It is one of the major suppliers in the Hong Kong electricity industry. For the first time, HK Electric is one of the two oligarchs in the Hong Kong power industry. By the end of 2023, the installed capacity reached 3,403 MV, and electricity sales reached 10.04 billion kilowatt-hours in 2023, accounting for 22% of Hong Kong's local electricity consumption. Deeply involved in the local electricity business in Hong Kong, the company has shown outstanding performance in terms of profitability and stability. We expect the company's net profit due to mother of HK$32.9/36.2/HK$3.89 billion in 2024-2026, with reference to the average PB value of 1.11x in the company's history. Considering that the current control plan agreement stipulates that the permitted profit achieved by the company's electricity business accounts for 8% of the net fixed assets, we are optimistic that under the guarantee of high-certainty capital expenditure (estimated HK$22 billion in 2024-2028), the company's net profit to mother will increase steadily, giving the company 2024E PB 1.13x, and a target price of HK$6.33. The first coverage was given a “buy” rating.
Focus on Hong Kong's electricity business, which has strong profitability and excellent stability. The profit stability of the Hong Kong power business is guaranteed. The revenue side - the Hong Kong electricity market is more mature, and electricity demand is relatively stable; the cost side - actual fuel costs are reported and sold under government control, which is borne by users; profit side - the permitted profit is determined according to the permitted rate of return agreed in the control agreement. Compared with CLP Holdings, which has a wider business distribution, the company is deeply involved in the local electricity market in Hong Kong and focuses on providing electricity services to users on Hong Kong Island and Lamma Island. The stability of revenue, net profit to mother, and return on net assets in 2018-2023 was significantly better. In addition, the profitability of the company's regulated business is advantageous. In 2023, the Hong Kong Electric Lighting Company's authorized profit/net electricity profit was HK$0.52/0.38 per kilowatt hour, which is HK$0.21/0.10 higher than that of China Electric Power Company Limited and Aoyama Power Generation Co., Ltd., respectively.
Under high-certainty capital expenditure, I am optimistic that net profit to the mother will increase steadily
The current control plan agreement came into effect in 2019. The share of permitted profit in the total average net value of fixed assets was reduced from 9.99% to 8%, putting phased pressure on the company's profits and dividends. However, as new gas generators were put into operation and the construction of offshore gas terminals continued to advance, the company's net profit to mother continued to rise in 2019-2023 (CAGR 8%). Under Hong Kong's energy transformation goals, the company's future capital expenditure plan is quite clear (HK$22 billion for 2024-2028). Considering that the current control plan agreement stipulates that the permitted profit achieved by the company's electricity business accounts for 8% of the net fixed assets, the net profit to the mother is expected to increase steadily after the continuous capital expenditure is converted into the company's fixed assets. Furthermore, the company's dividend rate performance was impressive. Compared with major utilities in Hong Kong, the company's dividend rate in 2022 (annual dividend per share/year-end closing price) reached 6.2%, ranking first in the industry; 6.8% in 2023, ranking second in the industry.
Risk warning: Hong Kong's electricity demand falls short of expectations, hours of use fall short of expectations, and control of borrowing costs falls short of expectations.