ENN Ecological Holdings (600803 CH) ENN Ecol Ogical H Oldi Ngs

China Materials 4 March 2020

ENN Ecological Holdings (600803 CH) ENN Ecol ogical H oldi ngs

Target price: CNY13.50 Share price (4 Mar): CNY10.31 | Up/downside: +30.9%

Initiation: soon to be China’s only A-share city-gas play Dennis Ip, CFA (852) 2848 4068  Short-term rerating potential from restructuring with ENN Energy [email protected]  Long-term earnings growth from LNG and city-gas development Anna Lu, CFA (852) 2848 4465  Initiating with a Buy (1) and SOTP TP of CNY13.5; 16.6x 2020E PER [email protected]

Investment case: We initiate on ENN Ecological (ENNEC) with a Buy (1) Share price performance rating and 12-month SOTP TP of CNY13.5. ENNEC is engaged currently in (CNY) (%) upstream energy businesses focusing on LNG, energy engineering, coal 13.5 110 mining and coal chemicals in China. However, the company is poised to 12.3 103 generate c.70% of its earnings from ENN Energy (2688 HK, HKD88.00, 11.0 95 9.8 88

Buy [1]) from 2020E after a proposed restructuring with ENN Energy due to 8.5 80 be completed in 3Q20E, thus creating a rerating opportunity for ENNEC. Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 We believe the stock offers a good risk-reward profile for investors seeking ENN Ecolog (LHS) Relative to SHASHR Index (RHS) A-share exposure to China’s growing natural gas sector. We also include a summary of the company’s ESG initiatives on page 29. 12-month range 8.70-13.07 Market cap (USDbn) 1.82 Soon to be the only national city-gas A-share company. The 3m avg daily turnover (USDm) 13.32 restructuring will transfer Chairman Wang Yusuo’s 32.80% share of ENN Shares outstanding (m) 1,229 Major shareholder Wang Yusuo (48.4%) Energy to ENNEC, making ENNEC the only national city-gas company on the A-share market. After the restructuring, ENN Energy should contribute Financial summary (CNY) significantly to ENNEC’s profit growth, particularly as we forecast ENN Year to 31 Dec 19E 20E 21E Energy’s gas sales to rise at a 17% CAGR over 2018-21E. The Revenue (m) 12,601 12,022 12,822 restructuring will have no impact on the fundamentals of both companies, Operating profit (m) 1,473 3,088 1,570 Net profit (m) 1,195 2,296 3,160 but we see a rerating opportunity for ENNEC from a valuation perspective Core EPS (fully-diluted) 0.972 0.815 1.122 and view the restructuring as EPS- and DPS-accretive (see page 8). We EPS change (%) (9.1) (16.2) 37.6 believe the injection of the city-gas business will lead to ENNEC being Daiwa vs Cons. EPS (%) (11.7) (34.6) (18.7) rerated from a 12.6x 2020E PER towards the valuation of the A-share PER (x) 10.6 12.6 9.2 Dividend yield (%) 2.0 2.8 2.8 regional gas names (average 19x 2020E PER, per Bloomberg forecasts). DPS 0.207 0.284 0.286 PBR (x) 1.3 1.0 0.9 In-group synergies to be further realised. With commencement of its EV/EBITDA (x) 10.3 6.5 10.9 coal gasification plant and expansion of the Zhoushan LNG terminal, ENN ROE (%) 13.2 12.1 10.6 Energy is poised to see lower dollar margin risk with more price-competitive Source: FactSet, Daiwa forecasts and diversified gas supply offered by ENNEC, while ENNEC can ensure gas demand for its LNG products through collaboration with ENN Energy. After ENN Group’s potential injection of the Zhoushan LNG terminal into ENNEC, ENNEC will also be exposed to an extra income stream with stable cash flow from ENN Energy’s terminal usage, in our view.

Catalysts: 1) Completion of its restructuring plan with ENN Energy, 2) production ramp-up of its coal gasification plant in Inner Mongolia, 3) construction of the Zhoushan LNG terminal (phase 3), and 4) ENN Group’s injection of the Zhoushan LNG terminal into ENNEC.

Valuation: We use a SOTP valuation to value ENNEC, which gives us a 12-month TP of CNY13.5, representing a blended 2020E PER of 16.6x.

Risks: 1) Postponement of the restructuring, 2) a larger-than-expected decline in coal prices, 3) a larger-than-expected decline in methanol prices, and 4) asset injection at an unattractive valuation.

See important disclosures, including any required research certifications, beginning on page 43

ENN Ecological Holdings (600803 CH): 4 March 2020

Table of contents

Soon to be the only national city-gas company on the A-share market ...... 6 Group synergies to be further released...... 12 Financials ...... 23 Valuation ...... 26 Risks to our call ...... 28 ESG activity ...... 29 Appendices ...... 30 Appendix 1: China natural gas demand ...... 30 Appendix 2: DE/IE Development in China ...... 31 Appendix 3: Coal-gasification industry in China ...... 33 Appendix 4: Development of the Zhoushan LNG terminal ...... 37 Appendix 5: Development of LNG terminals in China...... 39

ENN Ecological Holdings (600803 CH): 4 March 2020

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook ENNEC: PBT (net one-off items)

Given weak commodity prices (LNG, coal, methanol) in (CNYm) 2H19, the spin-off of ENNEC’s bio-medicine segment, and 4,000 the Wangjiata coal mine accident, we forecast ENNEC to 3,000 see a 26% YoY decline in PBT for 2019E. Yet, we forecast 98% and 20% YoY increases in its PBT for 2020E and 2,000 2021E, respectively, after the injection of ENN Energy as 1,000 well as production expansion of its underlying LNG, coal 0 and coal chemical segments. We also see substantial PBT upside upon commencement of construction of Zhoushan (1,000) 2017 2018 2019E 2020E 2021E LNG terminal (phase 3) which we have yet to factor into ENN Energy Coal Chemical Energy Engineering Coal our forecasts. LNG Bio-medicine Others

Source: Company, Daiwa Note: Others include income from Santos and other JVs/Associates

Valuation ENNEC: 1-year forward PER

ENNEC is trading currently at 12.6x 2020E PER, 0.7SD PER (x) below its past 5-year average 1-year forward PER. Our 40 SOTP-based TP of CNY13.50 equates to a 16.6x 2020E 35 30 PER, the same as its past 5-year average. As we forecast 27.5x Avg+2SD ENNEC’s EPS to rise by 38% YoY growth for 2021E 25 22.1x Avg+1SD thanks to earnings growth derived from: 1) ENN Energy, 20 and 2) production ramp-up of its LNG and coal segment, 15 16.6x Avg our TP implies a 12.0x 2021E PER. 10 11.2x Avg-1SD 5 5.7x Avg-2SD We believe our valuation target is undemanding given the 0

paradigm shift of ENNEC from a coal-chemical company

Jul-15 Jul-16 Jul-17 Jul-18 Jul-19

Jan-18 Jan-16 Jan-17 Jan-19 Jan-20 with limited earnings upside into a promising integrated gas Jan-15 Source: Bloomberg, Daiwa forecasts company after the restructuring. Note: Reported EPS is used for computation of PER from 2015-18, Adjusted EPS is used for computation of PER from 2019 onwards

Earnings revisions ENNEC: consensus EPS forecasts

The 2019-2021E Bloomberg-consensus EPS forecasts for (HKD) ENNEC for 2019-21E were revised down in end-October 1.70 2019 due to weak 3Q19 results. 1.60 1.50 Our EPS forecasts are 11.7% below consensus in 2019E 1.40 likely due to our pessimistic view on commodity prices 1.30 (LNG, coal and methanol) over 2019-21E. Our EPS 1.20 forecasts are also 34.6% and 18.7% lower for 2020E and 1.10 2021E due to this pessimistic view, as well as our: 1) more 1.00

conservative assumptions on production ramp-up of its Jul-19

Oct-19 Apr-19

Jun-19 Jan-20

Mar-19

Feb-20

Nov-19 Aug-19 Sep-19 Dec-19 LNG plants over 2020-21E, 2) factoring in the impact of May-19 2019E EPS 2020E EPS 2021E EPS ENN Energy’s injection and share dilution in 2020E, and 3) Source: Bloomberg, Daiwa forecasts assumption of no construction of its Zhoushan terminal phase 3 in 2021E due to a potential construction delay.

ENN Ecological Holdings (600803 CH): 4 March 2020

Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Asso. Income from ENN Energy - 0 0 0 0 0 1,965 2,321 Coal-chemical Segmental Profit - 465 377 471 647 466 507 549 Energy Engineering Segmental Profit - 691 546 588 750 751 770 746 Coal Segmental Profit - 330 513 1,032 993 875 933 1,003 LNG Segmental Profit - 20 17 92 92 45 57 258

Profit and loss (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Coal-chemical Segment - 1,553 1,842 3,193 4,945 4,751 4,769 4,744 Energy Engineering Segment - 1,862 1,951 2,697 3,177 3,183 3,261 3,161 Other Revenue - 2,244 2,603 4,146 5,510 4,667 3,992 4,917 Total Revenue - 5,659 6,396 10,036 13,632 12,601 12,022 12,822 Other income - 31 229 (120) (329) 117 1,767 25 COGS - (3,877) (4,688) (7,537) (10,697) (10,226) (9,729) (10,240) SG&A - (604) (667) (784) (957) (884) (844) (900) Other op.expenses - 0 (0) (55) (146) (135) (128) (137) Operating profit - 1,209 1,269 1,540 1,504 1,473 3,088 1,570 Net-interest inc./(exp.) - (202) (360) (424) (467) (558) (594) (613) Assoc/forex/extraord./others - 50 (189) (194) 584 630 2,124 2,480 Pre-tax profit - 1,058 720 923 1,621 1,544 4,618 3,437 Tax - (173) (150) (230) (215) (190) (518) (199) Min. int./pref. div./others - (79) (52) (61) (84) (67) (62) (78) Net profit (reported) - 806 519 631 1,321 1,287 4,038 3,160 Net profit (adjusted) - 733 190 593 1,315 1,195 2,296 3,160 EPS (reported)(CNY) - 0.817 0.526 0.640 1.075 1.047 1.434 1.122 EPS (adjusted)(CNY) - 0.744 0.192 0.602 1.070 0.972 0.815 1.122 EPS (adjusted fully-diluted)(CNY) - 0.744 0.192 0.602 1.070 0.972 0.815 1.122 DPS (CNY) - 0.100 0.100 0.125 0.207 0.207 0.284 0.286 EBIT - 1,209 1,269 1,540 1,504 1,473 3,088 1,570 EBITDA - 1,517 1,543 1,851 1,879 1,957 3,605 2,123

Cash flow (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax - 1,058 720 923 1,621 1,544 4,618 3,437 Depreciation and amortisation - 308 274 311 375 484 517 553 Tax paid - (173) (150) (230) (215) (190) (518) (199) Change in working capital - (254) (2) 47 (409) (215) 36 (65) Other operational CF items - 153 138 (55) (95) 208 (2,829) (1,341) Cash flow from operations - 1,091 980 995 1,276 1,831 1,824 2,385 Capex - (197) (979) (1,075) (1,342) (900) (700) (500) Net (acquisitions)/disposals - (1,749) (4,921) (2) 15 635 (18,754) 0 Other investing CF items - (8) 264 (25) 0 0 0 0 Cash flow from investing - (1,954) (5,636) (1,101) (1,327) (265) (19,454) (500) Change in debt - 277 3,469 622 (1,928) 1,528 300 0 Net share issues/(repurchases) - 0 0 0 2,243 0 15,683 0 Dividends paid - (156) (47) (170) (134) (255) (800) (806) Other financing CF items - 822 1,909 (262) (587) (558) (594) (613) Cash flow from financing - 943 5,331 190 (406) 715 14,590 (1,418) Forex effect/others - 0 (19) (5) (14) 0 0 0 Change in cash - 80 656 79 (472) 2,281 (3,041) 467 Free cash flow - 894 1 (80) (66) 931 1,124 1,885 Source: FactSet, Daiwa forecasts

ENN Ecological Holdings (600803 CH): 4 March 2020

Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment - 1,930 2,416 2,427 1,957 4,238 1,197 1,664 Inventory - 706 750 1,615 1,775 1,612 1,534 1,614 Accounts receivable - 851 954 1,117 1,638 1,623 1,548 1,651 Other current assets - 512 616 958 914 849 844 852 Total current assets - 4,000 4,736 6,117 6,285 8,322 5,123 5,781 Fixed assets - 5,425 6,126 8,268 9,772 9,581 9,787 9,757 Goodwill & intangibles - 936 1,043 1,062 1,050 1,027 1,004 981 Other non-current assets - 1,014 6,472 6,107 6,408 6,778 28,935 30,889 Total assets - 11,375 18,376 21,555 23,514 25,708 44,849 47,408 Short-term debt - 1,743 4,038 5,674 4,733 3,603 3,603 3,603 Accounts payable - 1,387 1,543 2,645 2,979 2,522 2,399 2,525 Other current liabilities - 827 1,837 2,111 1,610 1,610 1,610 1,610 Total current liabilities - 3,957 7,418 10,430 9,323 7,735 7,613 7,739 Long-term debt - 2,274 5,484 5,025 4,628 7,285 7,585 7,585 Other non-current liabilities - 222 213 199 227 251 232 232 Total liabilities - 6,453 13,115 15,653 14,178 15,272 15,430 15,556 Share capital - 986 986 986 1,229 1,229 2,817 2,817 Reserves/R.E./others - 3,272 3,558 4,167 7,313 8,345 25,679 28,033 Shareholders' equity - 4,258 4,544 5,153 8,542 9,574 28,496 30,850 Minority interests - 665 716 748 795 862 924 1,002 Total equity & liabilities - 11,375 18,376 21,555 23,514 25,708 44,849 47,408 EV - 15,425 20,497 21,695 20,873 20,187 23,590 23,201 Net debt/(cash) - 2,086 7,106 8,272 7,403 6,650 9,991 9,524 BVPS (CNY) - 4.319 4.610 5.227 6.948 7.788 10.117 10.952

Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) - n.a. 13.0 56.9 35.8 (7.6) (4.6) 6.7 EBITDA (YoY) - n.a. 1.7 19.9 1.5 4.2 84.2 (41.1) Operating profit (YoY) - n.a. 5.0 21.3 (2.4) (2.1) 109.7 (49.2) Net profit (YoY) - n.a. (74.1) 212.6 121.7 (9.1) 92.1 37.6 Core EPS (fully-diluted) (YoY) - n.a. (74.1) 212.6 77.8 (9.1) (16.2) 37.6 Gross-profit margin - 31.5 26.7 24.9 21.5 18.8 19.1 20.1 EBITDA margin - 26.8 24.1 18.4 13.8 15.5 30.0 16.6 Operating-profit margin - 21.4 19.8 15.3 11.0 11.7 25.7 12.2 Net profit margin - 13.0 3.0 5.9 9.6 9.5 19.1 24.6 ROAE - n.a. 4.3 12.2 19.2 13.2 12.1 10.6 ROAA - n.a. 1.3 3.0 5.8 4.9 6.5 6.9 ROCE - n.a. 10.7 9.8 8.5 7.4 10.0 3.8 ROIC - n.a. 10.4 8.7 8.4 7.6 9.7 3.7 Net debt to equity - 49.0 156.4 160.5 86.7 69.5 35.1 30.9 Effective tax rate - 16.4 20.8 24.9 13.3 12.3 11.2 5.8 Accounts receivable (days) - n.a. 51.5 37.7 36.9 47.2 48.1 45.5 Current ratio (x) - 1.0 0.6 0.6 0.7 1.1 0.7 0.7 Net interest cover (x) - 6.0 3.5 3.6 3.2 2.6 5.2 2.6 Net dividend payout - 12.2 19.0 19.5 19.2 19.8 19.8 25.5 Free cash flow yield - 7.1 0.0 n.a. n.a. 7.3 8.9 14.9 Source: FactSet, Daiwa forecasts

Company profile

ENN Ecological (ENNEC) is currently engaged in the upstream energy business in China with a focus on coal mining, coal chemicals, and natural gas engineering, procurement, and construction (EPC) services (LNG and city-gas). After the proposed restructuring with ENN Energy, ENNEC will become the sole national city-gas company on the A-share market, deriving c.70% of its gross profit from ENN Energy.

ENN Ecological Holdings (600803 CH): 4 March 2020

Soon to be the only national city-gas company on the A-share market

Restructuring between In our view, the share restructuring between ENN Energy and ENNEC, which is due to be ENN Energy and ENNEC completed by or before early-3Q20, will be a major share-price catalyst for ENNEC. After set to create a rerating the shareholding restructuring, ENN Energy will become a 32.80%-owned associate of opportunity for ENNEC ENNEC, wherein the profit contribution from ENN Energy will account for c.70% of ENNEC’s PBT (in the form of associated income in our model). While the deal will have no material impact on the underlying businesses of both companies, we see an imminent valuation rerating for ENNEC. The stock is currently trading at an attractive 12.6x 2020E PER, which is significantly lower than the mid-to-high teens PER valuation level of Hong Kong-listed national gas distributors and high-teens PER valuation level of A-share listed regional gas distributors. As ENNEC will be transformed into the only national city-gas play on the A-share market, we expect the stock to be rerated to 16.6x 2020E PER after the restructuring.

ENNEC: ownership structure Before Restructuring

Wang Yusuo (王玉锁) & his Hony Capital Legend Holdings Other public shareholders 100% holding company 48.43% 8.00% 2.00% 41.57%

ENN Clean Energy ENN Group International ENN Ecological Holdings Limited 100% International Investment (600803.SH) Investment Limited Limited

32.80% 9.97% ENN Energy Holdings Limited Santos Natural Gas Liquefaction Energy Engineering Coal Based Chemical (HKEx: 2688) (ASX: STO)

After Restructuring

Wang Yusuo (王玉锁) & his Hony Capital Legend Holdings Other public shareholders 100% holding company 69.64% 3.49% 0.87% 26.00%

ENN Clean Energy ENN Group International Effective stake: ENN Ecological Holdings Limited 100% 22.85% International Investment (600803.SH) Investment Limited Limited Will be included in scope of consolidation 9.97% 32.80%

Santos ENN Energy Holdings Limited Natural Gas Liquefaction Energy Engineering Coal Based Chemical (ASX: STO) (HKEx: 2688)

Source: Company, Daiwa Note: We assume ENNEC’s placement price to specific investors (less than 10) is CNY9.88/share; Chairman Wang Yusuo will subscribe to 10% of the placement shares while Hony Capital and Legend Holdings will not subscribe to the placement shares

ENNEC: PBT (net one-off items) ENNEC: gross profit (CNYm) (CNYm) 4,000 3,500

3,000 3,000 2,500 2,000 2,000 1,000 1,500 0 1,000 500 (1,000) 2017 2018 2019E 2020E 2021E 0 ENN Energy Coal Chemical Energy Engineering Coal 2017 2018 2019E 2020E 2021E LNG Bio-medicine Others Coal Chemical Energy Engineering Coal LNG Bio-medicine Others

Source: Companies, Daiwa forecasts Source: Company, Daiwa forecasts Note: Others include income from Santos and other JVs/Associates Note: Gross profit excludes income from ENN Energy, Santos and other JVs/Associates

Injection of ENN Energy into ENNEC Chairman Wang’s 32.8% ENNEC announced on 30 August 2019 that its Chairman, Mr. Wang Yusuo, had proposed stake in ENN Energy will to transfer his 32.80% stake in ENN Energy to ENNEC, in which he has a 48.43% stake, in be transferred to ENNEC exchange for new shares in ENNEC, a stake in Santos (STO AU, not rated) and a cash

ENN Ecological Holdings (600803 CH): 4 March 2020

payment from ENNEC. According to the management of ENN Energy, the primary purpose of the share transfer was not a cash-out by the chairman, but a personal asset restructuring given ENN Energy will still be owned by Mr. Wang’s controlling A-share company, ENNEC, while Mr. Wang will remain the chairman of ENN Energy, with its independent operation status and management team unchanged.

According to the latest announcement on 21 November 2019, the 32.80% stake in ENN Energy is valued at CNY25.84bn (HKD79.57 per share, or an 11% discount to the current share price), of which will be transferred to ENNEC in exchange for: 1) The 9.97% stake in Santos owned by ENNEC, which is valued at CNY7,086m with a share-price consideration of AUD7.08/share. 2) New shares issued by ENNEC valued at CNY13.3bn (1,341m new shares at CNY9.88/share). 3) A cash payment of CNY5.5bn, which will be partly financed through the issuance of no more than 20% existing ENNEC shares (the chairman subscribes to no less than 10% of the new shares).

ENN Group: restructuring detail ENN Energy

Number of shares (m) - Chairman's stake in ENN 369 % stake 32.8% Closing share price (HKD) 88.0 Transaction share price (HKD) 79.6 Premium -11% Total value (HKD m) 29,375 CNY/HKD FX rate 0.88 Total Value (CNY m) 25,840

Consideration

1.Exchange for 29.26% of ENN A. Santos

# shares (m) 210 Transaction share price (AUD) 7.08 CNY/AUD FX rate 4.8 Santos’ stake equity value (CNY m) 7,086 B. Cash (CNY m) 2,705 C. Issuance of new ENNEC shares (CNY m) 13,254 # ENNEC new shares to be issued @CNY 9.88 (m) 1,341 2. Cash for 3.55% stake in ENN (ENNEC new share at price to be confirmed) D. Cash paid by internal resources and new share issuance of ENNEC ENNEC cash on hand at end-June 2019 (CNY m) 2,145 ENNEC - new shares issued to no more than 10 parties @ CNY 9.88 (m shares) 246 Cash raised by equity placement (CNY m) 2,429 Remaining cash consideration (CNY m) 365 Total cash to be paid (CNY m) 2,795

Source: Company, Daiwa; Note: We assume ENNEC’s placement price to specific investors (less than 10) is CNY9.88/share

Our base-case scenario After the restructuring, Chairman Wang’s stake in ENNEC will likely increase to assumes 56% share 69.6% and his effective stake in ENN Energy will be reduced to 22.9%. Chairman dilution after the new Wang currently owns 1,229m shares or a 48.43% stake in ENNEC, and a 32.80% effective share issuance to stake in ENN Energy. While ENNEC’s placement price to specific investors (fewer than 10) Chairman Wang and 10 is not confirmed, ENNEC will pay less cash or face less share dilution should its share external investors price rise, as shown by our sensitivity analysis below. Our base case assumes ENNEC will use up its 246m new share placement quota at CNY9.88 per share, which will contribute CNY2,429m, while the remaining cash consideration will be CNY365m.

Chairman’s stake in ENNEC and ENN Energy ENNEC: sensitivity analysis of share dilution to changes in placement price and capital raised by equity placement Current Chairman's stake Placement Price (CNY)

Number of ENNEC shares (before, m) 1,229 48.4% 10.89 10.37 9.88 9.39 8.92

Number of ENNEC shares (after, m) 2,817 69.6% 1,979 55.34% 55.48% 55.64% 55.81% 55.98% Additional ENNEC shares 1,587 2,083 55.49% 55.65% 55.81% 55.98% 56.16%

Potential ENNEC share dilution 56% 2,193 55.65% 55.81% 55.98% 56.16% 56.36%

by 2,308 55.82% 55.99% 56.16% 56.36%

ENN Energy effective stake(before) 32.8% 2,429 56.00% 56.17% 56.36%

equity placement equity ENN Energy effective stake(after) 22.8% to Cash beraised 2,551 56.17% 56.36%

Source: Daiwa estimates Source: Daiwa estimates

ENN Ecological Holdings (600803 CH): 4 March 2020

Investors should not be overly concerned about the impact of share dilution as the restructuring will be a positive for ENNEC’s dividend payout. Based on our calculations, the effect of the share dilution is likely to offset the earnings boost for ENNEC due to the injection of ENN Energy in 2020E, with adjusted EPS being CNY0.82/share in 2020E vs. CNY0.95/share if there is no restructuring. However, we estimate the restructuring will bring about a CNY1,742m gain from the disposal of Santos shares (which is classified as other income in our model), leading reported EPS of CNY1.43/share vs. CNY0.95/share if there is no restructuring. Given ENNEC’s dividend policy of setting DPS based on reported earnings, we estimate the restructuring will bring about a boost in DPS of CNY0.28/share for 2020E vs. CNY0.18/share if there is no restructuring. Starting from 2021E, ENNEC is likely to see much higher EPS and DPS on the back of our forecast for mid-teen EPS growth for ENN Energy.

ENNEC: dividend payout with restructuring ENNEC: scenario analysis on EPS and DPS (CNY) 2019E 2020E 2021E 2022E

0.35 60% w/ restructuring / 1.43 1.12 1.24 Reported EPS w/o restructuring 1.05 0.95 1.01 1.01 0.30 50% w/ restructuring / 0.82 1.12 1.24 Adjusted EPS 0.25 40% w/o restructuring 0.97 0.95 1.01 1.01 w/ restructuring / 0.28 0.29 0.32 0.20 DPS 30% w/o restructuring 0.21 0.18 0.25 0.25 0.15 20% 0.10 0.05 10% 0.00 0% 2015 2016 2017 2018 2019E 2020E 2021E

DPS (LHS)) Payout ratio (RHS) Adjusted payout ratio (RHS)

Source: Daiwa estimates Source: Daiwa estimates

ENN Energy’s strong fundamentals to support ENNEC’s future earnings ENNEC’s earnings to be ENN Energy is our top pick among the HK-listed China gas distributors, for which we have supported by associate a Buy (1) rating. On the back of a strong 8% CAGR in gas demand growth in China over income from ENN 2020-25E per our forecasts (see Appendix 1 on page 30), we expect ENN Energy to Energy, our top pick outperform the industry in terms of gas consumption growth (with an 17% retail gas sales among the HK-listed CAGR over 2018-21E and 8.7% CAGR over 2019-25E) on a resilient dollar margin, as well China downstream gas as rapid distributed/integrated energy (DE/IE) and value-added energy technology services distributors (VAS) growth. We believe ENNEC will benefit from the promising EPS growth of ENN Energy, which we forecast to deliver a strong 17% EPS CAGR over 2018-21E vs. CRG (1193 HK, HKD40.85, Outperform [2])’s 13% and CGHL (384 HK, HKD29.50, Underperform [4])’s 12%.

China city-gas distributors: EPS growth 2017 2018 2019E 2020E 2021E 2018-21E CAGR ENN 16% 17% 19% 16% 17% 17% CRG 11% 22% 12% 13% 14% 13% CGHL 37% 26% 19% 4% 13% 12%

Source: Bloomberg, Daiwa forecasts; Note: We adopt FY19-22E (or 2018-21E) CAGR for CGHL

ENN Energy: recent reports Company name BBG Ticker Report Title Publish date

ENN Energy 2688 HK Buy on weakness; imminent strong 2019 results 7-Feb-20 ENN Energy 2688 HK Key takeaways from Daiwa PURE conference: on-track operating metrics for 2019 6-Jan-20

ENN Energy 2688 HK Strong 2019 results likely before ENNEC restructuring 2-Jan-20

ENN Energy 2688 HK Detailed takeaways from Zhaoqing site visit 19-Nov-19

ENN Energy 2688 HK Conference notes: new residential connection target lifted 12-Nov-19

ENN Energy 2688 HK Upgrading: fundamentals unchanged from the deal 11-Sep-19

ENN Energy 2688 HK Santos to sweeten the deal 10-Sep-19

China PURE Sector Initiation: moving from the 13th to the 14th FYP, from quantity to quality and sustainability 5-Feb-20

China Gas Sector PURE ESG: who’s hitting the gas? 31-Jan-20

China Gas Sector 1H20 pecking order 3-Jan-20

Source: Daiwa

ENN Ecological Holdings (600803 CH): 4 March 2020

ENN Energy’s DE/IE ENN Energy’s earnings and dollar margin are supported by its undisputed leadership supports its leadership in DE/IE (see Appendix 2 on page 31). Through years of accumulated earnings experience, ENN Energy has become one of the forerunners in DE/IE with involvement dating back to 2009, when the company kicked off its energy-saving solution offering. As a result, ENN Energy has developed in-depth know-how (ie, proprietary technology in the manufacturing of DE generators for residential and commercial use) and experience, with 82 projects in operation (vs. 14-75 projects for its peers) and 119 secured projects as of end-1H19. We believe the dollar margin squeeze will be offset by DE/IE development for ENN Energy as the dollar margin for DE/IE projects can reach >CNY0.8/m3, assuming ASPs for electricity and steam of CNY0.77/kwh and CNY305/tonne (vs. CNY0.4/m3 to CNY0.7/m3 dollar margin for city-gas projects). Furthermore, ENN Energy sets a 12% IRR investment hurdle for all DE/IE projects and a 20% gross margin target for mature DE/IE projects to ensure these projects are value-accretive to the company.

VAS a second retail ENN Energy also has another retail hedge – its VAS, which it targets to contribute hedge to support ENN 20% of its gross profit in the long term. Apart from IE projects for industrial parks or Energy’s long-term large C&I customers, ENN Energy also offers energy-saving technology services to small profitability and medium C&I users, such as providing efficient gas-fired boilers or waste-heat recycling retrofits to help customers save on their energy bills. In 1H19, ENN Energy posted a 3-fold rise in gross profit to CNY659m in the VAS segment, and targets for the segment to deliver 20% of the company’s gross profit in the long term (1H19: 12%). We forecast ENN Energy to see its VAS and IE gross profit contribution rise from 5% in 2018 to 24% in 2025E, and hence record 11% recurring-profit growth over 2021-25E (zero gas connection profit assumption for 2025E).

China city-gas distributors: DE/IE projects in-operation ENN Energy: VAS and IE gross profit contribution 90 100% 80 80% 70 60 60% 50 40% 40 20%

30 0%

20 -20%

2016 2030E 2009 2010 2011 2012 2013 2014 2015 2017 2018 2019E 2020E 2021E 2022E 10

0 Gas connection Sales of gas Integrated energy services ENN CGHL CRG TCCL Value-added services Vehicle gas refuelling Wholesales gas Source: Daiwa estimates Source: Daiwa estimates

Large dollar margin We believe ENN Energy also offers the largest dollar margin upside among the city- upside for ENN Energy gas distributors in China. We expect ENN Energy to achieve a peer-leading dollar due to ENNEC’s margin from 2020E onwards due to the rapid development of its integrated business diversified gas sources model. With the completion of the ENN Group-owned Zhoushan LNG terminal phase 1 by 2018 and phase 2 by 2021E, as well as ramp up of coal-gasification production in Inner Mongolia by ENNEC by 4Q20E, we believe ENN Energy will also be exposed to cheaper seaborne LNG or self-produced LNG (please see Group synergies to be further released for details). Yet, we have not factored the positive impact of any potential upstream developments into our forecasts and expect further containment of the dollar margin squeeze when these gas diversification efforts are confirmed.

China gas sector: dollar margin of leading city-gas distributors 1H17 2H17 1H18 2H18 1H19 2019E 2020E ENN 0.66 0.60 0.62 0.60 0.58 0.60 0.57 CRG 0.64 0.52 0.62 0.58 0.58 0.60 0.58 CGHL 0.65 0.59 0.63 0.59 0.57 0.61 0.55

Source: Companies, Daiwa forecasts

ENN Ecological Holdings (600803 CH): 4 March 2020

A win-win, imminent deal for both ENNEC and ENN Energy We believe the restructuring will be value-accretive for both ENNEC and ENN Energy. We view Chairman Wang’s plans as a personal asset restructuring rather than a cash-out. In our view, investors should not be concerned about any disruption in the operations of either ENN Energy or ENNEC. Mr. Wang Yusuo will continue to act as the Chairman of ENN Energy, and ENN Energy’s independent operation status and management team will not change after the restructuring.

Valuation rerating ENNEC will benefit from the deal valuation-wise, and we see it being rerated from imminent after the current 12.6x 2020E PER level to a mid-teens level. After the injection of ENN restructuring Energy, ENNEC will generate c.70% of its net profit from ENN Energy in 2020-22E. Therefore, the deal will transform ENNEC from a coal chemical company into an integrated gas play as well as the only national city-gas distributor listed on the A-share market. Its Hong Kong-listed peers, which consist of the largest gas distributors in China, are trading in the mid-teens to high-teens range in terms of PER. For its A-share listed peers, most of them are regional players with a much smaller scale and are trading in the 13-26x PER range. Thus, we estimate ENNEC’s PER will be rerated to 16.6x in 2020E.

China and Hong Kong-listed downstream gas peers: valuation comparison Mkt cap Turnover PER (x) PBR (x) Company name BBG code Rating Share price Target price Upside (USDm) (USDm) 2019E 2020E 2021E 2019E 2020E 2021E ENNEC 600803 CH Buy 10.31 13.50 31% 1,829 13.5 10.6 12.6 9.2 1.32 1.02 0.94 H-Share companies ENN 2688 HK Buy 88.00 102.00 16% 12,746 24.0 16.9 14.9 12.6 3.5 3.0 2.5 CGHL 384 HK Underperform 29.50 26.50 -10% 18,865 25.6 18.1 16.6 15.7 4.2 3.7 3.2 CRG 1193 HK Outperform 40.85 47.00 15% 11,452 14.9 17.9 15.9 13.8 3.3 2.9 2.6 TCCL 1083 HK Hold 4.61 4.80 4% 1,667 1.2 9.1 9.1 8.0 0.8 0.7 0.7 Simple average 15.5 14.1 12.6 2.9 2.6 2.2 Weighted average 17.4 15.7 14.1 3.6 3.2 2.7 A-Share Companies Shenzhen Gas 601139 CH NR 6.66 n.a. - 2,765 13.6 17.3 14.2 12.4 1.9 1.8 1.6 Changchun Gas 600917 CH NR 6.83 n.a. - 1,534 4.9 26.3 26.3 25.3 2.5 2.4 2.3 Simple average 21.8 20.2 18.9 2.2 2.1 1.9 Weighted average 20.5 18.5 17.0 2.1 2.0 1.9 Source: Bloomberg and Daiwa estimates. Note: closing price as on 4 March 2020; We use FY19-21E numbers for CGHL

Mutual benefits to be On top of value enhancement for ENNEC, we believe the share restructuring will released bring about the following mutual benefits:

1) Strong synergies with upstream business. ENNEC can secure gas sales through a long-term collaboration with ENN Energy, while ENN Energy can obtain low-cost LNG from ENNEC.

2) Alignment of management interests. After the shareholder restructuring, ENN Energy’s profitability will become a major consideration for ENNEC’s management. We believe such an alignment will incentivise the managements of both companies to speed up the progress of collaboration and cultivation of synergies.

3) Better credit rating and lower financing costs. Given that ENN Energy has stronger and more stable cash flow (with ENN Energy being the 32.80% owned associate of ENNEC), ENNEC can leverage on this solid associate income stream to obtain a lower-cost loan. In fact, credit agencies Fitch and Moody’s both raised their outlook on ENNEC from neutral to positive following the announcement of the restructuring. ENNEC’s management believes there is a possibility that the credit agencies will also raise their credit rating for ENNEC later on, thus facilitating ENNEC to obtain loans at lower cost.

Restructuring will lead to a reduction in Chairman Wang’s stake in ENN Energy, but we see it as a non-issue. Some investors may worry that Chairman Wang’s reduced

ENN Ecological Holdings (600803 CH): 4 March 2020

stake in ENN Energy from 32.80% to 22.85% may translate into reduced management attention on ENN Energy. However, ENNEC’s profitability will hinge upon the performance of ENN Energy given ENNEC will derive c.70% of PBT from ENN Energy over 2020-22E after the asset re-organisation. As the interests of the 2 companies are closely linked, Chairman Wang will likely continue to pay undivided attention to both companies.

The restructuring plan was not welcomed by ENN Energy shareholders initially, but we believe this view is not supported by fundamentals. This concern was partly reflected in the 15% share-price correction of ENN Energy in the 2 weeks following the restructuring announcement on 30 August 2019. Yet, we believe the initial sell-off was driven largely by investor sentiment rather than the fundamentals of the deal, as we discussed in our ENN flash notes dated 2 September 2019 and 11 September 2019. As we discussed in our recent ESG Report on China Gas Distributors (31 January, pages 13-14), investors have turned cautious on any substantial corporate action on ENN Energy due to its previous corporate governance record after the injection of the loss-making North American gas refuelling business into ENN Energy back in 2014. In fact, despite the initial decline, we note ENN Energy’s share price has picked up meaningfully after investors digested news of the restructuring plan and fully understood the rationale behind the plan.

ENN Energy: 2019 share price H-share performance Event Date 1-day 3-day 7-day Announcement of Proposed Reorganization between ENNEC and ENN Energy 30-Aug-19 -7.60% -9.22% -14.64%

(HKD) 95 Share price plunged by 15% in 2-week time after initial announcement of the deal 90

75 Share price regains traction after investors digest the fundamentals 70 of the deal

65 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19

Source: Bloomberg, Daiwa

Restructuring is due to Restructuring is likely to be completed by 3Q20E. For ENNEC, it gained shareholder be completed by 3Q20 approval in December 2019 and subsequently applied for regulatory approval from the China Securities Regulatory Commission (CSRC), Ministry of Commerce, and the National Development and Reform Commission (NDRC). ENNEC has already received the first round of feedback from the CSRC in which the content is within expectations, according to the company. ENNEC expects one more round of feedback from the CSRC and believes the company will obtain the relevant approvals in 2Q20.

On 28 March 2020, ENNEC announced a delay in its reply to the CSRC and received approval from the CSRC to extend the reply deadline to 17 April 2020. According to the management of ENNEC, the delay was due mainly to the ordinance which requires ENNEC to submit the FY19 results of ENN Energy for the CSRC’s consideration; yet they still expect the deal to be completed in 2Q20E. In our view, the deal will more likely be completed by early 3Q20, meaning ENN Energy’s contribution would not be consolidated into ENNEC’s 2020E interim results. Yet, ENN Energy’s full-year results will still be consolidated in ENNEC’s 2020E annual results as long as the deal is executed before the end of 2020. As such, we see no material negative impact from this slight delay in restructuring. Meanwhile for ENN Energy, Hong Kong’s Securities and Futures Commission has granted a waiver from a mandatory general offer for shares of ENN Energy, given Chairman Wang also owns a controlling stake in ENNEC. ENN Energy’s management has also confirmed that there will be no delay in restructuring despite the outbreak of the coronavirus in China.

ENN Ecological Holdings (600803 CH): 4 March 2020

Group synergies to be further released

ENNEC’s underlying According to the management of ENN Energy, one of the key rationales behind the segments are likely to shareholding restructuring is to generate synergies between the 2 companies from a generate synergies with broader access to upstream gas resources. We subscribe to this idea as we see potential ENN Energy synergies between ENN Energy and almost all business segments of ENNEC. ENNEC can secure gas sales through a long-term collaboration with ENN Energy, while ENN Energy can obtain low-cost LNG from ENNEC.

ENNEC: gross profit ENNEC: gross-profit breakdown (CNYm) 100% 2% 13% 9% 10% 3,500 15% 2% 4% 80% 3% 3,000 41% 37% 39% 2,500 34% 60% 41% 2,000 1,500 40% 34% 26% 32% 29% 24% 1,000 20% 500 19% 22% 20% 22% 21% 0 0% 2017 2018 2019E 2020E 2021E 2017 2018 2019E 2020E 2021E Coal Chemical Energy Engineering Coal LNG Bio-medicine Others Coal Chemical Energy Engineering Coal LNG Bio-medicine Others

Source: Companies, Daiwa forecasts Source: Company, Daiwa forecasts Note: Gross profit excludes income from ENN Energy, Santos and other JVs/Associates

LNG segment. Currently operating through its wholly-owned subsidiary, Xinao Qinshui, which runs 2 coalbed methane-to-LNG plants in Shaanxi, ENNEC’s LNG segment will be its fastest-growing segment, in our view. Based on our estimates, ENNEC’s LNG production will increase more than three-fold during 2019-22E, thanks to the commencement of operations of its coal-gasification LNG plant in Inner Mongolia in 4Q20E and shale gas LNG plant in Sichuan in 2021E. From both gas cost and gas reliability perspectives, ENN Energy will be a direct beneficiary of ENNEC’s rapid LNG development, as the management of ENNEC has guaranteed the priority of gas supply to ENN Energy.

Energy engineering segment. Mainly operating through its wholly-owned subsidiary, Xindi Energy Engineering, ENNEC derives more than 50% of its engineering segmental income from ENN Energy. Looking ahead, ENNEC expects a stable revenue contribution from ENN Energy, while that from external parties increases from 17% in 2018 to 27% in 2021E. Xindi is also in charge of construction of the Zhoushan LNG terminal (in which ENN Energy contributes c.50% to terminal usage). We believe ENNEC management’s in-depth understanding of the terminal paves the way for the possibility of an injection of terminal assets into ENNEC’s portfolio, which is likely to take place in 2021/22E.

Coal chemical segment. ENNEC is primarily engaged in the production and trading of methanol through its 75%-owned subsidiary, Xinneng Energy. Having doubled its methanol production capacity in 2H18, we believe this segment will be under immense pressure from the downtrend in methanol prices over 2019-21E, but we also see management reacting quickly through the development of a methanol trading arm and a dimethyl ether (DME) production arm since 2Q19.

Coal segment. ENNEC owns the Wangjiata coal mine through its wholly-owned subsidiary, Xinneng Mining. This segment witnessed a short-term loss due to an operation suspension from 9 November 2019 to 15 February 2020. Yet, we think it will stage a strong comeback, supported by capacity expansion approved by the authorities in May 2019.

Bio-medicine segment. ENNEC sold its bio-medicine segment in March 2019 to turn the company into a pure energy play. While the consideration appears to be unattractive, we believe the spin-off can unlock the conglomerate discount and provide ammunition for ENNEC’s future action if looked at from a long-term perspective.

ENN Ecological Holdings (600803 CH): 4 March 2020

ENNEC: business segments Before Restructuring ENN Ecological Holdings Limited (600803.SH)

9.97%

Santos Energy Coal Coal Chemical LNG (ASX: STO) Engineering

75% 75% 75% 40% 100% 45% 100% 100% 50% Xinneng Xinneng Xinneng Xinneng CNOOC Xindi Energy Xinde Gas Xinneng Mining (Zhangjiagang) (Fenghuang) (Tianjin) Xinao Qinshui Energy (Beihai) Gas Engineering Engineering Energy Tengzhou Energy

After Restructuring ENN Ecological Holdings Limited (600803.SH)

32.80%

ENN Energy Energy Coal Coal Chemical LNG (HKEx: 2688 HK) Engineering

Source: Company, Daiwa

LNG: ramp-up of coal gasification secures gas source for ENN Energy The fastest-growing On our estimates, LNG will be the fastest-growing business segment for ENNEC, and we segment, which is set to expect its annual LNG production to increase more than 3-fold from 135mcm in 2019E to take off in 2021E 564mcm in 2021E. Currently, only operating through the 2 coalbed methane-to-LNG plants of its wholly-owned subsidiary, Xinao Qinshui, ENNEC’s LNG segment accounts for just 2.3% and 1.7% of ENNEC’s total revenue and gross profit, respectively, as of 1H19. We forecast the contribution of the LNG segment to revenue and gross profit to increase to 9.2% and 10.0%, respectively, by 2021E (we do not consider associate income from ENN Energy in our calculation of revenue and gross profit), aided by the commencement of the coal gasification plant under Xinneng Energy, its 75%-owned subsidiary, and future M&A opportunities.

ENNEC: LNG segment forecasts 2017 2018 2019E 2020E 2021E Production Capacity (mcm) 135 135 135 185 632 Production Volume (mcm) 147 151 135 179 564 Sales Volume (mcm) 147 151 135 179 564 LNG ASP (CNY/m3) 2.22 2.63 2.24 2.13 2.08 LNG AC (CNY/m3) 1.60 2.02 1.90 1.81 1.63 Dollar Margin (CNY/m3) 0.62 0.61 0.34 0.32 0.46 Total Revenue (CNYm) 327 396 301 380 1,175 Total Cost (CNYm) 235 305 256 323 917 Gross Profit (CNYm) 92 92 45 57 258 Gross Profit Margin 28.11% 23.14% 15.00% 15.00% 21.94%

Source: Bloomberg, Daiwa forecasts

Currently, ENNEC has 2 coalbed methane-to-LNG projects in Qinshui, Shanxi with designated production capacity of c.135mcm per year. To ensure sufficient supply, Xinao Qinshui signed a 15-year procurement contract with China United Coalbed Methane

ENN Ecological Holdings (600803 CH): 4 March 2020

whereby coal methane is directly transferred through pipelines to Xinao Qinshui’s CBM-to- LNG plants. The 2 plants produced 150.9m m3 of LNG in 2018 (exceeding designated capacity by 12%) and 61.6m m3 in 1H19.

Development of coal To further enhance its upstream gas production capability, ENNEC has developed gasification technology coal gasification technology to secure more upstream gas resources (see Appendix to diversify upstream 3 on page 33). It has been conducting coal gasification R&D in Inner Mongolia since 2004 gas sources and made a major breakthrough in coal gasification technology in 2012. ENNEC’s subsidiary, Xinneng Energy, currently operates the stable light hydrocarbon project, which incorporates hydro-gasification and catalytic gasification core technology. The stable light hydrocarbon project underwent its first successful trial production in December 2018. The project is currently in the ramp-up trial production phase and ENNEC targets to achieve LNG production of c.200mcm p.a. by 2021E, based on our forecasts, rising further to c.240mcm later on. In addition to LNG, other by-products such as 44,000 tonnes of LPG may also be produced. However, the production timeline is uncertain as it is still optimising the production process. We expect the coal gasification plant to commence operations in 4Q20 with the utilisation rate picking up gradually from 75% in 2020E to 100% in 2021E.

ENNEC: LNG average selling price and average cost China: LNG ex-factory National Index 2.80 5,500 2.60 2.40 5,000 2.20 2.00 4,500 1.80 4,000 1.60 1.40 3,500 1.20 1.00 3,000 2017 2018 2019E 2020E 2021E

LNG ASP (CNY/m3) LNG AC (CNY/m3) Jul-19

Apr-19 Oct-19 Apr-19 Oct-19

Jan-19 Jan-19 Jun-19 Jun-19 Jan-20 Jan-20

Mar-19

Feb-19 Feb-20

Aug-19 Aug-19 Sep-19 Nov-19 Dec-19 May-19 Source: Daiwa estimates Source: Wind, Daiwa

Gradual dollar margin expansion will be seen over 2020-22E despite declining average selling prices of LNG. We forecast ENNEC to see a sharp decline in LNG average sales price from CNY2.63/m3 in 2018 to CNY2.24/m3 in 2019E, CNY2.13/m3 in 2020E and CNY2.08/m3 in 2021E, due to sluggish economic growth caused by the ongoing trade war and outbreak of the coronavirus. Despite the ongoing downward spiral in LNG prices in China, we expect dollar margins to start to expand from 2021E, as we anticipate an even more drastic decline in the average cost of LNG from CNY1.81/m3 in 2020E to CNY1.63/m3 in 2021E. During a recent conference call, ENNEC’s management said the company’s coal gasification technology had led to a significant reduction in non- water costs compared with its peers. By utilising Coal Hydrogasification for Aromatics and Methane (CHARM) and Catalytic Gasification technology, which lowered its water consumption by a third and raised its heat efficiency by 15pp to 76% in 2019, ENNEC was able to reduce its production cost of coal-gasified LNG by >24% to CNY1.1-1.2/m3, according to the company. This should help to lower its average LNG cost sharply from 4Q20E. We therefore forecast the dollar margin of ENNEC’s LNG segment to recover from CNY0.32/m3 in 2020E to CNY0.46/m3 in 2021E.

ENN Energy can further alleviate dollar margin risk given the cost-competitiveness of coal-gasified LNG. Based on our calculation, LNG from ENNEC’s coal-gasification plant is 40% and 50% lower than non-heating and heating season provincial-gate tariffs in eastern China, respectively. Our channel checks also confirmed that ENN Energy is interested in purchasing gas from ENNEC as long as the prices are competitive and ENN Energy believes the synergies with ENNEC can help them negotiate new city-gas projects with the government.

ENN Ecological Holdings (600803 CH): 4 March 2020

ENNEC: coal-gasification cost comparison (CNY/m3) 3.0

2.5

2.0

1.5 2.4 1.0 2.0 1.5 0.5 1.2

0.0 ENNEC's Coal-gasification cost Traditional Coal-gasification cost Average provincial-gate tariff in Average provincial-gate tariff in eastern China in non-heating eastern China in heating season season Source: Company, Daiwa estimates

LNG M&A: asset-light development for further diversification of gas sources According to ENNEC management, the asset-light M&A development model will become the long-term growth driver of the company’s LNG segment. The company does not expect to participate in other organic LNG project developments after the completion of its current coal-gasification plants. Instead, ENNEC will seek both local and overseas LNG M&A opportunities that require a low level of investment (ie, asset-light) in the future to diversify its upstream gas sources.

Failure to acquire We believe the failed attempt to acquire Toshiba’s US LNG asset prompts ENNEC to Toshiba’s US LNG asset turn to the asset-light development model. On 11 November 2018, ENNEC announced turns ENNEC to asset- the acquisition of Toshiba’s US LNG asset, with a total LNG production capacity of light development model 2.2mtpa, for a consideration of USD15m. The deal was originally scheduled to be completed by end-March 2019. Yet, ENNEC later announced that it had pulled out of the deal due to an objection from Hony Capital, its second-largest shareholder. Despite this failed attempt, we believe ENNEC will not step back from securing more upstream gas resources, particularly as management’s objective is to ensure the company has a stable internal gas supply after the restructuring. In our view, asset-light development is precisely the solution to this problem – given the small investment under the asset-light model, ENNEC can develop LNG sources without facing the uncertainty associated with shareholder opposition.

Chongqing shale gas Acquisition of the Chongqing LNG plant in December 2019 marks the very beginning LNG plant is just the first of its asset-light development. According to our channel check, ENNEC acquired a attempt shale-gas LNG plant in Longyan, Chongqing, with FuLing Energy in December 2019. ENNEC will contribute CNY20m for a minority 14% stake in the plant and a 51% stake in the gas sales company. On top of that, ENNEC will provide engineering procurement and construction (EPC) services for the project. The LNG plant is expected to be completed by 2H20 and have an annual capacity of 0.33bcm (or 2.2mtpa), in which ENNEC will be in charge of sales of 90% of LNG output, probably to ENN Energy. In our view, ENNEC will continue to lock in gas resources through the asset-light model as it brings about a spill- over effect for its other business segments (ie, downstream city-gas and energy engineering) without putting too much capex pressure on the company. We believe the major obstacle will be the scarcity of suitable projects, given ENNEC management’s preference to only invest a small amount in each project. This concern is also the reason for ENNEC looking for both local and overseas opportunities, in our view.

Diversification of gas ENNEC’s attempt at gas source diversification has significant synergies with ENN sources is important for Energy’s downstream gas distribution business. According to ENNEC’s management, ENN Energy during the priority for LNG gas usage will always be given to ENN Energy for newly-acquired LNG winter season plants. We believe broader access to gas supply resources is important for ENN Energy to contain dollar margin squeeze, particularly during the winter heating season when the market-based spot LNG price can be as high as CNY4.0/m3, based on historical records.

ENN Ecological Holdings (600803 CH): 4 March 2020

Energy Engineering: paves the way for an LNG terminal injection which safeguards ENN Energy’s gas supply Solid earnings from ENN The energy engineering arm of ENNEC operates under Xindi Energy Engineering Energy and ENN Group Technology (Xindi), a wholly-owned subsidiary of ENNEC, which accounted for 21% and until 2021E 24% of ENNEC’s revenue and gross profit, respectively, for 1H19. Xindi is engaged in integrated business services, including technical R&D, engineering design, equipment manufacturing and integration, project construction and management in the fields of municipal engineering, petrochemical, coal chemical and clean energy utilisation. We expect ENNEC’s energy engineering segment to witness stable returns with c.CNY3,200m of revenue and c.750m of gross profit until 2021E on the back of: 1) its geographically and horizontally diversified business profile, and 2) the ongoing construction of the Zhoushan LNG terminal (phase 2) until 2021E. For conservative reasons, our base-case scenario does not factor in the other potential impacts from: 1) the asset-light development of ENNEC’s LNG segment, and 2) construction of the Zhoushan LNG terminal (phase 3). We see substantial upside for ENNEC’s energy engineering arm if these 2 projects materialise.

ENNEC: energy engineering segmental revenue forecasts (CNYm) 3,500

3,000 542 596 715 859 2,500 549 2,000 991 908 833 556 271 1,500 1,207 843 1,000 1,645 1,679 1,712 1,747 500 837 941 0 2016 2017 2018 2019E 2020E 2021E ENN Energy ENN Group External parties

Source: Company, Daiwa forecasts

ENNEC: business profile of Xindi

Source: Company

ENNEC to record a 2% Engineering arm of ENNEC (aka Xindi) will continue to enjoy engineering business CAGR in engineering opportunities from ENN Energy on the back of rapid city-gas and DE/IE revenue from ENN development. According to the management of ENNEC, 50% of its energy engineering Energy over 2018-22E income came from ENN Energy in 2018. The contribution from ENN Energy rose further to 60% in 1H19, based on our calculation. In terms of projects involved, ENNEC is mainly in charge of the construction of medium- to-low-pressure local distribution pipelines for ENN Energy. Against the backdrop of strong gas sales growth for ENN Energy as mentioned in

ENN Ecological Holdings (600803 CH): 4 March 2020

the previous section, we expect ENNEC to generate a moderate 2% CAGR in engineering revenue from ENN Energy over 2018-21E.

No further income from Diminishing income stream from the construction of the Zhoushan LNG terminal ENN Group, assuming (phase 2) owned by ENN Group (not listed, parent of ENNEC and ENN Energy). there is no Zhoushan Phase 1 of Zhoushan LNG terminal was completed in 2018 with an investment of terminal (phase 3) CNY5.8bn (see Appendix 4 on page 37). Currently, ENNEC is still generating revenue from phase 2 and the Zhoushan transmission pipeline projects with investment amounts of CNY3.0bn and CNY1.8bn, respectively. As the group’s engineering contractor, ENNEC took the majority portion of the construction work and enjoys a stable income stream from the project. According to the management of ENNEC, c.30% of its energy engineering income came from the ENN Group in 2018. Yet, we expect the revenue contribution from ENN Group to gradually decline from 29% in 2019E to 18% in 2021E. As the prospect of phase 3 development remains unclear at this point in time, our base-case scenario assumes ENNEC will receive no revenue from the ENN Group from 2022E.

ENNEC believes Xindi has received increasing external recognition and business opportunities since the completion of Zhoushan LNG terminal (phase 1). We forecast ENNEC’s engineering revenue from external parties to rise at a CAGR of 17% over 2018- 21E. The revenue contribution from external parties rose to 20% in 1H19 from 17% in 2018. We expect this contribution to rise to 27.2% for 2021E and 34% for 2022E as ENNEC’s management said in a recent conference call that the development of engineering projects for external parties would be the next main focus of Xindi. The increase in external projects should partly offset the impact of any delay in the construction of Zhoushan LNG terminal (phase 3), in our view.

Injection of Zhoushan After our discussion with management, we see a possibility that the Chairman will terminal likely, given inject the LNG terminal asset into ENNEC over 2021-22E to improve synergies under ENNEC’s in-depth its integrated business model. While the valuation of the Zoushan terminal remains understanding of the unknown, we believe the injection would be value-accretive from a corporate governance asset perspective given the management of ENNEC’s in-depth understanding of the project. We also expect the terminal’s utilisation rate to remain high on the back of ENN Energy’s high- single-digit gas sales CAGR on our forecasts until 2025E, which would drive up the company’s demand for imported LNG.

The LNG terminal is a crucial gateway for ENN Energy to access off-shore LNG resources. Limited direct access to overseas LNG remains a common industry pain point for city-gas distributors in China (See Appendix 5 on page 39), but ENN Energy is perhaps the only exception. With the help of the Zhoushan LNG terminal, ENN Energy can search for seaborne LNG supply to alleviate the dollar margin risk, given off-shore spot LNG import costs can be kept below provincial-gate tariffs as long as Brent is below USD60/bbl, based on our calculation. During the winter period, supply can be tight and LNG prices can shoot up to above CNY4/m3, which implies that ENN Energy can enjoy >50% cost savings with the LNG procurement agreement, on our estimates.

ENN: all-in cost of long-term LNG offtake contract in eastern China CNY/m3 2.5

2.0 0.3 1.5 0.1 2.4 1.0 2.0 1.5 0.5

0.0 Off-shore spot LNG import cost Average provincial-gate tariff in eastern China Average provincial-gate tariff in eastern China in non-heating season in heating season FOB VAT Operator handling fee

Source: ENN and Daiwa estimates; Note: Assuming Brent price of USD60/bbl

ENN Ecological Holdings (600803 CH): 4 March 2020

Zhoushan terminal will We expect ENN Energy to continue to utilise the Zhoushan terminal, if not ramp up continue to be an LNG imports through this channel. For the purpose of cost savings and energy important gateway for reliability, ENN Energy signed 5-year procurement agreements with Chevron, Origin and ENN Energy Total in 2018 to procure a total of 1.43mtpa of contracted LNG. Given the price competitiveness of imported LNG, ENN Energy decided back in January 2019 to utilise its full import quota for 2019 of 1.43mtpa. During our Daiwa PURE conference held in early January 2020, management stated that ENN Energy procured 2bcm of LNG through the Zhoushan terminal in 2019 (c.50% of the total capacity of the terminal) to alleviate the pressure of a dollar margin squeeze. Should there be an injection of the Zhoushan terminal into ENNEC, ENNEC would take the profit from the ongoing usage of the terminal.

ENN Energy: confirmed LNG import contracts starting from 2H18 CIF price at current LNG terminal total fee Current non-residential Supply Length of oil price, CNY/m³ (handling, gasification etc), All-in cost coastal city-gate Difference Supplier volume (ktpa) contract (Daiwa estimates) LNG pricing method (CNY/m³) (CNY/m³) (CNY/m³) (CNY/m³) Chevron 650 5 years 1.65 Oil-linked with price ceiling 0.35 2.00 2.05 0.05 Qatar 500 5 years 1.65 Oil-linked with price ceiling 0.35 2.00 2.05 0.05 Origin Energy 280 5 years 1.6 Oil-linked with price ceiling 0.35 1.95 2.05 0.1 Source: Company, Daiwa research

Coal mining: impact of Wangjiata coal mine accident manageable The coal mining business accounted for 25% and 38% of ENNEC’s total revenue and gross profit, respectively, for 1H19. Operating under its wholly-owned subsidiary, Xinneng Mining, ENNEC owns the Wangjiata coal mine in Inner Mongolia, which has an annual production capacity of 8.0m tonnes. Due to a halt in operations after a fatal accident in November 2019, we expect ENNEC’s coal production volume in 2019E to be 5.92m tonnes, down 8% from a total production of 6.44m tonnes in 2018. Despite the accident, we expect coal production in 2020E to be 6.65m tonnes, marginally higher than the 2018 level, on the back of capacity expansion approved by the Inner Mongolia Government in May 2019 that raised annual production capacity of the mine from 6.8m tonnes to 8.0m tonnes. Furthermore, we expect coal production at the Wangjiata coal mine to ramp up to 7.57m tonnes for 2021E, thanks to the expansion plan.

Earnings recovery to be We expect a short-term earnings recovery over 2020-21E due to: 1) capacity seen after the overhang expansion, and 2) a low-production base in 2019E. Due to the accident, we forecast a of coal mine accident decline in gross profit to CNY875m for 2019E from CNY993m for 2018. Besides, we removed expect the increase in production volume to drive up gross profit to CNY933m for 2020E and CNY1,003m for 2021E. From 2022E, we believe profitability of ENNEC’s coal segment is likely to go down due to a margin squeeze. Despite a fall in coal average costs caused by: 1) an increase in contribution from coal production, and 2) falling procurement costs for the traded coal segment, we believe the fall in average selling price of coal will be even more prominent.

ENNEC: coal segment forecast 2017 2018 2019E 2020E 2021E Production Capacity (tonnes) 6,800,000 6,800,000 7,550,000 8,000,000 8,000,000 Production Volume (tonnes) 6,416,700 6,435,427 5,922,225 6,645,735 7,571,091 Sales Volume (tonnes) 8,157,900 9,199,717 9,288,240 10,684,953 11,610,308 Production (tonnes) 6,455,900 6,407,310 5,922,225 6,645,735 7,571,091 Traded (tonnes) 1,702,000 2,792,407 3,366,015 4,039,218 4,039,218 Coal ASP (CNY/tonne) 278 345 342 331 316 Coal AC (CNY/tonne) 152 237 247 244 230 Coal Gross Margin (CNY/tonne) 127 108 94 87 86 Total Revenue (CNYm) 2,271 3,174 3,174 3,542 3,672 Total Cost (CNYm) 1,238 2,181 2,298 2,609 2,669 Gross Profit (CNYm) 1,032 993 875 933 1,003 Margin 45.46% 31.28% 27.58% 26.34% 27.33%

Source: Bloomberg, Daiwa forecasts

ENN Ecological Holdings (600803 CH): 4 March 2020

Temporary shutdown of the Wangjiata coal mine from 9 November 2019 to 15 February 2020 due to safety reset after the fatal accident. On 28 December 2019, ENNEC disclosed in an investigative report that operations at the Wangjiata coal mine had been halted after a third-party transportation accident occurred inside the coal mine, killing a worker. The closure is expected to incur a net loss of CNY132.26m on revenue and CNY80.77m on net profit for the period from 9 November 2019 to 31 December 2019, according to ENNEC. We believe the operation suspension reduced ENNEC’s coal production in 4Q19E to 0.74m tonnes, down c.55% compared with the previous quarters. On 17 February, ENNEC announced that the Wangjiata coal mine had been re-opened on 15 February 2020 and the closure incurred a further CNY168.15m and CNY96.78m in losses on revenue and net profit for the period from 1 January 2020 to 15 February 2020.

ENNEC: net loss calculation 2019E 2020E 2018 9M19 w/o accident w/ accident Loss w/o accident w/ accident Loss (tonnes) Production 6,435,400 5,028,500 6,815,153 5,922,225 -892,928 7,571,091 6,645,735 -925,356 Sales 6,414,400 5,044,400 6,831,053 5,922,225 -908,828 7,571,091 6,645,735 -925,356 (CNYm) Revenue 1,595 1,302 1,609 1,477 -132 1,776 1,608 -168 Net Profit 534 393 533 452 -81 792 695 -97

Source: Company, Daiwa forecasts

Capacity expansion Expansion plan of the Wangjiata coal mine stays intact despite the recent accident. remains intact On 16 May 2019, ENNEC announced that it had received final approval from the NDRC and Inner Mongolia Energy Bureau on the annual capacity expansion of the Wangjiata coal mine from 6.8m tonnes to 8.0m tonnes. However, after the fatal accident, the Mongolia Energy Bureau downgraded the safety level of the Wangjiata coal mine from first class to third class, which may reduce the odds of, or delay, capacity expansion despite getting final approval. According to our channel check, the management of ENNEC said the expansion plan is not affected by the accident, and the Wangjiata coal mine can resume its upgraded 8.0m tonne annual production capacity once it reopens.

Other business segments remain unaffected by the temporary shutdown. The temporary shutdown of the Wangjiata coal mine is unlikely to have any impact on ENNEC’s other business segments. According to ENNEC, 99.99% of the coal and 100% of the coal produced at Wangjiata in 2018 and 9M19, respectively, were for external sales. In short, we believe the impact from the halt of coal mine operations will not spill over to ENNEC’s coal chemical business segment. Looking ahead, the management of ENNEC said all coal produced at Wangjiata would still be subject to external sales, while the company’s coal- chemical and coal gasification segments are unlikely to procure coal from Wangjiata due to a calorific value mismatch. Meanwhile, the coal trading arm of ENNEC will also be completely unaffected by the operation suspension of the Wangjiata coal mine. Yet, given that the contribution of revenue and profit of the trading segment will become more prominent during this period, our calculation suggests that the blended gross profit margin of ENNEC’s coal business will fall from 31.28% for 2018 to 27.58% for 2019E.

ENNEC: recent events at the Wangjiata coal mine 16 May 2019 ENNEC upgraded 2019 coal production target to 7.6m tonnes after Inner Mongolia 31 December 2019 Government approved capacity ENNEC expects CNY132.26m loss in expansion of Wangjiata Coal Mine from revenue and CNY80.77m loss in porfit 6.8mtpa to 8.0mtpa from 9 Nov to 31 Dec due to the halt

12 March 2019 9 November 2019 15 February 2019 ENNEC set 2019 coal production target of Wangjiata Coal Mine suspended Wangjiata Coal Mine resumed operation 6.5m tonnes for Wangjiata Coal Mine operation following a fatal accident

Source: Company, Daiwa

ENN Ecological Holdings (600803 CH): 4 March 2020

Coal-based chemical: eye on methanol prices The coal-based chemical arm of ENNEC operates under Xinneng Energy, a 75%-owned subsidiary of ENNEC, and accounted for 35% and 19% of ENNEC’s total revenue and profit, respectively, for 1H19. Xinneng Energy focuses on the production of methanol utilising coal and coal water slurry additive, as well as a small-scale production of DME with methanol as a raw material. Xinneng Energy’s total methanol capacity will reach 1.2m tonnes per year starting from 2019E after the full-fledged operations of its methyl alcohol device (phase 2) in Inner Mongolia in June 2018. We believe the production increase will not crowd out the sales volume of the trading arm, as the management of ENNEC explains that the trading arm is indeed a different business segment strictly speaking that caters to different customers.

Earnings decline due to A sharp earnings decline in 2019E but a modest recovery from 2020E. Due to a slump slump in methanol price in methanol prices since December 2018, we expect ENNEC’s coal-chemical segmental likely to be offset by profit to decline significantly from CNY647m for 2018 to CNY466m for 2019E. Yet, we see volume growth a recovery in segmental profit from 2020E due to: 1) expansion of the methanol trading segment, and 2) rising profitability of the DME segment due to falling methanol prices. We believe these 3 factors will drive the segment’s gross profit from CNY466m for 2019E to CNY627m for 2022E.

ENNEC: coal-chemical segment forecasts 2017 2018 2019E 2020E 2021E Production Capacity (tonnes) 600,000 900,000 1,200,000 1,200,000 1,200,000 Production Volume (tonnes) 778,649 1,033,534 1,416,000 1,392,000 1,368,000 Sales Volume (tonnes) 1,589,479 2,165,928 2,541,583 2,576,479 2,614,843 Production (tonnes) 784,071 1,041,761 1,416,000 1,392,000 1,368,000 Traded (tonnes) 785,262 1,108,134 1,108,138 1,163,544 1,221,722 Other (tonnes) 20,146 16,032 17,446 20,935 25,122 Coal-chemical ASP (CNY/tonne) 2,009 2,283 1,869 1,851 1,814 Coal-chemical AC (CNYtonne) 1,712 1,984 1,686 1,654 1,604 Coal-chemical Gross Margin (CNYtonne) 296 299 183 197 210 Total Revenue (CNYm) 3,193 4,945 4,751 4,769 4,744 Total Cost (CNYm) 2,722 4,298 4,285 4,261 4,195 Gross Profit (CNYm) 471 647 466 507 549 Margin 14.75% 13.08% 9.81% 10.63% 11.57%

Source: Company, Daiwa forecasts

Coal-based chemical business remains unaffected by the production disruption at the Wangjiata coal mine. According to ENNEC’s management, 99.97% of coal used by Xinneng Energy in 2018 was externally purchased, which means the Wangjiata coal mine accident is unlikely to have any adverse impact on ENNEC’s coal-based chemical business.

Total annual methanol We expect total annual methanol production for Xinneng Energy to reach 1,400,000 production is to reach tonnes in 2019E, exceeding its stated annual capacity. As of 2018, ENN Energy 1.4mt in 2019E subsidiary Xinneng Energy’s methyl alcohol device phase 1 in Inner Mongolia produced 803,900 tonnes of methanol, exceeding its stated annual capacity by 203,900 tonnes. Meanwhile, its methyl alcohol device phase 2 (ie, the coal gasification plant, which also produces 600,000 tonnes of methanol per year as intermediate output for the production of stable light hydrocarbon) has produced 230,000 tonnes of methanol in 2H18 after the commencement of operations in June 2018. Meanwhile in 1H19, phase 1 and phase 2 of the methyl alcohol device produced 418,500 tonnes and 354,300 tonnes, respectively, exceeding the designed capacity by 40% and 18%, respectively. We estimate ENNEC continued to produce above maximum capacity in 2H19E and forecast annual methanol production for 2019E to reach 1,400,000 tonnes.

However, slumping methanol prices since end-2018 will continue to suppress segmental earnings. Due to the ramp-up in methanol production in Iran, Chile and China, a global supply glut of methanol has emerged to drive down methanol prices across the globe, and China is no exception. According to operating data provided by ENNEC, its average sales prices of self-produced methanol and traded methanol declined by 28% YoY and 21% YoY, respectively, for 9M19. Looking ahead, we see methanol prices declining by 5% YoY over 2019-22E.

ENN Ecological Holdings (600803 CH): 4 March 2020

ENNEC: methanol ASP vs. China methanol price China: methanol price since 2018 (USD/t) (CNY/t) (USD/t) 550 2,100 450 500 2,000 400 450 1,900 400 350 350 1,800 300 300 1,700 250 250 1,600 200 200 150 1,500 150 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-18 Jan-19 Jan-20 China Methanol CFR Price (LHS) ENNEC Methanol ASP (RHS) China Methanol CFR Price (LHS)

Source: Bloomberg, Company, Daiwa Source: Bloomberg, Company, Daiwa Note: Correlation between ENNEC Methanol ASP and China Methanol Price is 0.73.

The fall in production Fall in production costs to partially hedge the negative impact of slumping methanol costs will provide profit- prices and contribute to an earnings recovery for ENNEC. Investors should bear in margin support mind the “hedge” nature of some of ENNEC’s business segments. The first “hedge” is between the methanol segment and the DME segment. Thanks to the slump in methanol prices since end-2018, ENNEC’s DME segment has seen a boost to profitability against the backdrop of a 22% YoY decline in raw-material costs, but only an 11% YoY fall in average selling price in 9M19. Consequently, ENNEC capitalised on this opportunity to increase sales of DME in each of the first 3 quarters of 2019. The second “hedge” is between methanol production and methanol trading. Leveraging on its established supply network, ENNEC can scale back methanol production while increasing sales volume of the traded segment. As the profitability of the production segment is positivity correlated to the methanol price, while the profitability of the trading segment is largely fixed, we believe ENNEC will continue the substitution of production by trading if the methanol price continues to decline.

ENNEC: DME sales volume ENNEC: methanol sales volume (tonnes) (tonnes) 5,500 500,000

5,000 400,000

300,000 4,500 200,000 4,000 100,000 3,500 0

3,000

1Q18 2Q19 2Q17 3Q17 4Q17 2Q18 3Q18 4Q18 1Q19 3Q19

1Q 2Q 3Q 4Q 1Q17 4Q19E 2018 2019 Self-produced methanol Traded methanol

Source: Bloomberg, Company, Daiwa Source: Bloomberg, Company, Daiwa

Bio-medicine: negative financial impact of spin-off largely priced in ENNEC became a pure Formerly listed as Hebei Weiyuan Heilen Bio-chemical before being restructured into energy play after the ENNEC in January 2015, ENNEC continued to be involved in the production of pesticides spin-off of the bio- and veterinary drugs until March 2019. On 10 October 2018, ENNEC announced the medicine segment proposed spin-off of 3 of its subsidiaries under the biopharmaceutical segment (collectively known as the Weiyuan Asset) to Limin Chemical (002734 CH) for a consideration of CNY750m to CNY800m, or a 2018 PER of 7.0x to 7.5x. On 13 March 2019, ENNEC announced the finalised spin-off deal of this legacy Weiyuan Asset for a total consideration of CNY759m with a disposal gain of CNY96m. After the spin-off of Weiyuan Asset, ENNEC became a pure energy company.

ENN Ecological Holdings (600803 CH): 4 March 2020

We believe the negative financial impact of the spin-off has been largely priced in. The total consideration of CNY750m to CNY800m proposed in October 2018 was deemed unattractive. Consequently, a share-price correction of 25% was seen for 2 weeks following the announcement in October 2018. Yet, we saw a rather mild share-price correction after the announcement of the final spin-off agreement in March 2019 and after the announcement of 3Q19 results with a 42% YoY drop in attributable profit, due partly to the disposal of the pharmaceutical business. We believe the initial price correction of ENNEC in October 2018 largely factored in the negative impact of the spin-off on earnings.

ENNEC: 2018-19 share price A-share performance Event Date 1-day 3-day 7-day Announcement of Proposed Spin-off of Weiyuan Asset 10-Oct-18 -4.76% -11.64% -19.74% Announcement of Finalized Spin-off Deal of Weiyuan Asset 12-Mar-19 -0.52% -2.32% 6.19% Announcement of 3Q19 Result 25-Oct-19 -2.26% -7.85% -5.23%

(CNY) 16 15 Mild price correction 14 13 12 11 10 Share price plunged by 25% in 9 2-week time after initial announcement of the deal

Jul-18 Jul-19

Apr-19 Apr-18 Oct-18 Oct-19

Jan-18 Jun-18 Jan-19 Jun-19

Mar-19 Mar-18

Feb-18 Feb-19

Aug-18 Sep-18 Nov-18 Dec-18 Aug-19 Sep-19 Nov-19 Dec-19 May-19 May-18 Source: Bloomberg, Daiwa

In the longer run, we expect the spin-off of the biopharmaceutical business to unlock the conglomerate discount. From a valuation perspective, the spin-off can reduce the conglomerate discount by turning ENNEC into a pure integrated gas company. With hindsight, it also gives ENNEC sufficient ammunition for the restructuring with ENN Energy.

Santos: the deal sweetener set to boost ENNEC’s reported earnings in 2020E Santos should support Santos is one of the leading independent oil and gas producers in the Asia-Pacific region ENNEC’s reported with a high-quality portfolio of pipeline gas and oil assets. Its net profit attributable to earnings in 2020E shareholders reached USD630m and USD674m for 2018 and 2019, respectively. As such, we estimate ENNEC will book CNY470m of associate income (of which CNY159m will be dividends) from Santos in 2019E, up 11% YoY (216% YoY). We also calculate that the asset swap of Santos will bring about a CNY1,742m disposal gain for ENNEC in 2020E.

As discussed in our ENN Energy memo dated 10 September 2019, we believe ENN Energy will also have more collaboration with the upstream company despite the asset swap, which will put Santos out of ENNEC. Particularly, after the commencement of operations of Zhoushan LNG terminal (currently owned by ENN Group which we believe will be injected into ENNEC by 2021/22E), ENN Energy will possibly import LNG from Santos through the LNG Terminal to broaden gas supply resources for additional gas sales and potentially lower costs during the peak season.

ENN Ecological Holdings (600803 CH): 4 March 2020

Financials Strong earnings from ENN Energy to offset weak performance of underlying segments We believe ENNEC’s earnings will be boosted by ENN Energy’s contribution as associate income from 2020E. We forecast ENNEC’s PBT (net one-off items) to surge by 98.0% YoY for 2020E on a 237% YoY increase in associate earnings after the injection of ENN Energy in that year. We forecast a further 16.8% YoY increase in associate income for 2021E, driven by strong EPS growth for ENN Energy, which we estimate will contribute partly to the 19.5% YoY increase in PBT (net one-off items) for that year.

Earnings of underlying Meanwhile for underlying segments, we do not expect an earnings recovery until segments recovery to be 2021E. Based on our estimates, ENNEC will suffer from a 7.6% YoY decline in revenue seen only until 2021E and 19.1% decline in gross profit for 2019E due to: 1) the spin-off of the biopharmaceutical segment, 2) the production suspension at the Wangjiata coal mine, and 3) the slump in coal, methanol and LNG prices. We forecast ENNEC to see a further 4.6% YoY decline in revenue and 3.5% decline in gross profit for 2020E due to: 1) the spin-off of the bio-pharmaceutical business, which will lead to a fall in earnings for 1H20E, and 2) weak commodity prices due to the outbreak of the coronavirus. In 2021E, we look for its gross profit to pass the CNY2,500m mark due to production ramp-up for the LNG and coal segments.

ENNEC: key financial snapshot 2017 2018 2019E 2020E 2021E Revenue 10,036 13,632 12,601 12,022 12,822 YoY 56.9% 35.8% -7.6% -4.6% 6.7% Gross Profit 2,499 2,936 2,375 2,293 2,582 YoY 46.3% 17.5% -19.1% -3.5% 12.6% Associate Income (194) 584 630 2,124 2,480 YoY n.a. n.a. 7.8% 237.4% 16.8% PBT (net one-off items) 1,047 1,962 1,453 2,876 3,437 YoY 28.1% 87.4% -25.9% 98.0% 19.5%

Source: Company, Daiwa forecasts

ENNEC: PBT (net one-off items) 2017 2018 2019E 2020E 2021E ENN Energy 0 0 0 1,965 2,321 Coal Chemical 234 304 161 166 203 Energy Engineering 292 352 260 252 277 Coal 513 466 303 306 372 LNG 46 43 16 19 96 Bio-medicine 156 201 73 0 0 Others (193) 596 638 168 169 Total 1,047 1,962 1,453 2,876 3,437

Source: Company, Daiwa forecasts Note: Others include income from Santos (in 2017-19E) and income from other associates and joint ventures

ENNEC: PBT (net one-off items) ENNEC: PBT (net one-off items) breakdown (CNYm) 100% 6% 5% 4,000 30% 11% 11% 80% 15% 44% 9% 8% 6% 6% 3,000 60% 10% 49% 5% 24% 2,000 40% 21% 68% 68% 28% 1,000 20% 18% 18% 22% 15% 11% 0 0% -18% (1,000) (20%) 2017 2018 2019E 2020E 2021E 2017 2018 2019E 2020E 2021E ENN Energy Coal Chemical Energy Engineering Coal ENN Energy Coal Chemical Energy Engineering Coal LNG Bio-medicine Others LNG Bio-medicine Others

Source: Companies, Daiwa forecasts Source: Company, Daiwa forecasts Note: Others include income from Santos and other JVs/Associates

ENN Ecological Holdings (600803 CH): 4 March 2020

Balance sheet to improve with gradual decline in capex We believe ENNEC’s balance sheet will improve from 2019E on the back of: 1) a gradual decline in its capex since 2019E, and 2) strong earnings growth for ENN Energy (as mentioned in the previous paragraphs) since 2020E.

We look for a As the coal gasification plant project is scheduled to be completed over 2019-20E, considerable we expect a decline in organic capex from 2019E. According to its annual report, improvement in the ENNEC’s coal gasification plant has accounted for more than 70% of its total expenditure balance sheet, thanks to on construction in progress since 2016. ENNEC’s management confirmed during a falling capex and the conference call in February 2020 that there would be no more large-scale projects after issuance of new shares completion of the coal gasification plant, and that it expects the vast majority of organic capex to be recurring maintenance expenses. Our channel check also confirmed that there will be CNY700m in residual capex on a coal gasification plant spread over 2019-22E for the final adjustment of the plant and ramp-up of production capacity from 2mcm pa. to 2.4mcm pa. later on. Meanwhile, regular capex for existing projects accounts for CNY300- 500m each year. Considering all these factors, we expect ENNEC’s organic capex to decline gradually from the peak of CNY1,342m in 2018 to c.CNY700m in 2020E and c.CNY500m from 2021E.

ENNEC: organic capex ENNEC: construction in progress (CNYm) (CNYm) 1,600 3,500 1,400 3,000 1,200 2,500 1,000 2,000 800 1,500 600 1,000 400 500 200 0 2014 2015 2016 2017 2018 1H19 0 2015 2016 2017 2018 2019E 2020E 2021E Coal Gasification Plant Other Projects

Source: Companies, Daiwa forecasts Source: Companies, Daiwa forecasts

We expect a surge in acquisition capex in 2020E, but low in other forecast years. We note that ENNEC’s acquisition capex is highly uneven and event-driven. Capex was relatively high in 2014 (for the acquisition of LNG arm Xinao Qinshui), 2015 (for the acquisition of energy engineering arm Xindi), 2016 (for the acquisition of Santos) and 2020E (for the acquisition of ENN Energy), but zero acquisitions in 2017 and 2018. Overall, these acquisitions can broadly be divided into 2 types: 1) acquisitions of companies within ENN Group, and 2) acquisitions of external companies.

ENNEC: acquisition capex ENNEC: major acquisition events (CNYm) Year Target Total Consideration Result 30,000 2014 Xinao Qinshui CNY161m Completed 2015 Xindi Energy Engineering CNY1,768m Completed 25,000 2016 Santos CNY4,906m Completed 20,000 2019 Toshiba's US LNG Asset CNY105m Terminated 2020E CNY25,840m In progress

15,000

10,000

5,000

0 2014 2015 2016 2017 2018 2019E 2020E 2021E Acquision of JV/Associate Acquision of Subsidiaries

Source: Companies, Daiwa forecasts Source: Company, Daiwa forecasts

ENN Ecological Holdings (600803 CH): 4 March 2020

In our view, the Zhoushan LNG terminal is the only suitable project remaining that ENNEC will probably acquire over 2021/22E. Yet, due to a potential construction delay and uncertainty over the construction of phase 3 of the terminal, we have yet to factor this potential acquisition in our capex consideration.

Meanwhile, we believe external acquisition capex will be low given ENNEC’s asset- light model in LNG development. After the attempt to acquire Toshiba’s US LNG assets being scuppered by Hony Capital, the second-largest shareholder of ENNEC, ENNEC has switched to an asset-light approach, in which it will only take a minority role in those projects to lock in LNG resources while minimising capex. Capex on these LNG projects is bound to be low as evidenced in the mere CNY20m investment in the Chongqing LNG plant in December 2019. Overall, we forecast the company’s acquisition capex to remain low, if there is no acquisition of the Zhoushan LNG terminal.

Free cash flow and net- We believe ENNEC’s free cash flow and net-debt-to-equity position started to improve debt-to-equity of ENNEC significantly from 2019E. We expect ENNEC to register over CNY900m in free cash flow has seen an each year from 2019E, from a negative position over 2017-18. We see further FCF upside as improvement since ENNEC will likely enjoy a lower financing cost if there is a potential credit rating upgrade after 2019E having stable recurring earnings from ENN Energy. We also expect an ongoing decline in its net-debt-to-equity ratio from 161% in 2017 to 70% in 2019E to 31% in 2021E. In 2019, ENNEC raised USD300m in total through 2 rounds of high-yield note offerings in the US with a 7.5% interest rate. We believe the issuance of bond payables will have a marginal impact on the net-debt-to-equity ratio as the rise in bond payables is offset by the cash raised and saved for the restructuring in 2020E. Meanwhile, in 2020E, the issuance of 1,588m new shares at a price of CNY9.88 per share is likely to strengthen ENNEC’s balance sheet and contribute to a further decline in its net-debt-to-equity ratio. We believe it is likely that ENNEC will boost its dividend payout ratio to 25% on reported net profit in 2021E from the current level of 20%, as Chairman Wang will have greater incentive to cash out of ENNEC after the restructuring, which is set to raise his stake in ENNEC from 48.4% to 69.6%.

ENNEC: free cash flow ENNEC: net-debt-to-equity ratio (CNYm) (CNYm) 2,000 12,000 180% 160% 10,000 1,500 140% 8,000 120% 100% 1,000 6,000 80% 500 4,000 60% 40% 2,000 20% 0 0 0% 2015 2016 2017 2018 2019E 2020E 2021E (500) Net debt (LHS) Net debt to equity (RHS) 2015 2016 2017 2018 2019E 2020E 2021E Source: Companies, Daiwa forecasts Source: Company, Daiwa forecasts Note: Acquisition capex is not considered

ENNEC: EPS ENNEC: dividend payout (CNY) (CNY) 1.60 0.35 60% 1.40 0.30 50% 1.20 0.25 40% 1.00 0.20 0.80 30% 0.15 0.60 20% 0.10 0.40 0.05 10% 0.20 0.00 0.00 0% 2015 2016 2017 2018 2019E 2020E 2021E 2015 2016 2017 2018 2019E 2020E 2021E EPS (Basic) Adj EPS (Basic) DPS (LHS)) Payout ratio (RHS) Adjusted payout ratio (RHS)

Source: Companies, Daiwa forecasts Source: Company, Daiwa forecasts

ENN Ecological Holdings (600803 CH): 4 March 2020

Valuation Initiating with a Buy (1) rating and TP of CNY13.5 Our TP of CNY13.5 is Considering the differences in the business nature, earnings visibility, and return profiles of derived from SOTP ENNEC’s businesses, we believe it is appropriate to use sum-of-the-parts (SOTP) methodology with methodology to value the stock. We use a PER valuation to value each of ENNEC’s reference to relevant A- business lines independently through a comparable analysis and arrive at a 12-month share comparables SOTP-based TP of CNY13.5, representing a blended 2020E PER of 16.6x.

ENNEC: SOTP valuation Segments Target PER Net Profit Contribution in 2020E ENN Energy 19.0x 68% Coal Chemical 6.5x 6% Energy Engineering 16.0x 9% Coal 11.0x 11% LNG 10.0x 1% Others 9.7x 6% Blended PER 16.6x 2020E EPS 0.82 Target price (CNY) 13.50

Source: Company, Daiwa forecasts

ENNEC: comparable analysis Mkt cap Turnover PER (x) PBR (x) Company name BBG code Rating Share price Target price Upside (USDm) (USDm) 2019E 2020E 2021E 2019E 2020E 2021E ENNEC 600803 CH Buy 10.31 13.50 31% 1,829 13.5 10.6 12.6 9.2 1.32 1.02 0.94 H-Share companies ENN 2688 HK Buy 88.00 102.00 16% 12,746 24.0 16.9 14.9 12.6 3.5 3.0 2.5 CGHL 384 HK Underperform 29.50 26.50 -10% 18,865 25.6 18.1 16.6 15.7 4.2 3.7 3.2 CRG 1193 HK Outperform 40.85 47.00 15% 11,452 14.9 17.9 15.9 13.8 3.3 2.9 2.6 TCCL 1083 HK Hold 4.61 4.80 4% 1,667 1.2 9.1 9.1 8.0 0.8 0.7 0.7 Simple average 15.5 14.1 12.6 2.9 2.6 2.2 Weighted average 17.4 15.7 14.1 3.6 3.2 2.7 A-Share Companies Shenzhen Gas 601139 CH NR 6.66 n.a. - 2,765 13.6 17.3 14.2 12.4 1.9 1.8 1.6 Changchun Gas 600917 CH NR 6.83 n.a. - 1,534 4.9 26.3 26.3 25.3 2.5 2.4 2.3 Simple average 21.8 20.2 18.9 2.2 2.1 1.9 Weighted average 20.5 18.5 17.0 2.1 2.0 1.9 A-Share coal-chemical companies Yuan Xing Energy 000683 CH NR 2.21 n.a. - 1,252 11.5 6.7 5.8 n.a. 0.81 0.73 n.a. Shaanxi Heimao 601015 CH NR 2.94 n.a. - 691 3.9 8.4 7.9 n.a. n.a. n.a. n.a. Haohua Energy 601101 CH NR 4.34 n.a. - 752 5.2 7.2 6.0 5.7 n.a. n.a. n.a. Simple average 7.4 6.6 5.7 0.8 0.7 n.a. Weighted average 7.3 6.4 1.6 0.4 0.3 n.a. A-Share energy engineering companies China Petroleum Engineering 600339 CH NR 2.92 n.a. - 2,353 13.5 14.7 11.4 12.0 0.68 0.65 0.63 Offshore Oil Engineering 600583 CH NR 6.00 n.a. - 3,828 24.0 n.a. 29.1 18.5 1.17 1.13 1.08 Simple average 14.7 20.3 15.2 0.9 0.9 0.9 Weighted average 5.6 22.4 16.0 1.0 0.9 0.9 A-Share coal companies China Coal 601898 CH NR 4.49 n.a. - 7,299 10.8 9.7 9.3 9.0 0.61 0.59 0.56 Shanxi Coal 600546 CH NR 12.10 n.a. - 3,462 58.4 23.4 20.3 18.2 4.77 3.70 3.05 Haohua Energy 601101 CH NR 4.34 n.a. - 752 5.2 7.2 6.0 5.7 n.a. n.a. n.a. Simple average 13.4 11.8 11.0 2.7 2.1 1.8 Weighted average 13.6 12.4 11.6 1.8 1.5 1.3 A-Share LNG companies Guanghui 600256 CH NR 2.93 n.a. - 2,873 14.9 10.7 8.0 7.0 1.21 1.10 1.00 Shanxi Blue Flame 000968 CH NR 8.70 n.a. - 1,215 5.8 11.6 9.8 9.2 1.85 1.57 1.33 Shanxi Guoxin Energy 600617 CH NR 4.19 n.a. - 628 2.2 29.9 20.0 15.5 n.a. n.a. n.a. Simple average 17.4 12.6 10.6 1.5 1.3 1.2 Weighted average 13.5 10.1 8.7 1.2 1.1 0.9 Source: Bloomberg and Daiwa estimates; Note: closing price as on 4 February 2020

With reference to ENNEC’s historical valuation, our TP implies a 16.6x 12-month-forward PER, the same as its past-5-year average. In terms of PBR, our TP implies a 1.3x 12-month- forward PBR, or 0.9SD below its past-5-year average of 2.1x PBR. We believe our valuation target is undemanding given the paradigm shift of ENNEC from a coal-chemical company with limited earnings upside to a promising integrated gas company after the restructuring.

ENN Ecological Holdings (600803 CH): 4 March 2020

ENNEC: 12-month-forward PER chart ENNEC: 12-month-forward PBR chart PER (x) PBR (x) 40 6.0 35 5.0 30 27.5x Avg+2SD 4.0 25 3.7x Avg+2SD 22.1x Avg+1SD 20 3.0 2.9x Avg+1SD 15 16.6x Avg 2.0 2.1x Avg 11.2x Avg-1SD 10 1.3x Avg-1SD 5.7x Avg-2SD 1.0 5 0.5x Avg-2SD

0 0.0

Jul-15 Jul-16 Jul-17 Jul-18 Jul-19

Jan-15 Jan-17 Jan-16 Jan-18 Jan-19 Jan-20

Jan-18 Jan-15 Jan-16 Jan-17 Jan-19 Jan-20

Sep-18 Sep-15 Sep-16 Sep-17 Sep-19

May-16 May-17 May-18 May-19 May-15 Source: Company Source: Company Note: Reported EPS is used for computation of PER from 2015-18, Adjusted EPS is used for computation of PER from 2019 onwards

Our TP implies a 16.6x Currently, ENNEC is trading at a 12.6x 2020E PER, which represents a 25% discount to 2020E PER and 10% national city-gas distributors listed in Hong Kong and A-share downstream city-gas players. discount to A-share Our TP of CNY13.5 translates into a 16.6x 2020E PER which is higher than the 15.7x regional city-gas players weighted average 2020E PER of H-share national city-gas distributors. We believe this valuation is justified by the A-share premium, not to mention ENNEC will become the only national city-gas distributors in the A-share market after the restructuring. Compared with regional city-gas distributors in the A-share market, our TP still represents an 11% discount, which is due mainly to the low PER we apply to ENNEC’s existing segments.

It is noteworthy that our 2020E PER calculation is based on a 2020 EPS forecast of CNY0.84/share, assuming that ENNEC will use up its entire new shares placement quota (246m shares; or 20% of total shares in 2019) to raise capital for the restructuring. Despite the issuance of 2 rounds of high-yield note offerings in the US with a total raised capital of USD300m, we believe this assumption of placement quotas is reasonable as our sensitivity analysis finds that ENNEC needs to use more than half of the quota to ensure a positive cash balance by end-2020E. However, if ENNEC turns out to be using more debt financing and issuing fewer placement shares than we assumed, we would see further upside for its EPS from 2020E; and consequently an even less demanding implied PER target.

ENNEC: sensitivity analysis of 2020E EPS, implied PER and 2020E cash ending balance to changes in placement share quotas used Placement quotas used (m) 245.9 184.4 122.9 61.5 0.0 2020E EPS (CNY/share) 0.82 0.84 0.86 0.88 0.90 Implied PER (x) 16.56 16.20 15.84 15.48 15.12 2020E Cash Ending Balance (CNYm) 1,062 455 (153) (760) (1,367)

Source: Company, Daiwa forecasts

ENN Ecological Holdings (600803 CH): 4 March 2020

Risks to our call Postponement of the restructuring Postponement of the We see the postponement of restructuring as the greatest risk to our call as our financial restructuring is the main forecasts for ENNEC from 2020E are premised on the assumption that the restructuring risk to our call, although we plan will be implemented as scheduled. Although the restructuring is right on track at this believe it is highly unlikely point of time, there may still be a force majeure (eg, the coronavirus epidemic) that could delay the restructuring plan.

A larger-than-expected decline in coal prices Currently, we expect average coal prices in China (CCTD QHD5500 index) to contract from CNY574/tonne in 2019 to CNY430/tonne in 2025E. A larger-than-expected decline in coal prices would lower the profitability of ENNEC’s coal mining segment. Yet, it is noteworthy that any negative impact would likely be offset by the lower costs for ENNEC’s LNG and coal-chemical segments, should there be a sharper-than-expected fall in coal prices.

A larger-than-expected decline in methanol prices Currently, we forecast average methanol prices in China to decline by 5% YoY over 2019- 22E due to the global supply glut. A larger-than-expected decline in methanol prices would lead to a decline in the ASP of methyl alcohol and the profitability of the coal-chemical segment of ENNEC.

Asset injection at an unattractive valuation Under the light-asset development model, ENNEC will continue to look for acquisition opportunities of LNG projects. While the investment amount is bound to be small for each of these projects, injection at a subpar valuation may still pose downside risk to ENNEC’s share price. As we expect the injection of the Zhoushan LNG terminal into ENNEC to potentially be the next major corporate action, which will likely take place over 2021/22E, it is also possible that Chairman Wang will seek to monetise his position by injecting the terminal assets at an unattractive valuation, which would create the risk of value destruction.

ENN Ecological Holdings (600803 CH): 4 March 2020

ESG activity

Environmental – enhancing energy efficiency through technology Since 2004, ENNEC has been conducting coal gasification R&D in Inner Mongolia to seek ways to improve its energy efficiency. It finally made a major breakthrough in coal gasification technology in 2012, which has since significantly reduced its water consumption and coal requirements. The new technology reduces the company’s water consumption by a third compared with advanced industry peers, with its water emission level now close to zero, as well as cutting its CO2 emissions by >37%, and lowering its requirement on caloric value of coal used. Along with the existing carbon capture technology, the coal gasification field can produce gas at a low cost and with a low-carbon footprint. We believe this tech-driven development approach will help ENNEC adapt to the ongoing decarbonisation trend in China.

Social – high responsiveness to safety issues Social performance is perhaps the weak spot for ENNEC after the fatal accident at its Wangjiata coal mine last year. But according to management, the accident was identified to be caused by a third party, hence ENNEC holds no liability. It is also worth mentioning that Wangjiata had a zero fatality record prior to this accident.

Governance – long-term focused management We believe Chairman We believe the restructuring plan is a good example to showcase the excellent governance Wang’s interests will be efficiency of ENNEC’s management, in the creation of a mutually beneficial deal between aligned with those of ENNEC and ENN Energy. With ENNEC being a founding firm, Chairman Wang can impart ENNEC shareholders significant influence over ENNEC’s corporate actions, sometimes at the expense of after the restructuring minority shareholder interests. Yet, we believe the founding family will exercise self- constraint after the injection of a loss-making North American vehicular gas refuelling business into ENN back in 2014 which led to a severe share-price correction. Besides, Chairman Wang will own c.70% of ENNEC’s shares after the restructuring, which means he is unlikely to hurt ENNEC shareholders’ interests given that doing so would also affect his own interests.

ENN Energy – city-gas distributor with the largest ESG upside After the restructuring, c.70% of ENNEC’s income will be derived from ENN Energy, which means the overall ESG performance of ENNEC will hinge largely on the ESG performance of ENN Energy. We believe the injection of ENN Energy will be a big plus for ENNEC from the perspective of both ESG performance and disclosure. As we analysed in our ESG Report on China Gas Distributors (31 January 2020), ENN Energy is the best environmental performer in the sector, thanks to its leadership in DE/IE development, and is best prepared to handle energy shortages and affordability concerns. We see it as having the best ESG growth potential (ie, from a performance perspective), as the key drag is its poor disclosure in the social dimension — an overhang that could be easily removed.

ENN: summary of ESG-BIT performance in 2018 Description Environmental ENN’s generation fleet compared positively with its peers’. It had the lowest energy efficiency and NOx emissions efficiency. We believe ENN’s high eco-efficiency is both the result and cause of its undisputed leadership in the DE/IE business. Social ENN decided not to disclose social KPIs, which is not an optimal decision in our view. Governance We see certain governance risks due to its founder firm nature but think management exercised self-constraint after the 2014 injection of a loss-making North American asset. Best practice ENN’s overall ESG policy was less clear and less determined than that of its peers, suggesting that ESG may remain a peripheral issue for the management of ENN. Ideas & innovation ENN is best-positioned to handle energy reliability and affordability constraints thanks to the infrastructural development by ENN Group as a whole. Transparency ENN withheld a substantial amount of information in the social aspect while environmental and governance disclosure was in line with peers’.

Source: Daiwa

ENN Ecological Holdings (600803 CH): 4 March 2020

Appendices Appendix 1: China natural gas demand Natural gas demand set to increase at an 8% CAGR during 2020-25E We forecast natural gas The government targets to increase the energy mix for natural gas to 15% by 2030E and demand in China to we expect it to reach 8.3% by 2020E. We forecast natural gas demand in China to expand expand at a CAGR of 8% at a CAGR of 8% during 2020-25E and the energy mix to reach 10-13% by 2025E. during 2020-25E Although the government was ambitious in setting its original target for 2020 at 10%, it has lowered the target to 8.3-10% as gas demand growth was affected by low oil prices in 2015-16 and the trade war in 2018. While the progress of trade talks between China and the US will have an impact on economic growth and gas consumption, the ongoing industry tailwind for the Chinese government to fight air pollution will drive up gas demand, in our view.

China: natural gas consumption estimates 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E Bull #1 Bull #2 Bull #3 Residential 34 36 38 42 48 52 56 60 65 69 74 79 87 97 106 C&I 105 99 102 125 149 163 182 204 225 248 272 298 332 368 402 Transportation 21 24 27 30 36 39 41 43 45 46 47 48 53 59 64 Power, heating, others 26 34 39 42 47 51 54 58 61 64 67 69 77 86 94 Total demand (bcm) 187 193 206 239 280 305 334 365 396 427 460 494 550 610 665

Demand proportion Residential 18% 19% 18% 18% 17% 17% 17% 16% 16% 16% 16% 16% 16% 16% 16% C&I 56% 51% 50% 52% 53% 54% 55% 56% 57% 58% 59% 60% 60% 60% 60% Transportation 11% 12% 13% 13% 13% 13% 12% 12% 11% 11% 10% 10% 10% 10% 10% Power, heating, others 14% 18% 19% 18% 17% 17% 16% 16% 15% 15% 15% 14% 14% 14% 14%

Demand growth rate 10% 3% 7% 16% 17% 9% 10% 9% 9% 8% 8% 7% Residential 6% 5% 6% 11% 14% 8% 9% 6% 8% 7% 6% 7% C&I 9% -6% 3% 22% 20% 9% 12% 12% 10% 10% 10% 10% Transportation 22% 11% 12% 12% 21% 8% 6% 5% 4% 3% 2% 0% Power, heating, others 7% 31% 13% 8% 12% 9% 7% 6% 6% 5% 4% 4%

Source: CEIC, Daiwa estimates

The coal-to-gas conversion initiative accelerates natural gas consumption in China. This policy officially kicked off in 2017 when the Chinese government started strictly implementing environmental regulations in an effort to curb air pollution to ease its citizens’ escalating concerns about the deteriorating living environment. As a result, natural gas consumption accelerated in 2017, rising by 16% YoY and 18% YoY for 2017 and 2018, respectively. We reckon coal-to-gas conversion has 2 major drivers: industrial customers and residential customers: 1) for the industrial side, the government targets to convert coal boilers with 189ktonnes/hour into gas during 2015-20, which we estimate will contribute additional gas volume of 49bcm, 2) on the residential side, city-gas operators will increase the penetration of city-gas projects from the current <60% to a mature level of >80%. In addition, the urbanisation rate reached 59.6% in 2018 and continues to increase, which will help lift the gas consumption rate.

China: natural gas consumption forecasts China: energy mix 100% bcm 1% 1% 2% 2% 2% 3% 3% 4% 6% 9% 9% 9% 9% 600 20% 90% 18% 80% 500 16% 70% 14% 60% 400 69% 68% 68% 66% 64% 62% 60% 58% 56% 50% 49.2% 48.8% 48.6% 12% 50% 300 10% 40% 8% 200 30% 6% 8.3% 10.8%11.2%11.6%12.0% 20% 5% 5% 5% 5.6% 5.8% 5.9% 6.6% 7.4% 100 4% 2% 10% 18% 18% 17% 18% 19% 19% 19% 20% 20% 20% 20% 20% 20% 0 0% 0% 2017 2018 2019E2020E2021E2022E2023E2024E2025E Bull 1 Bull 2 Bull 3 2011 2012 2013 2014 2015 2016 2017 2018 2020E2025E Bull 1 Bull 2 Bull 3 China gas demand (LHS) YoY (RHS) Oil Natural gas Coal Nuclear energy Hydropower Renewables

Source: Daiwa Source: Daiwa

ENN Ecological Holdings (600803 CH): 4 March 2020

Appendix 2: DE/IE Development in China DE/IE development of Integrated energy providers sell secondary energy directly to end-customers by setting up the gas sector remains customised gas-fired distributed energy (DE) facilities. With tri-generation (heat, cooling, under the power and electricity) capabilities, these DE facilities can achieve energy efficiency of 70-80%, decentralisation trend in compared with the 40-60% achieved by pure power generators. Together with the: 1) in- China house energy saving system and equipment (ie, DE generators), and 2) economies of scale, city-gas distributors can normally offer secondary energy to end-users at cheaper prices compared with the cost end-users need to pay if they purchase natural gas from city-gas distributors, heat from a heating company and power from the power grid.

Efficiency of natural gas tri-generation Integrated Energy System

Source: Gulf Organisation for Research and Development Source: Daiwa

We see the DE/IE business as an ideal way for city-gas distributors to generate additional income per unit of gas sold in order to make up for lower earnings from gas distribution, given its: 1) synergies with the city-gas business, and 2) reasonable return profile.

China: IRR model for a typical industrial DE/IE project Assumptions Electricity ASP (CNY/kWh) 0.66 Steam gas ASP (CNY/ ton) 174 Hot water ASP (CNY/kWh) 0.26 Natural gas procurement cost (CNY/m3) 2.00

Electricity sales per annum (m kWh) 48 Steam gas sales per annum (k ton) 169 Hot water sales per annum (m kWh) 31

Natural gas consumption per annum (mcm) 28

Interest rate (%) 5% Debt proportion (%) 30%

CNY (m) Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11 Yr 15 Yr 16 Revenue 70 70 70 70 70 70 70 70 70 70 70 70 Electricity sales 32 32 32 32 32 32 32 32 32 32 32 32 Steam gas sales 30 30 30 30 30 30 30 30 30 30 30 30 Hot water sales 8 8 8 8 8 8 8 8 8 8 8 8 Fuel cost (56) (56) (56) (56) (56) (56) (56) (56) (56) (56) (56) (56) D&A (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) Other operating cost (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) Financing cost (1) (1) (1) (1) (1) (1) (1) (0) (0) (0) (0) (0) PBT 4 4 5 5 5 5 5 5 5 5 5 5 Tax (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) Net Profit 3 3 3 3 3 3 4 4 4 4 4 4 Accrued interest 1 1 1 1 1 1 1 0 0 0 0 0 Debt repayment (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) D&A 3 3 3 3 3 3 3 3 3 3 3 3 FCFF (48.9) 7 7 7 7 7 7 7 7 7 7 7 7 FCFE (34.3) 5 5 5 5 5 5 5 5 5 5 5 5

Project IRR 10% Equity IRR 13%

Source: Companies, Daiwa estimates

ENN Ecological Holdings (600803 CH): 4 March 2020

Case Study: ENN Energy – a triumph in TCCL’s concession area ENN demonstrates In 2018, we visited ENN’s Yuhang natural gas integrated energy project, which is located undisputed leadership in inside the concession area of TCCL. (See our report: Reaping expected benefits of DE/IE development hedging & diversifying published on 21 June 2018.) This site visit reaffirmed our view that ENN is the undisputed leader in natural gas DE/IE projects.

Yuhang Economic Development Zone (餘杭經濟技術開發區) is the manufacturing base. The industrial park has robust demand for electricity and steam gas, which for 20 years had been primarily used by on-site coal-fired units. However, in order to combat air pollution, the local government decided to go for coal-to-gas conversion and replaced the coal-fired units with a natural gas integrated energy (IE) project.

Instead of directly cooperating with TCCL, the incumbent city-gas distributor, the district government, put the project out for public tender in 2017. The project attracted bids from TCCL, Huadian Group, Datang Group and GCL Group. However, as a pioneer in natural gas DE/IE projects, ENN secured the project in late 2017, given its: 1) short construction time (the first DE station was operational in 4 months, 8 months ahead of the time scheduled by the government), 2) land-efficient solution (ENN required only 19mu of land vs. 50mu of land as suggested by TCCL), and 3) more competitive pricing for secondary energy (eg, steam, gas and electricity) on a higher rate of energy conversion, thanks to ENN’s in-depth expertise and experience.

We believe the Yuhang industrial park project represents a milestone for ENN as it is the first time the company has secured a DE/IE project in the concession area of other city-gas distributors. In our view, it illustrates the company’s expertise and experience in the natural gas DE/IE area. More importantly, ENN’s successful bid for the project signifies that the selection process should be merit-based and incumbent city-gas distributors will not have exclusive rights to run natural gas DE/IE projects inside their concession area; we believe this will likely become the benchmark for other local governments when they undergo coal- to-gas conversion over time, especially for large industrial parks.

Yuhang Economic and Technological Area: IE Project (left) and DE stations (right)

Source: Daiwa

ENN Ecological Holdings (600803 CH): 4 March 2020

Appendix 3: Coal-gasification industry in China Immature coal-gasification industry in China. Coal gasification production volume in China reached a mere 6.3bcm by end-2019, falling significantly behind the 13th FYP target of 24bcm by 2020 and accounting for only 1.9% of the country’s total gas consumption. Based on our calculation, China will only have a total of 23.3bcm coal gasification production capacity by 2022E, which is still behind the 13th FYP target.

China: coal gasification capacity (bcm) 30

0 2014 2015 2016 2017 2018 2019 2020 Target Source: WIND, Daiwa

Five major obstacles Meanwhile, there are more than 30 projects with a total capacity of over 150bcm in the hinder coal gasification preliminary stage of development. Nevertheless, we see 5 major obstacles remaining development in China unsolved, which could hinder the development of coal gasification in China:

1) High production cost: lack of technological advancement leading to low efficiency and high costs for environment treatment.

2) High water consumption: traditional coal-gasification technology requires high water usage, but major coal-producing areas in China (Inner Mongolia, Shaanxi) are water- deficit inland areas.

3) Uncompetitive pricing: the Datang project in Hexigten Banner is the first trial coal gasification project in China, and the government has set the ASP for the gas produced at CNY2.72/m3. During the initial phase of coal gasification promotion, the pricing mechanism adopted the cost-plus model. Subsequently, the city-gate price was set as the price ceiling and determined by the supply and demand. Amid increasing coal prices in recent years, the pricing model has led to lower profitability for coal gasification plants.

4) Lack of access to transmission pipelines: the natural gas pipeline network is mostly dominated by oil majors, especially PetroChina. In order to enter the transmission network, coal gasification plants are often price takers.

5) High financing costs: capital-intensive projects and difficulties in obtaining low- interest loans are common constraints faced by coal companies interested in developing coal-gasification plants.

Yet, ENNEC is able to overcome some of these key obstacles and produce LNG at a cost of CNY1.1-1.2/m3. Utilising CHARM Catalytic Gasification technology, ENNEC was able to reduce its production costs of coal-gasified LNG by >24% in 2019 by lowering its water consumption by one-third, cutting its CO2 emissions by >67% and raising its heat efficiency by 15pp to 76%.

ENN Ecological Holdings (600803 CH): 4 March 2020

Technical note All-in-one gasifier From the Lurgi FBDB gasifier to all-in-one gasifier. The current 2-step process for coal reduces resource gasification technology includes gasification under high temperature and pressure to obtain consumption hydrogen and carbon monoxide and synthesis of methane. The typical technology is the significantly Lurgi Fixed Bed Dry Bottom (FBDB) gasifier that produces 10% of methane content in the output. The traditional process of alternative high/low-temperature conditions and fine desulfurisation increases intense energy consumption. Compared with the legacy technique, coal catalytic gasification technology has the following advantages:

1) Use of pulverised coal (less than 5mm) as the raw material with a lower cost.

2) No desulfurisation is required during the methanation process in the gasifier.

3) 20% or more of methane content in the gas output vs traditional 10%.

4) No wastewater treatment problems.

ENNEC: all-inclusive gasifier

Pyrolysis gas Oil-gas separation Methane Raw coal Tar Tar

Overflow Pyrolysis zone device

Pulverized coal powder Semi-coke Pyrolysis Alkali metal catalyst Oxygen reaction

Catalytic gasification zone

Coal Crude gas Energy from residues Carbon residue coal residues

Combustion zone

Gasifying agents

Source: Daiwa

ENNEC spent years developing an all-inclusive gasifier and improving its gasification process. ENNEC meliorated the traditional structure of a gasifier used in the catalytic gasification process. The gasifier is divided into pyrolysis (upper part), catalytic gasification (middle part), and combustion zones (lower part). The gasifying agents enter through the bottom of the gasifier, and the raw coal is added from the upper part of the gasifier. The synthesis gas generated in the catalytic gasification and the combustion zones contact with

ENN Ecological Holdings (600803 CH): 4 March 2020

the raw coal in the pyrolysis zone, resulting in pyrolysis reaction. Products such as methane-rich pyrolysis gas and tar are discharged from the top of the gasifier. The pulverised coal powder enters the catalytic gasification zone through the overflow device, and catalytic methanation takes place with the aid of an alkali metal catalyst, while coal residues that are not fully reacted enter the bottom combustion zone to continue the reaction process with gasifying agents and oxygen. The advantage of this design is that the pyrolysis, gasification and combustion are coupled in a multi-layer fluidised bed to achieve staged conversion. It can enhance energy efficiency and reduce equipment expenditure. In addition, ENNEC has also improved the catalyst system for different products such that different catalyst combinations cater to different types of raw coal.

Reduction of wastewater discharge. The replacement of the traditional direct water spraying method of the Lurgi’s 2-step method with the latest indirect condensation technique to cool the outlet gas can minimise the organic wastewater containing tar and phenol. On the other hand, the wastewater that is not reacted during the gasification process can be reused. The metal catalyst carried in the gas is then impregnated with coal with phenol, tar, and catalyst-rich wastewater, and then the coal is dried. Dried coal with phenol, tar, and catalyst adsorbed enters the pyrolysis area for further pyrolysis and gasification reactions. The small amount of low-boiling-point organic wastewater produced during the coal drying process is sent to the biochemical wastewater treatment unit or used to produce coal-water-slurry. In combination with the catalyst recovery process, not only the amount of wastewater is greatly reduced, but also organic matter such as tar in the wastewater is used for gasification, which steps up the efficiency.

ENN Ecological Holdings (600803 CH): 4 March 2020

China: coal gasification projects Start date Status Location Province Owner Capacity (bcm) 2013 In-operation Hexigten Banner Inner Mongolia Datang International Power Generation 1.3 2013 In-operation Yili Yining (I) Xinjiang China Kingho Group 1.4 2014 In-operation Ordos (I) Inner Mongolia Huineng Group 1.6 2017 In-operation Yili Xinjiang Xintian Coal Chemical Industry 2.0 Total capacity (In-operation) 6.3 2020 Under-construction Dalat Banner Inner Mongolia Tianjin Bohai Wynn Chemical 7.2 2020 Under-construction Tacheng (I) Xinjiang Suxin Energy 4.0 2020 Under-construction Inner Mongolia ENNEC 0.2

2021 Under-construction Ordos (II) Inner Mongolia Huineng Group 1.6 2022 Under-construction Fuxin Liaoning Datang International Power Generation 4.0 TBC Under-construction Yili Yining (II) Xinjiang China Kingho Group 4.1 TBC Under-construction Ordos Inner Mongolia Beijing Enterprises Group, CNOOC, Hebei Jiantou 4.0 TBC Under-construction Qitai Xinjiang Beijing Enterprises Group 4.0 TBC Under-construction Huainan Anhui Anhui Energy Group 2.2 TBC Under-construction Alxa League Inner Mongolia China Energy Reserve and Chemicals Group 4.0 TBC Under-construction Handan Hebei Wuan Xinfeng 1.8 TBC Under-construction Hinggan League Inner Mongolia Xingan Energy Chemical 4.0 Total capacity (Under-construction) 41.1 TBC Approved Ordos (I,II) Inner Mongolia Huaxing Energy 4.0 TBC Planning Zhang Ye Gansu Gansu Hongsheng New Energy 4.0 TBC Planning Zhundong Xinjiang Huaneng Group 4.0 TBC Planning Zhundong Xinjiang Suxin Energy 4.0 TBC Planning Zhundong Xinjiang China Coal Energy Group 4.0 TBC Planning Zhundong Xinjiang Beijing Enterprises Group 4.0 TBC Planning Zhundong Xinjiang Guanghu Group 4.0 TBC Planning Zhundong Xinjiang Xinjiang Longyu 4.0 TBC Planning Zhundong Xinjiang Zhejiang Zheneng Electric Power 4.0 TBC Planning Zhundong Xinjiang Sinopec 8.0 TBC Planning Inner Mongolia Inner Mongolia Xinmeng Energy 4.0 TBC Planning Datong Shanxi CNOOC, Shanxi Tongmei Group 4.0 TBC Planning Qapqal Xibe Xinjiang China Power Investment Corporation Xinjiang Energy 6.0 TBC Planning Guangneung Hubei Hubei Energy Group 4.0 TBC Planning Ordos Inner Mongolia Datang Huayin Electric Power 3.6 TBC Planning Ordos Inner Mongolia China Shenhua Group 2.0 TBC Planning Hulunbuir Inner Mongolia Huaneng Yimin Coal Power 4.0 TBC Planning Jimsar Xinjiang Shendong Tianlong Group 1.3 TBC Planning Hami Xinjiang Xinjiang Guanghui New Energy 8.0 TBC Planning Yili Xinjiang Shandong Xinwen Mining 4.0 TBC Planning Yili Huocheng Xinjiang China Power Investment Corporation Xinjiang Energy 6.0 TBC Planning Nilka Xinjiang China Guodian Group 10.0 TBC Planning Qitai Xinjiang Henan Coal Chemical Industry Group 4.0 TBC Planning Yili Xinjiang Luan Group 4.0 TBC Planning Changji Xinjiang Huaneng Group 4.0 TBC Planning Changji Xinjiang Xinjiang Longyu, Dongyin Holdings Group 4.0 TBC Planning Changji Xinjiang China Coal Energy Group 4.0 TBC Planning Changji Xinjiang Huadian Group 6.0 TBC Planning Changji Xinjiang Kailuan Group 4.0 TBC Planning Changji Xinjiang Changji Shengxin 1.6 TBC Planning Changji Xinjiang TBEA 4.0 TBC Planning Changji Xinjiang Huahong Mining 2.0 TBC Planning Changji Xinjiang Yankuang 4.0 TBC Planning Altay Prefecture Xinjiang Guanghu Group 4.0 TBC Planning Hami Xinjiang Tsinghua Unigroup 0.8 TBC Planning Tacheng (II) Xinjiang Suxin Energy 4.0 Total capacity (Approved/Planning) 151.3 Grand Total 198.7 Source: Daiwa

ENN Ecological Holdings (600803 CH): 4 March 2020

Appendix 4: Development of the Zhoushan LNG terminal The Zhoushan LNG The Zhoushan LNG terminal, currently owned by ENN Group, is the largest LNG terminal terminal is the first in China. Construction of the LNG terminal (phase 1) began in 2016 for a total investment privately owned LNG of CNY5.8bn, and it commenced operations in 2018. The LNG terminal now has a total of terminal in China eight 160k m3 storage tanks with 2 completed tanks for phase 1. Initially, the terminal had to distribute LNG by truck or ship, but completion of the Zhoushan transmission pipeline (Ningbo section) at end-2019 is expected to alleviate the distribution bottleneck. ENN Group is currently constructing the Zhoushan transmission pipeline (submarine section), which is expected to be completed in 2H20E, as well as phase 2, which will increase capacity by a further 2m tonnes after it comes on stream in 2021E. In the longer run, phase 3 will provide an additional 4m tonnes of capacity, but the details have yet to be announced.

Upon completion, there will be 3 piers for the terminal with unique functions. Pier 1 (for phase 1) will only have a LNG receiving function, while Pier 2 (for phase 2) will have a LNG filling and refuelling function. Pier 3 (for phase 3) will have a LNG trailer filling function, which is unique versus other LNG terminals owned by the big three oil majors.

ENN Group: Zhoushan LNG terminal project pipeline Project Year of Completion Capacity (mt) Investment (CNY bn) Zhoushan LNG terminal (phase 1) 2018 3 5.8 Zhoushan LNG terminal (phase 2) 2021E 2 3.0 Zhoushan LNG terminal (phase 3) TBD 4 TBD Zhoushan transmission pipeline 2020E / 1.8

Source: Company

Zhoushan LNG terminal: overview Zhoushan LNG terminal: connection pipelines in Zhoushan and Ningbo

Source: Daiwa Source: Daiwa

Zhoushan LNG terminal: 160k m3 storage tanks Zhoushan LNG terminal: LNG storage tanks

Source: Daiwa Source: Daiwa

ENN Ecological Holdings (600803 CH): 4 March 2020

Zhoushan LNG terminal: pier 1 Zhoushan LNG terminal: pier 1 LNG receiving facilities

Source: Daiwa Source: Daiwa

Zhoushan LNG terminal: pier 2 Zhoushan LNG terminal: pier 2 (under construction)

Source: Daiwa Source: Daiwa

According to management, the total capacity of 10mtpa (when completed) of imported LNG will be used to supply:

1. LNG trailers in Zhejiang and the surrounding Jiangsu and Anhui provinces. 2. Piped gas to its 46%-owned Zhoushan city-gas project. 3. Piped gas to a large industrial petrochemical project that consumes 1.09mtpa of LNG (or 2mtpa of LNG after completion of the project). 4. Piped gas to Zhejiang through a 33.6km submarine pipeline scheduled to be commissioned by end-2020. 5. A gas volume swap with CNPC for additional gas supply for ENN’s city-gas projects in Henan and Hunan.

ENN Ecological Holdings (600803 CH): 4 March 2020

Appendix 5: Development of LNG terminals in China Private enterprises in Despite the setting up of the National Oil & Gas Pipeline Company (NPC), which may China face the constraint include a few LNG terminals in the first round of restructuring, the issue of limited access to of limited access to LNG LNG terminals by third parties remains unsolved. There are 21 operating LNG terminals in terminals China with only 5 of them being owned by non-oil majors. Moreover, LNG terminals usually sign long-term LNG procurement contracts that account for >80% of the processing capacity to stable LNG supplies, leaving little room to buy from the spot market. China also has a lack of gas storage capacity, where the total gas storage capacity accounts for just 6% of the demand, compared with 11% for mature markets such as the US.

During the winter peak season when gas supply becomes tight in China, downstream city- gas operators without their own LNG terminal access have no choice but to purchase scarce spot off-shore LNG resources at a high cost and suffer from a dollar margin squeeze.

China: LNG terminal

LNG terminals (operating)

LNG terminals (under-construction)

Heilongjiang

Jilin

Liaoning

Xinjiang Beijing Bestsun Dongdaihe PetroChina Dalian Inner Mongolia Tianjin Gansu CNOOC Tianjin (I,II), Sinopec Tianjin (I,II), Beijing Gas Tianjin PetroChina Tangshan (I,II,III), Suntien Tangshan Sinopec Longkou/PetroChina Yantai Shandong Ningxia Shanxi Hebei Sinopec Qingdao (I,II,III)

Sinopec Lianyungang Qinghai Jiangsu Sinoenergy Jiangyin/CNOOC Yancheng Shaanxi Henan Guanghui Qidong (I,II,III)/Kunlun Rudong Shanghai Shenergy Yangshan (I,II)/Wuhaogou Tibet Anhui ENN Zhoushan (I,II) Hubei CNOOC Ningbo (I,II) Zhejiang Chongqing Sinopec Wenzhou Sichuan Jiangxi CNOOC Ningde LNG Hunan Guizhou CNOOC Putian Fujian Taiwan CNOOC Zhangzhou Yunan CNOOC Jieyang (I,II)/Sinoenergy Chaozhou/Huafeng Chaozhou Guangxi Guangdong CNOOC Shenzhen Diefu

CNOOC Dapeng (I,II) Hong Kong Shenzhen Gas Shenzhen Macau CNOOC Zhuhai (I,II) CNOOC Fangchengang (I,II) Sinopec Beihai (I,II) JOVO Dongguan

CNOOC Hainan Hainan

Source: Daiwa

ENN Ecological Holdings (600803 CH): 4 March 2020

China: LNG terminal Start date Status Location Province Owner Capacity (mt) 2000 In-operation Wuhaogou Shanghai Shenergy Group 1.5 2006 In-operation Dapeng Guangdong CNOOC (35%), BP (30%), Shenzhen Gas (10%), others (25%) 6.8 2008 In-operation Putian Fujian CNOOC (60%), Fujian Investment & Development (40%) 6.3 2009 In-operation Yangshan Shanghai Shenergy (55%), CNOOC (45%) 3.0 2011 In-operation Rudong (I) Jiangsu Kunlun Energy (55%), Pacific O&G (35%), Jiangsu Guoxin Investment Group (10%) 3.5 2011 In-operation Dalian Liaoning PetroChina (75%), Dalian Port (20%), Dalian Construction Investment (5%) 6.0 2012 In-operation Ningbo (I) Zhejiang CNOOC (51%), Zhejiang Energy (29%), Ningbo Power (20%) 3.0 2012 In-operation Dongguan Guangdong JOVO Group 1.5 2013 In-operation Zhuhai (I) Guangdong CNOOC (50%), Yudean (25%), Guangzhou Development (25%) 3.5 2013 In-operation Nanjiang Tianjin CNOOC (46%), Tianjin port (Group) Company (40%), Tianjin Gas Group (9%) 2.2 2013 In-operation Tangshan Caofeidian (I) Hebei PetroChina (51%), Beijing Gas Blue Sky (29%), Hebei Gas (20%) 3.5 2014 In-operation Tangshan Caofeidian (II) Hebei PetroChina (51%), Beijing Gas Blue Sky (29%), Hebei Gas (20%) 6.5 2014 In-operation Hainan Hainan CNOOC 3.0 2014 In-operation Qingdao Shandong Sinopec (99%), Qingdao Port International (1%) 6.2 2016 In-operation Rudong (II) Jiangsu Kunlun Energy (55%), Pacific O&G (35%), Jiangsu Guoxin Investment Group (10%) 6.5 2016 In-operation Beihai (I) Guangxi Sinopec 3.0 2017 In-operation Jieyang (I) Guangdong CNOOC 2.0 2017 In-operation Qidong (I, II) Jiangsu Guanghui Energy 1.2 2018 In-operation Shenzhen Diefu Guangdong CNOOC (70%), Shenzhen Energy (30%) 4.0 2018 In-operation Zhoushan (I) Zhejiang ENN 3.0 2018 In-operation Nanjiang Tianjin Sinopec (98%), TianJin Nangang Industrial Zone Development (2%) 3.0 2019 In-operation Shenzhen Guangdong Shenzhen Gas 0.8 2019 In-operation Fangchengang Guangxi CNOOC 0.6 Total capacity (In-operation) 80.5 2020 Under-construction Chaozhou Guangdong Sinoenergy Corporation 1.0 2020 Under-construction Jiangyin Jiangsu Sinoenergy Corporation 4.0 2020 Under-construction Yangshan (II) Shanghai Shenergy (55%), CNOOC (45%) 3.0 2020 Under-construction Zhangzhou Fujian CNOOC 3.0 2020 Under-construction Caofeidian (III) Hebei PetroChina (51%), Beijing Gas Blue Sky (29%), Hebei Gas (20%) 3.5 2020 Under-construction Qidong (III) Jiangsu Guanghui Energy 1.9 2020 Under-construction Lianyungang Jiangsu Sinopec 3.0 2020 Under-construction Chaozhou (I,II) Guangdong Huafeng Zhongtian 3.0 2020 Under-construction Jieyang (II) Guangdong CNOOC 2.0 2020 Under-construction Zhuhai (II) Guangdong CNOOC 3.5 2020 Under-construction Beihai (II) Guangxi Sinopec 3.0 2020 Under-construction Ningbo (II) Zhejiang CNOOC 3.0 2020 Under-construction Wenzhou Zhejiang Sinopec, Zheneng 3.0 2020 Under-construction Nanjiang (II) Tianjin CNOOC (46%), Tianjin port Group (40%), Tianjin Gas Group (9%) 3.8 2020 Under-construction Zhoushan (II) Zhejiang ENN 2.0 2020 Under-construction Dapeng (II) Guangdong CNOOC 2.0 2021 Under-construction Yancheng (I) Jiangsu CNOOC 3.0 2021 Under-construction Nanjiang (II) Tianjin Sinopec (98%), TianJin Nangang Industrial Zone Development (2%) 7.0 2021 Under-construction Qingdao (II) Shandong Sinopec (99%), Qingdao Port International (1%) 2.0 2022 Under-construction Longkou (I) Shandong Sinopec 6.0 2022 Under-construction Tangshan Caofeidian (I) Hebei China Suntien Green Energy 7.0 2022 Under-construction Nanjiang Tianjin Beijing Gas Group 5.0 2022 Under-construction Qingdao (III) Shandong Sinopec 2.0 2022 Under-construction Yantai (I) Shandong PetroChina 3.0 TBC Under-construction Dongdaihe (I,II,III) Liaoning Bestsun Energy 5.0 TBC Under-construction Fangchenggang (II) Guangxi CNOOC 0.4 Total capacity (Under-construction) 85.1 2023 Planning Yingkou Liaoning ShenNeng Gas 3.0 2024 Planning Yangjiang (I) Guangdong Royal Golden Eagle 2.8 TBC Planning Yangjiang (II) Guangdong Royal Golden Eagle 3.2 TBC Planning Rizhao Shandong Royal Golden Eagle 2.0 TBC Planning Yancheng (II) Jiangsu CNOOC 3.0 TBC Planning Yantai (II,III) Shandong PetroChina 16.0 TBC Planning Binzhou Shandong Great United Petroleum Holding 2.0 TBC Planning Longkou (II) Shandong Sinopec 20.0 TBC Planning Tangshan Caofeidian (II, III) Hebei China Suntien Green Energy 5.0 TBC Planning Lianyungang Jiangsu Huadian 6.0 TBC Planning Shantou Guangdong Guangdong Yudean 3.0 TBC Planning Yantai Shandong Poly-GCL Petroleum 40.0 TBC Pending Penglai Shandong Datong Reciprocity and Baota Petrochemical 2.6 Total capacity (Planning) 108.6 Grand Total 274.2

Source: Daiwa

ENN Ecological Holdings (600803 CH): 4 March 2020

Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Machinery Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Defence); REITs, Utilities; Steel Co-head of Asia Pacific Research Josh RHEE (82) 2 787 9124 [email protected] Craig CORK (852) 2848 4463 [email protected] Chemicals Regional Head of Asia Pacific Product Management JH LEE (82) 2 787 9838 [email protected] Paul M. KITNEY (852) 2848 4947 [email protected] Consumer/Retail – Cosmetics Chief Strategist for Asia Pacific; Strategy (Regional) Thomas Y KWON (82) 2 787 9181 [email protected] Kevin LAI (852) 2848 4926 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Chief Economist for Asia ex-Japan; Macro Economics (Regional) SK KIM (82) 2 787 9173 [email protected] Kelvin LAU (852) 2848 4467 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Head of Automobiles; Transportation and Industrials (Hong Kong/China) Henny JUNG (82) 2 787 9182 [email protected] Fiona LIANG (852) 2532 4341 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware (Small/Mid Cap) Industrials (Hong Kong/China) Minjoo KANG (82) 2 787 9176 [email protected] Jay LU (852) 2848 4970 [email protected] Media Automobiles and Components (Hong Kong/China) Leon QI (852) 2532 4381 [email protected] TAIWAN Rick HSU (886) 2 8758 6261 [email protected] Regional Head of Financials; Banking; Diversified financials; Insurance (Hong Kong/China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Kevin JIANG (852) 2532 4383 [email protected] (Regional) Nora HOU (886) 2 8758 6249 [email protected] Banking (China) Susie LIU (852) 2773 8745 [email protected] Banking; Diversified financials; Insurance; Strategy Diversified financials (China) Steven TSENG (886) 2 8758 6252 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Automation & PC Hardware) Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Adrian CHAN (852) 2848 4427 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Jonathan HO (852) 2848 4056 [email protected] Small/Mid Cap Consumer (Hong Kong/China) Andrew CHUNG (852) 2773 8529 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of Gaming (Hong Kong/China) Head of India Research; Strategy; Banking/Finance John CHOI (852) 2773 8730 [email protected] Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Capital Goods; Utilities Carlton LAI (852) 2532 4349 [email protected]

Small/Mid Cap (Hong Kong/China) SINGAPORE Dennis IP (852) 2848 4068 [email protected] Ramakrishna MARUVADA (65) 6228 6742 [email protected] Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Kong/China) Head of Singapore Research; Telecommunications (China/ASEAN/India) Anna LU (852) 2848 4465 [email protected] David LUM (65) 6228 6740 [email protected] Power, Utilities, Renewable and Environment (PURE) – IPP, Wind & Nuclear (China) Banking; Property and REITs Jonas KAN (852) 2848 4439 [email protected] Jame OSMAN (65) 6228 6744 [email protected] Head of Hong Kong and China Property Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer Cynthia CHAN (852) 2773 8243 [email protected] Property (China) JAPAN Selwyn CHENG (852) 2773 8716 [email protected] Yukino YAMADA (81) 3 5555 7295 [email protected] Strategy (Regional) Custom Products Group Jack CHAN (852) 2773 8731 [email protected] Custom Products Group

PHILIPPINES Micaela ABAQUITA (63) 2 737 3021 [email protected] Banking; Property Renzo CANDANO (63) 2 737 3022 [email protected] Consumer Gregg ILAG (63) 2 737 3023 [email protected] Utilities; Energy

ENN Ecological Holdings (600803 CH): 4 March 2020

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ENN Ecological Holdings (600803 CH): 4 March 2020

conflict of interest that may affect the objectivity of this research.

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Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 70.88% Hold** 22.81% Sell*** 6.31% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 December 2019. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

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