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1、November 7,2012Hong Kong:UtilitiesEquity ResearchEventful 2013 may offer catalysts for otherwise fair valuationCatalysts abound for the Hong Kong utilities in 2013,Power utilities:1)Tariff discussion would be the highlight in Decemberand we expect about 4%-5%yoy increase for 2013E tariffs.2)The next
2、 five-year development plan would be key to driving Scheme of Control(SoC)earnings in Hong Kong in the medium term.3)With limited local organicgrowth,overseas profits,via acquisitions or restructuring,would continueto be a key driver for earnings growth.With the above in mind,we preferPower Assets H
3、oldings(PAH)to CLP because:1)it may face less political/social resistance in tariff hikes as its user mix and fuel cost structure mayallow for easier acceptance on smaller hikes;2)it may see more upside incapex off a lower base via potential new plant construction for purpose ofemission reduction;3)
4、overseas business has been a key source of profitgrowth for PAH but earnings volatility for CLP;and 4)it may have upsiderisks to dividend per share sooner based on rising associate dividends.Hong Kong and China Gas(HKCG):We think with rising market competitionand gradually maturing gas demand growth
5、 in China,HKCG would count onits ability to optimize its customer mix in terms of sources and volumes of gasconsumption.Its execution in the coal/chemical and new energy businesseswould also be key to sustaining its valuation premium vs.peers.,THREE KEY CATALYSTS FOR CLP,PAH-Tariff hikes in 2013.-Fi
6、ve-year development plan capex.-Overseas profits growth.STOCK IDEAS-Prefer PAH to CLP based on the abovethree catalysts and relative upsideperformance though we think both of them(Neutral-rated)are close to fair valuation.-Maintain Sell rating for HKCG as wethink its relative P/E valuation premium v
7、s.peers has more than priced in its growthpotential in its China business.-2012E dividend yields for CLP,PAH,andHKCG are 3.8%,3.5%,and 1.9%,respectively.We see upside risks to their dividends pershare based on our projected improvementsto their cash flows.VALUATION SUMMARY,12-month,Price,Potential,P
8、/E(X),Raising earnings estimates for PAH but lowering estimates for CLPPAH:We raise our 2012-2014 EPS estimates by an average 5%mostly toreflect 4%hike(0%before)in 2013 tariff in Hong Kong and higher overseas,CompanyPAHCLPHKCG,Ticker6.HK2.HK3.HK,RatingNeutralNeutralSell,TPHK$67.8HK$65.0HK$18.0,5-Nov
9、-201266.966.120.6,Up/downside1%(2%)(13%),2013141423,(associate)income based on efficiency gain.Hence,we raise our 12-month P/E-based target price(TP)by 4%to HK$67.8(same 14X 2013 target P/E multiple).CLP:We cut our 2012-2014 EPS estimates by an average 13%mostly to reflect5%hike(4%before)in 2013 tar
10、iff in Hong Kong and a reduced 2012 base ofAustralian profits(reported 1H12 charges).We roll over our target multiple to2013(14X)from 2012(14.5X).Hence,we cut our TP by 6%to HK$65.0.Key risks for CLP/PAH:tariff and overseas profits vary from our forecasts.HKCG(Sell)Valuation remains our key reservat
11、ionWe raise our 2012-2014 EPS estimates by an average 10%mostly to reflectbetter returns from investments in China.We roll over our target multiple to2013(20.0X)from 2012(18.5X).Hence,we raise our TP by 28%to HK$18.0.Keyrisks:higher-than-expected earnings growth in China.,Source:Datastream,Goldman S
12、achs Research estimates.Key risks to our 12-month target prices:higher/lower-than-expected domestic sales and overseas profits.,Franklin Chow,CFA+852-2978-0790 Goldman Sachs(Asia)L.L.C.Viola Zhang+852-2978-7215 Goldman Sachs(Asia)L.L.C.The Goldman Sachs Group,Inc.,Goldman Sachs does and seeks to do
13、business withcompanies covered in its research reports.As a result,investors should be aware that the firm may have a conflict ofinterest that could affect the objectivity of this report.Investorsshould consider this report as only a single factor in makingtheir investment decision.For Reg AC certif
14、ication and otherimportant disclosures,see the Disclosure Appendix,or go Analysts employed by non-US affiliates are not registered/qualified as research analystswith FINRA in the U.S.Global Investment Research,2,November 7,2012,Hong Kong:Utilities,Prefer Power Assets to CLP:tariff,SoC capex,and over
15、seas earningWhile we think both are well-managed Hong Kong utilities,we prefer Power Assetsto CLP on the three upcoming industry catalysts.I)Power tariff discussion in December could remain controversialThe question is more on how much rather than why.We expect power tariffs in HongKong to rise agai
16、n in 2013 and then in 2014.While the magnitude can be managed withoperational efficiency subject to fuel cost trend,the need for tariff increases in accordancewith the Scheme of Control(SoC)as agreed between the Hong Kong utilities and HongKong government seems difficult to avoid.We are not advocate
17、s for tariff hikes but werecognize the reality of striking a difficult balance between environmental protection(fuelemission and fuel mix diversity)and immediate cost increases.We now assume 3%-6%annual tariff hikes in 2013 and 2014.For 2012,PAH raised more in tariffs than CLP off itsalready higher
18、base.For 2013,we expect the tariff hike amounts to be lower than what themarket has previously expected given the milder fuel cost during 2012,especially on coal.Exhibit 1:We expect further power tariff hikes for 2013 and 2014 in Hong KongTariff,actual and projected,for CLP and Power Assets,2012,201
19、3E,2014E,CLP,PAH,2012,2013E,2014E,2012,2013E,2014E,Tariff(HK$cents),Basic tariffFuel clause surcharge/rebateOthersNet totalyoy change(%),84.217.8(3.3)98.74.9%,84.220.8(1.6)103.44.8%,84.225.00.0109.25.6%,94.137.00.0131.16.5%,94.142.00.0136.13.8%,94.146.00.0140.12.9%,Source:Company data,Goldman Sachs
20、Research estimates.We expect the two utilities to both raise power tariffs by about 5%each.However,wethink CLP may again face more political pressure like last year due to its customer base(Exhibit 2);for example:1)CLP reported that it served 80%of the population in Hong Kongin 2011.It accounted for
21、 74%of total power consumption in Hong Kong in 2011,along withPAH;2)among residential users,average income level for PAH customers is likely higherthan CLP customers;and 3)among commercial users,we believe the service area of PAH(majority in Hong Kong Island)has a much higher concentration of large
22、and globalcorporations than that of CLP.While we think these factors should not change how weascertain the fairness of power tariff hikes,relative affordability would still matter withinthe political process and for media attention.Exhibit 2:Power Assets has a much larger mix of commercial customers
23、 than CLP does2011 customer mix(%)based on power generation,CLP(local power sold in 2011:31,168GWh)Infrastructureand publicservices,PAH(local power sold in 2011:10,897GWh)Industrial(3%),(26%)Industrial(6%)Residential(28%),Commercial(41%),Residential(23%),Commercial(74%),Source:Company data,Goldman S
24、achs Research.Goldman Sachs Global Investment Research,3,November 7,2012,Hong Kong:Utilities,Downside risk to 9.99%permitted return is too early to quantify now.There have beenvoices in the public in recent months about whether the permitted return allowed for CLPand PAH would seem too high and sugg
25、estions to consider reforming the power supplymarket.We,however,would not anticipate any changes to the 9.99%return profile unlessdue to unforeseen extreme scenarios.Key aspects of the current agreement as reachedbetween the two utilities and the Hong Kong government include:In 2013,the Hong Kong go
26、vernment is scheduled to make an interim review of the SoCagreement.Before 2016,the government will also review the regulatory framework for electricitysupply,potentially covering market liberalization and power grid interconnectivity.In 2018(the 10th year of the current agreement),the government ha
27、s an option tochange the current regulatory framework or extend the current agreement for fivemore years to a total of 15 years which will be equivalent to the prior agreement period.We think any subsequent potential changes to the framework would at least becontingent on the following:1)Economic gr
28、owth and income equality in Hong Kong,which would shape publicopinion and perception of the need and“acceptable”degree of tariff hikes.2)Governments comprehensive policy in environmental protection andaccompanying monetary incentives,e.g.support to curb pollutant emission ofpower plants via emission
29、 reduction equipment installation as well as construction ofnew and cleaner power plants.3)Transparency and accountability of the public policy and business contracts(i.e.SoC)undertaken by the government regarding a stable and reasonably priced powersupply.4)If fuel costs remain a key driver for nea
30、r-term power tariff hikes(especially for CLP),clear communication from the government on its policy which limits,if any,the fuelmix and fuel supply options(e.g.long-term gas supply from China for CLP)for powerutilities would also be important for the public to understand the tariff hike mechanism.5)
31、Candid communication from power suppliers to the public on their balancebetween shareholder returns and affordable/stable power supply in Hong Kong.6)Cost and benefits of introducing new competition to the power supply market aswell as the criteria to measure qualification and reliability of potenti
32、al new entrants.II)Capex discussion could boost permitted returnWe believe the next five-year capex plan would be key to driving Scheme of Control(SoC)earnings in Hong Kong for the two power utilities.Under the current five-yeardevelopment plans as approved by the Hong Kong government,CLP is allowed
33、 a capitalexpenditure in Hong Kong power-related infrastructure of HK$39.9bn over October 2008 toDecember 2013 while Power Assets is allowed HK$12.3bn over 2009 to 2013.Since the9.99%permitted return is applied to companies net fixed asset values to derive allowableSoC profits in Hong Kong,upside to
34、 their next five-year(2014-2018)development plancapex budgets could result in upside to their permitted returns.We think such upside mayinclude government supports to build new power plants to replace older ones.We expectCLP to still have a bit faster growth in its permitted return than PAH(Exhibit
35、3)based on itslarger annual approved development plan capex.However,given the smaller base ofPAHs current capex plan,we think it may see more upside risks if new power plantconstruction is approved,notwithstanding a potentially lengthy process.Goldman Sachs Global Investment Research,4,November 7,20
36、12,Hong Kong:UtilitiesExhibit 3:CLP has seen stronger growth in its permitted return than PAH in recent yearsPermitted return of CLP and PAH,2006 2014EPermitted return(%),5%0%,CLPPAH,(5%)(10%)(15%)(20%)(25%)(30%)2006 2007 2008 2009 2010 2011 2012E 2013E 2014ENote:The declines in 2009 reflected the c
37、hange of permitted return from 13.5%to 9.99%,effective October 1,2008 forCLP and January 1,2009 for PAH.Source:Company data,Goldman Sachs research estimates.III)Overseas profits,via acquisitions or restructuring,may signify differentiationDifferent outcomes on overseas investments.Seeking growth out
38、side Hong Kong hasbeen a strategy for the Hong Kong utilities given their mature low-growth local businesses.Strong cash flows from these local businesses tend to help fund overseas growth.Asshown in Exhibit 4,the portion of overseas profits has been generally rising since 2007 forCLP and PAH.Howeve
39、r,we notice that the track record of PAH on its overseas earningsgrowth seems to be better than CLP in recent years(Exhibit 5).Key observations:1)Earnings profile:CLP:its overseas units are scattered across very different geographic markets in termsof growth and regulation,e.g.Australia,China,India,
40、and Southeast Asia.Its overseasprofits tend to be more volatile than PAHs and include more non-recurring charges.Power Assets:we believe its overseas assets tend to be more defensive and regulatedas well as concentrated in relatively similar markets(e.g.UK,Australia,New Zealand)at least in terms of
41、regulatory and legal framework.2)Growth profile:CLP:we expect it to focus on optimizing/restructuring its current portfolio of assetsrather than on new acquisitions.We believe its key focus market is currently Australiaas it continues to restructure its recently re-branded EnergyAustralia and prepar
42、es forthe potential initial public offering of that unit(previously reported by CLP).We thinkthey would continue to focus on Fangchenggang power plant in China and look for exitopportunities for certain existing coal-fired power joint ventures.We do not expectmuch new investment in India and Southea
43、st Asia from CLP.Power Assets:we expect it will remain committed to jointly invest along Cheung KongInfrastructure in power utilities assets with inflation-adjusted returns in markets theyare already active in.We think these acquired growth plus efficiency gains on existingassets may offer earnings
44、growth upside.Goldman Sachs Global Investment Research,CLP,5,November 7,2012,Hong Kong:Utilities,3)Dividend profile:CLP:we believe the mandate for CLP management is to deliver stable dividends withoccasional growth;acquisitions are not necessarily top priority.We assume itsdividend per share to rema
45、in at HK$2.52 until 2014.This implies the payout ratio wouldfall from 65%in 2012 to 49%in 2014.We think stabilization in its Australia businessearnings may position CLP to pay a higher dividend per share before 2014 as thepayout ratio has not been below 50%since our review from 1999.Power Assets:we
46、believe the mandate for PAH is to:1)deliver stable dividends from its local business.We assume its dividend per share toremain at HK$2.32 until 2014.This implies payout ratio to fall from 51%in 2012 to 46%in 2014.We see upside risks to its dividends given its growing cash dividends fromassociates an
47、d that its dividend payout ratio has not been below 50%since our reviewfrom 1999;and2)invest some of its abundant cash from its Hong Kong unit to fund investments inoverseas power utility assets with inflation-adjusted returns with an objective ofobtaining long-term dividend growth.Dividends receive
48、d from associates wereHK$1.4bn(up 82%yoy)in 2011 and we expect those to grow to HK$2.8bn andHK$3.3bn in 2012 and 2013.Exhibit 4:Rising profit contribution from non-Hong-Kong businessesProfit from Hong Kong businesses vs.non-Hong Kong businesses(profit before interest/tax for CLP and net profit for P
49、AH),2006-2011,1H12,CLP:23%in 1H12(36%in 2011),PAH:60%in 1H12(50%in 2011),Outside Hong KongProfit before interest and tax(HK$mn)20,000,Total,Proportion(%)40%,PAHNet profit(HK$mn)10,000,Outside Hong Kong,Total,Proportion(%)60%,60%,36%,50%,16,000,32%,8,000,48%,12,0008,0004,000,21%,23%,24%16%8%,6,0004,0
50、002,000,10%,36%24%12%,0,2006,2007,2008,2009,2010,2011,1H2012,0%,0,2006,2007,2008,2009,2010,2011,1H2012,0%,Note:For CLP,we use its profit before interest and tax including associate/jointly controlled entity(JCE)income as segment net profit is not reported for thetime series.Unallocated profit is exc
