CKI, Power Assets:A one-off first half

The 24% YoY decline in Power Assets’ 1H14 operating earnings washigher than our estimate of 12% decline due to sharp increase in otherexpenses. Management was vague about these but hinted that thisincrease is likely one-off and may even be reversed later. Earnings of keyassociates were broadly in line with our estimates and reported earningswere boosted by HK$53bn one off gains on sale of HK Electric. The 11%YoY decline in CKI’s operating earnings was in line with our estimate. Thekey going forward will be the deployment of Power Assets’ HK$64bn cashwhich is currently earnings c.1% returns. Maintain O-PF on PAH and CKI.

Sharp increase in other expenses pulls down PAH’s 1H results

We were expecting a 12% YoY decline in operating earnings of Power Assets, dueto the sale of 50% stake in HK Electric during January 2014. However, the actualdecline was much higher at 24% YoY to HK$3.6bn. The key culprit was sharp 94%YoY increase in other expenses.

Management was a bit vague about these expenses but hinted that these are likelyto be one-off and could even be reversed in the future. We believe these could bedue to aggressive provisioning for potential liabilities (for instance for tax liabilitiesin Australia). Earnings contribution from HK Electric was also lower than ourestimate which is due to some spin-off/listing related expenses.

Power Assets - from HK$15bn net debt to HK$53bn net cashq The cash on Power Assets’ books is in line with our estimates at HK$64.2bn.Netting of borrowings of HK$11.4bn, the net cash with Power Assets is HK$52.8bn.This compares with HK$14.5bn of net debt at end 2013, before HKE listing.

The key going forward is deployment of this cash. As highlighted in our note HKUtilities (A loaded elephant gun) there are investment opportunities in Swedenand Australia which could open up in next 1-2 years.

We assume that most of this cash is deployed in regulated utility assets by 2018and earn a 9% return. Earlier deployment of cash could offer upside.CKI – results in line. Maintain O-PF on Power Assets and CKIq。

CKI’s operating profit at HK$4.5bn, down 11% YoY, was in line with our estimates.

Unlike Power Assets, CKI’s operating costs were under control.

As expected, the earnings from UKPN have stabilised after strong growth over lastfew years. We expect UKPN’s earnings do decline for next couple of years as itenters a new regulatory period and there are no more deferred tax write-backsq。

Returns from Australia were a bit lower mainly due to weaker currency.

Power Assets and CKI remain our preferred HK utilities. Between the two ourpreference is for Power Assets given large net cash on its books.