, Hong Kong

HK Electric Investments to spend $4b for new gas-fired unit "L10"

The amount is scheduled to be spent within 2016-2018 and 2019-2020.

Analysts are downbeat on HK Electric Investments despite its FY16 profit being above consensus, according to Citi. Its distribution to share stapled unit (SSU) holders was unchanged yoy and Citi expects the distribution to drop 32% yoy in 2019E when the SOC permitted return is lowered from 9.99% to 8.0% ROA, in our view.

Citi also believes that the increase in interest rates would lower its net profit with 40% debt being in floating rates.

Here's more from Citi:

HKEI’s FY16 consolidated profit attributable to SSU holders was +0.2% yoy to HK$3,599m. We raise 2017-18E net profits by 10-12% and DCF TP +4% to HK$5.60/share for more capex (+11% yoy to HK$2,799m) boosted by building a new gas-fired unit “L10” with HK$3bn to spend in 2016-18E and HK$1bn in 2019-20E.

Its new “L11” gas unit will add capex mostly from 2019E. HKEI declared a final distribution of HK$0.2012 per SSU, same as that a year ago, payable on 19 Apr 2017 on the SSU Register on 6 Apr 2017.

HKEI’s net debt was -4% yoy to HK$39.7bn by end 2016 with net debt to equity -4.9% to 78.9%. All its debts are in HK$ or equivalent.

Its debt in floating rates was up from 22% by end 2016 to 40% now as interest rate swap is costly. HKEI’s average debt cost would rise from 2.4% in 2016 to close to 3.0% in 2017E and looks likely to rise further. For every 25bps HK$ debt cost rise, HKEI’s net profit would drop HK$22m or 0.6% and our DCF TP would drop 7.0%.

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