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Edited Transcript of 2688.HK earnings conference call or presentation 20-Aug-20 12:30pm GMT

Half Year 2020 ENN Energy Holdings Ltd Earnings Call (Chinese, English)

LANGFANG Aug 21, 2020 (Thomson StreetEvents) -- Edited Transcript of ENN Energy Holdings Ltd earnings conference call or presentation Thursday, August 20, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dongzhi Wang

ENN Energy Holdings Limited - Executive Director

* Jianfeng Liu

ENN Energy Holdings Limited - CFO

* Jishen Han

ENN Energy Holdings Limited - CEO & Executive Director

* Yuying Zhang

ENN Energy Holdings Limited - Chief Strategy Officer, President & Executive Director

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Conference Call Participants

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* Dennis Ip

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* Eric Siu

* Gary Zhou

Crédit Suisse AG, Research Division - Research Analyst

* Ming-Hon Li

HSBC, Research Division - Head of Utility and Alternative Energy and Analyst

* Pierre Lau

Citigroup Inc., Research Division - MD, Head of Pan-Asia Utilities Research and Deputy Head of China Research

* Wenjun Yu

SWS Research Co., Ltd. - Analyst

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Presentation

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Unidentified Company Representative, [1]

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Welcome to ENN Energy Holdings interim results presentation. First of all, we have, together with us, the management, including the Executive Director and CEO, Mr. Han Jishen; Executive Director and President, Mr. Zhang Yuying; Executive Director, Mr. Wang Dongzhi; and the CFO, Mr. Liu Jianfeng.

For the first half of 2020, we saw that the global economy was in the doldrums. Oil prices hit the bottom before rebounding, and there was a combating of the epidemic COVID-19 and floods in south of China. Dangers were everywhere. But with the wise leadership of the Board of the company and with the efforts of the management and also all the staff concerned, we were able to be steadfast in our existing strategy.

Next, we will have Mr. Liu Jianfeng, CFO, to talk to us about the first half performance.

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Jianfeng Liu, ENN Energy Holdings Limited - CFO [2]

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Well, welcome to the presentation for the interim results 2020 for ENN Energy Holdings Limited. Let me go through some of the performance for the first half of the year.

I would have the pleasure to report to you the interim results highlights. Through a number of measures in face of the COVID-19 and other impact, we were able to record retail gas sales volume up by 4% to 10.16 billion cubic meters. We added C/I customers with 6.56 million cubic meters installed designed daily capacity and 1.025 million new residential customers. We added 12 city-gas and 10 IE projects, expanded operation areas and also core energy sales business grew steadily. Gross profit of retail gas sales, integrated energy and wholesale of gas increased by 9.4%, 99.5% and also 257.9%, respectively. Our core profit was up 13.8% to RMB 3.11 billion with the support of the different sectors of our business.

There had been a number of impacts overall for the community and also for the economy. But during this time, we have dedicated our company to corporate social responsibility. We made every effort to fight against the COVID-19 epidemic and ensured our protection of our staff. We had all-rounded protection for employees, and we have recorded no case of COVID-19 among all our staff. And at the same time, we guaranteed stable supply of natural gas and support to customers' production resumption, especially during the flood areas at Anhui province and Hunan province, which were directly impacted. But through the floods and through the rain and the winds, we had provided customers with overnight maintenance and inspection so as to help them resume production safety -- safely and in time and one they trust by providing high-quality services.

And all the more, during these trying times, we continually improved our ESG performance and management, reducing energy consumption and carbon footprint for our society. We have continued with our training and also with our stepping up with compliance with international standards. We now have 6 member companies, which have obtained ISO14001, while ISO145001, et cetera, certificates. And we have also been included into the index of the capital markets, showing that we have been given recognition and positive regard in the capital market.

Next, we will look at the operation and financial review. First of all, in terms of our natural gas sales volume, it has continued to increase 4.8% compared to first half of last year, and that's for retail and wholesale 4%. And we have reached 13,832 million cubic meters and 10,163 million cubic meters, respectively. And during the period, there has been large decrease of transport and other demands. And therefore, there has been a vehicle refueling station drop of 30%. And we continue to develop our new customers all around. We have put in a lot of assets in promoting bottled LPG to piped gas, actively communicating with local governments to obtain relevant policies and subsidies and leverage our low-cost gas resources in interconnecting surrounding pipeline networks. And as a result, leveraging our local policies and technological advantages, we developed 1.97 million cubic meters in installed designed daily capacity for coal-to-gas customers.

And for new CI customers, we were able to continue to increase the number of our customers. And we have also been able to develop new customer with our construction. And we also took advantage of the opportunities to bring on government initiatives and also to transform old urban residential areas, including in particular provinces. And with the urbanization, we were able to also increase from 60% to 70% by 2030 for urbanization, and we had large-scale urbanization projects which will provide enormous opportunities for us.

We continue to expand our city-gas concessions. We acquired 12 new projects with incremental population coverage of 2.17 million. And we have projects in Jiangsu, Zhejiang and a number of provinces. And also in Ganyu, Fujian, Rui'an projects have also realized pipeline network interconnection, forming a one network gas sourcing and also propelling our city-gas projects going forward. Gas penetration rate was 61.2%.

As for expanded dollar margin, it is CNY 0.03 higher than the same period of last year. And this is because of international LNG imports, reduced overall procurement cost of gas source and also preferential incremental gas price. So we are always reducing our price for the customers. And we were able to achieve ASP drop of RMB 0.43 per cubic meter due to cost pass-through, and this is a win-win situation together with our customers.

We have diversified resources planning and enhanced our competitiveness and boosted our gas sales during the period. We took advantage of low LNG prices. And together with our parent company in the first half of the year, we were able to really execute this cooperation, and we have been able to achieve 1.08 million tons of LNG imported in the first half and significantly reducing the average gas procurement costs.

The Zhoushan terminal, with 8 billion cubic meters of annual transmission capacity, is operational, greatly enhancing send-out capacity. And also, we have secured other LNG terminals' available slots. And also together with the local governments, including provincial governments, we were able to reduce our gas procurement costs improved our natural gas competitiveness and also stimulate customers' gas consumption and developed new customers.

For IE business, we continue to innovate in a number of areas. And in the first half of the year, we were able to achieve growth in all areas. Our revenue had achieved RMB 1,019 million. And also, we have been able to increase our IE sales volume million kilowatts by 2.46%, and installed capacity increased by 1.32%. And for gross profit, it has grown 2x to RMB 411 million. Projects in operation were 82, which is 1.32x increase to RMB 108 million.

For our value added business, we continue to provide this VA, value-added, for our customers in a number of areas, including for our Gratle appliances sales and also reduced -- COVID-19 reduced home services. We were nevertheless were able to provide value-added service to our customers. In the first half, value-added business was RMB 663 million and the gross profit was RMB 566 million, which is a drop in both from last year. But on the other hand, we have provided our new services, including our new APP and also product innovation and providing personalized value-added product package. So overall speaking, our penetration had been 6% to 7% increase. And also with our new customers, and we have a new penetration of 15%. And overall, we achieved a 20% penetration. So overall speaking for value-added business, we have a very good outlook.

For the different sectors of growth for the company, it had achieved for us solid results. Our revenue for the first half was negative 10.8%. Gross profit was increased 0.1%. So revenue drop was because of the natural gas price dropping significantly. EBITDA was 4.9% increase to RMB 5,407 million. Profit attributable to shareholders was RMB 2,693 million; core profit RMB 3,112 million, which was a 13.8% increase. And our basic core EPS was CNY 2.77.

For our results, the decrease of natural price gas led to lower sell price, which affected the revenue, but gross profit rose 9.4% and 257.9% year-on-year, respectively. And we benefit from utilization rate in the existing projects and also incremental energy demand from new projects.

Revenue for Integrated Energy business increased 106.2% and gross profit rose 99.5%. The projects delayed due to the COVID-19 shall be recovered in the second half of this year.

The very complicated macroeconomic situation and also the changeable operating environment had tried our company. But on the other hand, we were still able to achieve superior financial management. CapEx was a 15% decrease. And for our management of our financials, AR and turnover days have also decreased by 15%. Net gearing and net debt-to-EBITDA ratio had also been optimized to 40% gearing. And with all sorts of trials in the first half, we have been able to achieve good cash on hand.

With our development and our very good financial management, it has given us liquidity and also ample financial resources. Our debt structure is varied. We have concessions in terms of our rate and also for -- it had decreased by 48 basis points in terms of our interest rate of bank loans to 3.42%.

For our credit rating, we continue to be a BBB+ for S&P Global, and we continue to be of investment grade, and we are providing very good financial resource capability for our company. It has provided us a very good foundation, and our innovation has given us a continued growth outlook.

Next, Mr. Zhang Yuying will be looking at the strategy and the outlook together with us.

Mr. Zhang, please.

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Yuying Zhang, ENN Energy Holdings Limited - Chief Strategy Officer, President & Executive Director [3]

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Respected investors, analysts, I will now go through some of the outlook and business strategies for the future with you.

In the first half of the year, it was an unusual period of time. We can all see that it was the epidemic and the complex exterior condition, they have brought on a lot of uncertainties to the operation of the company. With this kind of situation, we have continued to grow. And I would say that this kind of growth had brought on to us results, which were because of the accumulation of our buildup and foundation building and also the assets of the management and also of our entire staff, that is the reason of our positive results despite the challenges.

The worst time we believe is over. In the second half of the year, we believe for the overall situation -- for the second quarter even, the GDP had already grown to 3.2% from a 6.8% contraction in Q1. And we believe that with the consumption and expansion and also infrastructure investments, they will bring on future and more growth in the second half of 2020 and achieving the before epidemic levels. In July of this year, we also saw exports of China rising 10.4% year-on-year. And we believe that this growth is a good and clear rebound.

For Belt and Road and also for Southeast Asia, our China exports will be very important in these areas. And the Chinese government has also made it clear that for -- there will be dual circulation in which domestic circulation plays a major role. That will be the major theme. And China will continue to strengthen. Consumption is the driving force for the economy, increasing investment in industries and also infrastructure. All these will boost domestic demand, in particular for natural gas.

For the industry, the 14th 5-year period in terms of industry policy, China will continue to adhere to environmental governance and promote optimization of energy structure. And for coal-to-gas especially for C/I, they will continue to be a very important policy for the government. Coal-to-gas transformation will continue to bring on natural gas increase as a component overall. 2020 is a critical year to win the battle for Blue Sky for China, and local government will continue to enhance the environmental protection efforts to achieve the scheduled milestones. We already see this. And the delta region -- the pearl river delta region in the Central China region, everybody is putting in the efforts to achieve the Blue Sky battle victory.

And also the progress of national pipeline stabilization is accelerating, which will further incentivize upstream and downstream players. In particular, for upstream, there will be more resources optimization. And with this, there will be more demand in terms of stable supply of natural gas. All these will be positive.

Now at the same time, while we look at the macro situation, we see that there is further digitalization for China overall. It's a transform from consumer to industrial digitalization. Industrial digitalization is very important, and it is a positive incentive and also empowerment for the natural gas industry, in particular with the cloud IoT chain. For the energy industry, it will stimulate demand for digitalized and smart energy from customers and there will be a series of policies to accelerate the development of Internet for industries. This is going to be a very disruptive and good force. And according to understanding, this will be the policy, and our company will continue to benefit from these policies. And overall, we will be providing a stable and healthy growth.

For sale of natural gas according to the government -- central government policy will grasp opportunities of industry development, especially for the C/I and also small to medium-sized industrial customers. We will use flexible sales packages and also provide optimized gas source mix and reduce cost in order to provide this kind of supply to the industries and at the same time be able to lower our costs and also optimize our mix of sources.

Now in the M&A opportunities, there would be more such opportunities, and we will continue to optimize and innovate on our model, especially for synergistic effects with some of the related companies to extend external markets and also the large C/I customers.

As for pipeline transmission service, with the government policy, in the future, there will be backbone and also the branch networks, which will continue to be interconnected. And there will be new changes and new challenges as well. According to the pipeline strategy of the entire country, we will be starting early our layout, especially in connecting the major areas, major users, these branch pipelines and also some of the connection to the main backbone pipeline. We will be enhancing transmission and our distribution efficiency, so as to safeguard the connection of our customers.

Now because the pipeline network is controlled and managed by the government, how can we, on a high quality, be able to transfer the -- and transmit the energy; how do we, in the main areas, be able to achieve smart pipeline so that our transmission efficiency can increase rapidly and significantly. In IE service, Integrated Energy service, we seize the opportunity of national energy conservation and emission reduction. Industrial transfer and energy utilization, we will use our knowledge and optimize the technology to develop this area of the business. We will also deepen our understanding of our customer and also to be very close to them in order to optimize our business solutions based on the local conditions and fully unlock the value of the integrated energy, lower the cost for our customers and also to unlock the total value of our projects.

We will also actively promote asset-light business model. Asset-light means we have -- we will be using our customers' facilities or the customer will invest in such facilities. That would include managing on their behalf and also supplying on their behalf. So the customers will be buying in the processing, transfer of energy and using different methods to achieve asset-light model so that the cost for the customers will be lowered and also for the company, for IE, increase our profitability, build a very good foundation for it. And also, for the customer side and also for our supply side and also for government promoted trading of energy, we will continue to provide integrated capabilities in order to raise our profitability for IE.

For value-added service, ENN had already consolidated 21 million customers and also 150,000 C/I customers as customers in the C/I area raised their demand for efficiency and also the standard of living demand for the residential community. We will continue to provide value-added service in answer to their demands by consolidating our resources of ecosystem partners, promote innovative products to satisfy our customers' diversified demand to provide new products and also new services, which are also customized for them.

And also, we have door-to-door maintenance and also safety checks, et cetera, so as to provide more value for our customers. Especially during the epidemic, we step up all the more with this kind of service, to integrate online and offline sales, improve customer penetration rates and they will -- our customers will feel the convenience and the quality of our service. And integrating online, offline, the customer penetration rate will also be increased, driving our business growth. So in a number of areas, 4 areas where we're innovating, in keeping with being close to the demand of our customers.

Today, we see that apart from using traditional models, digitalization is very important and very effective in allowing us to provide better service and enhance our efficiency and increase our scale of production. And a number of areas in the digitalization field, we have smart distribution and we have products that are designed for them. And also, we will be customer oriented. And also, we will be close to the behavior and habits of our customers. So as more accurately map the requirements of our customers.

And also with the pipeline -- or the smart pipeline network that is built up, we enhanced the intelligent adjustment capability based on IoT for more efficient operation for pipeline network and lower the costs.

In this backdrop of smart, large-scale pipeline network, how do we provide digitalization? This is about how we can very quickly satisfy our customers' demand and also increase our capacity as well as productivity so as to serve our customers better.

In pipeline network, smart pipeline is going to be very important in adjusting the peak and balancing the supply. All these are very important in providing new models of supply to our customers, so that for pipeline planning, design, construction, operation and also life cycle management for pipeline through digitalization, our assets or pipeline from planning, quality to design quality and level of operation, they will all be enhanced so that pipeline as an asset can be fully extricated in its value. So that in the entire transmission network, we will be using AI and also IoT to provide high-efficiency usage. So that overall, our pipeline asset utilization and stability, safety can all be enhanced.

For artificial intelligence service, as mentioned just now, we will continue to be close to our customers so that they can enjoy more services and products conveniently online, and they feel that it is user-friendly. And through more exchanges with the customers, we want to understand their demands and needs. And through digitalization means we provide our service process so that our customers will feel the service. And also in their own scenario, we will be able to ingrain our service and products so as to increase the servicing of the demand of our customers.

And apart from this, at the same time, we will be digitalizing our products and upgrade our products that cover the life cycle of IE, Integrated Energy projects, from designing solutions, delivering to operations to improve quality and efficiency, all digitalized.

From the user side, we will be, according to their demand and the capacity and the need to be able to optimize our products so that they are able to lower their costs or increase the efficiency. For power or energy trading and the spot market that is supported by the government, we -- this will have to be -- there will have to be smart power trading products to enhance the purchase and sales of power. So we will continue to build up our trading products.

Environmental change, economy, policy and also our internal strategy for digitalization and for product and services, put this all together, we have the following, which is the 2020 guidance. First of all, we'll proactively develop our new customers with new C/I development of at least 18 million cubic meters daily installed capacity, new residential development of at least 2.3 million households and 20 to 30 new city-gas projects acquisition. For natural gas, we ensure volume and quality. Volume growth at least 10% and dollar margin up about RMB 0.02. For new business development or IE business revenue, at least RMB 6 billion and value-added business revenue to reach RMB 2 billion. And we create higher returns for our shareholders. Core earnings growth 15% with dividend payout at least 32%.

This closes my report. Thank you very much.

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Questions and Answers

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Unidentified Company Representative, [1]

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Thank you. He has reviewed -- we have reviewed the performance of the first half. And also, we have looked at the strategies of our company and also the outlook. Next, we will have the Q&A session.

(Operator Instructions) The first question, please.

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Unidentified Analyst, [2]

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Greetings, management. (inaudible). First of all, congratulations in these very difficult times in the first half, you were still able to get such very good results. I have a couple of questions. First of all, which has been mentioned that for the import of the first half, you have mentioned 108 tons natural gas. I would like to know the profit margin and also the import volume for the second half. And another question, how do we look at the new policy in our challenges and also some of the opportunities for our company going forward with the policy?

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Jianfeng Liu, ENN Energy Holdings Limited - CFO [3]

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The second half will be the same as the first half in import, 108 tons. And as I mentioned, it will be CNY 0.02 for the second half. It was around CNY 0.03 for the first half. That's an answer to your first question.

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Jishen Han, ENN Energy Holdings Limited - CEO & Executive Director [4]

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And the second question, concerning the pipeline -- national pipeline building. It will bring on changes to the business model because it will impact the industry a lot, including our terminals, our receiving terminals and also the development of our pipelines. And this will bring on certain price changes. For pipelines, it is a -- the development of the pipeline is very important, but we have accumulated a lot of experience and customer resources in the past few years, where company in LNG had accumulated a lot of experience. We have the capability to acquire resources so as to develop for the future, especially in this integrated approach.

And also for provincial pipeline network development. In the past, it had been monopolistic and it has increased our costs. Our costs have been high because of that. With this opening up, the costs will come down.

And another point is that ENN, over the many years, had accumulated huge customer resources. Customer sources, to us, is very important. The capacity of our customers gives us bargaining power. Anything new, when it comes out, if a company is fully and well prepared, it is a good thing for the company and will bring on more profitability for the well prepared companies, which is also ENN.

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Unidentified Company Representative, [5]

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The next question please. (Operator Instructions)

Pierre Lau, Citibank.

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Pierre Lau, Citigroup Inc., Research Division - MD, Head of Pan-Asia Utilities Research and Deputy Head of China Research [6]

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Two questions for you. For the first half, it has -- it was an increase of 13.8%, you have mentioned, for core profit. And it's CNY 5.6 billion, which is more or less the same as last year, not much growth. But the core profit had been up 13.8%. Why is that? And for the first half of the year, for cost of natural gas, it was CNY 0.046 per unit. I would like to know how much of it is because of imported LNG.

I have a third question, actually. Management has given us a guide about dollar margin. I would like to know, in our calculation, do we take into account LNG imports for the second half or for the next half, what is the average import LNG? How does it change the dollar margin?

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Dongzhi Wang, ENN Energy Holdings Limited - Executive Director [7]

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Thank you very much, Mr. Liu, for the question. I will answer the question, and then my colleagues will answer the third question. I'll answer the first 2 questions. First of all, about our core profit up 13.8%, but our gross profit had not increased much. That was your question. If you looked at our financials for the first half of the year, in financial costs, there was a good RMB 50 million decrease savings. Mr. Liu, you can also look at our financial statements for minority shareholders' interest. This year compared to same period, it is a decrease of RMB 100 million. That represents for this year the -- for the companies, which are controlling for us, the performance is relatively better. So even though the gross margin had not increased much, our gross profit had not increased much, but our core profit in this item, it has grown more clearly and significantly. So this is reflected in our financial statements. Because at the end, for the financial statements, we have not split out all these. So perhaps you don't have all that information yet.

Now the other question about our purchasing cost, lowering our purchasing cost. About this question, in the first half of the year, the 100 -- there has been a 3,000 million for our imported tons, and all these will be reflected in our wholesale profits. And it will -- there will be about 200 million, which will be reflected in our retail. So our profit -- the dollar margin for this year is stable. And the -- so it's, therefore, a RMB 0.03 increase for our dollar margin. It is because of our lower cost.

Third question that you have asked. In the second half of the year or the entire year, the dollar margin guide does reflect the purchasing cost -- lower purchasing costs. Yes, we have taken that into account. With lower purchasing cost, in fact, compared to the first half, it will be even more significant. And I have also talked to some of the investors before, saying that for some of the long-term contracts, together -- for the [ETC]moving average, it is back to that. So therefore, for July purchase noncontract price, it is linked to March, April and May oil price. For July, August and also September, import LNG price. Long contracts compared to first half, it is even lower. So for our cost compression for the second half purchasing cost lowering would be even more significant. This is the answer. Thank you.

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Unidentified Company Representative, [8]

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Daiwa, Dennis Ip.

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Dennis Ip, Daiwa Securities Co. Ltd., Research Division - Research Analyst [9]

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Congratulations. In these very difficult times, you are still able to increase your profit. From 13% to 14% core profit up is very commendable. A couple of questions. Mr. Liu had mentioned just now for asset-light, that is a customer to also invest in facilities, we will operate and manage on the customers' behalf. What does this mean? Does it mean that for IE, our cost will be lower. And does it also mean that in future, for each year's CapEx, we will control it about to CNY 800 million to CNY 900 million? And also for the first half of the year, what is our free cash position? Because our receivables have improved. So our free cash should be an improvement, I would think. It should grow. Is that right?

And another question to ask for income. It's decreased 26%, but profit has decreased only 24%. And that is excellent because with the epidemic situation, for construction costs, it would be higher. For example, for the communities and also for the epidemic, you have to do some prevention measures for the epidemic. So the construction costs will be higher. But on the other hand, we see that your growth profit is very healthy. So my question is, do you see that your cost control has been better? And how do you see, for the future, connecting for residential? Would the gross margin be increased because you're able to control cost better, please?

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Jianfeng Liu, ENN Energy Holdings Limited - CFO [10]

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Thank you for your question. As Mr. Zhang had mentioned, asset-light, this is coming from the business model and business -- and coming from the customer cooperation model, so that the customer will be able to in their ecology or we will be cooperating with them and servicing them.

As for CapEx, it is true. As you have pointed out, for some new projects, with this asset-light model, the costs will come down, CapEx will come down. For the CNY 800 million -- CNY 8 billion to CNY 9 billion CapEx, we will be flexibly adjusting them because of our asset-light model.

Our asset-light model in the future for IE, this will be the model that we adopt, where we find good projects. This will be our mode of operation. Because for the country, in terms of marketization, in some areas, for example, in Guangdong, it has already been piloted. And for our overall sales, we continue to -- the coal part had already been continuing to decrease. And therefore, our reliance on this is also lower. And at the same time, we are -- we have some value added business, a lot more value-added business and also our safety products and also heating revenue had also increased. These are the sources where our revenue are increasing.

And also for some provinces, there are new measures and policies. We think that, for us, the -- any adverse effect on our company would not be big. Any supplement?

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Dongzhi Wang, ENN Energy Holdings Limited - Executive Director [11]

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About our connection with this will -- our -- the profit would increase. Now the cost and fee is stable. And in the past years, you're able to see our -- see the tariffs had also been stable. And every year, we have our teams and our construction teams, they will be abiding by the quality and also safety measures requirements. And there will be low costs in their operations. And you will be able to see for some certain years our growth profit may be -- or gross profit margin may be higher. And this is because of these changes among the different cities and geographies and also the connection gross profit margin will be stabilizing at the present level.

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Unidentified Company Representative, [12]

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Credit Suisse, Gary Zhou.

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Gary Zhou, Crédit Suisse AG, Research Division - Research Analyst [13]

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I have a couple of questions. For the first half, C/I, can you separate C and I, commercial and industrial? And what is the growth for each and the tariff? And also, for the past few months, how do you see the past 2 months in terms of gas sales? And for asset-light, I would like to know how has it impacted us and how is it comparing the first half with the first half of last year?

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Jianfeng Liu, ENN Energy Holdings Limited - CFO [14]

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I will answer the question. Concerning C/I, our -- it is the normal distribution. I don't have the accurate number here, but I can communicate with you afterwards. As for your other question about the first half, with the end of the epidemic, it has recovered. May was about 10%, June 15% and July gas sales will be high double-digit increase. And with the epidemic stabilizing and with the -- we believe natural gas sales will be achieving high growth and fast growth. And to the first half, it was slightly lower than last year. This is cash after CapEx. Our cash is RMB 890 million.

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Unidentified Company Representative, [15]

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Thank you. The next question, [Nelson Wang].

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Unidentified Analyst, [16]

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First of all, for entire year, the capacity reduced by 10%. But you're saying that by July, it can go back up to double-digit area, so maybe 12% or before the epidemic levels. And also for the connection for new residentials, in the past, there had been some reduction, and we see that there is some reduction. Is it because of the epidemic situation, please?

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Yuying Zhang, ENN Energy Holdings Limited - Chief Strategy Officer, President & Executive Director [17]

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Thank you for your question. For the first half, gas volume sales, because of the epidemic and also, very importantly, for the impact of the government EV promotion, the refueling had been -- for vehicles, had dropped by some 31%. And in the second half of the year, for areas which are not certain or where the profitability is not very good, we will be optimizing these. And we'll be only retaining the refueling stations which are doing well.

So overall speaking, because of all these factors, for this year, we reduced the gas volume growth guidance. But for internal operation, the pressure that we give ourselves, we will continue with the 12% growth as our internal guidelines. So this guidance is actually relatively conservative.

And as you know, for the first half of the year, because of the epidemic situation, whether it is old residentials or new residentials, they have both been affected. These -- so for new constructed residential compared to the existing residential and also the rural, the former had slowed down. And therefore, the latter has been higher in terms of proportion. In the second half of the year, in July, for instance, we see that for installation and connection, the numbers have been rapidly increasing back up again.

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Unidentified Company Representative, [18]

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Thank you very much. Next question, Yu Wenjun.

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Wenjun Yu, SWS Research Co., Ltd. - Analyst [19]

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First of all, I would like to thank the management for doing so well for the first half. Two questions. First of all, I see for gross margin -- gross profit margin, can you perhaps split up and give us some itemization for the -- what are some of the higher gross profit margin areas and are growing more rapidly? What are some of these items, please? And secondly, for the gas price. And the country has come out to say that there will be certain insistence in terms of gas pricing, and there is a question that is elicited. And that is for the first half, coastal regions, do we see a lot of imported low-cost LNG, so that the -- it has already been very big for the profit differential. And how will it play out in the future?

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Unidentified Company Representative, [20]

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The first question, Mr. Liu, please.

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Jianfeng Liu, ENN Energy Holdings Limited - CFO [21]

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Thank you, [Mr Yu]. Concerning the gross profit, a couple of things. First of all, in the first half of the year, there's a lot of facilities and also, for example, stores, et cetera, and it has impacted -- the sales had been lower. And the -- and also our service, VAB, value-added service, had increased. And therefore, that profit -- gross profit margin is also higher. And further, overall speaking, our gross profit margin had increased. Those are some of the reasons.

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Yuying Zhang, ENN Energy Holdings Limited - Chief Strategy Officer, President & Executive Director [22]

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In 2018, the country, the central government had already said that the work had to be completed. NDRC and the relevant departments' documents continue to urge the different regions to complete the work of allocating the gas price. And this is to complete the work that has already been promulgated as a policy for our company. Most of our projects, the setting of price had already been done. For gas allocation price, it is about CNY 0.06. For C/I, it will be different from each area, but between CNY 0.08 to CNY 0.09 for C/I and RMB 0.06 for residential. For LNG price, it is lower this year. And as a result, our price differential had reflected that.

This year, indeed, it is true that on the one hand, LNG price is -- has been lower. And overseas, there had been a lot of production problems. The company will use some of its upstream lowering of price to pass on this to the users, so that the users and customers will have a better relationship with us and be able to build that foundation for future growth. And for allocation of price -- for allocation of gas price, it is within the bounds or range of the central government. And the policy of this -- of the central government is to facilitate and to help users to lower their operation cost and to use different methods to open up new resources. So this is the impact and the intent of the policies of the government. And it will not bring us any risks at all. Thank you.

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Unidentified Company Representative, [23]

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HSBC, Li Ming-Hon.

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Ming-Hon Li, HSBC, Research Division - Head of Utility and Alternative Energy and Analyst [24]

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I have a question concerning cash flow. Can you share with us, for the first half of the year, our operating cash flow and free cash flow, what is the relationship? And what's the level? And also compared to the same period of last year, what is it? And at the same time, we see the receivables, turnover days, it is controlled to a very ideal place. So given that, I would like to understand from you for controlling our cash, what are some of the measures we have taken? And also for the entire year, what is the cash flow situation?

And another question, we see that for our core profit for the company in the first half, it has risen nicely. And if I remember correctly, it is better than the guidance given by the covenant -- the company. It is higher than the 10% guidance you've given. What is the -- what will be the entire year? 15%, I think you're steadfast on that. So I think for the second half, do you still feel that there are certain risks? And are you being a little bit conservative in your guidance?

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Dongzhi Wang, ENN Energy Holdings Limited - Executive Director [25]

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We will be disclosing the financial statements of the company for operating cash flow for the first half of '20, it is CNY 3.2 billion. And as mentioned just now, it is because compared to last year, there is a -- for operating cash flow, it is not as good as last year. For the first half of the year, we have CNY 800 million to CNY 900 million free cash flow. And last year, it was CNY 800 million free cash flow last year. And for the first half of the year compared to same period of last year, it was because of the impact of epidemic. So for business -- and that is volume and also free cash flow both been impacted by the epidemic.

As for our core profit growth, we continue with our original level of growth guidance. And this is taking into account the winter in the second half and also the LNG price possible changes. And this is our estimate. And we do not have to follow or rely on the very low LNG price that we see in the first half. So in that sense, you can say that we are somewhat conservative.

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Unidentified Company Representative, [26]

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Next question. (inaudible).

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Unidentified Analyst, [27]

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I have a question about value-added business. Can the management give us a split as to industrial VAB? And also the -- in the future, as we develop VAB, what areas will we be developing this VAB business in? And will we be looking at -- for example, property management companies, will we be competing with them? And in operation, and we are indeed competing with them, what is our competitiveness? What are some of the plans that we have already put into place, if that is the case?

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Yuying Zhang, ENN Energy Holdings Limited - Chief Strategy Officer, President & Executive Director [28]

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For VAB, value-added business, as I've mentioned earlier, the customers' resource will be one of the core resource that we'll be developing in the future. It is very important. 21 million residential and also our huge C/I -- 150,000 C/I customers. This is very -- this is one of our fortes in the sense that as a public utility company, whether it is in operation and our maintenance and safety check for our customers, we are very close in our communication with our customers because the service and the product and the brand name for the customer, the awareness among our customers is very high compared to some other competitors. So this is a value that we bring. And also through years of communication and servicing our customers, in particular, in safety and also in operation, we have accumulated so much knowledge and experience with our customers. And through this, we are going to digitalize all this knowledge so that we are able to customize and to understand the customers' demands all the better.

Third area is that for preparation, we have prepared for a few years for the customers, also on the online customers, online installation and also the feedback and also maintenance service, et cetera. Among the customers, we have already built up a kind of habit with them. And we have built up a very good rapport. And we will excavate and dig this value so that we are able to utilize this kind of value, so that we are able to come up with innovative products and services that they need. From our brand name, ENN, and our exchange and communication with the customers, our network, all these allow ENN to provide us with a competitive and rapid growth.

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Unidentified Company Representative, [29]

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China Merchants Bank, Eric Siu.

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Eric Siu, [30]

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10% retail growth, how much does it come from M&A, please.

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Jianfeng Liu, ENN Energy Holdings Limited - CFO [31]

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Last year, it is -- the M&A is contributing CNY 400 million. And some of the new projects are still coming on to line.

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Unidentified Company Representative, [32]

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(inaudible)

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Unidentified Analyst, [33]

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I still have 2 further questions. First of all, for free cash flow, it is more or less the same as last year. But for the first half of this year, CapEx is less by CNY 500 million and receivables CNY 400 million. I would like to know, for free cash flow, what is the main reason for the increase? Is it because of payables? There's a lot of payables? Is that the reason?

Second question. For the second half for Zhoushan terminal, if I heard you correctly, there will be 1.08 million tons. So from Zhoushan to Ningbo, is it already connected in the second half of the year? LNG, if will there be more connection? That is for LNG. Will there be a revision upwards for LNG sales, please, in the second half?

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Dongzhi Wang, ENN Energy Holdings Limited - Executive Director [34]

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For free cash flow, just now, it's been mentioned that the free cash flow compared to last year is a decrease. And the main reason is because of receivables is -- or pre-received items. And this is related to the contracting with customers. For contracting, it has been delayed to the second half. So for pre-collection, on our part, for pre-collecting out of the contracts, it is lower than last year as a result. So you see for free cash flow and operating cash flow, both have decreased because of this reason.

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Unidentified Company Representative, [35]

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Now because of time, we will close this Q&A session. Thank you very much for your active participation, and thank you for your long-term trust and confidence in the company. We close the presentation here. If you have other questions, please approach the IR of the company. We'll answer your questions as soon as possible. Thank you.