德银-港股-公用事业行业-2017年年终结果预览：看好CKI，维持持有评级-20180102-27页_1mb

FY17 Results Summary and Investment Outlook for HK Utilities Sector

Core Content

The HK utilities sector underperformed the HSI Index by approximately 25ppt in 2017, driven by the cyclical recovery in the broader market. Despite this, the sector remains fully valued, with a cautious outlook due to potential regulatory changes and rising US treasury yields. Among the Hold-rated stocks, CK Infrastructure (CKI, 1038.HK) is preferred for its dividend sustainability and flexibility.

Main Points

• Sector Performance:

  • HK utilities sector returned ~15% in 2017, lagging behind the HSI Index.
  • The sector is expected to have a Hold rating due to valuations and regulatory uncertainty.
  • CKI is highlighted as the preferred name in the Hold-rated sector.

• CKI's Position:

  • CKI is expected to have the lowest payout ratio (~75%) if dividend yields rise to 5% in 2019e, due to higher US treasury yields.
  • This implies greater dividend sustainability and flexibility for CKI.
  • CKI's dividend yield is currently ~1.6% above the US 10-year treasury yield, which is in line with historical averages.
  • CKI's earnings are expected to come from the UK (~54%) and Australia (~25%) in 2019e, with Ista and Duet contributing to growth.

• Regulatory Outlook in the UK:

  • Ofgem is considering shorter price control periods and alternative approaches to ensure return legitimacy.
  • Ofwat proposed an initial allowed return on capital of 2.4% for 2019, down from 3.7%.
  • These changes may negatively impact CKI/PAH's long-term profitability, especially for Northumbrian Water in 2020.
  • CKI and PAH are top performers in the UK, but potential cuts in allowed returns could affect their earnings.

• Australia Power Market:

  • Electricity prices have fallen from March 2017 levels, with forward prices suggesting a return to 2017 levels over the next 2-3 years.
  • The 2018 wholesale forward curves are flat, indicating tightness in the market.
  • CLP's generation assets may benefit from higher wholesale prices, but retail customers face increased power sourcing costs.
  • Competition, churn, and discounting remain high in the Australian energy market.

• Earnings and Target Price Revisions:

  • Revised FX rate assumptions (up 6%/9%/9% for GBP and 8%/6%/6% for AUD in 2017-19e) have led to updated earnings forecasts.
  • CLP's target price was raised to HKD80.00 from HKD77.00, with revised forecasts in line with consensus.
  • CKI's target price was raised to HKD72.10 from HKD66.40, with forecasts 4% above consensus in 2018e.
  • PAH's target price was raised to HKD64.90 from HKD63.20, with forecasts in line with consensus.

• Valuation and Risks:

  • The sector is valued using an SoTP (Sum of the Parts) method.
  • Key risks include regulatory developments, M&A progress, and foreign currency fluctuations.
  • CKI is expected to benefit from the full-year impact of Duet and Ista in 2018, while CLP's earnings are expected to shift towards the UK and Australia over time.

Key Information

• Dividend Yield and Payout Ratio:

  • CKI has a lower payout ratio (~75%) compared to CLP (~85%) and PAH (~95%) if dividend yields rise to 5% in 2019e.
  • This suggests CKI has the greatest dividend sustainability and flexibility.

• Earnings Mix by Region:

  • In 2017e, CKI's earnings are expected to be 60% from the UK and 20% from Australia.
  • In 2019e, these percentages are expected to shift to ~54% and ~25% respectively, with more contributions from Australia.

• FX Rate Impact:

  • FX rate revisions have significantly influenced earnings forecasts.
  • Higher GBP and AUD rates are expected to positively impact CKI and PAH's earnings.

• US Rate Hikes and UK Inflation:

  • The US is expected to raise interest rates, with four hikes in 2018 and three in 2019, potentially pushing 10-year yields close to 3%.
  • UK inflation is expected to rise to ~4% in 2018, with a gradual decline to ~3.5% by 2019, which is positive for CKI's profitability.

Tables of Key Data

Earnings and Target Price Revisions

Payout Ratio (Assuming 5% Dividend Yield in 2019e)

Earnings Mix by Region (2017E and 2019E)

Figures and Visuals

• Figure 1: Share price change and total return YTD
• Figure 2: Dividend yield spread
• Figure 3: Payout ratio assuming same dividend yield of 5% for 2019e
• Figure 4: Valuation comps
• Figure 5: 10-year UST yields
• Figure 6: UK monthly RPI, %
• Figure 7: NSW weekly volume weighted wholesale spot price, A$/MWh
• Figure 8: Earnings mix by region (2017E)
• Figure 9: Earnings mix by region (2019E)
• Figure 10: Earnings and target price revisions, HKD'm
• Figure 11: DB vs. consensus
• Figure 12: Sensitivity analysis (CKI, PAH, CLP)

Conclusion

CKI is the preferred name in the Hold-rated HK utilities sector due to its lower payout ratio and greater flexibility to sustain and increase dividends. The sector is expected to benefit from rising US treasury yields and potential UK inflation, but regulatory changes may impact long-term profitability. Investors should monitor FX movements and regulatory developments closely.