Hong Kong Electric spin-off sets lure on returns

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.