We downgrade Power Assets from OW to Neutral as share prices approachour revised PT of HK$74. Current prices already factor in the special DPS ofHK$5 and partly factor in potential upside from the Duet acquisition, on ourestimates. We see limited catalysts in the near term and expect in-line resultswhen the company reports next month. Within HK utilities, we prefer CKI,which has more M&A exposure. For investors looking for yield, werecommend GDI (4.8% dividend yield, with potential positives from strongresults at end-March).
Government approval on Duet investment clouded by new reviewboard. PAH’s investment in Duet Group is pending approval from theAustralian government. However, local authorities’ recent decision to createa foreign infrastructure investment board has added uncertainty to thesuccess of the bid in its current form, in our view.
Special DPS a one-off event for now. We believe another special DPS isunlikely in 2017. PAH has waited three years to issue one since itsdivestment of HK Electric Investments in an IPO in Jan 2014. While thecompany still has cHK$20/share of cash on hand, we believe it will likelyhold onto it for investments in the medium term.
PAH may play a smaller role in M&A within CK group in future. In therecently announced acquisition of Duet Group, PAH will take only a 20%stake in the company while Cheung Kong Infrastructure and CK Propertywill each take a 40% stake. This was the first time for CKP to participate ina utility acquisition with PAH and could indicate more of such structure inthe future, in our view.
Revising down PT. We lower our Dec-17 PT to HK$74 to factor in thespecial DPS but have not changed our EPS estimates. If the Duet transactionis approved, it could potentially add 2%/4% upside to FY1718 EPSestimates.