This is the story of statistics – a story of numbers that, combined, define why we want exposure to China’s natural-gas industry.

• Natural gas constituted just 5% of China’s total energy consumption in 2013. But because China’s skies are so heavily polluted by dependence on coal (67% of total energy consumption), the government has mandated a doubling of natural-gas consumption by 2020, a guarantee that demand for natural-gas will continue to grow through the end of the decade at the very least.

• About 212 million Chinese currently rely on natural gas, just 30% of the urban population, where most natural gas is consumed at the moment. Ongoing urbanization, as well as rising standards of living and demand from Chinese citizens for a cleaner environment, promises to increase that sum every year for at least the next decade … if not longer.

• Natural-gas supply inside China — a key determinant in consumption growth — has been growing at 9% a year. China has one of the world’s largest bases of gas reserves, including a massive load of shale gas, guaranteeing supply growth well into the future.

Those are the big-picture statistics. Now, let’s get granular so you can see why we want to own Hong Kong-traded ENN Energy Holdings (Hong Kong: 2688), one of the largest gas-distribution networks in China.

• ENN has expanded its pipeline network by nearly 14% a year on average over the last five years, and now has nearly 17,000 miles of pipelines serving 142 cities in 16 provinces.

• Urban residential connections to ENN’s network have grown by nearly 8% a year since 2008, and the connectable population — the number of potential customers — numbers nearly 66 million. Yet the penetration rate, though having nearly doubled, is still a bit less than 50% — meaning ENN has enormous growth opportunities within its already existing footprint.

• Daily capacity of gas used by customers grew by more than a third to 1.8 trillion cubic feet, and that’s expected to continue growing at a quick pace as China tilts toward natural gas.

• Sales have increased by more than 28% for the last five years, and given the push toward natural gas among consumers, businesses and the government, there’s little reason for sales to slow dramatically.

For all those reasons, we come to this week’s trade.

Action to take: Buy ENN Energy Holdings (Hong Kong: 2688) up to HK$52 (US$6.71).

Overnight, ENN closed in the Hong Kong market at HK$50.90.

I have been following ENN for years. Early on, before I began writing Profit Seeker, I recommended that readers of Sovereign Investor buy ENN after I’d spent a rainy Shanghai afternoon in a sidewalk eatery where the owner raved about his new natural-gas connection. We ultimately closed that position with a gain of more than 159%.

Now, I see a new opportunity to build a position in this stock.

ENN’s Growth Is Preordained

All the factors are in place to drive ENN’s sales — and, ultimately, its shares — higher. The Chinese government is determined to clean up an environment smudged by the fallout of the country’s dependency on grungy coal. Natural gas and nuclear are the two most obvious answers for the time being — and China is pursuing both.

On the natural-gas front, that clearly benefits ENN.

The company is a leader in gas distribution to residential and commercial buildings in the provinces where it operates, and it continues to expand its pipelines into new cities and new provinces. Moreover, within ENN’s current footprint, almost every new residential and commercial building is connected to the gas network, and old buildings (only 49% of which are tied to natural gas at the moment) are increasingly being retrofitted for gas.

ENN also serves the transportation market. It operates nearly 530 natural-gas refueling stations for the rapidly expanding fleet of commercial vehicles, taxis and others that run on either liquefied natural gas or compressed natural gas. Government policies that mandate compliance with certain emission standards mean preordained growth in this segment of the business.

In all, ENN’s revenue should grow by more than 20% a year through the end of the decade, at least. Earnings should grow at a mid-teens rate.

At current prices, ENN’s shares trade at about 18 times the 2016 earnings estimate. I am looking ahead to 2016 because we are now almost halfway through 2015 and the market will soon enough begin valuing the company based on next year’s profits. We’re positioning ourselves ahead of the curve to benefit from the revaluation.

I have a price target of about HK$75, which means we’re looking at a potential return near 50%. We’ll also be picking up a small yield of about 1.6%, though that yield is likely to grow since ENN has a history of consistently raising its dividend every year since it first started paying dividends in 2004.

Financially, the company is strong. It has low debt and a strong balance sheet, and clearly has the operations to support its financial obligations. And, well, it has huge tailwinds in terms of government policy and consumer demand.

It’s exactly the kind of stock we want to own to benefit from China’s growing environmental awareness, urbanization and consumer population.

Action to take: Buy ENN Energy (Hong Kong: 2688) up to HK$52 (US$6.71).

As for our current positions, you can see how they’re doing by clicking here.

Until next time, keep a global view…

Jeff D. Opdyke
Editor, Profit Seeker