Weak FY16 results and no plan for merger with CKI; maintaining Hold
PAH reported weak FY16 results （-17% yoy） after market close on 21 March,driven by the absence of a provisions write-back in 2016 and lower deferredtax benefits from the UK. Management has not decided whether more specialdividend from PAH will be proposed in the future and there is no plan foranother round of merger with CKI. We maintain Hold as our target price （closeto current share price） has already factored in a reasonable amount of valuationcreation from potential M&A.
　　Weak FY16 results
　　Reported earnings were only HKD6.4bn, down 17% yoy and 16%/15% belowconsensus/DBe. The major surprise was from expenses at the group level, asthe provisions write-back in 2015 did not recur in 2016. In terms of countryearnings breakdown, the biggest surprise was from the UK, where earnings（HKD4.4bn） beat our estimates by 16%, presumably driven by the strongerthan-expected performance from the UK power network and UK rail. DPS in2016 was HK$2.72 per share （ex-special dividend）， up 1% yoy.
　　Briefing takeaways
　　During the post-results analysts briefing, management mentioned thatnegotiation on the new Scheme of Control is going smoothly, althoughmanagement did not provide timing for the negation results. Management hasnot decided whether more special dividend from PAH will be proposed in thefuture and there is no plan for another round of merger with CKI.
　　New SOTP target price of HKD66.6; maintaining Hold
We lower our target price by HKD5.0 as we take out the special dividend thatPAH recently paid out. Our target price values existing assets at HK$57.6 andHK$9.0 for value creation from potential M&A. Risks: failure or success inmaking value-accretive M&A, and higher/lower bond yields.
　　Investment thesis
　　Outlook
　　We rate PAH as Hold. We believe the shares are fully valued, with a fairamount of value creation from potential acquisitions priced in and US ratehikes as an overhang. We have not yet factored in the planned DUET M&A onownership uncertainty, but calculate that the deal should boost PAH earningsby 2%/4% in 2017/18 under our base case scenario. However, PAH earningsshould still decline in 2017-18 if there is no more major M&A after the DUETdeal. We expect minimal value creation from the DUET deal considering thehigh premium that PAH is offering.
　　PAH is trading on a recurring dividend yield of ~4%, which we believe is fairunder the current macro environment, but it may be insufficient if the USraises interest rates.
　　Valuation
　　Our earnings forecasts do not factor in any new potential acquisitions.However, our target price includes value creation from potential acquisitions,assuming a total deal size of US$25bn in EV with a debt-to-equity ratio of70:30 and PAH taking a 40% stake （or US$3.0bn of equity investment）。 Wevalue PAH's existing assets at with a sum-of-the-parts approach based on DCFfor key assets （including the assumed HK$ special dividend）。 We value theremaining assets using various multiple-based approaches.
　　Risks
　　The key downside risk is a failure to secure value-accretive deals. In the eventof no value-accretive acquisitions, there would be downside potential to ourtarget price, with existing assets valued at HK$57.6.
　　Other major downside/upside risks include lower/higher-than-expectedoutperformance of regulatory assets, lower/higher-than-expected inflation inthe UK, unfavorable/favorable currency movements, higher/lower bond yieldsand an improving/deteriorating macroeconomic environment, which couldaffect investors' preference for defensive plays in general