Hong Kong Electric spin-off sets lure on returns
Power Assets' proposed stake sale and separate listing of utility will be done through trust firm that will offer first-year return of up to 7.3pc
Power Assets, an international utilities firm controlled by Asia's richest man, Li Ka-shing, plans to spin off its Hong Kong electricity unit at a valuation of HK$48 billion to HK$63.4 billion via the establishment of a trust firm that will offer potential investors a 5.5 per cent to 7.3 per cent annual return in the first year.
The proposed stake sale and separate listing of Hong Kong Electric, one of the world's oldest power utilities and the sole electricity supplier to Hong Kong and Lamma islands, is expected to be completed as early as January 29, according to a circular to shareholders issued yesterday.
Analysts said the deal could offer would-be investors in the trust firm relatively stable returns similar to those offered by investment trusts backed by properties spun off from listed property firms in recent years. Power Assets could use the proceeds to buy overseas assets that potentially offered higher returns but carried greater risks, they said.
"Given Hong Kong power utilities are limited to earn annual returns of not more than 9.9 per cent on their assets, compared to up to 15 per cent of internal rate of returns on overseas projects and assets, the spin-off would allow Power Assets to seek other opportunities," said Kenny Tang Sing-hing, a general manager at AMTD Financial Planning.
He noted the 5.5 per cent to 7.3 per cent first-year indicative return from the trust was higher than the typical 4 per cent to 5 per cent annual dividend yield of power utilities in Hong Kong. "It is not unusual for investment trust deals to be structured to offer higher returns in the initial years," he said.
Power Assets proposed to sell 50.1 per cent to 70 per cent of wholly owned Hong Kong Electric to the trust's investors, leaving it with 30 per cent to 49.9 per cent.
Power Assets said it expected to receive at least HK$52.6 billion from the proposed spin-off. Some HK$20.9 billion would settle debt owed by Hong Kong Electric to it, while the remaining amount of at least HK$31.7 billion would give it "the financial strength to seek acquisitions in the global power sector," it said.
Li has been seeking this year to sell off some Hong Kong assets with relatively lower but stable returns, such as Hong Kong Electric, his flagship Hutchison Whampoa's supermarket chain ParknShop and health goods retailer AS Watson. He dismissed talk he is cashing out of the city, saying such possible transactions were simply good business. Hutchison withdrew the plan to sell ParknShop after the offers fell short of expectations.
Power Assets estimated that Hong Kong Electric's net profit for this year would be at least HK$5.18 billion, compared with HK$4.62 billion in 2010, HK$4.5 billion in 2011 and HK$4.54 billion last year.
The forecast net profit of the trust firm attributable to the trust's unit holders for next year is HK$2.77 billion. Power Assets attributed the expected profit decline to higher interest, depreciation and amortisation charges, adding that such charges would continue to impact the trust firm's profits and profit margins. Interest will be incurred on a HK$8.7 billion loan that will fund the purchase of the Hong Kong Electric stake, besides funds raised from would-be investors in the trust firm. Power Assets said it planned to maintain at least the same amount of dividend payouts this year and next year as with last year, after the spin-off. It also expects to be able to book a gain on asset disposal of at least HK$53 billion from the spin-off.
The deal is subject to the offer price being agreed among the joint global co-ordinators and the trust's manager, as well as approval by Power Assets' shareholders. It will only go ahead of Hong Kong Electric is valued at a minimum of HK$48 billion. Not less than 10 per cent of the trust's units will be offered to Power Assets shareholders.