ENN bids to reshape its gas business with listing switch-up

ENN Natural Gas, part of China’s ENN energy group, is looking to buy out a listed subsidiary and take the firm’s place on the Hong Kong stock market

Key Takeaways:

• The two-step plan would see ENN Natural Gas take control of ENN Energy Holdings, delist the acquired firm and then relist under its own name
• The company says the consolidation should help streamline operations and strengthen its position in the gas market

By Lee Shih Ta

Chinese energy enterprise ENN Natural Gas Co. Ltd. (600803.SH) is taking an unusual route to becoming a dual-listed company. It will not have to issue any new shares along the way, but the process is by no means straightforward.

The proposed maneuver involves buying out shareholders in a listed subsidiary then effectively taking that unit’s place on the Hong Kong stock market, as the combined company bids to streamline its gas operations and raise its profile with international investors.

The strategy became clear on Monday when ENN Natural Gas, part of a group headed by billionaire businessman Wang Yusou, applied to list on the main board of the Hong Kong Stock Exchange by means of introduction, a method that leverages existing shares without raising fresh funds.

The listing is predicated on a successful buyout of the gas supplier’s subsidiary, ENN Energy Holdings Ltd. (2688.HK), under a plan announced in March. Starting from an existing 34.28% stake, ENN Natural Gas would need to buy up the remaining shares to take control of the energy subsidiary and withdraw it from the Hong Kong stock market.

ENN Natural Gas then aims to take the vacated place by issuing Hong Kong shares under its own name, adding to its primary listing on the Shanghai stock market, according to documents submitted by the company. China International Capital Corporation Hong Kong Securities was named as the sole sponsor for the Hong Kong listing.

For all the steps to fall into place, ENN Natural Gas would need the backing of shareholders and approval from the exchange’s listing committee.

The stated aim is to create an integrated gas operation within the ENN group, as the industry comes under pressure to accelerate China’s strategic push for energy security and low-carbon solutions to energy needs.

Under the proposed buyout terms, holders of each ENN Energy share would get 2.9427 shares in ENN Natural Gas plus a cash payment of HK$24.50 ($3.12) per share. The cash part of the deal would amount to HK$18.36 billion ($2.34 billion), covered by a bank loan of HK$18.5 billion secured through the gas company’s wholly owned subsidiary Xinneng (Hong Kong) Energy Investment.

Up to 2.204 billion Hong Kong shares would be issued to facilitate the switch-up, not open to the public or for fundraising purposes, but offered to existing ENN Energy investors, thereby meeting the exchange’s criteria for a listing by introduction, the company said.

Touting the benefits of a revised capital structure, ENN Natural Gas said shareholders would retain their interest in the ENN Energy business while gaining from the integration of operations and a swifter, more coordinated corporate response to market conditions and opportunities.

The move also provides investors with arbitrage opportunities. ENN Energy’s stock price is currently trading around HK$65. Using company figures estimating the ENN Natural Gas share price at HK$18.86, the value of the buyout offer would be around HK$80 per share, with a potential return exceeding 23%. ENN Energy’s stock price has risen 10% since the privatization plan was unveiled.

At the end of 2024, the debt-to-asset ratio at ENN Natural Gas stood at approximately 54.3%. Even after adding another HK$18.5 billion in borrowings, the company would still sit below the widely accepted 70% risk threshold for energy companies. Furthermore, the company holds around 12.1 billion yuan in cash and enjoys a stable cash flow.

Seeking synergies

ENN Energy describes itself as one of the largest clean energy distributors in China, with a focus on piped gas, LNG and low-carbon products. It holds exclusive rights for gas projects in 261 Chinese cities, serving over 31 million residential customers and 270,000 commercial or industrial customers. ENN Natural Gas focuses more on fuel imports, storage and transportation, platform trading and integrated energy solutions. Although the two companies previously had capital ties, via the stake held by ENN Natural Gas, their independent finances and management structures made it challenging to capture efficiencies and maximize profits.

If the buyout offer succeeds, ENN Natural Gas will become the outright owner of ENN Energy, allowing it to consolidate profits, sales networks and end-user resources. Figures in the listing documents say the net profit of 4.49 billion yuan in 2024 would have been 8.14 billion yuan under the proposed enlarged structure, a rise of 81%. On that basis, ENN Natural Gas could reach a Hong Kong market capitalization in the region of HK$100 billion.

Greater control over the supply and sales chain could give the gas supplier more bargaining power and offer increased scope to hedge risks.

A sharp fall in natural gas prices has squeezed earnings. Revenues dropped from 154.04 billion yuan ($21.4 billion) in 2022 to 135.83 billion yuan in 2024, while gross profit margin for the natural gas wholesale business plummeted from 4.27% in 2023 to 0.37%. However, ENN Energy’s retail business has consistently delivered a gross profit margin of over 11%, with the potential to rise further if demand from industrial users recovers.

With borrowed cash, ENN Natural Gas is bidding for full ownership of a company valued at approximately HK$72 billion. If the deal goes through and the gamble pays off, it could find itself in a better position to exploit growth opportunities in China’s energy market.

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