20131101-大和证券-Next_acquisition_might_be_HK__21页_1mb_1mb

Cheung Kong Infrastructure Summary

Core Content

Cheung Kong Infrastructure (CKI) is an infrastructure and utilities conglomerate with investments in Hong Kong, the UK, Australia, mainland China, New Zealand, the Netherlands, and Canada. It operates through subsidiaries such as Power Assets Holdings (PAH), which plans to spin off its Hong Kong electricity business (HEC) in 4Q13. This report analyzes the potential implications of this spin-off and suggests that CKI might privatize PAH to maximize the value of its overseas assets.

Main Points

• Spin-off of HEC: PAH is planning to list and sell a 50.1–70% stake in HEC, which could result in CKI having a more leveraged position for overseas M&A, while PAH would trade at a discount to peers due to its low free float.
• Privatization of PAH: The report suggests that CKI may privatize PAH to unlock the value of its overseas assets, which are co-owned with PAH, and to enhance CKI's 2014E EPS, free float, and fair value.
• Rating Upgrade: CKI's rating is upgraded from Outperform (2) to Buy (1) based on the potential for value unlocking through privatization and the current discount in valuation.
• Target Price: The new target price for CKI is HKD63, up from HKD60, based on a SOTP valuation.
• Valuation: CKI is currently trading at a 12x forward PER, which is lower than its peers (PAH at 13x, CLP at 15x), attributed to its lower free float and trading volume.

Key Information

• PAH's Role: PAH would be left with a cash pile of HKD45–65bn after the spin-off, but it may not be able to deploy it effectively due to a limited M&A pipeline.
• Earnings Impact: If PAH's cash remains idle, the stock may be gradually derated. However, if CKI privatizes PAH, it could enhance CKI's 2014E EPS by 3–8% and its fair value by 15–25%.
• Tax Dispute: The report notes that the tax dispute with the Australian Taxation Office (ATO) is a key risk, but the impact is expected to be limited.
• Regulatory Environment: A potential rate upturn is not a concern for CKI.
• Financial Summary:
  • Revenue: Expected to grow from HKD5,447m in 2013 to HKD6,208m in 2015.
  • Net Profit: Projected to increase from HKD10,993m in 2013 to HKD11,257m in 2015.
  • EPS: Fully-diluted EPS is forecasted to rise from HKD4.404 in 2013 to HKD4.509 in 2015.
  • Dividend Yield: Expected to increase from 3.3% in 2013 to 3.7% in 2015.
  • Free Cash Flow: Projected to be HKD945m in 2013, HKD1,312m in 2014, and HKD1,188m in 2015.
• Balance Sheet:
  • Cash & Short-term Investment: Expected to be HKD3,000m in 2013, HKD3,000m in 2014, and HKD3,000m in 2015.
  • Total Assets: Projected to increase from HKD45,009m in 2008 to HKD112,271m in 2015.
  • Liabilities: Expected to rise from HKD8,279m in 2008 to HKD19,671m in 2015.
  • Shareholders' Equity: Forecasted to grow from HKD36,675m in 2008 to HKD92,499m in 2015.
• Key Ratios:
  • ROE: Expected to decline from 14.4% in 2013 to 12.6% in 2015.
  • Net Debt to Equity: Projected to decrease from 10.5% in 2013 to 9.6% in 2015.
  • Current Ratio: Likely to decrease from 1.3 in 2013 to 0.8 in 2015.
• Three Scenarios:
  1. Scenario 1: PAH engages in large-scale M&A, which would be positive for both.
  2. Scenario 2: PAH cannot deploy its cash, leading to a derating of its stock.
  3. Scenario 3: CKI privatizes PAH, which could maximize the value of overseas assets and improve CKI's valuation.

Recommendation

• Rating Upgrade: CKI is upgraded to Buy (1) from Outperform (2).
• Target Price: HKD63 for CKI, with an upside of 16.8% from the 31 Oct price of HKD53.95.
• Risks: Unfavorable tax dispute outcome and a regulatory reset for UK and Australia assets.

Conclusion

The report concludes that CKI's valuation is undervalued compared to its peers, and that privatizing PAH could unlock more value for the group. The potential for CKI to benefit from PAH's overseas assets and the current discount in its valuation support the upgrade to Buy. The main risks include the tax dispute and regulatory changes, but the overall outlook for CKI remains positive.