CLP Holdings Earnings: An All-Around Improvement but EnergyAustralia Is Key to Further Gains

CLP’s 00002 first-half 2023 performance, rebounding to a net profit of HKD 5.06 billion from a net loss of HKD 4.85 billion a year ago, showed an all-around improvement given more benign energy costs and the absence of significant mark-to-market fair value losses. Operating performance was in line, but we lift our 2023 net profit estimate by 17.8% to HKD 10.25 billion as we cut our effective tax rate assumption to 15% from 19%. Our operating profit projections are little changed as we had already factored in a pick-up in operating margin on more benign fuel cost swings, reduced disruptions in its Mt Piper and Yallourn power plants and the absence of further hedging losses. We do not expect much market reaction to the earnings results as EnergyAustralia remains an overhang in the absence of any developments to find partners for its projects. We think CLP is fairly valued, trading close to our unchanged fair value estimate of HKD 63, pricing shares at 8.8 times enterprise value/EBITDA and at 5% dividend yield.

Around 85% of CLP’s operating income is relatively stable, comprising its regulated Hong Kong integrated power operations and its diversified portfolio of power plants in mainland China. First-half net profit of the former grew 2.6% year on year and the latter, 9.1%. CLP is negotiating its next Hong Kong five-year development plan with authorities. We have assumed a 3% increase in CLP’s next plan to HKD 59.52 billion, but higher material costs may lead to upside, which may lift 2024-28 growth. CLP should see a stronger second-half 2023 profit from mainland China with lower coal costs leading to higher margins.

We still expect EnergyAustralia to see a net loss in 2023 as it has not fully cycled through unfavorable pricing contracts. We expect this to improve as spot prices are less volatile in 2023 and new contracts better reflect current market economics. EnergyAustralia’s half-year net loss was HKD 0.56 billion.