Electric Power Industries (hereinafter referred to as the “Company”) is an investment company under Changhe Group focusing on global utilities. The company's investment is mainly in regulated energy infrastructure businesses in developed countries and regions. Among them, gas distribution and power transmission and distribution assets account for about 80% of the company's total fixed assets, and the power generation business accounts for about 12% of total assets. Since coal-fired power generation facilities have been gradually reduced in recent years, it currently accounts for less than 3% of total assets.
We believe that the current logic of investing in company stocks is mainly that the company's regulated business located in developed countries and regions can show strong defensiveness when the macro environment is uncertain. In the first half of 2023, despite rising global financing costs combined with adverse foreign exchange changes in the location where the company operates, the company's profit increased 3.1% year over year to HK$2,959 billion. The defensive nature of the company's business mainly stems from the following two points: first, the regulatory model in the countries and regions where the company's energy pipeline network business is located has an inflation transmission mechanism; second, there is an upward trend in the company's utility returns in various countries and regions. This is because governments intend to promote carbon neutrality, thereby allowing utility companies to increase their investment efforts.
The company's dividend payout has been stable over the years, and the 2023 dividend rate has reached 7% based on recent stock prices. In the first half of 2023, the company announced a mid-term dividend of HK$0.78 per share, flat year-on-year — in fact, the company has not experienced a decline in dividends since it went public. Due to the company's stable dividend payments, its stocks have certain bond properties. That is, under the same conditions, the lower the risk-free interest rate such as US bond yields, the higher the company's stock price, and vice versa.
At present, the interest rate difference between the company's dividend rate and US bond yield has reached a historically high level. At the same time, the Fed's interest rate cuts are getting closer and closer. Both of these situations mean that the company's bond-like performance supports the company's stock price to a certain extent.
Furthermore, global travel restrictions during the COVID-19 pandemic have greatly disrupted the company's M&A activities, which have been the company's main means of achieving leapfrog profit growth in the past. Currently, as travel restrictions are lifted and the company's balance sheet becomes stronger, we think the company is likely to regain this engine of growth, thereby catalyzing stock prices.
We gave the company a “buy” rating, with a target price of HK$53.00.