1H16 results met expectations: Power Assets Holdings (PAH) reported 1H16 earningsof HKD3.48bn (up +7% YoY). After excluding the HKD0.54bn loss from disposal of somestakes in HK Electric Investment in June 2015, we calculate recurring earnings were -8%YoY. Such earnings drop was within our expectations, given FX losses incurred after theUK referendum in June 2016 and lower regulated earnings from the utility contractrenewals in the UK and Australia over the past 12 months. Interim DPS came in atHKD0.70 (+3% YoY), maintaining a steady growth.
UK (64% of 1H16 profits): Profits fell 4% YoY, due to FX losses from 6% depreciation inGBP-USD and lower regulated earnings since 2Q15. In GBP terms, profit was +2% YoY.
Australia (16%): Profit up 36% YoY, due to: 1) better operation at Australian GasNetwork, 2) a tax penalty in 1H15 causing a lower base comparison, offset by 2) a 6%YoY drop in AUD-USD in 1H16. Excluding these effects, recurring profit in AUD termswas +3% YoY based on our calculation, despite lower regulated returns from new resets.
HK Electric (11%): Profits fell 35% YoY because PAH sold some of its holdings in HKElectric in June 2015, which brought its stake down to 33.4% (from 49.9%).
Mainland China (4%): Profits fell 44% YoY as the Jinwan coal-fired IPP suffered lowerutilisation, owing to stronger hydropower imported from western China.
Revision of forecast and TP: Our forecasts are updated to include latest project addsand new fair value on HKE; thus we lift our TP to HKD83 from HKD78. We see 2016eprofits down 8% YoY because of a weak GBP-HKD throughout 2H16, although partlyoffset by new earnings from the Husky JV (PAH has a 48% stake, completed in Jul 2016).
Preferred play in HK utilities: We prefer PAH for its HKD57bn net-cash (value:HKD26/sh), which is sufficient to: 1) acquire meaningful assets to drive earnings/ROEsand 2) return some cash to shareholders within 2016 – we think a special dividend ofHKD5-8/sh remains possible. We think both would serve as catalysts to our forecasts.From an asset perspective, PAH is less exposed in the UK than CKI (1038 HK), givenhalf of its market cap is denominated in HKD (ie, net cash plus its stake in HKE), which ismore preferable in the current risk-off environment.
We are holding a group breakfast for CKI (1038 HK) and PAH (6 HK) at 8:00am on29 July 2016 (Friday) in Hong Kong.