The Australian Energy Regulator （"AER"） formally began the process toset a default market offer （"DMO"） price for retail electricity, which willlikely lead to lower retail prices beginning July 1, 2019. The averageresidential electricity price in Australia had risen 55.8% to AU$ 29.6cents/kWh from AU$ 19.0 cents/kWh during the period 1H2007 to 1H2018.
Increased regulatory uncertainty as a result of the scrapping of the NEG andestablishment of the DMO will likely keep retail market competition high aswholesale prices are expected to decline, which could lead to downwardpressure on CLP’s Australia business results.
We revise 2018E-2020E shareholders’ profit by （0.6%）/ （4.4%）/ （0.0%） toHK$ 15,024 mn/ HK$ 13,734 mn/ HK$ 14,475 mn. The downward revisionprimarily accounts for increased uncertainty surrounding CLP’s Australiabusiness. We expect downward pressure on the Company’s margins tonegatively impact earnings in Australia due to high competition in the retailenergy market while wholesale prices gradually trend downwards, reducingearnings from the wholesale segment.
Lower TP to HK$ 91.00 and maintain investment rating, "Accumulate".
The TP represents 15.3x/ 16.7x/ 15.9x 2018E-2020E PER and correspondsto 1.8x/ 1.7x/ 1.6x 2018E-2020E PBR. We have lowered our TP as we havepriced in higher risk from CLP’s Australia business but maintain ourinvestment rating as we believe the Company remains an attractive defensiveinvestment that offers predictable earnings and stable dividend growth.