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1、ABGlobalResearch10June2019EquitiesHongKongUtilitiesSectorUtilitiesHongKongWeakCNYtodriveshareoutperformanceUpgradingPowerAssetsWeareturningmorepositiveonHongKongutilities.WebelievethepersistentlylowinterestrateenvironmentanddepreciationoftheCNYagainsttheUSD,
2、asexpectedbyoureconomicsteam,shouldprovidestrongsharepricesupport,aswebelieveinvestorsviewHongKongutilities'non-CNYdenominatedassetsasacurrencyhedge.Althoughearningsarelikelytodeclinein2019and2020,becauseoftheregulatoryresettingofreturns,thesearelargelyone-of
3、feventsandhavebeenpriced-inbythemarket.Webelievethisissobecausethesharesaretradingclosetotheirhistoricaldividendyieldaverages,comparedwiththebelow1SDinthepastfiveyears.WeupgradePowerAssets(PAH)fromNeutraltoBuy,asinvestorsappeartohaveoverlookeditsacquisitionpo
4、tential.SharepriceperformanceshowshighcorrelationwithCNY/USDrateWebelievetheCNYandUSDexchangeratehasbecomeanincreasinglyimportantsharepricedriverofHongKongutilitiessince2015,whenexchangeratevolatilityincreasedandtheShanghai-HongKongstockconnectwaslaunched.Our
5、analysissuggestsdepreciationoftheCNYagainsttheUSDwilldriveHongKongutilities'stockoutperformanceagainstMSCIHK.WethinkinvestorsviewutilitiesasproxiesforHKD/foreigncurrency-denominatedassets.Asoureconomicsteamexpects7CNY/USDbyend-2019,webelieveaweakCNYwouldconti
6、nuetoprovidesharepricesupport.2019/20likelytobechallengingforearnings,butdividendstobemaintainedWeexpectHongKongutilities'earningstodeclinein2019(exceptHKCG),asregulatorsarelikelyto,orhavealready,cuttheallowedreturnsforregulatedtransmissionanddistributionbusi
7、nesses.Fortheunregulatedgenerationandretailingbusinesses,weexpectheadwindsforCLP'sAustraliabusinessesinH119.WeassumecoverageofCKInfrastructure(CKI)andlowerour2020-21earningsestimatesforPAH/CKIby6%,andforCLPby3%toreflectthis.However,weareraisingourpricetargets
8、onourlowerriskfreerateassumptionfrom2.6%to2.2%(UBShouseview).PAH,ourtopsectorpickWelikePAHforits5%dividendyieldpotential,anditsattractiveshareexchangeratiotoCKI.Webelieveconcernsaboutthel
