EUR 850.00 For Business Accounts Only

Morningstar | HK Electric Investment's First-Half Result and Distribution In Line. See Updated Analyst Note from 24 Jul 2018

Hong Kong Electric Investment's, or HKEI's, first-half distribution per unit of HKD 0.1992 was in line with our expectations, and we maintain our full year forecast of HKD 0.40 per unit for the full year. The utility continues to perform as expected, with more favourable weather conditions resulting in a 2.1% increase in electricity sales. Our fair value of HKD 5.50 is unchanged and represents a fair distribution yield of 6% in 2019. This accounts for a decline in the rate of return to 8% from 9.9% in previous years, and in turn distribution per unit will decline to HKD 0.33 in 2019, growing thereafter. We believe the utility is overvalued and the positives from the latest development plan are factored into the current unit price. The stable and generally favourable regulatory regime is reflected in our unchanged narrow economic moat rating for HKEI.

As noted earlier this month, the development plans agreed with the government were positives for electricity utilities HKEI and CLP, which encompass the capital expenditure plans from 2019 to 2023. The higher-than-expected capital expenditure will result in a larger asset base for the utilities and help offset the lower rate of return from next year. Total capital expenditure of HKD 26.6 billion for HKEI is almost double the previous development plan and allows HKEI to replace its three coal units, which will be decommissioned in 2022 and 2023. By replacing the coal units with new gas units, the development plan achieves the government’s plan to reduce carbon emission. The development plan also covers the replacement of four oil-fired units with three new oil-fired units to meet peak demand and the rollout of smart meters.

Management noted that the construction of two new gas-fired generating units is proceeding as planned. Capital expenditure of HKD 1.7 billion incurred in the first half was largely expected, and we maintain our full year forecast of HKD 3.3 billion. The capital position remains strong, with undrawn bank facilities totalling HKD 5.75 billion. With capital expenditure stepping up over the next five years, we expect this to be partially funded by debt.