1H17 profit was challenged by some non-recurring items butfundamentals met expectations; DPS positive, up 4%
Hong Kong maintains its status quo; underlying operation inAustralia is strong & on track, despite volatile energy prices
Dividend yield looks sustainable; maintain our Hold rating
1H17 results: CLP reported profit at HKD5.9bn （EPS: HKD2.34）， down 3.5% YoY.Excluding non-cash items, changes in accounting treatment and FX impact, adjustedcurrent operating income （ACOI） was down 2.8%, reflecting a stable operationalperformance against some volatility in energy prices across various regions. On apositive note, DPS were HKD1.18, up 4% YoY （pay-out: 50%）。
　　Hong Kong （69% of ACOI）： ACOI was flat YoY on a higher asset base, while offsetby increased expenses. The 550MW gas-fired unit has started construction,expecting completion by 2020, while the new floating LNG terminal will seekgovernment approval in 4Q17. Together with the preparation of a new developmentplan （2018-23）， CLP expects its asset base to grow, which helps to defend earningsunder the new Scheme of Control （SOC） agreement.
　　Australia （14%）： Earnings reported a 15% drop, due to a fair value （non-cash） lossresulting from the hedging instruments used for energy selling, which help stabilizethe underlying operation against energy price volatility. In 1H17, the wholesale subsettook a hit because prices were volatile and higher YoY, because of increased gascosts – contributed by 1） the closure of Hazelwood （1.6GW, coal-fired）， 2） extremeweather, and 3） new renewable energy capacity. Helped by a stronger retail businesswith increased margins, ACOI was flat YoY. If we strip out the one-off gain ofAUD40m in 1H16, EBITDAF in fact rose 17% in 1H17. EBITDA seems to be on track,or ahead, of a guided 30% increase by 2018, over 2015 levels.
　　Mainland China （9%）： ACOI was down 21% YoY, due to overall higher coal pricesand utilisation cuts at the Fangchenggang unit, resulting from the overcapacity inGuangxi. This was partially offset by the increased capacity in renewable energy andbetter solar resources during the period. The acquisition of a 17% stake in Yangjiangnuclear power project is expecting completion in 2H17.
　　India （7%）： ACOI was flat YoY. The thermal power subset enjoyed benefits from arecalibration of coal stock-take, despite lower availability in June due to an outage.Cancellation of the Yermala project also incurred a one-off cost.
　　Stable organic growth; maintain Hold: Operations are on track to meet guidance.New SoC agreement in HK aims to adjust fuel cost more frequently, enhancing cashflow stability. Recent upgrades on credit ratings underline a better balance sheet. Wemaintain a Hold rating for its inverse correlation with rising interest rates.
　　Valuation and risks
　　Valuation: Our unchanged TP of HKD84 is based on sum of the parts valuation. CLP’s HongKong business and 70% equity interest in Castle Peak Power （CAPCO） are valued using DCFwith cost of equity 4.4%, risk-free rate 2.5%, and equity beta of 0.38x, while businesses in othercountries are valued using 2017e PE multiples. Our DCF assumptions remain unchanged. OurTP implies 0.6% downside from current levels. We maintain our Hold rating on the stock due tomacro headwinds such as rate hikes.
　　Upside risks: Delays in rate hikes by the US Fed; stronger-than-expected performance in theAustralian business.
　　Downside risks: Sooner-than expected rate hikes by the US Fed; worse-than-expectedperformance of the Australian business.