Looming tariff cuts at Australian units pose biggest uncertainty, say analysts
Regulated tariff increases at home augur well for future earnings at Hongkong Electric Holdings - but looming price cuts in ventures in Australia could hurt overseas contributions, warn analysts.
The mixed picture for the sole supplier of electricity on Hong Kong and Lamma islands emerged from its interim result yesterday, which showed a modest 4.4 per cent growth in net profit to $2.28 billion in the six months to June.
The profit growth was partly attributed to new accounting standards, which lifted earnings $39 million in the half and revised lower the profit in the previous corresponding period by $38 million.
In its domestic market, Hongkong Electric failed to benefit from the economic recovery as cooler weather saw electricity sales growth at 1 per cent. Revenues were barely changed at $5.36 billion from $5.32 billion previously.
And although profitability, which is regulated by the scheme of control agreement, continued its downward trend in the first half, many analysts believed recovery was on the cards.
'The regulated business is gradually recovering given a tariff increase at the beginning of this year and prospective increases in the next few years,' JP Morgan analyst Edmond Lee said. 'The worst is over.'
A positive sign is the $458 million balance of the development fund - a consumer-owned reserve collecting excess tariffs under the scheme of control aimed at buffering shortfalls in regulated earnings.
As a result of an average price rise of 6.5 per cent on January 1, the first half saw a notional transfer of $458 million into the fund, although the final amount is determined at the end of each year.
The scheme of control protects core earnings of Hongkong Electric and the other utility, CLP Holdings, by permitting them returns of up to 15 per cent on net fixed assets in use.
Hongkong Electric's spending on the assets was raised 55.57 per cent to $1.53 billion in the first half.
In Australia, electricity distribution units, ETSA Utilities in South Australia, Powercor Australia in Victoria, and CitiPower in Melbourne - 50-50 owned by Hongkong Electric and its parent Cheung Kong Infrastructure Holdings - combined to contribute a 36.7 per cent increase in net profit to $313 million.
However, some analysts feared that the prospective recovery at home would be blemished by looming tariff cuts in Australia.
They called this 'the biggest uncertainty' for the group in the near term.
In June, Victoria's electricity regulator proposed slashing tariffs of five electricity distributors in the state, presenting Powercor with a possible reduction in its revenues between next year and 2010 of 25.5 per cent; and CitiPower reductions of 22.3 per cent.
However, the proposal is undergoing a review, and Hongkong Electric said yesterday it expected a 'satisfactory outcome' from the process.
A decision is expected as soon as next month.
Earnings per share jumped 3.88 per cent to $1.07. Dividend was unchanged at 58 cents per share.
The company's share price yesterday closed flat at $36.75.