Why CLP and HK Electric will still be able to feed dividend-hungry investors after return cut
The power utilities reached an agreement with the government in which the cap on return will be cut to 8 per cent in 2019
The government said late last month that it had reached an agreement with the city’s two duopoly power utilities over the extension of the so-called “scheme of control [SoC]” regime, under which the cap on return on net fixed assets will be slashed to 8 per cent in 2019 from the current 9.99 per cent.
Although the change will result in a one-off profit drop in 2019, the companies are expected to see modest profit growth in subsequent years since their fixed assets will increase as they build more natural gas-fired generators to replace coal-fired ones to meet the government’s more stringent emission standards and environmental goals.
HK Electric, whose sole source of profit is its regulated utilities business in Hong Kong, would see profit drop just over 20 per cent in 2019, while CLP, which sources only 65 per cent of its profit from the business may see a smaller drop of 16 per cent in 2019, according to estimates by UBS head of Asian utilities research Simon Powell.
Analysts expect the duo to maintain their dividend yield – payout as a percentage of share price – at levels that will maintain investors’ interest.