Cheung Kong

Cheung Kong Infrastructure faces tough sell in plan to spin-off some assets in London listing

  • Plan to spin-off some assets in London listing may be a hard sell as utility rates face upcoming reset, analysts say
PUBLISHED : Wednesday, 21 November, 2018, 5:15pm
UPDATED : Wednesday, 21 November, 2018, 10:48pm

Cheung Kong Infrastructure Holdings faces an uphill battle in its drive to sell stakes in some European infrastructure assets through a spin-off to be listed in London, according to analysts.

CKI announced its intention in a filing on Tuesday, saying it is considering a proposal to sell minority stakes in its large portfolio of European assets to a new investment company that would be listed on the London Stock Exchange.

“The new investment company is intended to provide investors in the London market with the opportunity to invest in such infrastructure assets and, going forward, other third party infrastructure assets,” CKI said in the filing.

The asset spin-off and stock flotation proposal could provide CKI chairman Victor Li Tzar-kuoi the war chest to pursue future acquisitions, even as attitudes globally have become more protectionist towards the ambitions of Chinese firms.

Analysts said the partial listing would help the company pick up assets when global conditions change.

“An attempt at a partial listing of some UK assets is a great way to de-risk CKI’s portfolio given the political and regulatory headwinds, and it is a great way to raise cash to buy other infrastructure assets at a time when competition for such assets diminishes,” said UBS head of Asian utilities research Simon Powell.

Powell cautioned that the proposed listing comes a difficult period amid ongoing negotiations over Brexit and other issues.

“The IPO market in the UK is quite challenging, given the bankers will need to write a prospectus highlighting the risks of nationalisation of certain infrastructure industries and the UK’s impending exit from the European Union … besides the challenge of listing a dividend yield-based investment idea amid rising US interest rates,” he said.

Another concern is a pledge by one Labour Party politician to consider nationalising important infrastructure, which in some instance may be carried out by decree without full compensation paid to current owners.

Industries that may be affected if Labour were to come to power in the next election include railway, water, energy and post services.

Prime Minister Theresa May has vowed to stay on until the next election in 2022, but her leadership has been threatened by talks of an imminent leadership challenge and persistent opposition within her Conservative Party over her approach in delivering the UK’s exit from the European Union, adding to the risk of an earlier general election.

Daiwa Capital Markets’ head of utilities and renewables research Dennis Ip said while government nationalisation of industries is easier said than done, CKI will unlikely be able to get away from the government’s push to lower the return rates enjoyed by utilities.

“Re-nationalisation would be difficult to implement given the cost, legal implications and subsequent service quality concerns,” Hong Kong-based Ip wrote in a note. “On the other hand, the coming return resets are unlikely to favour operators, and CKI could face less political resistance by listing its regulated assets in the UK [and selling stakes to local investors].”

Ip noted that revenue caps and performance targets on regulated assets, including water, gas and electricity, are due to be renegotiated from the second quarter of 2020 and continue through the second quarter of 2023. CKI will generate 57 per cent of its earnings from the UK this year, according to Daiwa estimates.

For owners of CKI’s Hong Kong-listed shares he said there may not be much upside, if any, from the potential spin-off, since the IPO valuation is likely to be lower than the 14 to 15 times earnings multiples fetched by its UK peers. CKI enjoys a multiple of 12 times projected 2019 earnings.

On Tuesday, Australian lawmakers formally rejected the A$13 billion (US$9.5 billion) takeover bid by CKI for APA Group, the country’s biggest gas pipeline company. Canberra officials citied an undue concentration of foreign ownership by a single group among its concerns in blocking the deal. CKI had promised to sell some of APA’s assets if the takeover was permitted to go ahead.

In 2016, Canberra blocked a bid for its Ausgrid electricity network from CKI and a mainland Chinese state firm on national security concerns.

CKI shares closed Wednesday trade in Hong Kong up 0.5 per cent at HK$57.80, as the Hang Seng Index also rose 0.5 per cent.