According to a report by HSBC Global Research, empirical analysis shows that the Hong Kong utilities sector consistently exhibits defensive characteristics during significant global conflicts. The sector has outperformed the broader market in the aftermath of relevant events, surpassing the Hang Seng Index by 7% within 60 days of major incidents. Beyond typical risk aversion sentiment, the bank believes that the sector’s core fundamentals remain robust, protected by regulatory frameworks and long-term contracts, enabling it to withstand macroeconomic uncertainties and disruptions. The bank reviewed key risk factors and their impact on the sector.
HSBC Research noted that with Iran closing the Strait of Hormuz, fuel prices surged. However, the bank expects minimal impact on the sector's earnings, as fuel costs for regulated utilities in Hong Kong, the UK, and Australia can be fully passed on to consumer bills. Additionally, CLP Holdings (00002.HK) has reduced its forward contract risk exposure since 2022 and implemented operational remediation measures, which, in the bank’s view, keeps its financial risks manageable.
The initial impact of the Iran situation may push up the US dollar, implying foreign exchange translation losses for companies with significant overseas operations, such as CK Infrastructure (01038.HK) and Power Assets Holdings (00006.HK). However, overall, the bank believes the impact will be very limited.
HSBC Research maintains a 'Buy' rating for CK Infrastructure, HKElectric, and CLP Holdings, while keeping a 'Hold' rating for Power Assets Holdings and Towngas; target prices remain unchanged (see table for details).
HSBC Research remains optimistic about CK Infrastructure due to its defensive qualities (with over half of its profits coming from regulated assets) and greater potential for dividend increases — all underpinned by its strong free cash flow generation capabilities. The bank also favors HKElectric for its pure focus on the regulated Hong Kong electricity market, offering high defensiveness against macroeconomic and geopolitical risks. CLP Holdings, supported by profit guarantees from its regulated Hong Kong electricity business, may continue to increase dividends; however, its organic recovery in Australia might proceed at a slower pace. The bank anticipates limited likelihood of dividend increases for Power Assets Holdings and Towngas due to insufficient free cash flow generation, hence assigning them a 'Hold' rating.
