Morningstar | CLP Holdings Posts Solid 1H Result; FVE Unchanged at HKD 78
Higher electricity demand in Hong Kong, buoyant wholesale prices in Australia and the addition of its investment in nuclear power plant Yangjiang underpinned CLP Holdings' solid first-half result. While we remain of the view CLP is high-quality, the utility is currently overvalued against our unchanged fair value of HKD 78. With the new Scheme of Control, or SoC, beginning at the end of this year, wholesale prices moderating and competition in retail persisting in Australia, the strong first-half result is unlikely to be repeated and a weaker second half is expected. However, the above factors were previously anticipated and do not alter our long-term view on CLP. We reiterate our view that despite lower regulated return under the SoC in Hong Kong, the longer term of 15 years will underpin the group's consistent free cash flow and a favourable development plan will allow CLP to invest in its infrastructure and meet the emission standards set by the government. The group's strong free cash flow was reflected in an increase to HKD 8.7 billion in the first half, from HKD 6.3 billion the same period last year, excluding divestments.The rest of the portfolio generally performed well in the first half. Higher demand on its thermal plants in China resulted in higher volume and lower level of wind curtailment saw higher earnings contribution. The focus will continue to be on Yangjiang power plant as construction of another power unit proceeds and on renewables. Management noted renewables remain a long-term growth driver in China. Acquisitions will be limited to taking on the remaining stakes on existing joint ventures as reform in the power sector continues.
Similarly in Australia, the focus is also on renewables, exemplified on the acquisition of EcoGen. The Australian operation performed well in the first half with favourable wholesale electricity prices helping offset another half of declining retail customers. The latter is expected to persist in the near term as competition remains fierce, but this is factored into our forecast.
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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