EUR 850.00 For Business Accounts Only

Morningstar | CLP Posts Strong Fiscal 2018 Result, Led by Operations in Mainland China and Australia. See Updated Analyst Note from 25 Feb 2019

CLP Holdings posted a strong fiscal 2018 result, led by solid results for Mainland China and Australia. Our fair value is increased slightly to HKD 86 from HKD 84 but we continue to see the utility as overvalued. CLP, along with the rest of the utilities sector, outperformed the Hang Seng Index in 2018 as uncertainty in global markets saw investors staying defensive. As trade concerns began to subside in early 2019, CLP has underperformed and we expect more optimism on trade and a decline in market volatility could see its share price decline toward our fair value. Fundamentally, we continue to see CLP as high quality and our thesis on the narrow-moat-rated utility is unchanged. The utility continues to generate strong cash flow from its regulated Hong Kong business for reinvestments to grow its asset base there, as well as investments in emerging markets. Given regulatory uncertainty on energy policies across the world, we reiterate our view the new 15-year Scheme of arrangement in Hong Kong, which kicked in on Oct. 1, 2018 for CLP, will provide long-term certainty for investments, despite the lower return at 8% compared with 9.99% in the previous arrangement. A favourable development plan, covering capital expenditure over the next five years, underpins growth for its regulatory asset base.

The highlight for the utility’s overseas operation was a solid result in Mainland China, which benefited from a full-year contribution from Yangjiang Nuclear Power Station. Its wind assets were also less impacted by grid curtailment in 2018. For the Australia business, the retail market remained competitive as expected though the customer accounts decline of 2.8% for the full year was slightly larger than our expectation. The decline was mainly for its electricity customer base, offset by cross-selling efforts, which led to a higher level of gas customers. Positively, the pace of decline has also slowed in the second half. We assume the overall customer base to be flat over the next two years with slight increases thereafter. Generation assets performed well with wholesale prices remaining elevated. There is no change in our assumption of declining wholesale prices in the medium term as renewable projects come online.