Relatively better valued compared to Power Assets (PAH)
We believe CKI looks better valued compared to PAH. Though most of the overseas assets of the two companies are in overlap, CKI looks better positioned with less exposure to the Hong Kong (HK) SoC business for which we see increasing regulatory risks. While PAH is more cash rich and offers more acquisition upside, we believe such expectations have been priced in. We also believe it is possible for CKI to raise cash by selling some of its assets to PAH at fair value (as it has been the case for the China power projects in 2009).
Less exposed to HK business
We expect CKI’s earnings to decline by 14% after excluding FX gain/loss and HK$20-21bn one-off disposal gain via its 38.87% stake in PAH. The decline is mainly driven by the absence of UK deferred tax credit in 2014E (2013: c.HK$2bn) and lower effective stake in the HK SoC business. While reported earnings from the UK is set to decline in 2014, an additional layer of shareholder loan on Northern Gas Networks (CKI: 47.1%; PAH: 41.3%) would help reduce some tax payment and mitigate earnings downside marginally.
Asset monetization is also an option
While the market is more focused on acquisitions, we believe it is equally likely for CKI to monetize its investments (as was the case for Spark Infrastructure in 2005). With PAH now holding HK$50-60bn cash, we believe it is also possible for CKI to tap some cash from PAH by selling some of its assets at arm’s length valuation (as for the China power projects in 2009).
SoTP valuation of HK$46.2 (from HK$45.8); risks
We nudge up our SoTP to HK$46.2, reflecting our higher valuation for PAH and vastly offset by the removal of the 5% acquisition upside. Key up/downside risks relate to: acquisitions, regulatory return resets, taxation issues, currency and bond yield movements, and lower/higher RPI inflation in the UK .