20150721-大和证券-Cheung_Kong_Infrastructure__what_s_cooking__60页_3mb_3mb

Cheung Kong Infrastructure: What's Cooking?

Core Content

This report explores the potential for a merger between Cheung Kong Infrastructure (CKI) and Power Assets (PAH), suggesting it could be a pivotal step in the evolution of the Cheung Kong Group (CK Group). The analysis is framed within the context of Chapter 3 of CK Group's development, a phase focused on asset realisation and market positioning. The report is authored by Daiwa analysts, including Jonas Kan, Scott Chui, and Dennis Ip, and is presented as a strategic Q&A on the future of CKI and its potential to become a global infrastructure leader.

Main Points

1. CK Group's Development Phases

• Chapter 1 (1971-1992): Emergence as the largest business group in Hong Kong.
• Chapter 2 (1993-2014): Global business building across 6 sectors (property, ports, retail, energy, telecom, infrastructure).
• Chapter 3 (2015 onwards): Asset realisation and strengthening of core businesses, with a focus on creating global players.

2. CKI and PAH: A Merger Opportunity

• CKI and PAH are both subsidiaries of CK Group, with CKI focusing on infrastructure and PAH on energy-related assets.
• The spin-off of HEC in 2014 marked the start of Chapter 3.1, which unlocked value for CKI and PAH by separating the electricity business into HK Electric Investments (HKEI).
• A CKI/PAH merger (Chapter 3.2) is proposed as the next logical step to unlock further value, aligning their operations and enhancing their combined market position.

3. Benefits of the Merger

• Maximise value of co-owned overseas assets: The merger would allow CKI and PAH to consolidate their ownership of key infrastructure projects, such as UK Power Network, Northern Gas Network, and Envestra.
• Rerating of CKI: CKI's current valuation (14x 2016E PER) is lower than PAH's (18x), suggesting a potential rerating to 19x.
• Efficient use of cash: CKI would inherit HKD69bn in cash from PAH, which could be used for further M&A without the need for equity dilution.
• Enhanced free float and market cap: The merger would increase CKI's free float from 24.33% to 52.57–54.28%, and its market cap from HKD150bn to HKD280bn.
• Li family benefit: The Li family's effective stake in CKI would rise from 8.87% to 13.79–14.30%, increasing their control and financial gains.

4. Financial Impact

• Share price ratio: CKI would issue 1.15–1.27 new shares for each PAH share, depending on the merger premium.
• EPS dilution: The merger would result in an EPS dilution of 8–11% for CKI in 2015E, but the overall valuation would increase.
• Valuation multiples: The merged entity would likely trade at a higher multiple than CKI alone, with a target price of HKD68.00 for CKI, implying a 13–17% upside.
• Debt implications: The merger would increase CKI's net-debt-to-equity ratio from 11% to 36–38%, but this is not expected to affect its existing A- credit rating.

5. Strategic Vision for CKI

• The report envisions CKI becoming one of the largest global infrastructure companies by 2026, its 30th anniversary.
• It suggests that the merger would be the first step in a broader strategy to establish a yieldco (Chapter 3.4), which could lower CKI's cost of equity and allow for lower-return projects to be pursued with a stable return.
• A yieldco would also provide dividend stability and market recognition, aligning with the Li family's interest in defensive earnings and dividends.

Key Information

• CKI's current valuation: 14x 2016E PER, compared to PAH's 18x.
• Cash from HEC spin-off: HKD69bn, which could be used for further M&A.
• Li family's stake: Would increase from 8.87% to 13.79–14.30% after the merger.
• CKI's market cap after merger: Estimated at HKD280bn, potentially making it one of the largest global infrastructure companies.
• Potential for CKI to become a yieldco: This would be a long-term goal, following the merger and M&A phase.

Conclusion

The proposed CKI/PAH merger is viewed as a strategic move to unlock value, enhance market positioning, and create a stronger global infrastructure player. It aligns with the Li family's interests, improves financial efficiency, and is expected to increase CKI's valuation and market cap, potentially leading to a dividend-focused structure in the future.