The performance in 2020 slightly exceeded market expectations
The company announced its 2020 results: revenue of HK $10.39 billion, down 3% from the same period last year, and net profit of HK $2.73 billion, up 17% from the same period last year, slightly exceeding market expectations. The full-year dividend of HK $0.32 per share was in line with expectations.
HK Electric Investments and HK Electric Investments's performance slightly exceeded market expectations in 2020, mainly due to (1) the increase in profits of HK $131 million (2019: HK $268 million), and (2) we estimate that the company's financing costs in 2020 will be about 2.7% (2019: about 3.0%). As a result, the financial expenses of the company are still reduced by about 3% in the case of an increase in interest-bearing liabilities.
Trend of development
HK Electric Investments and HK Electric Investments plans to freeze electricity prices completely in 2021, which will have little impact on returns. Although the company plans to increase net electricity prices in 2021 according to its previous development plan for 2019-2023, the company plans to completely freeze electricity prices in 2021 to provide continuous relief measures for customers due to the impact of the continuing epidemic. In fact, the company's rising capital expenditure and declining electricity sales under the influence of the epidemic have put upward pressure on electricity prices, while fuel adjustment fees are likely to put cost pressure on the company under the recent rise in fuel prices. However, considering that the balance of the company's electricity stabilization fund is about HK $700 million by the end of 2020, it is expected to balance the potential return difference, so taken together, we think that it will have little impact on the return in 2021.
Optimize the debt structure and reduce the interest rate risk. In 2020, the company optimized its debt structure by publicly issuing long-term notes, accounting for 82% of loans with maturities of 5 years or more by the end of the year (42% at the end of 2019). And increase the proportion of fixed-rate loans from 70% at the end of 2019 to 82% at the end of 2020, effectively reducing interest rate risk.
Rising capital spending is expected to continue to boost earnings growth. The company's capital expenditure in 2020 increased by 19% year-on-year to HK $5.49 billion. Due to the construction of two new 380MW gas-fired generating units, L11 and L12, the amount of capital expenditure is expected to remain at the level of HK $5 billion over the next three years, the company will be able to continue to improve its asset base, and we expect to drive earnings growth on the basis of a constant permitted return.
Profit forecast and valuation
Taking into account the lower operating costs after the new unit is put into production than we had expected, we raised the company's 2021 net profit forecast for 2021 to HK $2.87 billion and introduced a forecast of HK $2.95 billion for 2022. We basically maintain our 2021 dividend forecast of HK $0.32 per share (unchanged from a year earlier) and introduce a dividend forecast of HK $0.35 per share for 2022.
The company's current share price corresponds to 23.5 times 2022 / 22.8 times earnings and 4.2% / 4.6% dividend yield in 2021 / 2022.
We still maintain the company's neutral rating, but considering the valuation switch, we raise our target price by 12.3% to HK $8.01 corresponding to the dividend yield of 4.0% / 4.4% in 2022 and 24.7 times earnings in 2021 / 2022, which has 5.0% upside compared to the current share price.
Risk.
Interest rates rose and capital expenditure was slower than expected.