Initiate Hold: Opportunities, but also near-term headwinds
CKHH’s greater European and energy focus creates neartermchallenges and long-term telecom opportunities
Expect modest recurring profit growth; key potential catalystsare EU mobile consolidation and US dollar weakness
Initiate with Hold – a complex company priced towards thetop end of its peer group; we set our target price at HKD118,based on a 15% discount to HKD138 appraised value
Restructuring – more complex than it looks. The CK Hutchison Holdings (CKHH)reorganisation created a 2014 proforma recurring profit slightly below the 2014 actuals forHutchison Whampoa (HWL); however, this masks some important changes. The propertybusiness has been replaced with extra infrastructure, a bigger stake in Husky Energy andnon-cash income of HKD5.8bn from accounting adjustments to depreciation and interest.
Greater near-term challenges than the old HWL, but some key opportunities. CKHH’sprofit is more focused on businesses outside of Hong Kong and mainland China and 70% isnon-HKD/USD. As a result, currency risk has risen; lower oil prices have also depressedHusky’s earnings. Yet the restructuring generates some important opportunities as it helpsprovide a platform to participate in the consolidation of the European mobile telephoneindustry. We believe retail and European telecoms offer the best underlying growthprospects, while ports growth has stalled and Husky forecasts are under pressure.
We forecast recurring net profit will fall 1% y-o-y in 2015e and rise at a 6% CAGR over2014-17e because of the near-term oil and currency headwinds. HSBC’s forecast for 2015eis in line with consensus, but our forecasts for 2016-17e are 9-15% below. Stripping out thenon-cash accounting adjustments, we forecast underlying earnings will rise 11% and 14%y-o-y in 2016e and 2017e. In contrast, consensus forecasts imply underlying growth of25% and 22% y-o-y, respectively – to us this looks overly optimistic.
We initiate coverage of CKHH with a target price of USD118 and a Hold rating. Ourappraised valuation is HKD138/share and we apply a 15% discount to arrive at our HKD118TP. The discount we use is towards the tighter end of our conglomerate coverage andreflects the liquidity of CKHH plus potential upside from the consolidation of the mobilemarket in Europe. At our target price, CKHH would trade at 14x 2016e PE or 16x afterstripping out non-cash accounting adjustments – its nearest peers trade at 10-13x 2016e.The keys to a rerating are further progress in mobile consolidation and a weakening USD.