Morningstar | CLP FVE Increased to $84 on Higher Valuation for Associates. See Updated Analyst Note from 05 Sep 2018
We are increasing our fair value estimate for CLP Holdings to HKD 84 from HKD 76 as we revise our forecasts slightly upward and also assume a higher valuation for its associates. The latter is mainly attributable to the power plant in Guangxi, as the plant returned to profitability in the first half. We still see the company as slightly overvalued relative to our new fair value estimate of HKD 84. This is in line with our recommendations on other Hong Kong utilities, with a 1-star rating on narrow-moat Hong Kong Electric Investment and 2-star ratings on Hong Kong Gas and China Gas Holdings. All three defensive names have outperformed the Hang Seng Index in the year to date and in recent months as the general market declined over global trade concerns. The defensive nature of the three utilities is reflected in our unchanged narrow economic moat ratings for the firms, as we believe the regulatory environment in Hong Kong is favourable to utility operators. The regulatory framework is consistent, setting generally favourable permitted returns and allowing capital expenditure for the operators to reinvest into the business, resulting in a high reliability rating. We still see the more acquisitive CK Infrastructure as undervalued, with the market viewing the bid for APA Group unfavourably from a valuation perspective.We assume higher valuation for the associates, mainly for the power plant for Guangxi Fangchenggang, which returned to profit in the first half of fiscal 2018. The coal power plant has struggled against competing hydro and nuclear power plants as electricity demand declined in 2016, in line with weaker economic conditions. A recovery in the economy has resulted in higher electricity demand, and the oversupply of electricity has eased, also helped by declining supply from hydro power plants. We also adjusted our forecast for Yangjiang Power Plant with the new Unit 5 beginning to operate in July, in line with its scheduled completion date.
CLP Holdings is an investment holding company. Through its subsidiaries, Co. operates five geographical regions, Hong Kong, Mainland China, India, Southeast Asia and Taiwan, and Australia. In Hong Kong, Co. generates, distributes and provides electricity supply. In china, Co. produces power with a focus on clean and low-carbon energy, including nuclear and renewables. In India, Co. has a diversified generation portfolio comprising coal, gas and renewable energy. In Southeast Asia and Taiwan, Co. has interests in Taiwan's Ho-Ping Power Station and Lopburi solar project in Thailand. In Australia, Co.'s asset portfolio includes coal, gas and wind generation and gas storage facilities.
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