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Edited Transcript of 2688.HK earnings conference call or presentation 16-Mar-20 12:30pm GMT

Full Year 2019 ENN Energy Holdings Ltd Earnings Call

Langfang Mar 18, 2020 (Thomson StreetEvents) -- Edited Transcript of ENN Energy Holdings Ltd earnings conference call or presentation Monday, March 16, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jianfeng Liu

ENN Energy Holdings Limited - CFO

* Jishen Han

ENN Energy Holdings Limited - CEO & Executive Director

* Yusuo Wang

ENN Energy Holdings Limited - Co-Founder & Chairman

* 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

* Gary Zhou

Crédit Suisse AG, Research Division - Research Analyst

* Ken Liu

UBS Investment Bank, Research Division - Associate Director and Lead Analyst

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Presentation

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Unidentified Company Representative, [1]

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Dear investors, welcome to the 2019 Annual Results Announcement of ENN Energy Holdings Limited. Let me introduce to you who are with us today, Mr. Wang Yusuo, Chairman; and our CEO, Jishen Han; President, Zhang Yuying; and our CFO, Liu Jianfeng. So we've 3 agendas tonight. Liu Jianfeng is going to bring you on a tour review our financial performance 2019. And then Mr. Zhang will introduce to you our corporate strategy. This is followed by a Q&A session. (Operator Instructions)

Now let's welcome Mr. Liu Jianfeng.

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

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Ladies and gentlemen, and investors, welcome to the 2019 annual results announcements. First, let me show you our results. These are some of the financial data. And in which our retail gas use volume increased by 14.7%, reaching 19.92 billion cubic meters, and we have added commercial and industrial customers with 18.2 million cubic meters and our installed daily capacity reached 2.4 million new residential customers. And so we have added the 30 city-gas customers and the core profit of the company increased by 18%, reaching RMB 5.28 billion, and our operating cash flow increased by 14 -- 40.9%, reaching RMB 11.69 billion and free cash flow reached RMB 2.69 billion. And our cash flow is very strong and solid. And the Board of the company decided to have a dividend per share of HKD 1.6, and this is up by 40.3%.

While reaching our performance targets, we are committed also to long-term developments and we are committed to improving the ESG management mechanism. And so the CEO is heading the ESG Committee. The CEO is making ESG-related policies, and this goes to safety operation, corporate management and also corporate social responsibility. In terms of management, we have set up a couple of ESG working groups allocating specific tax to different units. We are also going to leverage our customer base. And in more than 100 cities, we are pioneering in environmental protection and we are shouldering up the responsibility of our enterprise so that we can improve our ESG ranking.

If you look at the past 5 years, you can see that the continuous growth of the company has brought very obvious benefits to our shareholders. And our core profit has generated a compound growth of 17.8% over the past 5 years. Cash flow over the past 5 years increased by 24.9%, reaching RMB 12.343 billion in 2019. And the dividend per share increased by 21.8%, reaching HKD 1.67 billion. On a basis of strong cash flow or dividend per share in 2019, reached HKD 1.67 billion.

And now let's have a review of our business. The core business is gas and we have seen growing customer base and revenue. We also have obtained more customers in terms of customer development, we have added -- we have increased commercial and industrial customers and we now have increased 27,656 more commercial and industrial customers. And this is covering 148,761 households and the accumulated residential customers has increased by 12.9% and 58% of this comes from our newly established factory and 29% comes from coal-to-gas transformation. And in terms of new residential customers breakdown, 67% comes from new customers and 12% comes from customer base and coal-to-gas transformation accounts for 21%. For C/I and residential clients, we have seen a very stable trend of sustainable developments. And in terms of gas, revenue increase and the gas ratio increased by 147 -- 14.7%.

In terms of retail gas, both C/I and the residential customers increased by more than 15%. And the customer and the commercial and industrial customers accounts for more than 17%. And we have focused on C/I customers and the proportion of C/I in our company is higher than our peers. And our customer base covers a wide range of sectors. We cover some coastal provinces. And in those coastal provinces, the commercial and industrial customers increased dramatically.

In terms of dollar margin, the dollar margin of the company throughout the year reached CNY 0.59 and this is mainly stable due to the optimizing of our business structure and we were able to obtain low price resources and this also dramatically reduced the cost of procurement and also on the last winter, there is a very mild gas price hike.

As for the -- because of the drop of oil price, we believe that there is a price drop for related products, and this will help us secure a very positive dollar margin in 2020. And we are committed to expanding our city-gas concessions. And in 2019, we acquired 30 new projects. As of the end of last year, we were managing 217 city-gas projects covering 104 million people. And the average gas penetration rate is 60.4%. And we are focusing on some core areas in business expansion in 2019. Our new projects are mainly located in Anhui, Hebei and Shandong, and those are our key areas. And organic expansion in those regions can help reduce the risk and also can reduce the risk for future business expansion. In the meantime, for business acquisition, we focus on quality instead of quantity. And in 2019, we have secured 2 municipal level projects in Anhui and in Sichuan. And these new projects, they will be able to bring about more than 2.5 billion cubic meters of gas consumption.

And we focus on oil and gas. And we have been engaged in business innovation and from a traditional supply side business model, we are now transforming into a demand-side business model, and this can help release the potential of more than 14,000 commercial and industrial customers of the company. In 2019, the IE business and all the other financial indicators have registered an increase. We have 36 projects in operation and our IE business has reached 1,847 and our revenue is 2.4x larger than last year in terms of IE's use volume. And our total revenue was RMB 2.7 billion and our IE business has outpaced the increase of revenue. And in 2019, the gross profit of the company increased by 3.31 folds. We have focused on customer needs. And we have been pedaling to different -- to the conditions of different localities. And we have 98 projects in operation and the 22 projects are under construction. And in 2020, we're going to have a total of 120 IE projects. And among the 120 projects, we are using the most advantageous new entity to serve our customers. And this includes natural gas, industrial waste heat, biomass and renewable energy. Throughout the year, we have saved about 227,437 tons of standard coal, and we have also reduced carbon emission by a big margin.

Focusing on customer needs, we identified the needs of our customers and different development units have been diversifying our business and our business has grown exponentially over the past year. And we have our proprietary GRATLE projects from GRATLE to third-party products and all the production and sales have increased dramatically. And the overall, customer penetration rate is 6%. And for new customers, we have a product penetration rate of 15%. This shows that we have great potential going forward. And for the value-added business, we have also further unleashed customer value from gas stove to gas water heaters, gas-based heaters and gas boilers. We are now expanding to installation of auxiliary equipment in kitchens and to product maintenance and insurance agency services. We do so to tailor the diversified and customized needs of our customers. Traditionally, we provide on-site service and call services, but now we are doing innovative services, for example, online -- we have online shops; we also have mobile apps; and for industrial and family customers, we have door-to-door visits. We do so to further identify and serve customer needs.

And now let me share with you a couple of cases for industrial and commercial customers. For example, our energy experts provide various energy solutions for coal-to-gas transformation, and we have -- we are also providing equipments and solutions for customers to reduce their natural gas consumption and energy consumption. The different -- the developments of different business have resulted in a stable increase of our financial standings. And our revenue reached RMB 102 billion; and our revenue reached CNY 70 billion. And our gross profits and EBITDA, both registered an increase of more than 18%, reaching RMB 11 billion and RMB 10 billion, respectively. And profits attributable to shareholders reached RMB 5,670 million. This was an increase of 101.2%. And core profit increased by 18% and dividend per share reached HKD 1.67, increased by 40.3%.

So talking about specific business, you can find that there are some strategic emerging business in our company. And they are growing very dramatically. They have become a cornerstone for our overall business. And for construction and installation, we have generated an increase of 17.9%. And the value-added business and IE business registered an increase of 173.5% and 38.8% (sic) [38.8% and 173.5%.] And for the gross profit of value-added business increased by RMB 330 million (sic) [RMB 688 million.] And we have registered improvements in business portfolio, in general, this will lead to dramatic -- very good prospect for our business going forward. And we need to come up with some financial management to go hand-in-hand with our growing revenue. And at a time when our revenue has surpassed CNY 70 billion, our financial cost has reduced, our CapEx also reduced and the managements of receivables is also dramatically improved. The company has been practicing online to offline integration, we are bringing a lot of business online, and we have shortened the cycle of receivables. And we also see to the very source to guarantee that all the products are delivered, and the money is collected back.

Our CapEx of the year stood at CNY 80 billion, which increased only by 10%. And for the general expenditure of gas stood only at CNY 5 billion. And so in the coming year, we're going to further stabilize the management to guarantee a sound business performance. And we plan to invest -- we plan to spend roughly CNY 8 billion to CNY 9 billion in 2020 and CNY 4 billion to CNY 5 billion will go to pipeline-based gas and the comprehensive energy use will raise CNY 2 billion. And the new project acquisition is roughly CNY 2 billion, and we have improved the deficit structure -- the deficit ratio decreased from 48.2% to more than 30%.

The rapid increase of the gross margin has a led to ample financial resources and liquidity. And now we have a diversified range of liabilities. And the overall effective or the overall debt has decreased by 15 bps. And so we have been rated as BBB+ by S&P. And we are rated by 3 major rating agencies: S&P, Moody's and Fitch Ratings. And those are very optimistic. And this has created very good conditions for continuous financing going forward. And this has also laid a good financial foundation for our company going forward.

And now let me introduce Mr. Zhang to bring you on a tour of our projection in 2020.

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

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Dear, investors, good evening. Let me brief you about the development strategy of our company. Everybody is watching and following the COVID-19 and what are the impacts from COVID-19 to our business. From the first 2 months of this year, some of the clients have registered a drop of gas demand, and this is mainly involving small businesses and mobile gas stations. So from the 2 months -- first 2 months in January, in particular, if we take out the factor of Spring Festival, we have actually registered a double-digit increase and the COVID-19 mainly affected our business in February, starting from the end of February, with industrial operation being resumed, we also see an increase of our business.

From the connection volume, we are lagging behind in January and February, but compared to connection use January and February, they tend to account for only 5% of the annual connection volume, and we can expect that with the coronavirus disappearing with our reproduction going on and by the second and third quarter, we will be able to offset this part of the impact.

And in terms of IE projects, there is some delays for some of the projects, of course, but with the passage of time, we are able to accelerate some of the projects. And for some projects in operation to this moment, we focus on some fine industrial parks and the fine project. And those customers, they are relatively immune to the COVID-19. So for the IE business, I'm talking about Integrated Energy business, we are not really seeing very dramatic negative influences. And -- but we have also identified some of the business behind this COVID-19 and the governments, they are announcing a lot of infrastructure projects. And so far, we have exceeded RMB 40 trillion. This will go to manufacturing, data centers, transportation and electronic -- electricity infrastructures. And the government has also improved its subsidies in terms of panels and fiscal investment. And this will further unleash more liquidity on to the market. And we believe that these measures will help reduce the tax and fees and burdens of the enterprises, and this will help a lot of enterprises to accelerate their pace of work resumption and the resumption of industrial operations. And this is also conducive for our business in 2020.

And in the long run, we have opportunities as well as challenges. But in general, there are more opportunities than challenges. And from this opportunity, talking about opportunities, we see there is the chance of reform in a business and the government is encouraging the use of natural gas and the natural gas consumption will be more diversified. And this will help us reduce our procurement costs for the reform in the electricity field. We are now seeing a decentralized transaction, and this will help further widen the mortgage and bring about more development spaces. And the governments will continue to be engaged in environmental protection. And this will further reduce the utilization of coals, this will bring about more space for IE as well as natural gas.

So we also see that the government is tackling air pollution and there is a transformation of government strategies, and it will focus more on energy consumption and the improvement of efficiencies. So there is also a lot of opportunities in this aspect. After many years of developments, we have already accumulated 20 million of residential customers and the 15 -- and 150,000 commercial and industrial customers. So with the improvement of people's livelihood, the -- our customers, they are generating more diversified needs. And this will also create a lot of opportunities for value-added business of our company. And so professional services that we provide can help serve their needs.

If we talk about the combination of energy and data, we see that solar energy is now further developed. And on the customer side, there is also fierce competition. And this is where our competitiveness lies. And we know that the data industry and energy sector are quickly combining. And so this will help cruise the upgrading of our business. All these opportunities will help benefit our value-added business, our natural gas business as well as our IE business.

In terms of natural gas, we will continue to expand our volume; refine our structure for gas resources; and given the change in policies, we are going to further break through the gas source and customers; we're going to bring innovation to our business model and better serve our customers. And for external markets, we will emphasize obtaining some quality projects through maybe acquisition, and we can do that to improve our customer base. And through our resources, we can also improve our customer service and maybe we can also obtain some large-scale clients. By relying on our skill and our expertise, we can focus on -- we can cooperate with those small and medium-size distributors, and we can provide them with gas provision. And by -- in doing so, we can improve our revenue.

And in terms of optimizing our gas source structure, we are going to improve our collaboration with upstream resources. And we're going to use for flexible manners to procure nonconventional gas so that we can improve our overall supply and reduce the cost of procurement. With the establishment of national pipeline gas company and pipeline-based gas will become more important. And therefore, ENN, we're going to break through the customers and gas sources and based on the diversified needs of our customers, we can engage in innovation. So that we can truly align our expertise and resources with the needs for our customers.

The governments will regulate heavily on the cost of gas provision. And by improving our energy management efficiency and by innovation and through innovation, we can dramatically improve our presence on a market, and we are going to carryout assessment and management by asset class to ensure the safe operations and extend service life. And we are also going to optimize our measurement systems. So that we can improve facility quality standards. In the meantime, we are going to levels with the benchmark those internally and externally, so that we can improve asset utilization and maximize returns.

In terms of innovation, innovate pipeline operation models, we're going to leverage on data intelligence technology to engage in smart distribution. And this goes to the natural gas market reform and pipeline operation model and also other sectors. So that we can achieve more economic and effective gas transportation.

And against the backdrop of the natural gas reform, we're going to bring more innovation to our business and meet customer needs. In terms of warehousing infrastructure interconnection, we can optimize our city-gas pipeline network to improve layout and dispatch efficiency and through internal collaboration and external alliances, we can facilitate interconnection of infrastructure and enhance the stability of gas supply. And this will help us achieve better interconnection between different infrastructures and different sectors in the upper stream.

In 2019, the IE service saw rapid development in terms of revenue and the customer base and quality of service. And in the next step, we are going to further follow through with this strategy and in particular, we're going to focus on high quality projects. We will focus on some key gas sources. And by leveraging on some of the key infrastructure, such as -- key investments, such as infrastructure and data centers, and we will try to serve some of those very large infrastructure projects and increase our presence in IE business.

And in the meantime, we are going to collaborate with some of the textile industrial players. And for those industries, they use a huge amount of energy. And they also have tremendous space for flexible use. And so we can very rapidly scale up our service and expand our service to those new customers. And in doing so, we can also improve our service on the customer side. For example, for electricity clients, we can provide maintenance services. So that we can improve the reliability of our service and reduce our cost. And for energy customers, we can also provide our (inaudible) services and we already have mature experience in other regions so that we can help our clients to reduce the cost and improve their efficiency. And for our photovoltaic project investors, we can provide some one-stop service so that we can reduce the cost and improve their revenue. And so our service is both offline and online, and we can also empower our offline efficiency with our online expertise. We have our own proprietary resources and we can better improve our service with all our resources. And in 2019, we have seen very rapid development of our value-added business. And we will continue to do so in 2020. And this will help us meet the needs -- meet the potential needs of our residential customers as well as commercial and industrial customers.

On the basis of the existing products, we are going to further extend our product portfolio. We are going to build a better ecology so that we can maybe provide one-stop services such as, safe home and smart kitchen and one-stop heating and safety and security system. From our back stage, we can modularize our existing products and services by tailoring to customer needs, we can provide them with package services that we can meet their needs.

In order to step -- to increase our VA, value-added, business, we can establish a market-based incentive mechanism internally so as to constantly stimulate on products and service upgrading. Externally, we can create more new business alliances to engage more business partners within the ecosystem. So we can strengthen our collaboration with third-party service teams and better serve our commercial and industrial customers.

And talking about our future, we have to be empowered by data. And we have to empower our offline presence with our data. And through digital solutions and tools, we can very quickly identify customer needs. Our existing -- based on our existing business strategies, we can put in place needs based procurements so that we can unleash the value of existing resources. And in terms of smart pipeline gases, intelligent pipeline operation, we can support the entire life cycle of pipeline operations. So that we can ensure safe operation, reduce costs and maximize the value of assets.

In terms of IE, we can digitalize the whole value chain of IE business so that we can promote the high-quality developments of our IE business. In terms of intelligent service, we are going to meet customers more personalized needs by offering them more convenience, interaction services and more timely responses. Through data service, we can witness even better and faster development of our business.

With all of these strategies, we provide the following guidance for 2020, and we will dramatically expand new customers. And for 2020, we can develop 2.5 million household customers on a daily basis. And we also have -- we may also have 20 to 30 new city-gas project acquisitions. And for the natural gas business growth, the volume growth may reach 12% to 15%. And it will also have a stable dollar margin. And therefore, new business developments, the IE business revenue will reach RMB 6 billion to RMB 8 billion and the value-added business revenue will reach RMB 3 billion. And in terms of creating higher returns for shareholders, the core earnings will grow by 15% and the dividend payouts will be no less than 32%. That's all to my report. Thank you.

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Questions and Answers

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Unidentified Company Representative, [1]

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Thank you very much to our 2 presenters. Now let's kick off the Q&A session. (Operator Instructions) And first two questions is actually from [Mr. Leo] (inaudible) from Citibank.

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Unidentified Analyst, [2]

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I have 2 questions. Will there be some new procurement strategies? Will there be any impact or burden from the COVID-19. And...

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Unidentified Company Representative, [3]

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Thank you very much to [Mr. Leo] and our response, please from CFO.

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Jianfeng Liu, ENN Energy Holdings Limited - CFO [4]

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For the press drop of oil, we have been following the situation. And it brings about 2 opportunities and because we have some inventory. And if you follow the current oil price and the -- if you look at the market for every CNY 1 to CNY 2 drop, it will result in CNY 3 to CNY 4 gas price drop, and now it has -- now the oil price has dropped by CNY 0.5 to CNY 0.6, and it will also lead to the price drop of the gas. And you can use our calculation and you will meet -- you will know how that will affect our gas price.

The Chinese LNG -- Chinese imported LNG will have a decreased price, and this will lead to price drop at the upper stream. And this is actually an advantage. And as for the gross profit and over the past year, we have actually developed a lot of service-based value-added services. And they have a high gross margin. And on the other hand, we have some of the sales, which are actually from internals use and those kind of use generates high gross margins. And I believe that this is sustainable. And in the coming years, and this will help sustain the business revenue.

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Unidentified Analyst, [5]

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(inaudible) Sorry, the interpreter has problems listening to this.

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Jianfeng Liu, ENN Energy Holdings Limited - CFO [6]

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So you're talking about stores. So for stores, the gross margin is 45% to 55%. So it has a high gross margin because this is our own brands. I'm not sure if I have answered your question, [Mr. Leo].

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Unidentified Company Representative, [7]

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And now our next question, please. Crédit Suisse, Mr. Zhou.

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Gary Zhou, Crédit Suisse AG, Research Division - Research Analyst [8]

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I have 2 small questions. I'm wondering how fast will the amount of gas be picked up in March? The second question is, overall, revenue increased dramatically in 2020 and how will our gross profit stand in 2020 compared to 2019?

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Jianfeng Liu, ENN Energy Holdings Limited - CFO [9]

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So let me first address the question of gross margin, and then I'll hand right to my colleague about the gas provision. And last year, when we communicated with our customers, we talked about the gross margin for IE is 20% at different occasions. I have said many times that we expect the IE gross margin to stand at 15% to 20%. And now the gross margin for IE is around 17%. So it's within the reasonable scope between 15% and 20%. In the future, with more IE business investments, the management of the company believes that 15% to 20% is a reasonable scope of the gross profit, and we try to increase that model, but this is the reasonable scope. Thank you.

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Yuying Zhang, ENN Energy Holdings Limited - Chief Strategy Officer, President & Executive Director [10]

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Let me answer your first part of the question. And for the first 2 months of this year, as I have introduced in my presentation, for January, there is barely any impact from the COVID-19 and January, basically stood the same as the previous year. And if we don't talk about Spring Festival, we had a double-digit increase, actually, in January and the impact mainly came in the first and -- first half and mid-February. And this is mainly talking about industrial and commercial customers. A lot of the hotels and restaurants, they are now opening their business. And actually, our residential customers have reported a dramatic increase and it can offset this kind of negative impact. And for C/I customers, there was a drop of roughly 5%. And by the end of February and recently and the gas demand has been picking up very dramatically, and it's reaching the same level of the previous year and with China continuing the spread of COVID-19 and with more business resuming and recovering, and we believe that's -- there will be more demand in the next couple of weeks and months. Thank you.

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Unidentified Company Representative, [11]

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Our next question is Dennis from Daiwa Securities.

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Dennis Ip, Daiwa Securities Co. Ltd., Research Division - Research Analyst [12]

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Thank you very much to the management. Congratulations to the management for this very good results. I have 3 questions. So we have very good increase and the revenue increased by 40%. I'm talking about -- I'm wondering what will be the dividend sharing scheme in the future. And today -- this year, we have very good receivables because we have a very short cycle of payments from our customers. And because of the COVID-19 with some of our commercial and industrial customers request a delayed payment. Will the payment cycle be widened? So how will you look at the receivable cycle this year and cash flow and its impact on cash flow? And in 2019, you have acquired more than 30 projects. So what is your take on the growth speed of projects, acquisition? My last question is for customer and industrial customers, the quicker resuming level of last year. I've been talking to some investors and they are saying that the recovery is fairly slow. And I'm wondering the pace of recovery and reoperation and resumption of the industrial operation.

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Jianfeng Liu, ENN Energy Holdings Limited - CFO [13]

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So the first question is about dividend sharing. So let me answer your first question, and I will hand it over to my colleagues for your other questions. And that 40% of the profit is shared. And so we do so on a basis of very sufficient cash flow. And in the future, we believe that the core business and cash flow will continue to increase. And in the future, we will increase the rate of dividend. And so we believe that next year, the dividend payout will be no less than 32% and this is all prospect in the year of 2020. And in the long run, we will continue to improve our dividend per share. And now, we have a dividend payout of 38%, which means that we have a 68% of inventory profit.

And so this is a responsible move. And if you look at our capital earning, if it's amortized into different milestone, it's 16%. And so we believe that by utilizing the inventory capital, each and every year, we will be able to bring more than 50% of the return to our investors. And this reflects our value, and this is also reflecting our responsibility for our shareholders.

And so under the COVID-19, there is some difficulties in serving the needs at different households. And this will definitely impact our cycle of receivables. But this only accounts for a limited portion of our business. For C/I customers, there is no such case, and we are able to read the meter with a distance. So it will not affect the cycle of receivable.

As for the sustainable growth of our revenue, we are very confident. And if you look at 2019 and compare it to 2018, our growth mainly comes from profit and the profit increase has generated CNY 1.8 billion of cash flow. And so a lot of the cash flow is also generated by tax-related factors. So we are confident that the core business of the company will continue to increase. And so that is why we believe that the cash flow of the company will continue to be very sound.

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Yuying Zhang, ENN Energy Holdings Limited - Chief Strategy Officer, President & Executive Director [14]

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So as you have mentioned from the overall business structure, commercial and industrial customers are slowly recovering their operation. And so their business demand has not been fully unleashed, and we are now focused on industrial customers. And from the end of February and to early March, they are quickly recovering. Actually, I'm talking about industrial customers. And since the end of last year up until present because a lot of the population are in lockdown, in home quarantine, and there is an increase of residential customers. So this is a general introduction about the structure of demand.

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Unidentified Company Representative, [15]

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Our next question is from Ken Liu from UBS.

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Ken Liu, UBS Investment Bank, Research Division - Associate Director and Lead Analyst [16]

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I have 2 questions. A couple of weeks ago, the government says that we're going to reduce the gas price in cities. How will the price decrease based on your negotiation with China Petroleum? So that's my first question. And second question is about the fact that some of the provinces will introduce new provinces, and we know that Xinjiang and Shenzhen any other provinces, they're reducing the price. Can the management explain the impact to the company throughout the year?

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Unidentified Company Representative, [17]

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Maybe Yuying, can you answer this question?

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Yuying Zhang, ENN Energy Holdings Limited - Chief Strategy Officer, President & Executive Director [18]

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So in order to stimulate the resumption of industrial operation, the government has engaged in a lot of measures and some of the provinces have already launched some measures. And if you are talking about regulated gas in offseasons, the price will go down by 1%. And for nonregulated gas and the -- for offseason, and it will drop by 2.4%. For those kind of gas, we are supportive to the government in introducing measures to stimulate the resumption of industrial operation and we hope that these industries can quickly resume their operation. And so the price drop is mainly caused by policy, and it will not -- it will affect upstream companies instead of downstream companies. And at some of the provinces, they have introduced some policies to further stimulate the work resumption and resumption of industrial operations. And mainly at the provincial level, they are stimulating small and macro businesses. And the impact has been very minimal because a lot of these small and macro businesses, the small industrial users and they own account, a limited proportion in our revenue. And we believe that the price drop can stimulate the consumption of these users and the overall consumption and the demand will increase. And so this is a good news for us. And the COVID-19 has been largely contained here in China. And we believe that's in the next phase. These customers, they will generate huge demand and consumption going forward. So that is why we believe that there will not be a significant impact on our business.

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Unidentified Company Representative, [19]

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Next question is from (inaudible) from [Mr. Fan Xiangyang].

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Unidentified Analyst, [20]

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I have 2 questions. The first question is about the reorganization, the merging of ENN Energy Holding and ENN Limited.

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Yusuo Wang, ENN Energy Holdings Limited - Co-Founder & Chairman [21]

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Thank you very much for your question. I have to tell you the process, the progress of reorganization, we have submitted the material to CSRC and they are currently reviewing our material, and we are now waiting for the business reports from these 2 companies. If everything goes on well, according to the schedule of CSRC, we expect to complete the reorganization by the middle of this year. We will maybe see a very dramatic progress in this perspective.

And as for the change of Directors, some old investors you will know and also a lot of our analysts, if you have followed ENN for a very long time, you will know that we have relatively a stable management team and Board of Directors. And with the passage of time, some old teams, they are leaving the position to offer more chances for the young people. So this is a strategic arrangement and so in this process you will see that the old is being replaced by the young in a gradual fashion. And Wang Zizheng is fairly young and so he is moved from Executive Director to Chairman. And so we have another one who left the Board of Directors in 2017, now he's back to the Board of Directors. Why? This is mainly to add to the capacity in risk control and in compliance management. So it is because of this that he returned to the management. So in general, you will see that the team has been kept fairly stable. We did some macro adjustment. And so that's it.

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Unidentified Analyst, [22]

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I want to quickly follow up with another question. So next year marks the 20th anniversary for the founding of ENN, how will you plan to return to our long-term investors and shareholders?

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Yusuo Wang, ENN Energy Holdings Limited - Co-Founder & Chairman [23]

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So I'd like to hear your proposals because we have been around for 20 years, no matter it is investors or other stakeholders. I think you have extended tremendous amount of support to ENN. And I believe that we will have to -- we will express our gratitude in some sort of ways. If you have some good proposals, you can share them with me and we can carry out some discussions.

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Unidentified Company Representative, [24]

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Next question is from Morgan Stanley, [Mr. Wang Wei Chie].

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Unidentified Analyst, [25]

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I'm from Morgan Stanley. I have 2 questions. The first is with respect to 2020 guidance, there will be 2.5 million household users. And so how will -- what would be the breakdown of this figure? And over the past few years, the coal-to-gas transformation in rural areas is growing very quickly. So what is the breakdown of the 2.5 million household users? And now the penetration rate for gas is 15%. So is there a long-term target for this penetration rate increase, how would the penetration rate be in 3 to 5 years?

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Jianfeng Liu, ENN Energy Holdings Limited - CFO [26]

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Now let's give the question to Yuying.

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Yuying Zhang, ENN Energy Holdings Limited - Chief Strategy Officer, President & Executive Director [27]

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For coal-to-gas transformation, we follow a steady strategy to balance investment and yield. And in previous years and this proportion has been maintained at 30%. So it will now exceed this percentage point in 2020. In terms of value-added business, we believe there is a lot of opportunity in this area. And now it accounts for 6%. And in the next 3 years, VAB may account for 20% of our revenue. Thank you.

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Unidentified Company Representative, [28]

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Next question is from Merchant Securities, [Eric].

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Unidentified Analyst, [29]

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I have 3 questions. First question is related to CapEx, can you explain more about CapEx? The second question is when do you expect the gas demand to recover this year? So how will that impact our business in 2020, in general? What's your assessment of the sales of gas this year?

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Unidentified Company Representative, [30]

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So as for CapEx, Jianfeng, please.

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

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So for CapEx, the CapEx can be divided into 3 parts and acquisition of gas and IE and the general capital expenditure for gas. And in 2019, IE is CNY 2.2 billion and the remaining is the general capital expenditure. And for 2019 -- 2020, it's CNY 8 billion to CNY 9 billion. And CNY 4 billion to CNY 5 billion will go to IE.

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Unidentified Company Representative, [32]

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So the next question is about commercial customers. Yuying, please.

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Yuying Zhang, ENN Energy Holdings Limited - Chief Strategy Officer, President & Executive Director [33]

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As for the gas amount from commercial customers, this is directly related to the epidemic and it's also related to the government's measures against the COVID-19. We believe we'll still take some time, but it will not be very long. And with China containing the virus, the commercial customers will unleash their demand. And as for the value-added business, it's under severe blow in February, but in January, it's maintained the growth momentum as last year. And right now, China is quickly resuming industrial operation. And I believe that the value-added business will grow as we expect.

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Unidentified Company Representative, [34]

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Thank you very much, Eric. Because of time constraints, we can have 2 last questions. And our next question is from [Chelsea] from Guotai Junan Securities.

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Unidentified Analyst, [35]

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I have 2 questions. The first is about the drop of oil price. Will the oil price drop influence the demand of gas at the downstream? In 2014, there was the oil price drop. And in 2015, the gas price -- the gas demand saw a very sluggish performance in 2015. So that's the first question. And my second question is that for C/I customers, for our upstream and midstream, what is the price difference between upstream and middle stream and can you elaborate on this given the backdrop of the downward oil price?

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Unidentified Company Representative, [36]

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Jianfeng, please.

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Jianfeng Liu, ENN Energy Holdings Limited - CFO [37]

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Well, the oil price goes down from the supply side. And 47% of the natural gas in China comes from import and the 60% comes from LNG. So that is to see that 1/4 of natural gas comes from the imported LNG. And so, let's say, that will be 20%. And the oil price drop will bring down the price of imported LNG. And so this will help reduce the price in natural gas here in China, and it will unleash the demand of natural gas.

And you talked about 2014, over the past few years, for LPG and heavy oil -- and a lot of those suppliers have been replaced by natural gas and a lot of the facilities they have been phased out, and it's not possible for them to quickly recover in the near term. So we believe that there will be great demand in natural gas and also because of the environmental protection policies and so natural gas -- so the trend of replacing traditional energy with natural gas will not be changed. The second price is about the price difference between upstream and downstream. As I have mentioned earlier, because of the drop in imported LNG, and we believe that we can maintain a more positive price difference between upstream and middle stream. And we believe that this will be conducive to the use of commercial gas and because we are covering many of the eastern provinces, Shandong, Jiangsu, Zhejiang, Guangdong, Fujian. So these are where -- these are the provinces where we have a strong presence and this is also the area where we have more imported gas. So this will be able to further widen our price difference.

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Unidentified Company Representative, [38]

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And we have another question from online from [Zhang Lin Liu]. He said that different governments, the decrease in the gas price, how will that affect our business in 2020? And maybe Mr. Han can you answer this question?

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Jishen Han, ENN Energy Holdings Limited - CEO & Executive Director [39]

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Different provinces. Some provincial governments they have some guidelines for gas price. And this will give some impact to our business. And we will convey the price to our customers, of course. We will feed back the price to our customers, and we believe that the overall gas demand will be increased and different localities they will follow the guidelines of the governments and they will put the price regulation on the ground.

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Unidentified Company Representative, [40]

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So thank you very much. So this is the end of today's annual results announcement, and thank you very much for all your questions.

Thank you very much for showing concern and showing support to our business. Thank you very much.