supply one step further to the energy related products such as heat (steam), cold and electricity through distributed energy systems located close to end users. In our opinion, pan-energy services take advance steps in 1) understanding of industrial customers’ various energy demand and loading; 2) designing and providing tailormade energy solutions that suit local conditions; and 3) providing continuous services and improvements to cope with changinig customer needs.

Who & why choose pan-energy? We believe large energy users with energy needs in various forms are ENN’s target pan-energy clients. Such clients include large single industrial/commercial users (e.g. textile companies/commercial complex), or comprehensive industrial parks.

We believe the key edge of ENN’s pan-energy services is to realize cascade utilization of energy, which aims at realizing full energy value through applications from combining heat, cold and electricity generation. Compared with traditional coal/gas-fired power or cogenerators (see our comparison in Fig. 83), overall heat efficiency can be boosted from traditional coal-fired power or cogeneration’s 40- 60% to more than 80%. Such efficiency improvement can bring significant energy saving as well as carbon emission reduction, and we think that will lead to costs reduction in clients’ overall energy bill.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 42

8 Dec 2020

Figrue 83: Pan-energy project has high energy efficiency Energy type System Efficiency Coal-fired power Subcritical coal-fired power generation (<300MW) 35-38% Supercritical coal-fired power generation (600MW) 40% Ultral-supercritical coal-fired power generation (1000MW) 42% Cogeneration 48%

Gas fired power Simply cycle gas turbine 35-42% Combineed-cycle gas-fired plant (CCGT) 56-60% Combined cold, heat & power (CCHP) 80%

ENN's Pan Energy system Target Combination of various gas turbine, waste heat steam 85%* boiler, gas steam boilers

ENN's project demostrations Guangdong Haofeng ENN Ubiquitous Energy Station 80% Sino-German Eco Park 81% Source: CMBIS Note: * Pan-Energy system efficiency target is extracted from ENN’s 2017 ESG report

A trillian RMB size market Following our previous discussion, we expect industrial parks will be ENN’s key target clients, as they have relatively high energy consumption demand in different forms. We take industrial development park as a base to estimate the potential market size of the integrated energy market. Based on 1) 30% IE penetration rate in the national economic development park and national high- tech development park, 2) 15%/10% IE penetration in provincial economic development park and other development zones, respectively, and 3) a RMB0.35/KWh charge on each unit of IE consumed, we estimate the potential IE market size can reach above RMB1tn (see Fig.84). The figure includes only IE demand from industrial development park in China, but not yet includes considerable IE potentials from business complex. With reference to our estimate of IE market size, we think ENN’s pan-energy business is in early development phase, and has considerable room for expansion.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 43

8 Dec 2020

Figrue 84: Integrated energy market size estimates National National Provincial Total/ Economic High-Tech Economic Unit Others National Calculation Development Development Development average Park Park Park Information about development park in China Number of Development Park* (a) # 219 168 2053 3500 5940 GDP Contribution* RMB tn 10.2 10.5 n/a n/a n/a Average GDP Contribution (b) RMB bn 46.6 62.5 14.0 1.4 n/a Total GDP Contribution RMB bn 10,200 10,500 28,686 4,890 54,276

Energy consumption information Unit GDP vs. National Average % 60% 50% 71% 101% 100%

TCE/10k Unit GDP Energy Consumption** (c) 0.34 0.29 0.40 0.58 0.57 RMB GDP Total Primary energy consumption in TCE (d) bn t 0.35 0.30 1.16 0.28 2.09 (d) = (a)*(b)*(c)/10^4 KWh/tonne Electricity generation per tce (e) 3,333 3,333 3,333 3,333 n/a s Average energy efficiency (f) % 45.0% 50.0% 40.0% 40.0% n/a Total energy consumption equivalent to KWh (g) bn KWh 2589 1998 9635 2347 n/a (g)=(d)*(e)/(f)

Integrated Energy Market Size Estimates

IE penetration rate assumption (h) % 30.0% 30.0% 15.0% 10.0% n/a Equivalent to Energy Demand in KWh (i) bn KWh 777 600 1,445 235 3,056 (i)=(g)*(h) IE charge assumption with reference to ENN (j) RMB/KWh 0.35 0.35 0.35 0.35 n/a IE market size (k) bn RMB 272 210 506 82 1,070

Equivalent to TCE (l) bn t 0.10 0.09 0.17 0.03 n/a (l)=(d)*(h) Equivalent to Natural Gas Demand (m) bcm 86 74 143 23 326.41 (m)=(l)*12.43/10^5 Source: CMBIS estimates

ENN’s edge: first mover & comprehensive services provision Since pan-energy represents energy solutions servicing various energy needs at the same time, it helps ENN enter new energy sales market such as heat (mostly steam) and electricity sales. Market liberation of the electricity sales market was vital and completed ENN’s pan-energy business model, in our view. In 2015, China Central Government released several opinions on further deepening the reform of the power system (“关于进一步深化电力体制改革的若干意见”-9 号文) and set forth ancillary policies to shape “x+1+x” market structure of the China electricity market, aiming at seperating the grid from power suppliers and the downstream power sales market. We observed ENN has accelerated its move in pan-energy project development from 2017.

In regard to the competitors in the market with mega size potential, other than those gas distributing peers, we also think the grids and electricity distributors are the potential competitors in the IE market, since business boundary between natural gas and electricity distributor in IE business is increasingly hard to define. We expect ENN to stand out in the IE market given first mover advantages, comprehensive energy solutions, flexible business models as well as quick execution capability. Comparing with ENN, we think most of its gas peers are taking conservative steps in IE, while the grids and electricity distributors mainly focus on distributed electricity generating systems (distributed solar and wind + energy storage) but lack supports from gas related power and heat generating systems. Therefore, we think ENN can provide more advanced energy solutions than its IE peers.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 44

8 Dec 2020

Figrue 85: ENN will likely to compete with electricity sales companies and electricity-based integrated energy services providers in pan-energy business

Source: CMBIS

Figrue 86: ENN’s key edges in Pan-Energy business, in our view

Source: CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 45

8 Dec 2020

ENN’ pan-energy business model and projections ENN gathers clients’ (industial development parks or single industrial user) energy demand in different forms including steam, cooling and heating, and electricity. The Company then designs energy solutions with the best suitable equipment mix to meet those demand with significantly improved overall system efficiency, constructs those energy generation facilities, and connect those energy supply to end users.

Stable energy mix & change in 2020-22E With reference to ENN’s IE project operating data in 2017-19, steam/cooling and heating/electricity represents about 79%/15%/6% respectively in 2019 of the Company’s IE energy sales volume mix. Electricity sales mix was relatively low since the electricity sales market was in early stage of market liberation. In our conservative assumptions, we expect those energy sales mix to stay stable in 2020-22E in early phase development of IE business.

During the operating phase, ENN typically charges client for different prices for different energy forms. Those prices are likely lower than end users’ original costs, since overall system efficiencies significanly improved through ENN’s facilities. To simplify energy sales’ presentation, ENN uses KWh as the base unit to present and report its sales figures. According to management and our estimates, steam/ coolling & heating/ electricity is charging at RMB0.35/ 0.26/ 0.50 per KWh (VAT excl.) respectively. Based on stable pricing and energy mix assumption, we project blended unit price for each IE sale to be RMB0.35/kWh in 2020-22. In the long run, as we think electricity sales with higher price to account for higher proportion, we expect the blended energy sales ASP to increase gradually.

Figrue 87: ENN’s typical IE sales mix and pricing for Figrue 88: IE’s blended ASP experienced a hike in different energy type vs. market reference price 2017-19, and we expect ASP to stay flat at RMB0.35/kWh in 2020-22E. Reference market Energy Type Mix Price price(VAT excl) RMB/KWh RMB/KWh Steam 79% 0.35 0.31-0.36 Cooling and heating 15% 0.26 n/a Electricity 6% 0.50 0.54-0.58 Source: Company data, CMBIS estimates Note: 1 steam tonne = 770 KWh Energy mix structure is based on ENN’s operating disclosure in 2019, and we expect the mix to stay the same in 2020-22E

Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 46

8 Dec 2020

IE sales volume to surge at 77% CAGR in 2020-22E In 2017-19, ENN had 31/31/36 IE projects commenced operation and 20-30 projects under constructions by each year end. With reference to Company disclosure, we estimate ENN’s IE project service capability had expanded from 5.6bn KWh in 2017 to 18.5bn KWh in 2019, while actual IE sales volume was increased from 1.1bn KWh in 2017 to 6.8bn KWh in 2019, indicating utilization rate ramp-up. Looking ahead in 2020-22E, we expect project service capability to further expand at 41% CARG, and overall utilization rate to ramp up to 61.5- 73.6% during the period. We project IE sales volume to increase to 16.3bn/25.2bn/38.0bn KWh in 2020-22E, representing 52% CAGR during the period.

IE revenue CAGR to surge 70% in 2020-22E Other than IE sales, ENN also provides some engineering consultanting services through ENN Ubiquitous Energy Network Technology Co., Ltd. (ENN UENT, 泛 能科技), a subsidiary specialized in IE engineering that ENN acquired from ENN group in 2018. Combining with some IE consultancy revenue from ENN UENT acquired by ENN in 2018, the Company recorded revenue of RMB10bn/2.75bn for the pan-energy segment in 2018/19. Looking ahead, we expect pan-energy to contribute revenue of RMB6.1/9.1/13.5bn in 2020-22E with a CAGR of 50%, and we expect IE will contribute 12.4% revenue to ENN by 2022E.

Figrue 89: We expect ENN’s IE sales volume to Figrue 90: We expect IE sales to have significant increase at 77% CAGR in 2019-22E revenue contribution to ENN

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Steady gross profit and EBIT margin trend We see IE an extention of ENN’s existing gas utility business. In regard to business profitability, the Company guided gross profit margin of IE to be ~15%, and expected pay back period of IE project to be 7-8 years, similar to ENN’s gas distributing projects. In 2019, ENN realized IE gross profit of RMB473mn with a gross profit margin of 17.2% in 2019. We project IE’s gross profit margin to increase to ~19% in 2020-22E with reference to 1H20 performance.

ENN didn’t disclose exact EBIT performance of IE in 2017-19. With reference to ENN’s overall administrative and distribution costs to revenue ratio, we estimate EBIT margin of the segment was 11.6% in 2019, and we expect the ratio to increase to 13-14% in 2020-22E.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 47

8 Dec 2020

Figrue 91: We expect IE gross profit margin to stay at Figrue 92: We also expect EBIT margin to stay ~19% in 2020-22E steady at ~10.5% in 2020-22E

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figrue 93: By 2022E, we expect IE gross profit margin Figrue 94: By 2022E, we estimate IE will contribute to contribute 12.4% to ENN’s overall gross profit 13.1% EBIT to ENN

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

IE’s long term valuation worth RMB36.4bn We think market has not yet realized the complete value of ENN’s pan-energy segment, as the business is in early development phase. We established a DCF valuation model based on relative conservative long term assumptions to estimate the segment’s long term value. Our long term DCF projection reflects that the segment values RMB36.4bn, indicating a per share value of RMB32.27/HK$36.78. We think the market only reflects a fraction value of ENN’s pan-energy business. The following table listed our key assumptions and valuation results.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 48

8 Dec 2020

Figrue 95: Our DCF valuation for ENN’s Pan-Energy Segment DCF Valuation for IE Segment 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E ENN's IE sales (bn KWh) 38.02 55.14 74.92 85.22 95.53 105.84 116.13 126.40 136.62 146.80 Implying market share 1.24% 1.80% 2.45% 2.79% 2.98% 3.14% 3.28% 3.40% 3.50% 3.58% ENN's IE revenue (RMB mn) 13,537 19,533 26,510 30,226 33,978 37,760 41,568 45,397 49,243 53,101

Gross profit (RMB mn) 2,524.7 3,508.3 4,598.6 5,081.3 5,492.5 5,902.8 6,279.2 6,853.5 7,426.4 8,005.2 Gross profit margin (%) 18.7% 18.0% 17.3% 16.8% 16.2% 15.6% 15.1% 15.1% 15.1% 15.1%

EBIT (RMB mn) 1,807 2,493 3,247 3,540 3,760 3,977 4,159 4,538 4,915 5,297 EBIT Margin 13.4% 12.8% 12.2% 11.7% 11.1% 10.5% 10.0% 10.0% 10.0% 10.0%

Tax rate(%) 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% Depreciation (RMB mn) 671 965 1,304 1,481 1,658 1,835 2,012 2,188 2,364 2,538 Change in w orking capital -738 -1,001 -1,165 -621 -627 -632 -636 -639 -642 -644 CAPEX (RMB mn) -2,400 -2,400 -2,400 -2,400 -2,400 -2,400 -2,400 -2,400 -2,400 -2,400 Free cash flow -1,111 -567 174 1,115 1,451 1,786 2,095 2,552 3,008 3,467

Discount year 1 2 3 4 5 6 7 8 9 10 Discount factor 0.93 0.86 0.80 0.74 0.69 0.64 0.59 0.55 0.51 0.47 Discounted free cash flow (RMB mn) -1,031 -488 139 827 998 1,140 1,241 1,402 1,533 1,639

Terminal value (RMB mn) 61,221 Terminal EV/EBITDA (x) 8.41 Discounted Terminal value (RMB mn) 28,953 Terminal perpetual grow th 2%

WACC Calculations Cost of debt 4.00% Tax rate 25.00% After tax cost of debt 3.00% Cost of equity 9.82% Adjusted beta 0.70 Market risk premium 11.51% Risk free rate 1.76% % of debt financing 30.00% WACC 7.8%

Valuations （RMB mn） Discounted Terminal Value 28,953 Terminal perpetual grow th(%) 2% Terminal EV/EBITDA 8.4 Total discount FCF 7,400 Pan Energy Value 36,353 Discount FCF(% of total) 20.4% Terminal value (% of total) 79.6% IE value per share (RMB) 32.27 IE value per share (HK$) 36.78 Source: CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 49

8 Dec 2020

Operating forecast City gas sales volume to maintain decent growth in 2020-22E ENN realized city gas sales volume growth of 4.0% YoY in 1H20 despite suffering impacts from COVID-19 outbreak and cities lockdown measures in China. Wholesale gas volume also read 6.8% YoY growth in 1H20 on the back of increasing LNG import. Management guided full year gas sales growth to reach above 10% for 2020E, and the key growth driver will still come from ENN’s strategic focus, the industrial clients. For 2020E, we project city gas/wholesale gas sales volume to increase 11.9%/10% respectively, reflecting a strong gas sales volume growth rebound of 19.4%/13.0% YoY in 2H20. For 2021-22E, on the back of strong support from C&I clients as we expect coal to gas conversion measures to continue, we expect ENN’s city gas sales to accelerate to 14.6%/14.1% respectively, while we expect wholesale gas volume growth to stay flat at 10%.

Figure 96: ENN’s overall gas sales volume and Figure 97: ENN’s gas sales composition growth

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

We expect ENN’s residential gas sales volume growth to accelerate in 2020E on the back of 1) 5% average residential gas usage increment brought from impacts of COVID-19, and 2) 11.0% YoY growth in residential accounts number. In 2021- 22E, we expect average residential gas usage to resume normal, and the key growth driver of residential gas volume will be new residential connection. We project residential gas sales volume to expand 16.8%/7.8%/10.2% in 2020-22E, respectively.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 50

8 Dec 2020

Figure 98: ENN’s residential gas sales volume and Figure 99: ENN’s average residential gas YoY change consumption volume and YoY change

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

ENN combined commercial and industrial gas sales volume in its disclosures. For C&I gas sales volume, as we had indicated ENN’s stratigic focus of C&I clients, we expect C&I gas sales volume to maintain rapid growth. In 1H20, due to the impacts of COVID-19, C&I gas sales were dragged slow to 5.7% YoY growth. For 2H20, we expect C&I gas sales growth to rebound, which will bring along a 12% C&I gas volume growth in 2020E. For 2021-22E, as we believe ENN’s C&I business will resume normal, we expect gas sales volume to pick up its previous growth track at 16.9%/15.7% YoY, respectively.

Figure 100: ENN’s C&I gas sales volume and YoY Figure 101: ENN’s Average C&l gas consumption change volume and YoY change

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

For vehicles refueling gas sales, ENN read sales volume decline in 2017-19 as the Company chose to optimize its gas refueling station mix. Vehicles refueling gas sales volume exhibited a sharp decline by 30% during 1H20, and we expect gas sales volume to resume normal in 2H20. We project gas sales volume from the refueling station to decline 10% YoY in 2020E, and we expect the segment to have sales volume to resume normal in 2021-22E. As a supportive business line of ENN facing increasing competition from subsitutional energy such as diesel, hydrogen and electricity, we expect the segment’s performance to remain flat in the future.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 51

8 Dec 2020

Figure 102: ENN’s vehicles refuelling gas sales Figure 103: Average gas volume per LNG/CNG volume and growth station and growth

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Residential connection to range 2.3-2.5mn household in 2020- 22E Management guided down ENN’s residential connection from 2.5mn household in Mar to 2.3mn household during 1H20 results briefing mainly due to impacts brought from the pandamic. As ENN’s penetration rate approaching high to 60.4% by 2019, we expect residential connection growth to slow down gradually, which will likely reflect relatively flat figures in annual residential connection. We project 2020-22E annual residential connection to be 2.30/2.32/2.32mn household, respectively. As for residential connection fee, we expect the figure to stay flat at ~RMB2,500 per household.

For C&I connection, ENN uses daily design capacity as a key indicator to measure C&I gas connection. The Company recorded rapid daily design capacity growth during the past few years, and guided 18mcbm/day new C&I gas connection in 2020E. Since C&I clients are ENN’s strategic focus, we expect the C&I gas connection will likely to maintain rapid pace. Other than new C&I connection, we would also like to point out that, based on daily C&I gas usage, we estimate utilization rate was still below 40% comparing to ENN’s total installed daily C&I capacity, which implies the Company still has significant growth potential from its existing clients.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 52

8 Dec 2020

Figure 104: ENN’s annual residential connection Figure 105: We expect connection fee to stay stable and growth at ~RMB2,500/HH in 2020-22E

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 106: ENN’s annual C&I connection measure Figure 107: Utilization rate of daily design capacity in daily design capacity was low, implying future sales potentials

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 53

8 Dec 2020

Financial analysis Revenue to increase with 14.8% CAGR in 2019-22E With reference to our operating projections, we estimate ENN to have total revenue CAGR of 14.8% in 2019-22E. Revenue growth will be mainly driven by piped gas sales, wholesales gas trading, as well as integrated energy and services. We expect integrated energy will expand its revenue mix from 3.9% in 2019 to 12.4% in 2020E, while revenue mix of piped gas/gas connection/wholesale gas will gradually decline from 57.1%/8.4%/24.7% in 2019 to 54.1%/6.4%/22.4% in 2022E.

Figure 108: Revenue to increase at 14.8% CAGR in Figure 109: Integrated energy’s revenue 2019-22E contribution will expand at rapid pace

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Gross profit to expand with gradually expanding gas dollar margin ENN exhibited slight decline in gross profit margin, from 17.3% to 15.7% in 2017- 18 then rebounded to 16.1% in 2019. We expect ENN’s overall gross profit margin to remain stable as we expect retail gas dollar margin expansion to offset impacts from declining revenue mix from high margin gas connection business. Other than piped gas sales margin expansion, we also expect IE sales to have similar gross profit margin level as piped gas sales, and value added services will serve as high margin business (GPM was 38.3%/55.0% in 2018/19) with increasing revenue contribution. We project ENN’s gross profit to expand from RMB11.3bn in 2019 to RMB13.3/15.7/18.2bn in 2020-22E, with gross profit margin of 17.1%/17.1%/17.2%, respectively.

Operating leverage to improve with increasing gas sales ENN’s major operating expenses include selling and distribution expenses and administrative expenses. During the past few years, ENN had relatively stable selling and distribution costs to total revenue ratio at 1.3-1.4%, while administrative expenses exhibited considerable decline. Looking forward, we expect ENN’s overall operating leverage to increase with increasing gas sales, which will have significant dilution impact to administrative expenses to total revenue ratio.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 54

8 Dec 2020

Figure 110: ENN’s gross profit vs. gross profit Figure 111: ENN’s major expenses to revenue ratio margin showed improving operating leverage

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Share profits to increase while contribution rate to decline ENN had various acquisition and project equity investments in its expansion history. Share profit from associates and joint ventures contributed a significant portions to ENN’s earnings with reference to the Company’s historcal financials. In 2017-19, share profit from associates and JV accounted for 10.4%/12.1%/10.7% respectively to ENN’s pre-tax profit. We expect ENN’s share profit growth from associates and JVs to slow down in 2020E due to COVID-19 impacts. In 2021- 22E, we expect share profit growth pace to resume and project organic growth to restore. As we expect ENN’s consolidated business growth to outpace associates and joint ventures, we believe contribution rate from share profit will decline gradually.

Figure 112: ENN’s share profit from associates and Figure 113: ENN’s total share profit and JVs contribution rate to pre-tax profit

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 55

8 Dec 2020

Stable interests expenses outlook ENN realized positive free cash flow in 2017-19 with annual CAPEX expanded from RMB4.5bn to RMB9.8bn. We expect ENN’s increasing operating cash flow will be enough to cover its future CAPEX for city gas distribution facilities, integrated energy projects as well as project M&A. Therefore, we think ENN has limited intention to raise excessive borrowings, and to maintain an ample borrowing level. In view of ENN’s solid financials in a low interest rate environment, we expect ENN to have average borrowing interest rate decline.

Figure 114: ENN’s interests expenses vs. average Figure 115: ENN’s operating cash flow vs. CAPEX interest rate

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates Note: Interest expenses added back interest capitalization

Net profit CAGR at 16.7% in 2019-22E ENN realized net profit of RMB2,802/2,818/5,670mn in 2017-19 with a earnings CAGR of 42.3%. Stripping out impacts from non-recurring gain and losses and amortization of share option expenses, ENN’s earnings CAGR in 2017-19 was 18.9%. Based on our projection of gas sales volume, margin, annual connection figure and pan-energy business, we expect ENN’s net profit to increase to RMB6,251/ 7,473/ 9,023mn in 2020-22E, reflecting an earnings CAGR of 16.7% in 2019-22E. Stripping out non-recurring assumpts, we estimate core earnings CAGR to be higher at 19.7% in 2019-22E.

Figure 116: ENN’s net profit vs. net profit margin Figure 117: ENN’s core profit vs. core profit growth YoY

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates Note: Sluggish 2018 earnings was mainly dragged by non-cash hedging loss from long-term LNG contract. PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 56

8 Dec 2020

Dupont analysis: increasing assets turnover to sustain high ROE ENN experienced ROE decline from 21.8% to 19.4% in 2017-19. ROE decline was mainly driven by declining leverage while offset by increasing assets turnover. In 2020-22E, we expect ENN to maintain stable debt scale, while overall leverage to follow a graduate declining trend. We expect ENN’s ROE to increase to 20.5%/21.0%/21.4% on the back of increasing assets turnover, while other parameters to stay relatively stable.

Figure 118: DuPont analysis for ENN DuPonts analysis 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E ROE 24.5% 15.1% 14.4% 16.5% 13.2% 21.9% 20.5% 21.0% 21.4% Tax, minority and perpetual bond burden - NI/PBT 0.63 0.51 0.51 0.54 0.50 0.64 0.63 0.63 0.64 Interest burden - PBT/EBIT 1.21 0.88 0.80 0.86 0.80 1.10 1.02 1.02 1.02 Operating income margin - EBIT/Sales 0.13 0.14 0.15 0.12 0.12 0.11 0.12 0.13 0.13 Assets turnover - Sales/Assets 0.68 0.68 0.66 0.82 0.82 0.86 0.88 0.93 0.95 Leverage - Assets/Shareholders' equity 3.56 3.49 3.43 3.49 3.46 3.14 2.93 2.77 2.65 Source: CMBIS estimates

2020E to raise payout ratio to 37%; increasing future payout to boost ROE ENN’s guided payout ratio based on core profit to avoid those non-cash and non- recurring impacts such as hedging gain/loss from long term LNG purchasing contract. ENN’s core profit payout ratio was 25.5%/26.3% in 2017/18, and the figure was raised to 32.0% in 2019. For 2020, management guided 32% core profit payout ratio unchanged, and an additional 5% payout in March 2021 to celebrate the Company’s 20th anniversary. Based on ENN’s cash flow and CAPEX outlook, we think ENN’s operating cash flow will be well enough to cover its ~RMB9bn CAPEX budget. Since ENN is now a subsidiary consolidate to ENN EC, based on ENN EC’s relatively high gearing ratio, we expect ENN to increase dividend payout ratio to satisfy ENN EC’s funding demand. For ENN itself, we also believe increasing dividend payout level will help ENN to boost its overall ROE.

Figure 119: ENN’s ROE & ROA Figure 120: ENN’s dividend & core dividend pay-out ratio

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates Note: Sluggish 2018 earnings was mainly dragged by non-cash hedging loss from long-term LNG contract.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 57

8 Dec 2020

Financial Summary

Income statement Cash flow summary YE Dec 31 (RMB mn) FY18A FY19A FY20E FY21E FY22E YE Dec 31 (RMB mn) FY18A FY19A FY20E FY21E FY22E Revenue 60,698 70,183 78,040 91,638 106,253 Profit before tax 5,601 8,841 9,918 11,850 14,106 Gas connection 5,882 6,932 6,583 6,756 6,742 D & A 1,328 1,784 2,165 2,486 2,796 Sales of piped gas 34,272 40,049 43,526 50,509 57,467 Change in working capital 2,044 2,664 168 1,062 2,911 Whole sale of gas 18,107 18,465 19,296 21,633 23,796 Taxation (1,628) (1,114) (2,286) (2,668) (3,238) Integrated energy 1,005 2,749 5,654 8,720 13,137 Others 949 (485) (1,286) (1,415) (1,556) Value added services 1,432 1,988 2,982 4,020 5,112 Operating cash flow 8,294 11,690 8,678 11,315 15,019

Cost of sales (51,188) (58,918) (64,677) (75,936) (88,005) Capex & investments (6,156) (11,012 (9,763) (9,594) (9,431) Gross profit 9,510 11,265 13,363 15,701 18,249 Others (446) 4,216) - - - Investment cash flow (6,602) (6,796) (9,763) (9,594) (9,431) Other income 949 861 821 874 1,067 Other gains and losses (1,634) 644 14 10 3 Equity raised 2,608 (16) 36 36 36 Selling & distribution costs (790) (976) (1,093) (1,237) (1,381) Change of Debts 1,739 (111) 1,305 850 830 Admin expenses (2,673) (3,099) (3,368) (3,771) (4,160) Dividend paid (952) (1,176) (1,688) (2,322) (2,550) Share results of Assos 275 326 331 369 411 Others 477 556 515 566 623 Share results of JVs 601 547 576 633 694 Financing cash flow (1,774) (5,447) 168 (869) (1,062) Finance costs (637) (727) (726) (728) (776) Net change in cash (82) (553) (918) 852 4,526 Profit before tax 5,601 8,841 9,918 11,850 14,106 Cash at the beginning 7,975 7,923 7,373 6,455 7,307 Taxation (1,783) (1,980) (2,380) (2,963) (3,526) Exchange difference 30 3 - - -

Profit for the year 3,818 6,861 7,537 8,888 10,579 Cash at the end of the year 7,923 7,373 6,455 7,307 11,833 Less: minority interests 871 871 871 871 871 Cash at balance sheet 7,923 7,373 6,455 7,307 11,833 Net profit 2,818 5,670 6,251 7,473 9,023 Core profit 4,471 5,278 6,272 7,498 9,055

Balance sheet Key ratios YE Dec 31 (RMB mn) FY18A FY19A FY20E FY21E FY22E YE Dec 31 FY18A FY19A FY20E FY21E FY22E

Non-current assets 52,375 61,730 69,783 77,261 84,279 Sales mix (%) PPE 31,073 37,955 44,774 51,054 56,808 Gas connection 9.7 9.9 8.4 7.4 6.3 Intangible assets 3,037 4,175 4,058 3,928 3,787 Sales of piped gas 56.5 57.1 55.8 55.1 54.1 Interests in associates 3,049 3,308 3,689 4,108 4,568 Whole sale of gas 29.8 26.3 24.7 23.6 22.4 Interests in JVs 3,620 3,841 4,221 4,625 5,052 Integrated energy 1.7 3.9 7.2 9.5 12.4 Others 11,596 12,451 13,041 13,546 14,064 Value added services 2.4 2.8 3.8 4.4 4.8 Total 100 100 100 100 100 P&L ratios (%) Current assets 21,539 19,515 19,355 21,462 27,592 Gross profit margin 15.7 16.1 17.1 17.1 17.2 Trade and other 8,560 7,492 8,275 8,923 9,897 Operating margin 11.5 11.5 12.5 12.6 13.0 Contractreceivables assets 612 757 691 709 708 Pre-tax margin 9.2 12.6 12.7 12.9 13.3 Amounts due from 2,277 1,797 1,916 2,250 2,609 Net margin 4.6 8.1 8.0 8.2 8.5 Cash & equivalents 7,923 7,373 6,455 7,307 11,833 Effective tax rate 31.8 22.4 24.0 25.0 25.0 Others 2,167 2,096 2,018 2,273 2,546 Balance sheet ratios Current liabilities 33,017 31,288 33,158 35,866 40,365 Current ratio (x) 0.65 0.62 0.58 0.60 0.68 Trade and other payables 7,103 7,635 8,811 10,158 11,887 Quick ratio (x) 0.61 0.59 0.54 0.55 0.64 Contract liabilities 10,49 12,61 12,09 12,55 14,33 Cash ratio (x) 0.24 0.24 0.19 0.20 0.29 Borrowings 11,5610 7,4953 8,3005 4,7006 8,9724 Debtors turnover days 44.0 41.7 36.9 34.2 32.3 Amounts due to 2,837 2,034 2,360 2,713 3,179 Total debt / equity ratio (%) 92.6 76.1 68.9 61.3 53.8 Others 1,026 1,511 1,593 5,739 1,993 Net debt / equity ratio (%) 55.3 45.4 46.9 40.1 25.1 Returns (%) Non-current liabilities 15,343 18,937 19,847 20,970 22,488 ROE 13.2 21.9 20.5 21.0 21.4 Borrowings 8,688 12,100 12,600 13,110 13,608 ROA 3.8 7.0 7.0 7.6 8.1 Contract liabilities 3,240 3,302 3,411 3,542 4,043 Per share Others 3,415 3,535 3,835 4,318 4,837 EPS (RMB) 2.6 5.0 5.6 6.6 8.0 DPS (RMB) 1.04 1.50 2.06 2.26 2.89 Minority Interest 4,169 5,152 5,667 6,232 6,855 BVPS (RMB) 19.0 23.0 27.0 31.6 37.4 Shareholders' equity 21,385 25,868 30,467 35,654 42,163 Total Equity 25,554 31,020 36,134 41,887 49,018 Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 58

8 Dec 2020

Valuation Historical PER ranged from 10.4x – 20.6x. ENN was traded at range of 10.4x – 20.6x forward PER, with an average PER of 15.1x in the past five years. Based on ENN’s historical share price movement, we think valuation is sensitive to 1) short term gas sales volume and earnings growth; 2) gas dollar margin movement; 3) policy adjustments; and 4) corporate governance concerns caused by related transactions. As we discussed in our previous session, we think ENN’s board was well aware of the corporate governance issues after ENN Group’s asset restructure, and we expect more actions will be made to clear doubts for connected transactions and boost investors’ confidence. As a result, we think gas sales growth and dollar margin change will be key factors to alter ENN’s short term valuation.

For longer term valuation outlook, we expect 1) ENN’s gas sales volume to continue beat national average level; and 2) ENN’s own LNG terminal and PipeChina’s opening up of long hual transmission facilities will help sustain ENN’s gas dollar margin; and 3) pan-energy business to contribute rapid revenue and earnings growth. We expect ENN’s share price to increase based on relatively stable PER outlook.

Figure 121: ENN’s 5-yr forward PE band

Gas dollar margin Acquisition Pandamic ENN group's Rebound on strong to be boosted with of ENN Ubiquitous shock assets 9M20 operating Zhoushan LNG Energy Network; and rebound restructure results (HK$/share) terminal and policy shock on connection f ee

155 Range bound up with Gas v olume solid gas v olume and 19.66x Avg+2SD 135 surged with earnings growth coal to gas 17.34x Avg+1SD replcement 115 15.03x Avg PE 95 12.72x Avg-1SD 10.41x Avg-2SD 75 55 35 15

Source: Company data, Bloomberg, CMBIS

Initiate BUY with TP at HK$120 per share We separate ENN’s valuation into two parts, namely 1) Traditional Gas Distribution business and 2) Pan-Energy business. We use DCF valuation to estimate both parts’ value then sum up for overall Company valuation. We estimated Pan-Energy Segment’s value in our previous discussion at HK$36.78 per share. For traditional gas distributing business, stripping free cash flow contribution from Pan-Energy business, we derive traditional gas distribution’s valuation at HK$90.61 per share, already close to ENN’s current valuation. Since Pan-Energy is an emerging business with relatively high uncertainties from market and policy environment, we apply a 20% valuation discount. Adding up both parts, we derive ENN’s valuation at HK$120 per share.

We think market had partially factored in Pan-Energy business value, but the segment is obviously undervalued. We initiate ENN with BUY recommendation. Our target price for ENN is HK$120.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 59

8 Dec 2020

Figure 122: DCF valuation for ENN’s traditional gas distribution business DCF Valuation FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E FY31E Key operating forecasts City gas sales volume (mcbm) 29,157 32,732 36,005 39,606 43,566 47,051 50,815 54,881 59,271 64,013 YoY change (%) 14.0% 12.3% 10.0% 10.0% 10.0% 8.0% 8.0% 8.0% 8.0% 8.0% Wholesales gas volume (mcbm) 9,369 10,306 11,336 12,470 13,717 14,814 15,999 17,279 18,661 20,154 YoY change (%) 10.0% 10.0% 10.0% 10.0% 10.0% 8.0% 8.0% 8.0% 8.0% 8.0% Annual residential connection 2.3 2.3 2.2 2.1 2.0 2.0 1.9 1.8 1.7 1.7 YoY change (%) 0.1% -0.5% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% Accumulated residential customer 27.9 30.2 32.4 34.5 36.6 38.5 40.4 42.2 44.0 45.6

Turnover (HK$ mn) 106,253 122,545 138,885 154,625 169,056 181,791 192,214 199,774 204,035 204,715 Turnover growth (%) 15.9% 15.3% 13.3% 11.3% 9.3% 7.5% 5.7% 3.9% 2.1% 0.3% EBIT (HK$ mn) 14,879 17,339 18,957 20,332 21,385 22,087 22,392 22,274 21,729 20,777 EBIT margin 14.0% 14.1% 13.6% 13.1% 12.6% 12.1% 11.6% 11.1% 10.6% 10.1% Tax rate 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% DD&A - HK$ mn 2,796 3,096 3,514 3,918 4,291 4,621 4,894 5,094 5,211 5,237 CAPEX (HK$ mn) -9,431 -9,474 -9,664 -9,857 -10,054 -10,255 -10,460 -10,669 -10,883 -11,100 Invest in working capital 2,911 1,953 -997 -960 -880 -777 -636 -461 -260 -41 Free cash flow 7,436 8,579 7,071 8,351 9,395 10,154 10,592 10,669 10,365 9,678

IE FCF -1,111 -567 174 1,115 1,451 1,786 2,095 2,552 3,008 3,467 Non IE FCF 8,546 9,146 6,897 7,235 7,944 8,368 8,496 8,117 7,357 6,211

Years 1 2 3 4 5 6 7 8 9 10 Discount factor 0.93 0.86 0.80 0.74 0.69 0.64 0.59 0.55 0.51 0.47 Discount free cash flow 7,930 7,874 5,509 5,363 5,463 5,339 5,030 4,459 3,750 2,937 Terminal value 115,905 Terminal perpetual growth 2% Terminal EV/EBITDA(excl IE) 6.38

Valuations （HK$ mn） WACC Calculations Terminal value 115,905 Cost of debt 4.0% Terminal perpetual growth 2.0% Tax rate 25.0% Terminal EV/EBITDA 6.38 After tax cost of debt 3.0% Total discount FCF 50,717 Cost of equity 9.8% Discount terminal value 59,077 Adjusted beta 70.0% Firm value 109,793 Market risk premium 11.5% Discount FCF(% of total) 53.8% Risk free rate 1.8% Terminal value (% of total) 46.2% % of debt financing 30.0% Add: Cash & cash equivalent 6,431 WACC 7.8% Less: Debt 21,000 Non-controlling interest 5,667 Equity Value - (RMB, mn) 89,558 Number of shares 1,126 Share fair value (RMB) 79.50 Share fair value (HK$) 90.61

2020E PER 14.32 2021E PER 11.99 Source: CMBIS estimates

Figure 123: SOTP value of ENN SOTP Valuation Traditional business value - RMB 79.50 IE value @ 20% discount - RMB 25.82 ENN’s Total value 105.32 FX rate HK/RMB 0.88 Target price- HK$ 120.0 Source: CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 60

8 Dec 2020

Risk factors Policy risks ENN has high business exposure to industrial and commercial customers. Currently, ENN’s gas distribution business is protected by local government’s concession contracts. As China aims at liberating gas distribution market, however, ENN’s industrial gas distribution may face more challenges from direct supply for large users and market competition. Guangdong DRC allowed gas users with more than 10mcbm annual consumption to participate in gas direct sales in Sep 2020, while Zhejiang and Shandong province are set to follow with higher consumption bar at 20 and 50mcbm usage volume per year. In the future, if those policy regulations are relaxed, we expect ENN’s industrial gas distribution to face fierce competition.

Corporate governance ENN’s controlling shareholder had just finished shareholding restructuring, which turned ENN a secondary holding Company under ENN Group. After the restructuring, ENN Group’s investments in the natural gas supply chain will be allocated to 1) ENN for downstream distribution business, and 2) ENN EC, ENN’s new parent co., for mid-up stream businesses. ENN may encounter increasing connected transactions with both ENN EC and ENN Group for LNG trading and LNG terminal services usage. We think market may have concerns for the corporate governance related issues in those connected transactions, and the core concern is how LNG trading profit is distributed among the ENN Group’s natural gas supply chain.

Gas costs hike Gas price would be another key risk factor, given that our projection is based on relative stable gas dollar margin. A sudden price hike may lead to costs pass- through delay or squeezing gas dollar margin, which will lead to negative earnings impacts.

Gas shortage Gas shortage will limit ENN’s gas sales volume growth, on one hand, and lead to gas sales dollar margin squeeze due to higher purchasing costs and volume from LNG supply, on the other hand. In 2017/18 winter, China suffered from gas shortage due to too aggressive CTG conversion pace, which hit market confidence on ENN as well as city gas distributors.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 61

8 Dec 2020

CMB International Securities | Equity Research | Company Update

Tian Lun Gas (1600 HK)

BUY (Maintain) Accelerating township connection from 2021E Target Price HK$8.31 (Previous TP HK$7.45) TLG, originally a small regional gas distributor in Henan Province, had explored Up/Downside +29.8% a successful path to realize business breakthrough via strategic project Current Price HK$6.40 acquisitions and township and village gas connection projects. Dragged by China Gas Distributor pandemic impacts, we expect earnings growth to slow down to 8.0% in 2020E. Looking ahead in 2021-22E, on the back of accelerating township and village connection and new project M&A contribution, we expect earnings growth to Robin Xiao accelerate. We expect TLG to have earnings CARG of 15.2% in 2019-22E. (852) 3900 0849 Trading at only 5.2x forward P/E, we think TLG is very attractive. Reiterate BUY [email protected] with TP lifted 11.5% to HK$8.31. Stock Data  Strong rebound in gas sales volume. TLG recorded 1H20 gas sales volume Mkt Cap (HK$ mn) 6,423 decline by 3.9% YoY due to pandemic impacts. Mgmt. disclosed retail gas Avg 3 mths t/o (HK$ mn) 7.11 volume had strong rebound in 3Q20 at ~15% YoY, led by residential gas 52w High/Low (HK$) 7.25/4.53 consumption growth of ~16-17% while C&I gas also had considerable Total Issued Shares (mn) 1,004 increment. In 4Q20, we expect good performance to continue with accelerating Source: Bloomberg

gas sales. The Company guided 8-10% retail gas volume growth in 2020E. On Shareholding Structure the back of incremental residential and C&I customers, we expect TLG to realize Tianlun Group 65.5% retail gas volume growth guidance at guidance high end. IFC Assets Mgmt. 9.2% Free float 25.3%  Gas dollar margin to maintain stable. Supported by optimistic gas supply Source: HKEx outlook, TLG expected winter gas price hike at lower range this year than last year, which is likely to sustain stable gas dollar margin as in 1H20 Share Performance (RMB0.56/cbm), or seeing a slight increment in 2H20E. Absolute Relative 1-mth -1.4% -3.6%  Residential connection on track. TLG guided 200-250k households for city 3-mth 16.6% 9.2% residential connection and 600k households for township gas projects. At 6-mth 11.6% 5.1% high-end estimates, TLG completed 44.6% of its annual connection target, 12-mth -4.3% -3.6% despite impacts from pandemic lockdown as at Jun 2020. We expect TLG to Source: Bloomberg meet or beat its residential connection target with ease.  Township connection is likely to accelerate from 2021E. TLG 12-mth Price Performance (RMB) accumulated successful township gas project experience in Henan and 1600.HK HSI.HI (rebased) expanding its business model to Gansu province. Gansu had formed an 8.0 investment platform called Hualong Nengchuang (华陇能创) to accelerate 7.0 village and township gas development, and selected TLG as a key partner. 6.0 We expect TLG to accelerate township project development from 2021E in 5.0 both Henan and Gansu province. 4.0 3.0  Maintain BUY and lift TP to HK$8.31. Based on business update and more 2.0 conservative assumptions on both gas sales and user connections, we trim 1.0 0.0 2020E earnings by 5.4% to RMB859mn. We expect earnings growth to Dec-19 Mar-20 Jun-20 Sep-20 accelerate at 23.3%/13.8% YoY in 2021/22E to RMB1,059/1,205mn respectively. Our SOTP based TP is rolled over to 2021E and lifted by 11.5% Source: Wind to HK$8.31. Our TP reflects only 8.5x/6.9x 2020/21E PER. Auditor: PwC Earnings Summary (YE 31 Dec) FY18A FY19A FY20E FY21E FY22E Related Reports 1. Tian Lun Gas (1600 HK) –“Gas Revenue (RMB mn) 5,113 6,549 6,802 7,832 8,879 sales resumed growing pace” – 24 Net income (RMB mn) 569 789 859 1,059 1,206 Jun 2020 EPS (RMB) 0.58 0.80 0.86 1.06 1.21 2. Tian Lun Gas (1600 HK) – “FY19 YoY growth (%) 47.6 38.4 8.0 23.3 13.8 earnings miss; turning to stable Consensus EPS (RMB) N/A N/A 0.885 1.009 1.102 growth” – 2 Apr 2020 P/E (x) 9.8 7.1 6.5 5.3 4.7 3. ‘Tian Lun Gas (1600 HK) - 1H19 earnings beat; growth to sustain in P/B (x) 1.71 1.44 1.25 1.06 0.91 2H19” - 23 Aug 2019 Yield (%) 2.7 4.2 4.6 5.7 6.4 ROE (%) 17.5 20.5 19.1 20.1 19.6

Net gearing (%) 115.7 91.4 77.9 70.6 59.2 Source: Company data, Bloomberg, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 62 MORE REPORTS FROM BLOOMBERG: RESP CMBR AND http://www.cmbi.com.hk 8 Dec 2020

Focus chats

Figure 1: TLG’s total gas sales volume Figure 2: TLG’s gas sales mix

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 3: TLG’s annual residential user connection and Figure 4: TLG’s annual C&I user connection and acquisition acquisition

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 5: Net profit vs. net profit margin Figure 6: ROE vs. ROA

Source: Company, CMBIS estimates Source: Company, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 63

8 Dec 2020

Valuation

We adopt P/E multiple based SOTP method for TLG’s overall valuation. We estimate TLG’s city gas business and township connection constructions business will contribute RMB 604mn/456mn earnings to TLG in 2021E. Based on 8.0x/5.4x PER for city gas/township connection businesses respectively, our TP for TLG is HK$8.31, reflecting 8.5x/6.9x 2020/21E PER. Trading at only 6.7x/5.4x with 4.5/5.5% yield in 2020/21E, we think TLG is significantly undervalued.

Figure 7: Assumptions and earnings revision 3Yr Model Old New Change(%) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Key assumptions Total gas sales volume (mcbm) 1,681 1,982 2,267 1,639 1,919 2,193 -2.5% -3.2% -3.3% Residential 385 463 535 366 424 488 -4.8% -8.3% -8.8% C&I 597 781 951 553 734 901 -7.4% -6.0% -5.2% Transportation 169 172 176 169 172 176 0.0% 0.0% 0.0% Wholesale 420 445 473 442 467 495 5.1% 4.9% 4.8% Long-haul pipeline transmission (mcbm) 800 991 1,077 798 995 1,091 -0.3% 0.3% 1.3%

Gas connection & construction services (Households) Annual residential connection 287,005 309,966 328,564 260,914 287,005 315,706 -9.1% -7.4% -3.9% Annual C&I connection 3,850 3,780 3,780 3,850 3,780 3,780 0.0% 0.0% 0.0% Annual Coal to gas conversion 600,000 600,000 600,000 580,000 650,000 700,000 -3.3% 8.3% 16.7%

Financials estimation Revenue (Rmb mn) 7,032 7,919 8,830 6,802 7,832 8,879 -3.3% -1.1% 0.6% Net Income (Rmb mn) 908 1,062 1,165 859 1,059 1,206 -5.4% -0.2% 3.5% EPS (Rmb) 0.91 1.06 1.17 0.86 1.06 1.21 -5.4% -0.2% 3.5% Source: CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 64

8 Dec 2020

Financial Summary

Income statement Cash flow summary YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E Revenue 5,113 6,549 6,802 7,832 8,879 Pre -tax profit 865 1,127 1,251 1,528 1,748 Gas Sales 2,261 2,874 3,215 3,829 4,467 Depreciation and amortization 238 275 299 344 392 Transmission pipeline 909 1,188 1,045 1,104 1,168 Change in working capital (641) (197) 285 (204) (60) Connection fee 679 779 776 842 917 Taxation (107) (151) (324) (331) (387) CTG conversion 1,043 1,591 1,566 1,755 1,890 Others 108 (82) 122 (14) (14) Others 137 132 199 301 437 Net cash from operation 463 971 1,633 1,324 1,680 activities Costs of sales (3,685) (4,845) (5,037) (5,780) (6,550) Capex & investments (1,318) (259) (1,357) (1,204) (1,302) Gross profit 1,428 1,704 1,764 2,052 2,329 Others 277 9 - - - Net cash from investments (1,041) (250) (1,357) (1,204) (1,302) OPEX & other gains (338) (269) (303) (292) (332) Distribution expenses (41) (58) (60) (69) (79) Equity raised (18) 22 0 (0) (0) Administration expenses (167) (196) (201) (231) (262) Change of Debts 1,551 (226) 548 592 639 Other income 9 4 5 5 5 Dividend paid (74) (191) (245) (287) (339) Other gains/loss, net (139) (19) (47) 4 4 Others - - - - - EBIT 1,091 1,435 1,462 1,760 1,997 Net cash from financing 998 (451) 304 304 300 activities Finance income 80 25 31 38 46 Net change in cash 420 271 580 424 677 Finance expenses (261) (291) (273) (304) (334) Cash at the beginning of the year 678 1,076 1,350 1,930 2,354 Finance expenses, net (181) (266) (242) (267) (287) Exchange difference (22) 3 - - - Exceptional - - - - - Cash at the end of the year 1,076 1,350 1,930 2,354 3,031 Pre-tax profit 865 1,127 1,251 1,528 1,748 Cash at balance sheet 1,076 1,350 1,930 2,354 3,031 Income tax (264) (314) (366) (436) (505) Less: Minority interests 31 24 27 33 37 Net profit 569 789 859 1,059 1,206

Balance sheet Key ratios YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E YE 31 Dec FY18A FY19A FY20E FY21E FY22E Non-current assets 7,902 8,041 9,143 10,031 10,948 Sales mix (%) Lease prepayments 223 - - - - Gas Sales 44.2 43.9 47.3 48.9 50.3 PPE 2,679 2,850 3,648 4,401 5,207 Transmission pipeline 17.8 18.1 15.4 14.1 13.1 Intangible assets 3,787 3,875 3,953 4,027 4,094 Connection fee 13.3 11.9 11.4 10.8 10.3 Investments 857 806 989 1,024 1,063 CTG conversion 20.4 24.3 23.0 22.4 21.3 Other non-current assets 356 509 552 579 584 Others 2.7 2.0 2.9 3.8 4.9 Total 98.4 100.2 100.0 100.0 100.0 Current assets 3,532 3,898 4,209 4,998 5,913 P&L ratios (%) Trade and other receivables 1,462 1,548 1,188 1,519 1,722 Gross profit margin 27.9 26.0 25.9 26.2 26.2 Financial assets at fair value 305 51 51 51 51 Operating margin 21.3 21.9 21.5 22.5 22.5 Cash and cash equivalents 1,076 1,350 1,930 2,354 3,031 Pre-tax margin 16.9 17.2 18.4 19.5 19.7 Other current assets 689 950 1,041 1,074 1,109 Net margin 11.1 12.0 12.6 13.5 13.6 Effective tax rate 30.6 27.9 29.2 28.5 28.9 Current liabilities 3,467 3,313 3,467 3,835 4,217 Balance sheet ratios Trade and other payables 1,245 1,202 1,259 1,387 1,506 Current ratio (x) 1.0 1.2 1.2 1.3 1.4 Advances from customers 375 469 454 499 549 Quick ratio (x) 0.5 0.5 0.6 8.7 0.8 Borrowings 1,608 1,312 1,435 1,583 1,743 Debtors turnover days 76.0 83.9 73.4 63.1 66.6 Others 240 329 319 365 419 Total debt / equity ratio (%) 152.9 124.0 118.9 112.4 106.6 Net debt / equity ratio (%) 115.7 91.4 77.9 70.6 59.2 Non-current liabilities 4,423 4,439 5,057 5,561 6,107 Returns (%) Borrowings 3,810 3,880 4,306 4,749 5,229 ROE 17.5 20.5 19.1 20.1 19.6 Other payables 137 - 138 138 138 ROA 5.0 6.6 6.4 7.0 7.2 Deferred income 475 547 601 661 727 Per share Deferred income tax liabilities 1 12 12 13 13 EPS (RMB) 0.58 0.80 0.86 1.06 1.21 DPS (RMB) 0.15 0.23 0.26 0.32 0.36 Total Equity 3,544 4,187 4,828 5,633 6,537 BVPS (RMB) 3.28 3.89 4.51 5.28 6.15 Minority Interest 294 297 323 356 393 Shareholders' equity 3,250 3,891 4,505 5,277 6,144 Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 65

8 Dec 2020

CMB International Securities | Equity Research | Company Initiation

China Resource Gas (1193 HK)

Quality play on projects and cash flow HOLD (Initiation)

Target Price HK$42.0 China Resource Gas (CRG) has the best project quality among the top 3 gas Up/Downside +9.9% distributors in China. Supported by CRG’s SOE background and parent company Current Price HK$38.2 CR Holding’s resources, CRG has edges in participation of large scale equity reform projects such as Ningbo and Taiyuan which serve as a highlight in 2020/21E. In 2020E, however, we project CRG’s operations to suffer drag from COVID-19, especially from commercial gas sales and residential connections. China Gas Distribution Sector

 Best project quality. CRG’s projects covered major population centers in Robin Xiao central and southeastern developed areas, where densely populated with (852) 3900 0849 mature industrial and commercial businesses. We think CRG has the best [email protected] project quality among top 3 peers, given its 1) largest population coverage; 2) highest average project gas sales volume; and 3) largest proportion of gas sales in gross profit. Stock Data Mkt Cap (HK$ mn) 88,395  SOE background and CR Holding’s support. We believe SOE background Avg 3 mths t/o (HK$ mn) 101.8 helps shield CRG from restrictions in local gas distributing SOEs’ equity 52w High/Low (HK$) 44.6/32.1 Total Issued Shares (mn) 2,314 reforms, and CR Holding’s diversified business also helps CRG in obtaining Source: Bloomberg new projects. Shareholding Structure  Outstanding cash flow management. We believe market has high CR Company Ltd 61.5% recognition on CRG’s cash flow management. CRG recorded significantly The Capital Group 9.80% higher operating cash inflow than investment cash outflow in the past few Free float 28.8% years. We think the Company will have quite ample space to boost gearing Source: HKEx level as well as dividend payout ratio in order to adjust capital structure to a more optimized level, and to satisfy shareholders’ demand for dividend yield. Share Performance Absolute Relative  Key M&A projects will be highlights in 2020/21E. CRG seized major 1-mth 7.2% 4.7% population centers for gas distributing projects such as Zhengzhou, Chongqing, 3-mth 5.8% -0.9% 6-mth -7.1% -12.5% Wuhan and Chengdu. In 2019, CRG announced to have another two iconic project 12-mth -10.1% -9.5% M&As in Ningbo and Taiyuan. We estimate both projects together will contribute Source: Bloomberg 5.2-5.7% gas volume growth versus CRG’s gas sales volume in FY19. 12-mth Price Performance  Net profit CAGR at 10.1% in FY19-22E. We expect net profit to suffer a slight (RMB) drag of 7.6% due to slower gas sales growth and a decline in connection in 1193.HK HSI.HI (rebased) 50.0 2020, and earnings to resume growth to HK$5,691/6,728mn in FY21/22E. 45.0 40.0  Initiate at HOLD with a TP of HK$42.00. We derive CRG’s TP based on DCF 35.0 valuation at HK$42.00. Our TP reflects 20.0x/16.4x PER in FY20/21E. We 30.0 25.0 think boosting dividend payout would be a potential re-rating catalyst. 20.0 15.0  Risk factors: policy risks, project consolidation risks, gas costs hike, and gas 10.0 shortage. 5.0 0.0 Earnings Summary Dec-19 Mar-20 Jun-20 Sep-20

(YE 31 Dec) FY18A FY19A FY20E FY21E FY22E Source: Bloomberg Turnover (HK$ mn) 51,165 55,835 56,186 62,904 70,661 YoY growth (%) 28.43 9.13 0.63 11.96 12.33 Auditor: Ernst & Young Net Income (HK$ mn) 4,450 5,043 4,661 5,691 6,728 EPS (HK$) 2.04 2.32 2.10 2.56 3.03 EPS CHG (%) 21.8 13.3 -9.5 22.1 18.2 Consensus EPS (HK$) N/A N/A 2.23 2.53 2.82 PE (x) 18.7 16.5 18.2 14.9 12.6 PB (x) 3.5 3.2 2.7 2.42 2.2 Yield (%) 2.0 2.3 2.1 2.6 3.0 ROE (%) 18.9 19.2 14.9 16.2 17.1 Net gearing (%) Net Cash Net Cash Net Cash Net Cash Net Cash Source: Company data, Bloomberg, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE MORE REPORTS FROM BLOOMBERG: RESP CMBR OR http://www.cmbi.com.hk 66 8 Dec 2020

Focus Chart

Figure 124: CRG’s projects covering densely Figure 125: CRG had the largest retail gas sales populated areas volume among peers

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 126: Overall gas sales volume and growth Figure 127: CRG’s residential connection

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 128: CRG’s net profit vs. net profit margin Figure 129: CRG’s ROE vs. ROA

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 67

8 Dec 2020

Investment Thesis The largest city gas distribitor in China China Resource Gas Group Limited (hereinafter short for “CRG”), is a leading state owned gas utilities group in China. The Company principally engaged in downstream city gas distribution business including piped natural gas distribution and natural gas refilling stations operation. Supported by parent co., China Resources (Holdings) Company Limited, one the largest state-owned conglomerates in China, CRG has been able to seize gas distribution concession projects in densely populated and economically developed cities. By end-2019, CRG had 251 city gas projects, 359 CNG/LNG gas refilling stations, 37.65mn residential household customers, 293.86k industrial and commercial gas users, and covering 264mn population.

Expansion history: project M&A was one of the key growth drivers Looking back at CRG’s development history since the Company started business transformation to city gas distribution from 2008, project M&A has always been one of the key themes throughout CRG’s development path. We divide CGR’s development into three phases：

 In 2008 - 2012, the Company acquired 46 projects from parent co., CR Holdings, which helped CRG lay solid foundation for its gas distributing business. The Company also made several extensive asset acquisitions in 2011 and 2012 through acquiring Flemming Limited and AEI China to enrich its gas distribution territory.  In 2013 - 2018, after the rapid expansion through M&A period, the overall picture of urban gas competition is set. We believe CRG’s growth focus on green field project investments, increasing equity stakes in existing projects, boosting organic growth from existing projects, and participating in limited SOE reform opportunities such as Jinran China Resourc Gas Co., Ltd (Tianjin project).  From 2019 onwards, as policy tightened control on investment return from gas connection fee, we think it curbs profitability of some local gas distributors. A new round of gas distributing SOE reformation is emerging, as a result, and we think CRG is at the best position to harvest SOE reform project opportunities supported by CRH’s all-round services package for city development.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 68

8 Dec 2020

Figure 130: CRG’s development history can be divided into 3 phases

Source: CMBIS

Figure 131: CRG’s project number and annual project Figure 132: CRG’s population coverage expanded at number growth rapid pace

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates Note: CRG didn’t disclose population coverage figure before 2013

Best project quality among top 3 gas distributors CRG has seized the best natural gas distributing projects in China, in our view. Within CRG’s project coverage territory of 252 gas distributing projects, the Company had projects in 3 municipalities, 14 provincial capital cities, 74 prefecture-level cities, covering 264mn population in China by 1H20. We think CRG has the best project quality comparing among top 3 gas distributing peers, given its 1) largest population coverage; 2) highest average project gas sales volume; and 3) largest proportion of gas sales in gross profit. We believe CRG’s superior project quality was mainly source from location advantages, as the Company’s projects covered major population centers in central and southeastern developed areas, where densely populated with mature industrial and commercial business.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 69

8 Dec 2020

Figure 133: A snap shot of CRG’s project portfolio by 1H20

Source: Company data, CMBIS

Figure 134: Piped gas sales accounted for 48% of Figure 135: Average project population density CRG’s sum of segment results in 2019 indicated CRG’s projects covered densely populated areas

Source: Company data, CMBIS Source: Company data, CMBIS estimates Note: CRG didn’t disclose the figure before 2013 CGH’s data was based on financial years ended by 31 Mar

Figure 136: CRG has the largest retail gas sales Figure 137: CRG was leading in average project gas volume among leading peers sales volume

Source: Company data, CMBIS Source: Company data, CMBIS estimates Note: CRG didn’t disclose the figure before 2013 CGH’s data was based on financial years ended by 31 Mar

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 70

8 Dec 2020

Competitive Edges: SOE background and CR Holding’s support We think CRG’s SOE background and its coordinated development with CR Holding’s other subsidiaries are key competitive edges in its development path. SOE background helps shield CRG from restrictions in many local gas distributing SOEs’ equity reforms. For green field gas distributing project’s concession rights biddings, CRG can also leverage CR Holding’s diversified business advantages, which we think would be attractive to local government as potential bundle in package deals. Over years of business operation, CRG had established brand recognition for providing stable and safety gas supply and competitive customer services, shaping one of the key pieces in CR Holding’s energy services business. We think CRG’s superior project quality would be a good demonstration of its competitive edges.

Figure 138: We think SOE background, CR holding Figure 139: CRG’ mission and vision statement supports, and competitive services constitute CRG’s competitive edges.

Source: Company data

Source: CMBIS

Figure 140: China Resources Holdings had developed various brands covering consumer products, healthcare, urban construction and operation, energy services, and technology and finance businesses

Source: CR Holdings, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 71

8 Dec 2020

Key M&A projects will be highlights in 2020/21E During CRG’s expansion history, the Company seized major population centers for gas distributing projects such as Zhengzhou, Chongqing, Wuhan and Chengdu. Those projects were proved to have key contributions to CRG’s earnings performance. In 2019, CRG announced to have another two iconic project M&As in Ningbo and Taiyuan City. Ningbo is the vice-provincial city with developed commercial and industrial businesses, while Taiyuan is the capital city of Shanxi province turning to energy transformation from coal to gas. CRG entered into a co-operation agreement with Ningbo Xingguang Gas Group and Shanxi Gas group respectively in Dec and Oct 2019. Both projects will be the most significant SOE reform projects in terms of size, quality and scale in the recent years. We estimate both projects together will contribute 5.2-5.7% gas volume growth comparing to CRG’s gas sales volume in FY19, and we believe the growth pace will depend on M&A execution pace of both projects.

Ningbo Xingguang Gas Project CRG signed a JV co-operation agreement with Ningbo Government and Xingguang Gas on 12 Dec 2019. Once the JV is formed, CRG will hold 48.1% shares. According to CRG’s disclosure, Ningbo Xingguang has 1) more than 810 thousands natural gas customers, 2) more than 500 thousands bottled LPG customers, 3) annual natural gas sales volume of 800mcbm, 4) LNG sales of 84 thousands tonnes, and 5) a net profit level of RMB160mn per year. We estimate Ningbo project will contribute ~2.9% natural gas sales volume growth (attributable 1.37%) based on FY19 gas sales volume to CRG, and contribute at least 1.6% growth to CRG’s bottom line.

Taiyuan Gas project CRG entered co-operation agreement with Shanxi Gas Group on 22 Oct 2019 to subscribe new shares of Taiyuan Natural Gas Co., Ltd (Taiyuan NGC). At current stage, CRG didn’t disclose the target share holdings on Taiyuan NGC. The agreement was established under the backdrop of reorganization of the Shanxi Gas Group, however, we infer CRG will participate more gas distributing project equity reform in Shanxi as the province is pursuing a “Gasifying Shanxi Strategy” for its energy transformation path. For Taiyuan Gas, the target company realized natural gas/coke oven gas sales volume of 631mcbm/153mcbm in 2019, and had accumulated 1.27mn natural gas users and 36.4 thousand coke oven gas customers by 2019.

Figure 141: Key statistics for Ningbo and Taiyuan Project Ningbo Project Taiyuan Project Registed capital - RMB mn 1,600 Natural gas sales volume in 2019 - mcbm 631 Total assets - RMB mn 4,009 2020 sales target - mcbm 660 Piped gas users - k HH 700 Natural gas users - k HH 1,268 Bottled gas users - k HH 55 Annual natural gas sales volume - mcbm 800 Coke oven gas sales volume - mcbm 153 LNG sales volume - k tonnes 80 Coke oven gas users - k HH 36 Revenue - RMB mn >3,000 Net profit - RMB mn 160 Winter heating gas volume in Taiyuan - mcbm >500 CRG's shareholding 48.10% Source: Company data, Taiyuan Gas Company, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 72

8 Dec 2020

Outstanding cash flow management CRG has the best cash flow performance among the leading three gas distributors, and we believe market also has high recognition on its cash flow management. Looking back to the past few years, the Company recorded significantly higher operating cash inflow than investment cash outflow, except 2012-13 when the Company had quite sizable CAPEX for project acquisitions. We think CRG’s cash flow performance was another proof of its superior project quality, as the Company’s growth from operating cash flow was mainly source from organic development from previous project acquisition, which required limited fixed asset investment during the following years and took up less working capital.

To zoom in further, in terms of working capital change in 2012-2019, we observed CRG had 1) limited increment in trade and other receivables as well as amount due to customers and contract assets; and 2) quite considerable increment in trade and other payables as well as contract liabilities and amount due to customers in relation to connection business. Both factors had contributed to CRG’s well-controlled working capital movement, and demonstrated CRG’s outstanding cash flow management, in our view. We think CRG upheld prudent revenue recognition principles while taking strict measures in requiring customer advance payment for gas connection business was the key reason for good cash flow control. Looking ahead, as we expect CRG’s connection pace to slow down, we think 1) CRG’s room for further operating cash flow expansion will be limited, but 2) we expect CRG’s operating cash flow to remain steadily high.

Figure 142: CRG’ operating cash flow exhibited Figure 143: We sum up key items changes in current steady growth along with earnings growth in the assets and liabilities, and we found quite significant past few years contribution from working capital to CRG’s operating cash flow

Source: Company data, CMBIS Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 73

8 Dec 2020

Figure 144: CRG’s cash outflow for investments was Figure 145: CRG’s cash flow from financing: lower than operating cash inflow in 2014-19 backed by strong cash flow, CRG was able to pay down debts in the past few years

Source: Company data, CMBIS Source: Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 74

8 Dec 2020

Operating forecasts Gas sales volume to slowdown in 2020E, but reaccelerate in 2021/22E CRG’s gas sales suffered quite severe impacts due to COVID-19 outbreak during 1H20. Commercial gas sales volume is likely to read a YoY decline, in our view, as CRG has high commercial gas sales exposures in several population centers where catering services were largely curtailed during city lockdown periods. We project overall city gas sales volume growth to slow from double digit growth in previous several years to 6.8% in 2020E, and then resume to 10.3%/13.9% in 2021/22E. We expect overall gas sales volume to increase to 29.9/33.0/37.6bcm in 2020-22E, respectively.

Figure 146: Overall gas sales volume and growth Figure 147: CRG’s gas sales composition

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

We expect residential gas sales volume growth to accelerate in 2020E on the back of 1) 5% of average residential gas consumption growth with higher dine-in activities, and 2) residential account numbers to increase 7.9% YoY at 2.97mn household in 2020E. For 2021E, as we expect city residents to resume their dining activities outside, we project residential gas consumption to resume normal. We assume average residential gas consumption to expand at 1% YoY from 2022E. We predict residential gas sales to increase 13.3%/2.6%/8.6% YoY to 7,155/7,341/7,970mbcm in 2020-22E.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 75

8 Dec 2020

Figure 148: CRG’s residential gas sales volume and Figure 149: CRG’s average residential gas YoY change consumption volume and YoY change

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

We predict commercial gas sales volume to decline 0.6% YoY to 6,094mcbm due to a drag from average gas consumption decline by 8.0% YoY in 2020E. In 2021- 22E, as we assume commercial accounts to increase 10% in each year, and average commercial gas account’s consumption volume to expand by 6.2% and 5.0%, we predict commercial gas sales volume to grow to 7,118/8,221mcbm, implying commercial gas sales growth of 13.6%/16.3% YoY.

Figure 150: CRG’s commercial gas sales volume Figure 151: CRG’s average commercial gas and YoY change consumption volume and YoY change

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

CRG recorded rapid industrial gas sales volume growth in 2017-19, supported by industrial coal to gas replacement measures (replacing coal boilers to gas boilers). We think COVID-19’s impact to industrial gas sales growth would be mild in 2020E. We estimate industrial gas sales volume growth to be 7.6% in 2020E, and the growth will accelerate again in 2021/22E at 12.2/16.7% YoY. We predict industrial gas sales volume to be 15,025/16,864/19,672mcbm in 2020-22E, respectively.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 76

8 Dec 2020

Figure 152: CRG’s industrial gas sales volume and Figure 153: CRG’s average industrial gas YoY change consumption volume per gas account and YoY change

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

For vehicle gas(LNG/CNG) sales volume, other than sharp drop of 16.1% to 1,596mcbm in 2019, CRG maintained positive sales volume growth in previous few years. We expect CRG’s LNG and CNG sales volume to stay relatively flat with mild growth of 2.4% YoY in 2020-2022E.

Figure 154: CRG’s vehicle gas (LNG/CNG) sales Figure 155: Average gas volume per LNG/CNG volume and growth station and growth

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 77

8 Dec 2020

Residential connection to decline 9.2% in 2020E, and stay stable at ~3.2mn household from 2021E Gas connection played an important role in CRG’s operating history. The segment constituted 44.5% of CRG’s sum of segment profit in 2019. CRG’s residential gas penetration rate was lower than peers such as ENN (2688 HK) and CGH (384 HK), since its projects covered the most developed areas with relatively old gas distributing facilities. We think city renovation with new residential housing project development will gradually boost the gas connection potential in CRG’s service covering areas.

In 1H20, gas connection suffered a drag as gas connecting engineering and construction activities were ceased during city lock down period. Management turned annual residential connection target conservative to 2.8-3.0mn household in 2020E, in view of various uncertainties due to impacts from COVID-19. In 2020, we expect residential connection number to decline 9.2% YoY to 2.97mn. We think annual residential connection to resume above 3.2mn households in 2021E and maintain relatively stable above 3.2mn household thereafter.

Figure 156: CRG’s annual residential connection Figure 157: We expect connection fee to stay stable and growth at RMB2,710/HH in 2020-22E

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 78

8 Dec 2020

Financial analysis

Piped gas sales to expand in sales mix Based on our operating assumptions, we estimate CRG’s total revenue to expand at 8.2% CAGR in 2019-22E mainly driven by piped gas sales. In terms of revenue composition, as gas connection contribution stays flat in absolute amount, we expect piped gas sales to increase gradually in overall sales mix from 72.4% in 2019 to 76.5% in 2022E.

Figure 158: Revenue to increase with 8.2% CAGR in Figure 159: Piped gas sales to expand in revenue 2019-22E mix

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Gross profit to increase with a CAGR of 9.3% in 2019-22E We estimate CGR’s gross profit to decline slightly to HK$13.8bn in 2020E, while gross profit margin to decline 0.3ppt from 24.9% in 2019 to 24.6% in 2020E due to a drag from impacts brought by COVID-19. In 2021-22E, we expect gross profit margin to recover gradually to 25.6% and 25.8% on the back of higher contribution from high margin gas connection. We project gross profit to increase to HK$16.1/18.2bn in 2021/22E.

Increasing operating leverage Other than natural gas purchasing costs and depreciation, CRG’s major expenses include selling and distribution costs and administrative expenses. With reference to CRG’s financial performance in the past few years, operating leverage was increasing as both expenses to revenue ratio exhibited steady decline. We think CRG’s successful consolidation of project M&A and boosting project organic growth was the key to increase operating leverage. Looking forward, we expect both expenses to revenue ratio to follow declining trading as operating leverage further improves.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 79

8 Dec 2020

Figure 160: CRG’s gross profit vs. gross profit Figure 161: CRG’s major expenses to revenue ratio margin showed improving operating leverage

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Net profit CARR at 10.1% in 2019-22E CRG’s net profit increased from HK$3,654mn to HK$5,043mn in 2017-19 with a CAGR of 17.5%. Based on our assumptions and estimates, we expect net profit to suffer a slight drag of 7.6% due to slower gas sales growth and a decline in connection number in 2020. We expect earnings growth to accelerate in 2021/22E to HK$5,691mn and HK$6,728mn respectively, as gas sales business as well as connection turn normal. We estimate 2019-22E earnings CAGR to be 10.1%, and net margin to stay relatively stable at ~9%.

Figure 162: CRG’s net profit vs. net profit margin Figure 163: CRG’s net profit growth

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 80

8 Dec 2020

Dupont analysis: improving operating margin will be key ROE growth driver CRG’s ROE ranged from 16.6% to 18.8% in 2017-19. ROE growth was mainly driven by increasing assets turnover as well as declining tax and monority burden. In 2020E, as we expect revenue and earnings to suffer a drag due to impacts from COVID-19, we project ROE to decline to 14.3%. We expect ROE to recover in 2021/22E based on imprvoing outlook from operating margin as well as assets turnover. For CRG’s overall leverage, the ratio exhibited continuous decline in 2017-19, and we expect the ratio to decline further if CRG makes no change to its leverage and dividend policy.

Figure 164: DuPont analysis for CRG DuPonts analysis 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E ROE 15.4% 16.6% 18.5% 16.6% 18.5% 18.8% 14.3% 15.6% 16.4% Tax and minority burden - NI/PBT 0.52 0.53 0.53 0.55 0.56 0.60 0.59 0.59 0.59 Interest burden - PBT/EBIT 1.07 1.09 1.04 1.05 1.05 1.03 1.04 1.03 1.05 Operating income margin - EBIT/Sales 0.15 0.15 0.18 0.16 0.15 0.15 0.14 0.15 0.16 Assets turnover - Sales/Assets 0.50 0.55 0.55 0.58 0.70 0.69 0.64 0.66 0.70 Leverage - Assets/Shareholders' equity 3.58 3.52 3.36 3.13 3.06 3.02 2.70 2.62 2.45 Source: CMBIS estimates

Ample room to increase dividend payout CRG had prudent financial management on gearing. The Company turned to net cash position from 2018, and had debt to total equity ratio as low as 10.1% by end-2019. The Company had dividend payout ratio from 19.5% in 2012 gradually increased to 37.6% in 2019. As a utility company with stable cash flow with limited CAPEX budget, we think CRG’s overall leverage level is too conservative. Therefore, if CRG has no intention to accelerate investment outflow, we think the Company will have quite ample space to boost gearing level as well as dividend payout ratio to adjust capital structure to more appropriate level and to satisfy shareholders’ demand for dividend yield.

Figure 165: CRG’s debt to total assets ratio keep Figure 166: We think CRG will have ample room to decreasing on the back of strong cash flow increase dividend pay-out

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 81

8 Dec 2020

Valuation

Historical PER ranged from 11.8x – 19.5x. CRG traded at 11.8x – 19.5x PER, with an average level of 14.8x in the past five years. Based on CRG’s historical share prices, we think CRG’s valuation is sensitive to 1) short term gas sales volume, 2) gas sales dollar margin movement and 3) policy adjustments on connection fees. After years of discussion, we think market has thorough understanding on connetion fee, and we think potential profit control policy will have limited impact on CRG. Therefore, we believe gas sales growth and dollar marbin change will be key determinators for short term valuation.

For longer term valuation outlook, as we expect 1) CRG’s gas sales growth will continue to beat national average level; and 2) PipeChina’s operation will help reduce long-haul gas transmission fee and sustain long term gas sales dollar margin, we expect CRG’s share price to have steady increase following its earnings growth release. Moreover, we also believe increasing dividend payout will potentially boost valuation up to above average PE level.

Figure 167: CGH’s 5-yr forward PE band

Gas shortage Strong gas sales caused dollar & connection Policy risks on margin concern growth cutting connection (HK$/share) f ee Concerns on gas sales growth, connection, Strong gas sales and dollar margin 50 v olume with due to Cov id-19 Gas v olume stable dollar 45 surged with margin 18.89x Avg+2SD coal to gas 17.02x Avg+1SD 40 replcement 15.14x Avg PE 35 13.26x Avg-1SD

30 11.39x Avg-2SD 25 20 15

Source: Company data, Bloomberg, CMBIS

Initiate at HOLD with TP at HK$42.0 per share We use DCF valuation to estimate CRG’s equity value. Based on 6.5% WACC and future free cash flow projection, we derive CRG’s target price at HK$42.00 per share. Our TP reflects CRG’s FY20/21E PER of 20.0x/16.4x respectively. Our valuation reflects 9.9% upside potential on share price. We initiate CRG with HOLD rating.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 82

8 Dec 2020

Figure 168: DCF valuation for CRG DCF Valuation FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E Key operating forecasts City gas sales volume (mcbm) 37,577 42,574 48,032 51,874 56,024 59,385 62,949 66,725 70,729 YoY change (%) 13.9% 13.3% 12.8% 8.0% 8.0% 6.0% 6.0% 6.0% 6.0% Annual residential connection 3.29 3.25 3.23 3.00 2.79 2.60 2.41 2.25 2.09 YoY change (%) 1.2% -1.1% -0.8% -7.0% -7.0% -7.0% -7.0% -7.0% -7.0% Accumulated residential customers 47.2 50.4 53.7 56.7 59.4 62.0 64.5 66.7 68.8

Turnover (HK$ mn) 70,661 78,877 87,869 96,308 103,828 110,070 114,711 117,487 118,221 Turnover growth (%) 12.3% 11.6% 11.4% 9.6% 7.8% 6.0% 4.2% 2.4% 0.6% EBIT (HK$ mn) 11,799 13,506 15,529 15,384 14,820 13,840 12,473 10,778 8,835 EBIT margin 16.7% 17.1% 17.7% 16.0% 14.3% 12.6% 10.9% 9.2% 7.5% Tax rate 24.0% 24.0% 24.0% 24.0% 24.0% 24.0% 24.0% 24.0% 24.0% DD&A - HK$ mn 2,546 2,700 2,853 3,002 3,103 3,148 3,132 3,056 2,923 CAPEX (HK$ mn) (4,303) (4,289) (4,276) (4,490) (4,714) (4,950) (5,197) (5,457) (5,730) Invest in working capital 1,124 1,025 753 (422) (376) (312) (232) (139) (37) Free cash flow 8,334 9,700 11,132 9,782 9,276 8,404 7,182 5,651 3,871

Years 1 2 3 4 5 6 7 8 9 Discount factor 0.94 0.87 0.82 0.76 0.71 0.67 0.62 0.58 0.55 Discount free cash flow 7,793 8,481 9,100 7,477 6,629 5,616 4,488 3,302 2,114 Terminal value 75,969 Terminal perpetual growth 2% Terminal EV/EBITDA 6.46

Valuations （ HK$ mn） WACC Calculations Terminal value 76,063 Cost of debt 5.0% Terminal perpetual growth 1.5% Tax rate 25.0% Terminal EV/EBITDA 6.46 After tax cost of debt 3.8% Total discount FCF 55,007 Cost of equity 8.02% Discount terminal value 41,550 Adjusted beta 0.56 Firm value 96,557 Market risk premium 11.1% Discount FCF(% of total) 43.0% Risk free rate 1.8% Terminal value (% of total) 57.0% % of debt financing 25.0% Add: Cash & cash equivalent 19,131 WACC 6.9% Less: Debt 7,770 Non-controlling interest 10,729 Equity Value - (HK$, mn) 97,188 Number of shares 2,314 Share fair value (HK$) 42.00

2020E PER 20.0 2021E PER 16.4 Source: CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 83

8 Dec 2020

Risk factors

Policy risks Though we think CRG will have limited exposures to connection fee policy adjustments given its highly self-regulated connection fee, we still believe the Company may face other policy risks. Local government’s natural gas price cut to boost economy during 1H20 would be a good example. If CRG cannot seek corresponding gas supply costs reduction from its upstream, we think CRG’s gas dollar margin and bottom will suffer from short term gas price adjustment policies.

Project consolidation risks Project M&A may not always reflects earnings contribution. CRG invested in Tianjin project for 49% shares to form a JV with Tianjin Gas Group in 2013. The project had quite considerable gas sales volume, but kept reading negative contribution to CRG in 2016-19 due to various reasons. Gas distributing SOE reformation projects, due to its complexity with multiple stakeholders’ involvement, may not bring successful return as management projected before M&A investments.

Gas costs hike Gas price would be another key risk factor, given that our projection outlook is based on relatively stable gas dollar margin. A sudden price hike may lead to costs pass-through delay or squeezing gas dollar margin, which will bring negative earnings impact.

Gas shortage Gas shortage will limit CRG’s gas sales volume growth, on one hand, and lead to gas sales dollar margin squeeze due to higher purchasing costs and volume from LNG supply, on the other hand. In 2017/18 winter, China suffered from gas shortage due to too aggressive CTG conversion pace, which hit market confidence on CRG as well as city gas distributors.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 84

8 Dec 2020

Financial Summary

Income statement Cash flow summary YE Dec 31 (HK$ mn) FY18A FY19A FY20E FY21E FY22E YE Dec 31 (HK$ mn) FY18A FY19A FY20E FY21E FY22E Revenue 51,165 55,835 56,186 62,904 70,661 Profit before tax 7,877 8,391 7,965 9,726 11,497 D&A 1,682 1,922 2,114 2,389 2,546 Costs of sales (37,544) (41,904) (42,390) (46,825) (52,464) Change in working capital 2,594 2,861 814 1,006 1,124 Gross profit 13,622 13,931 13,796 16,079 18,197 Taxation (1,885) (2,024) (1,911) (2,194) (2,589) Others (1,926) (2,660) (1,195) (1,700) (2,010) Other income 937 1,517 1,381 1,525 1,690 Operating cash flow 8,342 8,491 7,786 9,226 10,569 Selling & distribution costs (4,132) (4,364) (4,551) (4,969) (5,441) Administrative expenses (2,830) (2,837) (2,865) (3,145) (3,392) Capex & investments (4,096) (5,230) (7,886) (4,328) (4,303) Impairment losses, net (67) (79) (83) (87) (91) Others (2,059) 1,356 - - - Operating profit 7,530 8,169 7,678 9,403 10,963 Investment cash flow (6,154) (3,875) (7,886) (4,328) (4,303)

Finance costs (460) (534) (502) (490) (302) Equity raised 0 - 3,669 - - Share of results of JVs 557 521 523 535 548 Change of debts (801) (2,657) (487) 125 (280) Share of results of Asso 249 236 267 277 288 Dividend paid (1,198) (1,677) (1,902) (1,771) (2,163) Pre-tax profit 7,877 8,391 7,965 9,726 11,497 Others 2,056 551 (33) 1,288 1,514 Financing cash flow (1,799) (1,613) 1,860 (763) (4,391) Income tax (1,989) (1,922) (1,912) (2,334) (2,759) Less: minority interests 1,438 1,426 1,392 1,700 2,010 Net change in cash 388 3,004 1,759 4,134 1,875 Net profit 4,450 5,043 4,661 5,691 6,728 Cash at the beginning 10,356 10,393 13,237 14,996 19,131 Exchange difference (351) (160) - - - Cash at the end of the year 10,393 13,237 14,996 19,131 21,005 Add: Acquired cash - - - - - Cash at balance sheet 10,393 13,237 14,996 19,131 21,005

Balance sheet Key ratios YE Dec 31 (HK$ mn) FY18A FY19A FY20E FY21E FY22E YE Dec 31 FY18A FY19A FY20E FY21E FY22E Non-current assets 48,545 51,781 57,542 59,501 61,279 Sales mix (%) Fixed asset 30,919 33,295 38,618 40,122 41,451 Piped gas sales 69.9 72.4 74.9 74.6 76.5 Right of use assets - 2,525 2,595 2,661 2,721 Gas connection 19.4 18.9 16.4 17.2 16.0 Investment in JVs 9,510 9,505 9,735 9,971 10,212 Sales of gas appliances 0.7 0.7 0.7 0.7 0.6 Investment in Asso 3,438 3,811 3,958 4,110 4,268 Design and construction 1.3 1.2 1.4 1.4 1.4 Others 4,677 2,645 2,635 2,637 2,626 Gas stations 8.7 6.8 6.6 6.1 5.5 Total 100 100 100 100 100 Current assets 25,027 29,243 30,385 36,009 39,177 P&L ratios (%) Trade and other receivables 10,965 11,671 11,858 13,090 14,252 Gross profit margin 26.6 24.9 24.6 25.6 25.8 Contract assets 2,626 3,473 2,711 2,826 2,917 Operating margin 14.7 14.6 13.7 14.9 15.5 Cash & equivalents 10,393 13,237 14,996 19,131 21,005 Pre-tax margin 15.4 15.0 14.2 15.5 16.3 Others 1,044 862 820 962 1,003 Net margin 8.7 9.0 8.3 9.0 9.5 Effective tax rate 25.2 22.9 24.0 24.0 24.0 Current liabilities 34,247 37,955 38,210 46,140 42,943 Balance sheet ratios Trade and other payables 18,486 21,996 21,664 23,220 25,088 Current ratio (x) 0.73 0.77 0.80 0.78 0.91 Contract liabilities 12,343 13,018 13,477 14,378 14,888 Quick ratio (x) 0.70 0.75 0.77 0.76 0.89 Borrowings 2,635 2,031 1,876 1,595 1,435 Cash ratio (x) 0.30 0.35 0.39 0.41 0.49 Others 784 910 1,193 6,947 1,531 Debtors turnover days 72.9 74.0 76.4 72.4 70.6 Total debt / equity ratio (%) 36.2 30.7 24.8 21.3 9.8 Non-current liabilities 7,716 7,712 7,716 2,174 4,244 Net debt / equity ratio (%) Net Cash Net Cash Net Cash Net Cash Net Cash Borrowings 251 285 208 177 159 Returns (%) Senior notes 5,824 5,545 5,600 - 2,000 ROE 18.48 18.82 14.32 15.61 16.40 Others 1,641 1,882 1,907 1,996 2,084 ROA 6.05 6.22 5.30 5.96 6.70 Per share Minority Interest 7,527 8,561 9,454 10,729 12,236 EPS(HK$) 2.04 2.32 2.10 2.56 3.03 Shareholders' equity 24,081 26,795 32,547 36,467 41,033 DPS(HK$) 0.77 0.87 0.80 0.97 1.15 Total Equity 31,608 35,357 42,001 47,196 53,269 BVPS(HK$) 10.83 12.05 14.07 15.76 17.73

Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 85

8 Dec 2020

Disclosures & Disclaimers Analyst Certification The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report.

CMBIS Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIS

OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months

CMB International Securities Limited Address: 45/F, Champion Tower, 3 Garden Road, Hong Kong, Tel: (852) 3900 0888 Fax: (852) 3900 0800

CMB International Securities Limited (“CMBIS”) is a wholly owned subsidiary of CMB International Capital Corporation Limited (a wholly owned subsidiary of China Merchants Bank)

Important Disclosures There are risks involved in transacting in any securities. The information contained in this report may not be suitable for the purposes of all investors. CMBIS does not provide individually tailored investment advice. This report has been prepared without regard to the individual investment objectives, financial position or special requirements. Past performance has no indication of future performance, and actual events may differ materially from that which is contained in the report. The value of, and returns from, any investments are uncertain and are not guaranteed and may fluctuate as a result of their dependence on the performance of underlying assets or other variable market factors. CMBIS recommends that investors should independently evaluate particular investments and strategies, and encourages investors to consult with a professional financial advisor in order to make their own investment decisions. This report or any information contained herein, have been prepared by the CMBIS, solely for the purpose of supplying information to the clients of CMBIS or its affiliate(s) to whom it is distributed. This report is not and should not be construed as an offer or solicitation to buy or sell any security or any interest in securities or enter into any transaction. Neither CMBIS nor any of its affiliates, shareholders, agents, consultants, directors, officers or employees shall be liable for any loss, damage or expense whatsoever, whether direct or consequential, incurred in relying on the information contained in this report. Anyone making use of the information contained in this report does so entirely at their own risk. The information and contents contained in this report are based on the analyses and interpretations of information believed to be publicly available and reliable. CMBIS has exerted every effort in its capacity to ensure, but not to guarantee, their accuracy, completeness, timeliness or correctness. CMBIS provides the information, advices and forecasts on an "AS IS" basis. The information and contents are subject to change without notice. CMBIS may issue other publications having information and/ or conclusions different from this report. These publications reflect different assumption, point-of-view and analytical methods when compiling. CMBIS may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. CMBIS may have a position, make markets or act as principal or engage in transactions in securities of companies referred to in this report for itself and/or on behalf of its clients from time to time. Investors should assume that CMBIS does or seeks to have investment banking or other business relationships with the companies in this report. As a result, recipients should be aware that CMBIS may have a conflict of interest that could affect the objectivity of this report and CMBIS will not assume any responsibility in respect thereof. This report is for the use of intended recipients only and this publication, may not be reproduced, reprinted, sold, redistributed or published in whole or in part for any purpose without prior written consent of CMBIS. Additional information on recommended securities is available upon request.

For recipients of this document in the United Kingdom This report has been provided only to persons (I)falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended from time to time) (“The Order”) or (II) are persons falling within Article 49(2) (a) to (d) (“High Net Worth Companies, Unincorporated Associations, etc.,) of the Order, and may not be provided to any other person without the prior written consent of CMBIS.

For recipients of this document in the United States CMBIS is not a registered broker-dealer in the United States. As a result, CMBIS is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. The research analyst who is primary responsible for the content of this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”). The analyst is not subject to applicable restrictions under FINRA Rules intended to ensure that the analyst is not affected by potential conflicts of interest that could bear upon the reliability of the research report. This report is intended for distribution in the United States solely to "major US institutional investors", as defined in Rule 15a-6under the US, Securities Exchange Act of 1934, as amended, and may not be furnished to any other person in the United States. Each major US institutional investor that receives a copy of this report by its acceptance hereof represents and agrees that it shall not distribute or provide this report to any other person. Any U.S. recipient of this report wishing to effect any transaction to buy or sell securities based on the information provided in this report should do so only through a U.S.-registered broker-dealer.

For recipients of this document in Singapore This report is distributed in Singapore by CMBI (Singapore) Pte. Limited (CMBISG) (Company Regn. No. 201731928D), an Exempt Financial Adviser as defined in the Financial Advisers Act (Cap. 110) of Singapore and regulated by the Monetary Authority of Singapore. CMBISG may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, as defined in the Securities and Futures Act (Cap. 289) of Singapore, CMBISG accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact CMBISG at +65 6350 4400 for matters arising from, or in connection with the report.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 86