EUR 850.00 For Business Accounts Only

Morningstar | No Surprise in CLP's 3Q Result; FVE Unchanged

There was little in CLP Holdings' third-quarter update to change our view on the utility and its narrow economic moat rating and our fair value of HKD 84 is unchanged. Despite a decline of close to 10% in its share price from a peak of HKD 97 last month, we continue to see CLP as largely fairly valued. There is no change in the company’s strong fundamentals as the share price decline was capital markets-related, in our view. The decline was in line with the Hang Seng Utilities index as U.S. interest rates normalise. We expect the share price of utilities to continue to be pressured in the near term though and advise investors to await a larger margin of safety to emerge before buying. As noted above, CLP remains well managed, supported by a favourable regulatory regime for its Hong Kong operation. Electricity sales in Hong Kong were up 1.9% for the nine months up to September, though electricity sales in Hong Kong declined by close to 2.1% in the third quarter with lower temperature resulting in softer demand for air conditioning compared with the same period last year. The offshore LNG terminal received a permit from the Environmental Protection Department this month while CLP will also proceed with the construction of a landfill gas power plant. The plant will add a small increment of 10 megawatts to CLP’s generation capacity in Hong Kong. In line with the first half, lower curtailment for its wind portfolio underpinned a good performance for the renewable generation assets in China. Margins for its thermal coal plants continues to be hampered by high coal prices while the two nuclear power plants’ contributions were steady. Positively, the decline in wholesale electricity prices in Australia is slower than anticipated. Retail competition remains and is expected to last at least until 2018 with CLP’s customer count declining, albeit at a slower pace. There is no change to our assumption of a slight decline in its customer accounts.

Similar to China, renewables for its India operation performed better than its thermal plants as the availability of coal continues to be a challenge. CLP divested a 40% stake in its India operation in September. Please refer to our previous note for further details.