EUR 850.00 For Business Accounts Only

Morningstar | HK Electric Investment Remains Overvalued Despite Weaker Unit Price. See Updated Analyst Note from 22 Nov 2018

Despite a decline of 8% in HK Electric Investments' unit price from a peak of HKD 8.20 in July this year, we continue to see the utility trust as overvalued against our unchanged fair value of HKD 5.50. The trust has outperformed the Hang Seng Index with investors staying defensive amid market volatility and concerns over Chinese and U.S. trade relations. We expect this to be the case for the remainder of the year if uncertainty in the market persists.

Our narrow economic moat rating on the trust is unchanged and its vertically integrated electricity network and favourable regulatory regime will continue to underpin the trust’s steady distribution. However, we do not see 2018 distribution yield of 5.3% as attractive and this will decline to 4.3% in 2020 as the trust’s permitted return is reduced to 8% from 9.99%. We reiterate our view that the regulatory regime is favourable despite the lower return, as the new Scheme of Control will last for 15 years, compared with the previous period of 10 years and provide more certainty to the trust’s distribution. Growth in its distribution over the medium term is supported by a favourable development plan covering the trust’s capital expenditure lifting its asset base.