Lau pick ENN Energy hit by two downgrade warnings

Two ratings agencies have warned that a top holding of Martin Lau’s First State Greater China Growth fund is at risk of being downgraded.

Chinese power firm ENN Energy and China Petroleum & Chemical, better known as Sinopec, have made a HK$15.3 billion (£1.25 billion) cash offer for China Gas Holdings (CGH). The acquisition would give the consortium control of a fuel distribution network covering 20 Chinese provinces.

However, Fitch Ratings and Moody’s Investors Service both placed ENN Energy on review for a possible downgrade after the bid was announced. The ratings agencies claim the deal risks weakening ENN Energy’s financial profile.

Fitch says: “The acquisition increases ENN’s net indebtedness, while providing limited incremental cash flows to ENN in the short-to-medium term.

“Given CGH’s high financial leverage and loss-making liquid petroleum gas operations, Fitch believes CGH’s capacity to pay dividends is limited until its leverage is reduced and capex commitments ease.”

Peter Choy, an associate managing director at Moody’s, adds: “The acquisition will significantly increase ENN’s net debt position, but only a minimal amount of cash flow contribution is expected from China Gas within the next few years.

“Such developments will materially weaken ENN’s financial profile and liquidity position.”

ENN Energy is a top-ten holding of Lau’s £556m First State Greater China Growth fund, accounting for 2.9% of the portfolio.

It is also owned by Peter Michaelis and Colin Purdie’s £310.6m Aviva Investors Sustainable Future Managed fund, as well as Richard Turnill and Andrew Williamson-Jones’ £190.9m BlackRock Global Equity fund.

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