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Denise Tsang

Power utility CLP Holdings is understood to have cut its capital expenditure (capex) by a quarter to HK$22.5 billion for the five years to 2004, in a move that could curb earnings growth.

In her latest report on the company, UBS Warburg analyst Alice Hui Suk-fong said she had 'discovered' recently that CLP's capex would be reduced from HK$30 billion - the maximum spending limit approved by the Government last year - as a result of lower replacement costs.

CLP, formerly known as China Light and Power Holdings, is the electricity supplier to consumers in Kowloon, the New Territories and Lantau Island. It earnings come from electricity supply pegged by the Scheme of Control (SoC) agreement.

The SoC permits power companies to earn profits at a 15 per cent maximum of assets, so the more the spending, the larger the potential earnings.

The Government uses the scheme to monitor power firms' financial affairs and protect consumer interests.

Last year, the Government approved CLP spending of up to HK$30 billion - between 1999 and 2004 - on power-related investment, including generation, transmission and distribution.

Ms Hui said the actual capex would be much lower as replacement costs for transmission and distribution facilities decreased.

A CLP spokesman said regulatory reasons meant the company could not comment on the amount of expenditure.

'Even though the Government has approved the capex, it is subject to a degree of uncertainty, depending on the actual performance of the economy,' she said.

'The capex was approved last May which was a nine-month delay. So, we do have to catch up the spending for that nine months.

'So far, the capex meets our target.'

The spokesman said there was strong sales growth in the first quarter of this year of 4.4 per cent.

'If we find there is stronger demand in future, we will increase our capex,' she said, declining to anticipate prospective sales growth.

Ms Hui's capex estimate is at the lower end of market expectations.

Merrill Lynch estimated the capex to be HK$27 billion, while Salomon Smith Barney said HK$25 billion. Lehman Brothers is more conservative at HK$30 billion.

Some analysts said it would be no surprise to see CLP spend less than budgeted - the question was how much lower.

In its previous financial plan, CLP spent HK$48 billion between 1992 and 1999, below the approved ceiling of HK$60 billion, analysts said.

The lower-than-expected capex was due to the shift of manufacturing industries across the border over the period.

As a result of the present capex estimate, Ms Hui has downgraded CLP's SoC earnings growth by 3 per cent to 4 per cent from this year to 2004.

'In the light of the lower-than-expected SoC and non-SoC earnings growth, we have cut our 2001 profit estimate by 7.8 per cent from HK$7.47 billion to HK$6.88 billion [including a HK$1.11 billion contribution from property project Laguna Verde],' Ms Hui said.

Excluding non-recurring items such as the provision and profit from Laguna Verde last year, Ms Hui expected CLP's net profit to rise 1.9 per cent this year.



CLP capex cut could curb earnings