Cheung Kong Infrastructure will be added to the Hang SengIndex as a constituent, effective 14 March
2015 earnings to be released on 16 March. We expect coreearnings to grow, backed by previous rounds of M&A
Reaffirm our positive thesis with a Buy rating and HKD85 TP
Cheung Kong Infrastructure to join as HSI constituent: According to Hang SengIndexes Company on 25 February 2016, Cheung Kong Infrastructure (CKI) would beincluded as one of the Hang Seng Index (HSI) constituents under the sub-indexUtilities, effective 14 March 2016. CKI has many defensive qualities in our view, andthe addition to the HSI should provide near-term support to share price. PowerAssets Holdings (PAH) (6 HK, HKD74.5, Buy, TP HKD83), which is 39% held by CKI,is already an HSI constituent.
2015 earnings to be released on 16 March: We estimate 2015 recurring earningsup 7% (excluding FX effects), but reporting earnings could fall 66% due to aHKD19bn gain from the spin-off of Hongkong Electric in 2014. Although regulatoryresets in the UK and Australia during 2015 have resulted in lower return rates,earnings growth is supported by the three rounds of M&A since mid-2014. We expectCKI to be one of the least affected by FX changes and rate hikes, amongst its peers.
HSBC is hosting a group breakfast with CKI on 17 March in Hong Kong: Pleasecontact your HSBC sales representation for meeting registration.
Hong Kong utilities are shelters in volatile markets, despite rate hikes: Sincelate 2014, the outperformance of Hong Kong utilities vs the HSI has been morecorrelated to equity risk premium (78%), than to Treasury yields.
Reiterate Buy on CKI: We have recently published a sector report on Hong Kongutilities, for details, please refer to "Seeking a stronger shelter" 18 February 2016.CKI is our preferred play among the Hong Kong utilities because of its enhancedasset portfolio (helped by acquisitions overseas) and its defensive growth profile with85% of its EBIT (peers: 0-70%) exposed to the UK and Australia where regulatedutilities are well-protected against rate hikes and inflation. It is also the mostleveraged to M&A with a broader mandate than its 39%-owned associate PAH toinvest in non-energy assets. We believe that PAH might recommend a specialdividend and if so, assuming it distributes HKD8/share, CKI’s balance sheet would bestrengthened with sufficient funds and could afford an acquisition worth HKD27bn inEV, or HKD11bn in equity value – equivalent to 1.7x the size of the Eversholt Rail(acquired in January 2015 for USD850m) or 1.2x the size of the Northumbrian Wateracquisition (October 2011 for USD1.2bn) – the share price appreciated by 15% in thethree months following each acquisition. Our target price of HKD85 implies 8.8%(excluding dividend yield) and we reiterate our Buy rating.