Company Reports

We maintain our fair value estimate of HKD 63 for CLP Holdings following 2023 earnings largely within our and market expectations. CLP had recently warned that it would write off HKD 5.9 billion of its Australian retail energy business. Hence, the 2023 net profit of HKD 6.65 billion was well within CLP's guidance and our forecast. Our bottom-line estimates through 2027 have changed little. We think CLP is fairly valued at the current share price, trading on 12.8 times 2024 price/earnings and 1.5 times price/book. The dividend is unchanged at HKD 3.10 per share, representing a 5% dividend yield.

CLP is in the process of transitioning its integrated power portfolio to be focused on renewable generation and related services. Over the next several years, we expect CLP to continue to sell or retire its coal-fired power plants and add renewable power plants and energy storage units to its portfolio. As of the end of 2023, CLP has an effective installed capacity of around 17 gigawatts. We anticipate that adding renewable plants may lag the exit from the coal-fired plants, so CLP’s generating capacity may shrink before building up.

While it's disappointing that CLP's 2023 net profit will be dampened by a HKD 5.9 billion impairment charge, the company's guidance that the bottom line would come in around HKD 6.6 billion implies a slightly better operating performance than we originally assumed. We now expect a 2023 net profit of HKD 6.9 billion, down from HKD 10.3 billion after factoring in the impairment charge, a fair value hedging gain of HKD 2.1 billion, and a 50 basis point rise in our operating profit margin assumption. However, pending CLP's 2023 results release at the end of February, we leave post-2023 earnings assumptions unchanged as we have already incorporated rising operating efficiency. Our DCF-derived fair value estimate is unchanged at HKD 63, and we see no impact to CLP's dividend payout. In our view, CLP is fairly valued, and we see better value in CKI Holdings presently.

CLP's 2024-28 development plan is mixed, in our view, with approved capital expenditure of HKD 52.9 billion somewhat disappointing, as it represents an effective decline in investment from the 2019-23 plan after factoring in inflation. However, tariff growth is decent and accounts for rising operating expenses, in our view. Overall, we think it indicates a healthy cash flow buffer for the scheme of control operations. Pending additional information on the tariff breakdown, we leave our fair value estimate for CLP at HKD 63 per share. We expect minimal change to our earnings estimates for CLP. CLP is slightly undervalued presently. We're expecting more benign conditions, particularly for its fuel costs, and this should allow CLP to see margins improve to pre-COVID-19 levels. At the moment we expect the group operating profit margin to improve to 17% in 2025 from 12% in 2023.

CLP’s 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.

CLP is in the process of transitioning its integrated power portfolio to be focused on renewable generation and related services. Over the next several years, we expect CLP to continue to sell or retire its coal-fired power plants and add renewable power plants and energy storage units to its portfolio. As of end-2022, CLP has an effective installed capacity of around 17 gigawatts, down from 19 GW in 2021 following the sale of its Fangchenggang power plants in China. We anticipate that adding renewable plants may lag the exit from the coal-fired plants, so CLP’s generating capacity may shrink before building up.

We remain buyers of CLP Holdings after adjusting our earnings forecast assumptions to reflect reduced losses for its Australian coal-fired power generation activities in 2023 and a lowered long-term operating margin. The net impact is a decline in our fair value estimate to HKD 63 from HKD 66, which prices CLP at 1.4 times 2023 price/book and 9.3 times EV/EBITDA, well within its 10-year range. We think the hiccups in 2022 are largely behind CLP, with wholesale prices in Australia and global fuel costs declining. This should allow CLP to grow its dividend payout by 2%-3% annually.

CLP is in the process of transitioning its integrated power portfolio to be focused on renewable generation and related services. Over the next several years, we expect CLP to continue to sell or retire its coal-fired power plants and add renewable power plants and energy storage units to its portfolio. As of end-2022, CLP has an effective installed capacity of around 17 gigawatts, down from 19 GW in 2021 following the sale of its Fangchenggang power plants in China. We anticipate that adding renewable plants may lag the exit from the coal-fired plants, so CLP’s generating capacity may shrink before building up.

We lower our EBITDA margin estimates for CLP Holdings and raise our capital expenditures assumptions leading to a cut in our fair value estimate to HKD 66 from HKD 73. We expect fuel costs to remain elevated for longer than previously assumed particularly with China's shift to a pro growth focus and somewhat tight supply. This impacts our margin outlook. For capital expenditures, we think CLP's plan to sell or shutdown its noncore and aging China coal-fired power plants will raise the likelihood of new greenfield renewable and nuclear projects in China. EnergyAustralia, or EA, is likely to remain a drag in 2023 as its unfavorable hedges continue to roll off. But we expect that the worst is over for CLP and net profit should recover to HKD 7.3 billion in 2023 from just HKD 0.9 billion in 2022. With a stable dividend, we remain buyers.

With a regulated return from its Hong Kong utility business expected to make up more than 70% of recurring net profit, CLP has been able to enjoy stable cash flows that have allowed it to keep annual dividend growth of 2% over the past decade, which we think is ultimately maintainable. This is likely to support a stable share price, and CLP has a relatively decent dividend yield of around 5.7% as of Feb. 27, 2023.

CLP releases full-year 2022 results at end-February and we expect a better second-half profit performance in the absence of further charges. However, we cut our fair value estimate to HKD 73 from HKD 82 to reflect a more subdued contribution for its Australian and Indian power plants over the next few years. The operational challenges remain for the Yallourn and Mount Piper power plants, with the former’s age leading to output disruptions and with the latter needing to secure coal supply that is likely to be more expensive. However, we think CLP’s share price is attractive at the current level, trading just above what we estimate to be the value of its Hong Kong power business of HKD 54 per share. Even if the Indian and Australian operations do not add much value, the mainland China assets—in which CLP’s effective installed capacity of its coal and nuclear power plants equates to 5,553 MW—should have a replacement value of about HKD 8 per share. Our revised bear case fair value estimate of HKD 62 reflects these values.

With a regulated return from its Hong Kong utility business expected to make up more than 70% of recurring net profit, CLP has been able to enjoy stable cash flows that have allowed it to keep annual dividend growth of 2% over the past decade, which we think is ultimately maintainable. This is likely to support a stable share price, and CLP has a relatively decent dividend yield of around 5% as of Jan. 27, 2023.

As was warned, CLP’s interim results were hit by noncash hedging losses and disrupted sales in Australia as well as an asset write down in India; all of which led to a net loss of HKD 4,855 million. However, recurring net profit of HKD 4,111 million was not far off from our expectation with stable Hong Kong income and strong China contributions offsetting dents elsewhere. Besides the challenges in Australia, its South East Asian and Taiwan assets also reflected an interim recurring loss due to the lagging regulatory adjustment to the higher fuel costs. The bulk of the adjustments are noncash items and with minimal change to our mid-term outlook, our fair value estimate remains at HKD 82. We believe the fixes to its Yallourn power plant and rising generating prices should help improve investor sentiment. However, we feel concerns linger over the ex-Greater China assets and we’d prefer to see some movement in its Australian partnership strategy before we get excited over the buying opportunity at the current price level. As of the August 8 share prices, we continue to prefer CKI Holdings, which trades at a slightly higher dividend yield of 5.2% versus CLP’s 4.7% .

We recognize that CLP Holdings' 6% share price fall as of midday June 21 is not unwarranted with the exceptional mark-to-market hedging losses expected to eat into the equity value of subsidiary EnergyAustralia; but we think it has limited impact on CLP’s free cash flow. CLP also warned that its Australian contributions are around HKD 1.1 billion below a year-ago's level as of end-May. As a result, CLP is expected to report a net loss for its first-half 2022 performance. To account for ongoing Australian operating challenges lasting through the full year, we have widened our assumed recurring net loss contribution to HKD 584 million from HKD 187 million. Coupled with the one-off hedging charge of HKD 7.2 billion, our full-year 2022 CLP group net profit falls to HKD 1.4 billion. Our fair value estimate drops to HKD 82 from HKD 84.

With a regulated return from its Hong Kong utility business making up more than 60% of the total operating profit, CLP has been able to enjoy stable cash flows that allow it to keep annual dividend growth of 2% over the past decade, which we think is ultimately maintainable. This is likely to support a stable share price, and CLP has a relatively decent dividend yield of around 4% presently.

CLP Holdings indicated that it is currently sitting on a marked-to-market non-cash loss on its Australian forward contract energy purchases of around HKD 2.5 billion. We have adjusted our model to reflect this news but have otherwise made minimal changes to our assumptions following CLP's first quarter update. No financial numbers were otherwise provided, as per CLP's normal practice. As we had already lowered our assumptions in March to reflect continued high fuel costs as the Ukraine war is prolonged, we've not made further changes. We think the impact of the likely weak 2022 earnings are already reflected in CLP's share price, but we also believe that there are unlikely to be near-term catalysts that would lead to share price outperformance against peers in the near term. Looking through the cycle and our expectation for oil and gas prices to normalize, we believe CLP is undervalued as at May 17, 2022. With no material change to our cash flow estimates for CLP, our fair value estimate remains at HKD 84.

We fine-tune our profit forecast for CLP Holdings after factoring in risks that energy input costs will be higher for longer and after additional detail from the release of its 2021 annual report. Because its Hong Kong scheme of control, or SOC, integrated electricity business enjoys a fuel cost passthrough, the majority of our earnings expectations are unchanged. We expect stable China contribution but we suspect we may see extended losses in 2022 at its Australian activities given high gas prices. There is no change in our dividend expectations. Given minimal changes, especially in our midcycle view, our fair value estimate remains at HKD 84.

With a regulated return from its Hong Kong utility business making up more than 60% of the total operating profit, CLP has been able to enjoy stable cash flows that allow it to keep annual dividend growth of 2% over the past decade, which we think is ultimately maintainable. This is likely to support a stable share price, and CLP has a relatively decent dividend yield of around 4% presently.

Narrow-moat CLP Group’s 2021 recurring net profit of HKD 9.52 billion came in 12% below our estimate with Energy Australia sliding more than expected to a recurring net loss of HKD 83 million. Overall, CLP’s challenges from the spike in coal and natural gas costs in the second half 2021 that it could not fully passthrough to customers in mainland China, Taiwan, and Australia were well anticipated. To account for extended fuel cost pressures, we cut our 2022 and 2023 net profit forecasts for CLP by 12.9% and 6.3%, respectively, but our midcycle assumptions are minimally changed. Our fair value estimate remains at HKD 84 pending CLP's full accounts release, and we see CLP as slightly undervalued at the current HKD 79.55 share price.

With a regulated return from its Hong Kong utility business making up more than 60% of the total operating profit, CLP has been able to enjoy stable cash flows that allow it to keep annual dividend growth of 2% over the past decade, which we think is ultimately maintainable. This is likely to support a stable share price, and CLP has a relatively decent dividend yield of around 4% presently.