In this briefing:
1. HKT Benefits from Price Increases and Offers Strong Dividend Support.
HKT (6823 HK) reported 2H18 EBITDA slightly below our estimates but free cash flow was in line and allowed a 5% increase in the dividend (to a 5.7% yield). We look for the dividend to grow gradually going forward as management’s focus is once again on returns. We saw that with the move by HKT to raise prices in September 2018 which is already helping mobile top-line trends.
Despite HKBN (1310 HK) and China Mobile HK not following, the pre-paid segment does not appear to be suffering. Management has not ruled out further tariff increases, and they clearly want to see more rational competition in the run up to 5G (and to allow for dividend growth).
Growing cash flow has allowed management to maintain an attractive dividend policy which we see as supportive for the group overall. The improved monetization in mobile and continued efficiencies is likely to support future cash flow growth. Given the encouraging mobile outlook we have lifted our target slightly HKD13.8 from HKD13.6), and maintain a BUY on the stock. For a discussion on parent PCCW (8 HK) and the stub trade, please see David Blennerhassett ‘s recent note: StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating.
2. Hanergy’s Hobson’s Choice
On the 23 October last year, the Board of Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Over a full week later, Hanergy acknowledged the proposal.
Following this privatisation, Hanergy would be listed on China’s A-share market. The indicative offer valued Hanergy at ~US$27bn. Hanergy has been suspended since 20 May 2015 and last traded at $3.91/share.
Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China.
The rub is that the consideration under the Scheme will be in the form of one special purpose vehicle share (SPV) per Hanergy share. To this:
it is not certain whether the A-Share Listing can be achieved. If the A-Share Listing cannot be completed, the Independent Shareholders will be holding onto unlisted SPV Shares for which there is no exchange platform for transfers. Even if the A-Share Listing is completed, there is no certainty as to
(a) when and how the SPV will be able to dispose of the A-Share Listco Shares;
(b) at what price the A-Share Listco Shares can be sold; and
(c) when the cash exit can be available to the Independent Shareholders, via the proposed A-Share Listing.Upon consultation with the Executive and given the above uncertainties, the Offeror is required not to attribute any monetary value to
(i) the Proposal and
(ii) any potential cash exit for the Independent Shareholders.
The announcement does not stipulate the jurisdiction of the SPV, only that it may be established in a jurisdiction apart from Hong Kong. That itself is a risk.
Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV shares which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to squeeze out minorities at a bargain price.
(A Hobson’s choice is a free choice in which only one thing is offered. In this instance, each outcome is undesirable.)
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