Earnings Call: H2 2023

Apr 23, 2024

In 2023, we have both opportunities and challenges, despite fluid and volatile international economic scenario. China's market has been rallying and also have a lot of transformation and revolution in natural gas. Also we are pushing forward the industrial digital transformation. We are constantly improving our operation capabilities and using multiple measures to satisfy our customers' energy use and demands. Especially with sales in mineral and mining assets, we are dedicated to focus more on our natural gas industry resources with our great leadership and the concerted efforts of our employees. Now let's invite Mr. Zhong Bo to introduce our financial performance in 2023, please. Dear investors and analysts, good afternoon, everyone. Now, please allow me to report to you the 2023 full year financial highlights. Due to the ecosystem positioning of ENN Group and the direct sales gas by the platforms acceleration, we have gained momentum. In 2023, the total revenue has been CNY 143.842 billion, down by 6.7% compared to 2022. That is mainly due to the overseas LNG business and disposal of our mine assets. The gross profit is CNY 22.152 billion, down by 5.3%. That was mainly due to the disposal of the main mine asset. The gross profit of mine asset has down by CNY 1.6 billion. If we exclude that, the gross profit actually increases by 2%. EBITDA is CNY 20.89 billion, representing a growth of 1.5%, and the total profit is CNY 15.766 billion, increasing 7.4%. Because of the disposal of the mine asset, the net profit attributable to parent increases by 21.3% at CNY 7.091 billion. The core profit is CNY 6.3 billion, increasing 5.1%. The core EPS is CNY 2.07. If we exclude the mine asset for the future, the growing business core profit contribution is more prominent, is 33%. As we increasing and accelerate the development of direct gas sales by platform and the integrated energy and value-added energy, we have been optimizing the structure. The Direct Gas Sales by Platform has been increased from 12.5% to 17.3% in 2023. Integrated Energy and Value-Added has been increased to 20.8% from 16.5 point %. Retail and wholesale of gas have contributed to 97% of the gross margin, down by 7.2% because of the overseas LNG wholesales has been down by 7.2%. If we exclude that, the retail and wholesale gas has increased actually 0.8%. For the Direct Gas Sales by Platform has been increased by 31 point %. Integrated energy and value-added has been CNY 4.61 billion, an increase of 19.6% because of the conversions, the engineering and installation has contributed to CNY 3.426 billion, a slight drop compared to last year, down by 1.1%. Because of the disposal of the mine asset, the energy production is CNY 361 million. As we implement more strategies in the future, the profit structure of our company will be further optimized. Now I would like to present the core profit and the sustainable growth because they represent the sustainability of where and where we can create values. For a long term, ENN Group has adhered the principle to adjust the one-time cash items. We have several adjustments to make this time. First is the bad debts and asset impairment. Actually, in Q3, we have already shared that with you. Because of the VAT tax and other regulatory, we have had a CNY 520 billion accrual loss. For Methanol, we have a full analysis based on the Methanol demand in China, including the imported Methanol's price influence, as well as the coal converted Methanol, as well as the impact over transportation. After consideration, we have hired appraisers to use the cash flow method and the supply value evaluation method to appraise the total asset. With the prudential accounting principle in mind, we have accrued CNY 1.3 billion loss. Altogether, that's CNY 1.857 billion loss. Altogether, the loss is CNY 1.5 billion. It's non-cash impairment, so we have made just adjustment. CNY 1.17 non-direct derivatives adjustment has been made because of the derivatives adjustment, because we use the paper and the physical combination in the impairment and loss impact. We have reflected on the P&L. The number is negative. Because when we settle from the previous revenue, and we have used that, the revenue for the reinvestment based on the fair value, the value has been negative. However, this change and adjustment in the P&L does not represent our revenue. If you go to our financial statements, please look at the financial derivatives and our debt. We do have CNY 1.2 billion by the end of last year, so that's the paper market, and this will generate the cash flow and contribution to the revenue. Those will be reflected in the future financial statements. Third is the equity investment disposal. We have completed the disposal of the mine asset, the asset transfer has generated profit. It's one-time profit, we have excluded that in the financial report. After the adjustment, the core profit is CNY 6.3 billion, which achieves our target set in the year beginning. In face of the complicated international scenarios and conditions, we have adhered to the prudential financial management and our key financial KPIs have been controlled very well. In 2023, the CapEx is CNY 9.772 billion because last year we have integrated the Zhoushan terminals. We have paid CNY 2 billion. If we exclude the cash paid to the Zhoushan terminal in the past two years, the CapEx of our company has been kept at a very stable level. As we disposes the mine asset, we have recovered more than CNY 10 billion cash and with the platform performance, which generates a good cash flow. At the end of the this year, we have CNY 19.98 billion up by CNY 7.9 billion. The debt has been reduced by CNY 2.7 billion, so we have a CNY 33.7 billion debt. I would like to say that in terms of the 600803, we used to be at CNY 10 billion, and we have achieved our target in the year beginning to reduce the debt. The net debt has been reduced dramatically at the CNY 14.659 billion and down by 25%. That is a very good gearing ratio, providing flexibility and resilience in our financial performance in the future. As the interest rate being added in U.S. dollars and more flexible investment environment, we have been adjusting our debt structures. The maturity within one year is 35.4%, up by 8% compared to last year because we have used a low interest CNY on a short-term loan to swap the long-term and high interest loans and project loans. With this method in place, the average interest we pay has been down by 36 BP. Now it's 3.53%. We have used the affluent U.S. cash on hand and low interest CNY loan. We have swapped CNY 6.644 million loans. The U.S. dollar loan has been reduced by 9%. Now it's 39.6%. We have been proactive managing the exposure of the USD loans. We have reached 36.7% of the high ratio. Now it's in a safe level. We have used the credit facilities and it's 42.8%. We can see the ratings by S&P and Moody's have given us positive and the CCXI and the CSCI Pengyuan have given us triple A ratings. With great cash flow, credit facilities and positive ratings will pave the road for us to translate the strategies to the actual actions. This is the dividend. Because of the sustainable growth and the principles, our cash flow has achieved CNY 15.57457 billion. Because we also disposed the mine asset, that's given us a CNY 10 billion, we have had the best cash flow. All together we 10.9 and we have increased the dividend and paybacks to our shareholders. We have increased the value per share. At the same time, we have paid a special dividend, and from the disposal of the coal mine assets. As you can see that in 2023, the dividend is RMB 0.91, and in 2024, the pay will now be no less than RMB 1.03 and RMB 1.04. As we grow in the future, we will increase our dividend and pay to the shareholders. With that, I would like to invite Mr. Jiang Chenghong to go through the business highlights and strategies in the future. Next, on behalf of the management, I'd like to report to you the business review in 2023 as well as our future development and strategies. I'd like to give you some important figures in 2023. In summary, the first is the direct gas sales by platform of the company and how we expanded our business in 2023. It was over 5.5 billion cubic meters and up by 44%. Second, we continue to gain advantageous resources. Last year, we have signed 2.8 million tons of overseas and new long-term contracts for LNG, with total contracted LNG exceeding 10 million tons per year in 2023. We have also disposed some mining assets, and we gained extra cash of CNY 10.5 billion. For that, it give us a focus of our main business of natural gas and increase our sustainability. The fourth is that our company's core profit has increased by 5.1%. Number five is that our cash dividend continue improving. The last is that our ESG has realized as a qualitative leap. First, let's take a look into 2023. Actually, what is the macro environmental at home and abroad to give us such kind of results? It should be said then in the past year as a whole, the global natural gas market gradually recovered to a normal price range. During this process, because of climate change and because of geopolitical conflicts and also some major natural gas conflicts and some incidents as a result, during the whole year, there were a lot of fluctuation. That was the regular situation. In the domestic market, we went out of the low value of the natural gas price and returned to the normal track. First of all, the NDRC supervised the establishment and improvement of the pass-through pricing mechanism of natural gas. In Mongolia and other provinces, they successfully issued the linkage policies. The second is that, in oil and gas and power policies, multiple ministries and departments also reinforced the support towards clean energy and incentives. In addition, in the intelligent industry policies, we know then to In last year, the artificial intelligence or AI was ramped up and supported by a lot of policies. Guided by those policies in China, the natural gas market in China has rallied to the growth track. Apparent natural gas increase has reached 394.5 billion cubic meters, up by 7.6%. LNG import in China registered 71 million tons up by 12.6%. Also, our total sales of gas volume increased by 6.8% and reached 38.67 billion cubic meters. Also, we have realized the growth from 2022's 3.5 billion cubic meters, and also grow all the way to 5 billion cubic meters. For the retail gas, it has slightly dropped a little bit, but still in 2023, we realized 25 billion cubic meters. First, let's look into the retail gas. We know that the life gas volume steadily increased, but the industrial gas volume affected by regional power plants somehow slid. In the second half of the year, the over retailing gas recovered a bit gradually. In addition, the natural gas procure cost sustainably dropped. During this process, we tried to reduce the cost of our customers. The second, let's look into our platform and gas sale. It has been steadily expanding. First, the gas sales volume in China has a sizable pickup from 1.48 billion cubic meters in 2022, grew all the way to 3.113 billion cubic meters, growing by 110%. International gas sales compared with 2022, it has leveled off. Now let's look into the gas and the liquid form. You could see then to the gas is. The gas state was 1.887 billion cubic meters, and the liquid form was 3.163 billion cubic meters. We are supported by the gas volume and the core profit has reached CNY 3.414 billion for the core profit in 2023. Now let's look at our customers in 2023. Our company constantly expanded the domestic customers as well as international customers at the same time. For the domestic customers, we have reached 266 customers, among which many of the city gas players followed by the energy groups and large industrial customers. Some parts of customers also include our distributors and traders. In eight provinces, especially Zhejiang, Guangdong, and Fujian provinces, those are the main provinces. For the international customer expansion, we have yielded a great success and progress as well. In 2023, we added 14 international customers, including the large oil and gas companies, as well as some utility companies, as well as some energy trading companies and traders in 10 countries and regions, and covering Europe, Asia, and North America, etc. As for the resource mix, resource structure in 2023, the international versus domestic resources, they have formed a very elastic resource pool. With the effective portfolio of the resources, we try to maximize the resource value. In 2023, the domestic resource structure, if you take a look, 67% come from the gas resources in China, and 23% come from China's liquid resources, and 10% come from the international resources. It is worth mentioning that we are consolidating our resource foundation. We have, again, the 3 major oil companies' resources. We have the 10-year long-term contract with CNPC. CNPC, for the 1st time, has signed such a long-term contract. For the international long-term contract in 2023, we also set up the 2.8 million tons, such as 1.8 million with Cheniere in U.S. and Abu Dhabi National Energy Company, ADNOC, which is the 1 million tons per year. Also for the totally contracted long-term agreement exceed 1 million tons per year. Ultimately, for the ESG field, in 2023, we have realized a qualitative leap. For our self-operated carbon emission indicator, it reduced by 48 million. Sorry, for 48,000 tons. Also help our customers to reduce 56 million tons of carbon reduction for our customers. We actively respond a lot of policies, and we issue Climate-related Financial Information Disclosure, and also to enhance the customer coping or responding resilience report. Our ESG rating has been raised to level A. For two years consecutively, our ESG has been enhanced, and so we have realized such kind of a qualitative leap. Therefore, for the ENN, we also played a very spearheading role. In 2024, it marks our listing for 30 years, which means we have gone public for 30 years. If we look back in 1994, at the time, the ENN was the first listed company in Hebei Province. In 2024, we also bought the Vision Group, we try to deploy in the clean energy industry, especially we march through the upstream of the clean energy in the past four years. It should be said that we have done a lot of strategic transformation also with the transformation and other efforts, we have formed a whole natural gas industrial chain. Especially, we try to deepen our transformation as ecological operator. Judging from the past four years, as overall operating revenue grows by 18% each year. Also our core profit has reached 42%. Also for the U.S. stock, dividend payout growth has reached 69%. Also we have realized a very good breakthrough. With that is the main performance and results in 2023. Next, let me report you about our development strategy in the future. First of all, let's take a look at the industry we are engaged in, especially the future prospect and the space for growth. It should be said then to worldwide, the low carbon and transformation is being pushed forward. Also the natural gas market is recovering. It's being recovered. By 2030, according to the mainstream and authoritative institutions prediction, it will still keep a very robust growth. In 2023, the global natural gas consumption stood at 4.06 trillion cubic meters. It is predicted that by 2030, it will grow to grow by 500 billion cubic meters and reach 4.52 trillion cubic meters. Also in 2024, it will grow all the way to 4.16 trillion cubic meters. For LNG in 2024, it will reach 427 million tons. By 2027, it will reach 588 million tons. The natural gas and LNG growth worldwide will be focused in Asia. Asia will account for around 50% of the global future increment. Therefore, the main increment of Asia will lie in China. Therefore, with the green drive and transformation in China, we believe that the natural gas market will still usher in a rapid growth. In 2024, the natural gas consumption growth speed will be 6%-7%, and we will end around 24 billion-28 billion cubic meters. By 2023, the consumption will reach around 580 billion cubic meters to 600 billion cubic meters. LNG will also maintain a very fast track of growth. In 2024, it is predicted that China will import 75 million tons. By 2030, LNG import will be around 103 million tons. There is a market growth and prospect of import. Next, let's look at the future market. As a industry player, we believe that both opportunities and challenges will coexist. In the past four years, as a practitioner, we have witnessed the very price of natural gas. It was $1.8 for MMBtu. Also we have witnessed the highest price, which is $80 per MMBtu. In the worldwide wise, we have also understand to normalize the range for the price, still we need to note a lot of uncertainties and the price fluctuation will be very frequent. At the same time, we have also observed that apart from the commodity attribute natural gas is also a very important component of the bulk commodity. It has the trading, transaction, and the financial attribute, which is increasing. Therefore, we have the coexistence as well of opportunities and challenges. What kind of companies can size up the opportunities and control the risk, and therefore such kind of companies can excel in our segment. Third, let's review. Let's look at our customers. In the past few years, we know then to the customers choice and sovereignty is returning. We have a market-based revolution in China and transformation in China, and we always follow the way of customer sovereignty. In the past, in the market, when it enters the resources and the pipelines were the decisive factor or the king. Whoever owning the pipeline will makes the call. Now, with a number of reforms being deepened, we found more and more big companies are doing direct procurement, a lot of bigger terminal customers are also using the pipeline, PipeChina resources, and especially a lot of big groups are also procuring overseas from overseas. For those non-NOC resource owners, as they go to the international market, and therefore the supply entities for the customers are becoming more and more diverse in 2019. Also, PipeChina was established. They're pushing forward such process. Now and in the future, the customer as the king, such kind of era is coming. In the future, we will be customer-centric and also driven by the customers that will become the new era, and we have a higher voice and more choices and more sovereignty for the customers. In addition, now. On the other hand, we have moved from the industrial times to the digital and even intelligent time with the technologies of digitalization and intelligence. It has revealed opportunities for us as well. We would like to leverage the intelligent technologies to facilitate customer success and therefore foster our own success. At the same time, I would like to talk about customer growth potential. How big room is there for ENN? We have several key customers. For example, the city gas companies, energy groups, and large industries, as well as the gas distributors and traders. Now, we have more than 60,000 city gas companies. With years of efforts of expanding our sales network, we only have cooperated with more than 20 of them, so big room there. For energy groups and large industries, there are more than 100 China, out of which we have worked with 40 plus. For distributors, we currently work with 170 distributors. However, there are more than 300 of them. What about the international market? What is the potential? Internationally, including the large oil and gas companies, large utilities, and energy traders, we have around more than 200 participants. Now, ENN has worked with 20 some out of this 200, and we have been under 60 counterparties whitelist, and we have more than 100 plus potential customers. We do have a large potential for incremental customers in the future. With that much being said, would we have a bright and promising future of the LNG overseas and large potential for our customers? We face great challenges and opportunities at the same time. What is our tackling solution? Why does ENN among this industry? We have consolidated the past experience and summarized as follows for your reference. First, with three decades of efforts in deploying the layout and resources, now the company has full supply chain and value chain strength. The first is we have the four pivots. With the three decades of efforts, we have built a massive customer demands in China. As of last year, we have an annually 40 billion cubic meters per annum gas volume, covers 30 million residential users and 240,000+ CNI users. The numbers are increasing per annum. Secondly, over these years, we come to form the diversified resources and resource pools, both in China and overseas, as I have reported in previous slides. Now we have more than 16 million tons overseas. We also have domestic LTA, 30 billion cubic meters. We have a self-owned LNG plants as well. Thirdly, we have a relatively efficient delivery networks. The core asset is the Zhoushan in Zhejiang Province. Once we start the operation of the third phase, we will expect 10 million tons per year. In addition to that, with the years of efforts, we have had 10 LNG vessels for international delivery. At the same time, we have more than 1,200 tankers that we have access to and also the storage capacities with PipeChina. In addition to that, we have come to form and stipulate advanced risk management systems. Last year, endorsed by the Tianjin Municipal Government, we have set up the International Gas and LNG Trade Center in Tianjin. Hopefully, we can provide diversified natural gas trading products. At the same time, we can introduce advanced international risk management best practices into China. In addition to the business pivots, in addition to the challenge of the hardwares, the company also believes what is more important or more valuable is the capabilities that we can scale up, especially in the soft power. In the past three decades, we have amassed the ability to service our customers, how to make a judgment, how to help and the customer's operation. In obtaining those capabilities, we have come to form the ability to match the supply and demand. At the same time, we have the delivery capability, and in the past years, when we have a rising international market, we also acquired the international trading capability, such as international credit, international commerce, international transportation. I can still remember that back in 2018 when we started the commerce and the international trade, our credit facility is only a couple of hundreds of millions. The hedge, it's just even little. Now, the credit facility is much, much more compared to 2018. Given the price fluctuations, we have had the inter-intelligent risk management capability, including the commodity hedging. During the past years, we have grown from small to big, and we have built the risk management system for energy trade. Because of the systems in place, and we are working on the iteration of the system, we are in a good position to control the strong fluctuations of the product price so that we can maintain the value. Based on what I have just presented pertaining to the hardwares and softwares and the experience we have accumulated over the past three decades, we continue to optimize and upgrade the business model of our group. Because we have so many pivots and capabilities in place, now we can work on the CNY 5 billion, CNY 8 billion. What about CNY 10 billion? What about CNY 20 billion? If we solely rely on human efforts to work on such a giant volume per day, it is not possible to achieve our target. In the future, we will have some different business models. Based on the past experience and our customer base and domestic and international resources and our delivery network, with those four pivots in place, we could transfer them into abilities. Based on those abilities, we want to leverage the cutting-edge technology in the intelligent era to produce intelligent products. With those products, we can accumulate the best practices so that they become models. In summary, or in this aggregation, we will have the big data model for the LNG and the gas industry. For the aggregate, big model can be used as a gas network. Those LMs from Haoqi Wang will be the platform for different ecosystem partners. Based on our iteration and thoughts on this platform, ENN Group or ENN Natural Gas has used its ability for all scenarios and IoT capabilities to build the big data model for the industry to become the ecosystem operator of our industry. We would like to use this platform to aggregate the different aspects and utilize intelligence to achieve optimal matching and demand and supply, assisting customers and ecological partners in expanding production to achieve the multiple winning situation. That's the business model I would like to report to you and some of our thoughts in its details. In 2024 where we celebrate opportunities and face our challenges, what are the specific initiatives? First is the coordinated actions between domestic and international businesses. As the price return to the normalized range, we have more market opportunities. The first one is we call it aggregation. For the, especially for the small and medium-sized city gas companies and energy groups, for those scattered demands, they will be aggregated. At the same time, for the large energy groups and large city and medium gas companies, would also be united. Actually, our total volume is 1 vessel, but if we can unite them, then we can have 20-30 vessels. In this sense, we are in a better position for a resource bargain in the international market. For large, even larger energy groups, we can output and we can provide the lower gas cost by importing spot LNG flexibly. Those are the combination of different actions and dynamically improve the volume of our platform and to combine domestic and international resources. With the LTAs on hand, as well as the active spot resources can be organically combined as well. At the same time, we can combine the physicals with the derivatives to be combined effectively so that we can achieve the coordinated movements in the domestic and international markets. The second strategy is international trade. In China and in the international markets, we have constant changing dynamics on a daily basis, we have a prudential thinking on the different strategies. We would like to use flexibilities to leverage those two markets to hedge, to hedge the risk and to maintain stability. To put it simply, when the international market prices are high, we can use domestic customers to achieve a better value. When the international resources drop dramatically, the domestic markets' demand will be further motivated. Consequently, the international LTAs and the spot resources will be introduced and the customer demand will be met. At the same time, we will be based in a domestic market to utilize the international customers' network to third-party international trade. In order to achieve this, we have to have the ability for effective hedging functions and also the risk management system so that international market strategies can truly work. Next strategy is the expansion of the retail sales volume in 2024. We expect quite a lot of opportunities in different areas. In the residential part, we will have the fast expansion in the connection of some of the old residential areas and renovated old residential areas. We also have incremental customers. At the same time, we have the advantage of price advantage adjustment window in 2024 to fully promote the price adjustment. In terms of commerce, we do attach great importance to the safety governance. We would like to seize that opportunity and use that to promote the standardized configuration, and also we will promote the diversified services and the packages to accelerate customer conversion. In terms of the industrial, we will grasp the opportunities of the deployment in the coastal area and the industrial transfer opportunities in the central provinces to get emerging industrial layout. Also for the continue of steel, textiles, and iron, we will grasp the opportunities of energy saving to provide gas technology solutions. In addition, we will also work on the energy consumption reduction and high quality industrial development, which is promoted by the central government. We will have the in-depth opportunity. Our last strategy, also in 2024, we will further unleash the potential of the pivot in the Tianjin International Petroleum & Gas Exchange Center in the last year. The company will rapidly form a very efficient platform, direct to gas sale mode with market-based mechanism. We will promote the trading, especially via the platform. At the same time, with the trading center, we will connect to internationally and domestically, especially for the advanced risk control mechanisms, the tools, the systems, experience will be introduced, and also we will form the industrial risk control systems and help our customers to effectively manage the fluctuation risks of market prices. Just now, on behalf of the management, that is the business review as well as a prospect for the new year. In the new year, the ENN and all the members will go out and try to compose a new chapter of natural gas industry in an intelligent way. Thank you.