Morningstar | Regulated Hong Kong Electricity Assets Underpin Stable Cash Inflow and Consistent Dividend Payouts
Founded in 1901, CLP Holdings is the larger of the two electric utility companies in Hong Kong. It operates a vertically integrated electricity generation, transmission, and distribution business, servicing 2.6 million customers in Kowloon and the New Territories through its wholly owned network. CLP’s key strengths include its difficult-to-replicate electricity network and its more than 100 years of experience in electricity generation, transmission, and distribution. The regulated position offers the company fair returns above its cost of capital. CLP's high-quality electricity assets and its regulated monopoly position in Hong Kong underpin our view that the company has a narrow economic moat.Despite economic fluctuations, CLP has consistently delivered stable earnings and dividend growth during the past decade. Growth potential in Hong Kong is limited as the economy is highly developed and service-oriented, and electricity consumption remains constant. The resilient earnings and cash flow from Hong Kong allowed CLP to aggressively expand its utility business outside of Hong Kong. Starting in the mid-1990s, it has added electricity generation and retailing assets in mainland China, Australia, India, Taiwan, and Southeast Asia to its portfolio. These assets are expected to provide higher returns and growth over the long term, though risks are higher.In our view, CLP's overseas expansion brings opportunities and challenges. Its reach into mainland China and India has successfully leveraged its brand and experience. Both geographies have experienced strong earnings growth in the past 10 years. In contrast, its business in Australia is challenging. Declining demand from the closure of smelters and a waning manufacturing sector have compressed earnings. Regulatory changes have also prompted asset write-downs. Better prospects are ahead because management has right-sized the portfolio with investments in renewables. The National Energy Guarantee, published in 2018, provides a long-term alignment of energy reliability and emissions standards. We expect further investments in renewables.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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