Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

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Equity Bottom-Up

We lower our fair value estimate for CLP to HKD 64 per share from HKD 70, following the decision by the government to cut the Scheme of Control, or SoC, regulated return on Hong Kong’s electric utilities to 8% from the current 9.99% from 2019 for 15 years. This outcome is 1% lower than our base-case assumption, leading us to downgrade our midcycle forecasts. However, there is no material change to our narrow moat rating, as the return of 8% is still above the firm’s weighted average cost of capital of 7.4%. In addition, we don’t expect CLP to cut its absolute dividend payouts, as the firm’s robust balance sheet and strong cash generation ability should be able to support its dividend payout policy. Track record also reaffirms this view: CLP maintained a stable dividend in 2009, when it received a cut in SoC return to 9.99% from 14.40%. Nonetheless, we think the shares are overvalued at the current level, trading at 1.9 times price/book, which is higher than its five-year average of 1.8 times. The earnings outlook is dampened following the reduced returns hurdle rate.The 2% cut in SoC return is in line with our worse-case scenario, and is 1% lower than our base-case assumption, and we expect CLP to see a 7.5% drop in our forecast earnings to HKD 12.3 billion, from 13.3 billion in 2019. This will also lead to a 7.3% cut in our midcycle earnings forecast to HKD 17.6 billion, as well as a 1.5% reduction in midcycle operating margin to 19.3%. Relative to <a href="https://www.smartkarma.com/entities/788" target="_blank" data-smartkarma-citation="entities:788:1">Power Assets Holdings Ltd (6 HK)</a>, we anticipate more weakness in CLP because the former only holds 33% in Hong Kong Electric and there is no impact to PAH’s dividend forecast, while the acquisition of <a href="https://www.smartkarma.com/entities/601" target="_blank" data-smartkarma-citation="entities:601:1">DUET Group (DUE AU)</a> mitigates the impact to returns and cash flow.Analysts: Jennifer Song and Lorraine Tan, CFA

We lower our fair value estimate for CLP to HKD 64 per share from HKD 70, following the decision by the government to cut the Scheme of Control, or SoC, regulated return on Hong Kong’s electric utilities to 8% from the current 9.99% from 2019 for 15 years. This outcome is 1% lower than our base-case assumption, leading us to downgrade our midcycle forecasts. However, there is no material change to our narrow moat rating, as the return of 8% is still above the firm’s weighted average cost of capital of 7.4%. In addition, we don’t expect CLP to cut its absolute dividend payouts, as the firm’s robust balance sheet and strong cash generation ability should be able to support its dividend payout policy. Track record also reaffirms this view: CLP maintained a stable dividend in 2009, when it received a cut in SoC return to 9.99% from 14.40%. Nonetheless, we think the shares are overvalued at the current level, trading at 1.9 times price/book, which is higher than its five-year average of 1.8 times. The earnings outlook is dampened following the reduced returns hurdle rate.The 2% cut in SoC return is in line with our worse-case scenario, and is 1% lower than our base-case assumption, and we expect CLP to see a 7.5% drop in our forecast earnings to HKD 12.3 billion, from 13.3 billion in 2019. This will also lead to a 7.3% cut in our midcycle earnings forecast to HKD 17.6 billion, as well as a 1.5% reduction in midcycle operating margin to 19.3%. Relative to Power Assets Holdings Ltd (6 HK), we anticipate more weakness in CLP because the former only holds 33% in Hong Kong Electric and there is no impact to PAH’s dividend forecast, while the acquisition of DUET Group (DUE AU) mitigates the impact to returns and cash flow.Analysts: Jennifer Song and Lorraine Tan, CFA

SoC Return Reset to 8% from 9.99%, and CLP's FVE Lowered to HKD 64

CLP Holdings

SoC Return Reset to 8% from 9.99%, and CLP's FVE Lowered to HKD 64