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雷达卡
11 February 2009
Hong Kong Utilities
We expect deal flow to drive
2009 outperformance
Michael Tong, CFA
Research Analyst
(852) 220 6167
michael.tong@db.com
Eric Cheng, CFA
Research Analyst
(852) 2203 6202
eric-ct.cheng@db.com
We expect deal flow to drive outperformance in 2009
After strong outperformance in 2008, we believe the defensive nature of HK utility
stocks is priced in. The sector now trades at a 15.8x FY09E PE, a big premium
over the HSI (10.3x), even considering the index's higher earnings uncertainty.
With predictable earnings from existing assets, we believe 2009 stock
performance will be mainly driven by deal flows. We upgrade CKI to Buy from
Hold as we believe it has the highest potential earnings upside in the industry. We
maintain Holds on HK Electric, CLP Holdings and Hong Kong & China Gas.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Industry Update
Top picks
Hong Kong & China Gas (0003.HK),HKD12.28 Hold
HK Electric (0006.HK),HKD44.00 Hold
CKI (1038.HK),HKD29.05 Buy
CLP Holdings (0002.HK),HKD51.70 Hold
Companies featured
Hong Kong & China Gas (0003.HK),HKD12.28 Hold
2007A 2008E 2009E
P/E (x) 36.3 21.0 19.1
EV/EBITDA (x) 25.8 10.2 9.1
Price/book (x) 5.5 2.8 2.6
HK Electric (0006.HK),HKD44.00 Hold
2007A 2008E 2009E
P/E (x) 11.4 11.9 15.8
EV/EBITDA (x) 8.0 8.3 10.8
Price/book (x) 2.0 1.8 1.8
CKI (1038.HK),HKD29.05 Buy
2007A 2008E 2009E
P/E (x) 13.4 13.0 15.7
EV/EBITDA (x) 69.7 70.3 70.4
Price/book (x) 1.7 1.6 1.5
CLP Holdings (0002.HK),HKD51.70 Hold
2007A 2008E 2009E
P/E (x) 14.9 12.4 15.5
EV/EBITDA (x) 8.7 8.1 9.0
Price/book (x) 2.0 1.8 1.8
Upcoming events Date
CLP 2008 results
26 Feb 2009
HKE 2008 results
05 Mar 2009
HKG 2008 results
17 Mar 2009
CKI 2008 results
19 Mar 2009
Global Markets Research Company
HK utilities – safe heaven at premium valuation
Going into 2009, the macro picture remains gloomy. We believe the market still
favors defensive names and therefore do not have any Sell ratings as we believe
playing the sector rotation out of utilities on a recovering economy is still
premature. However, neither do we believe further aggressive buying in these
names is a sensible strategy after a strong outperformance. The sector’s 15.8x
FY09E PE stands at a 12-yr high (excluding HKG), a big premium to the Hang Seng
Index (HSI) (10.3x) with the sector’s dividend yield 2ppt below HSI. With the
industry’s earnings visibility well-known by the market, it is hard to argue further
outperformance from a purely defensive angle.
Little surprise from existing assets; eyes should be on acquisitions
By the nature of the business, the four companies have ~65-98% of their earnings
guaranteed in FY09, while the balance is also unlikely to create >+/-10% earnings
shock for any company on an organic basis. Hence, we think the market will focus
on M&A potential given their high cash balances, access to borrowing and an array
of deal opportunities.
Improving deal environment presents M&A upside
After a frozen debt market in 4Q08, we see signs of recovery in a narrowing yield
spread and recent bond issuance. Privatizations and disposals by stretched players
or required by competition laws present a strong M&A environment. More
infrastructure spending in the US and Asia triggered by government stimulus
measures, offer new greenfield opportunities as well. Falling asset prices, coupled
with a stronger HK$, makes 2009 the time for overseas shopping.
2008 results preview
The sector will report 2008 results in late February to mid March, led by CLP on
February 26. CLP, CKI, and HKG are likely to report a YoY decline in net earnings
due to a lack of one-off disposal gains (CLP), FX loss (CKI), and investment loss
and lack of property gains (HKG). (See page 16 for details).
Valuation and risks
Our TPs are based on sum-of-the-parts valuations on a wide range of assets which
in turn are largely DCF-based. For regulated businesses, the DCF method is most
appropriate given predictable cash flows. We have also adopted various multiplebased
approaches. Upside risks: greater-than-expected acquisition opportunities
and extended market volatility which may continue to benefit defensive names.
Downside risks: volatility in unregulated business, unfavorable currency
movement, and a market recovery that triggers rotation out of defensive names.
Executive summary
Going into 2009, the macro picture remains gloomy. Following outperformance in 2008, we
expect the Hong Kong utility sector to maintain its “safe heaven” status on the visibility of
the bulk of its earnings base. We, therefore, do not have any Sell rating in the universe as we
believe it is not the time to play the rotation out of utilities on a recovering economy.
Having said that, we have to admit that the defensive characteristics have already been
priced in, represented by the peak PE premium and dividend yield discount to the Hang Seng
Index (HSI). The sector’s 15.8x FY09E PE, a 12-yr high, stands at a big premium to the HSI
(10.3x), with dividend yield 2ppt below HSI. We, therefore, also do not believe further
aggressive buying across the sector is a sensible strategy in 2009.
By the nature of the business, HK utility players have ~65-98% earnings guaranteed in FY09-
10E. The balance is unlikely to result in >±10% earnings deviation for any company on an
organic basis. Though earnings may swing on currency movements, this does not reflect
underlying fundamentals, and we expect less FX volatility in FY09 after a bumpy FY08. A
positive earnings surprise is therefore only likely to come from acquisitions. With relatively
low gearing levels and strong free cash flow generation from the home market, we believe all
four HK utility players are in a position to undertake M&A activity in 2009.
Note that even though the HK utility players are financially robust, they still need credit to
conduct sizeable transactions. After a frozen debt market in 4Q08, we see signs of recovery
in a narrowing yield spread, falling CDS rate, and resurgence of the bond market, with a
number of issuances in the utility space. Meanwhile, disposals by stressed/distressed sellers
have become more prevalent, with the most notable example of Babcock & Brown Power.
Privatizations to fill fiscal gaps and disposals required under competition laws present more
opportunities. More infrastructure spending in the US and Asia partly triggered by
government stimulus measures also offer new greenfield opportunities.
More importantly, asset prices have fallen to attractive levels again along with the capital
market. Value-accretive deals have become more available, with more reasonable
expectations from sellers and less competition from buyers who used to heavily rely on
borrowing.
Having analyzed their respective strategic priorities and financial positions, CKI is our top pick
in the sector as it is poised to have the highest potential earnings upside among peers. We
maintain a Hold on HKE, CLP, and HKG because their defensive earnings outlooks are largely
priced-in and their acquisition upsides look less exciting. We summarize our investment view
on each stock below:
CKI (Buy, TP HK$34.0) – HK$5.68bn sale of power plant assets announced
We believe CKI is set to create the biggest surprise among HK utilities within the next 12
months. CKI announced on 5 February that it is to sell its power plant assets in China's
Guangdong and Jilin provinces to its 38.87% Hongkong Electric (0006.HK) for HK$5.68 billion
($728 million). We estimate this will raise CKI's total cash balance to HK$12bn. We believe
the company to be favorably positioned in light of rising distressed selling and privatization
opportunities, falling asset prices, and tightening credit to competitors. Management intends
to monetize existing investments to capture more value-accretive opportunities. Upgrade to
Buy.
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