Hong Kong utilities’ “going out” mirrors the city’s transition since 1997
Backed by steady returns from their local businesses, Hong Kong utility companies have seen overseas ventures yield results in the past two decades
As much as the defensive counters and perceived safe bets that they are, Hong Kong’s listed utilities have shown that venturing beyond familiar territory has paid off.
Over the past two decades, the city’s gas and power utility firms have grown from being primarily local businesses into multi-markets majors, in tandem with Hong Kong’s transition from being the gateway for foreign firms to enter China into a centre channelling Chinese investments towards overseas projects.
Hong Kong and China Gas (Towngas), established in 1862 and one of the oldest utilities in the world, has made big strides in the mainland China market, while electricity suppliers CLP Holdings and Power Assets Holdings have spread their wings in various overseas markets through acquisitions.
City gas distributor Towngas last year derived around 60 per cent of its utilities revenue and profit from mainland China, where it had 131 natural gas distribution projects and sold 17 billion cubic metres in 23 provinces and administrative regions last year.
This compares to the mere three projects across the border in 1997, with a recorded gas sales of only 2.9 million cubic metres.
Similarly, Power Assets, whose local unit Hongkong Electric is the sole power supplier on Hong Kong island and Lamma island, had set up a consultancy and engineering services unit to serve electricity sector clients worldwide as early as 1975.
Power Assets completed its first major overseas acquisition in late 1999, expanding into Australia’s power distribution industry.
Last year, it earned 80 per cent of its profit from outside the city – mainly from the United Kingdom, Australia and mainland China, after it sold a two-third stake of the Hong Kong unit in recent years.
It now holds significant to major stakes in various natural gas and electricity distribution networks, as well as some power generation operations in the UK.
“If you look at the [major] infrastructure companies in Hong Kong, they have all expanded around the world, whether it is power generation, transportation or port operations,” CLP CEO Richard Lancaster told the South China Morning Post in an interview. Lancaster has been based in Hong Kong working for CLP for the past 25 years.
“Hong Kong is a fantastic hub for doing business ... within five hours from Hong Kong one can access almost half the world’s population,” said the Australian industry veteran who was recruited by CLP when he was working in Britain.
CLP was the first among the three utilities to have a significant business exposure in mainland China.
The sole electricity supplier in Kowloon, Lantau Island and New Territories started selling power across the border as early as 1979. Its 25 per cent-owned Daya Bay nuclear power station in Shenzhen began contributing profit when it came on stream in 1994.
The bulk of CLP’s expansion outside Hong Kong took place in the past two decades, during which it built a large portfolio of coal-fired, hydro and renewable power plants in mainland China and became the largest foreign power sector investor there.
In the early 2000s, it entered by acquisitions, the Australian and Indian markets, where it enjoyed years of decent profits before suffering some years of losses and low profits a decade later, due to the oversupply Down Under and high gas prices and coal shortages in India.
In Australia, power demand fell on the back of a rise in subsidised home solar panel installations and outsourcing of manufacturing activities after the Australian dollar surged against other foreign currencies.
The unexpected consumption decline was met with rising power generation capacity, as power plants were built based on outdated forecasts.
CLP was forced in 2014 to book a non-cash accounting asset impairment and other charges of HK$3.11 billion to reflect the expected impact of a tough operating environment in the years ahead.
“In Australia, our focus now is getting the business to return the value we would like to see ... and transform the business to a more efficient and cost effective footing,” Lancaster said.
“There is still quite a lot of work to be done.”
In India, coal supply growth could not match surging power and coal demand growth in 2012 and 2013, resulting in low plant utilisation and the need for CLP to make an accounting write-down on its plant there.
Gas shortage also meant its gas-fired power plant suffered from low utilisation in 2013 and 2014.
Even so, the company has invested substantially in renewable energy projects in both Australia and India, and is one of the biggest investors in the business in India.
Asked if the company would grow its overseas presence by buying more assets, Lancaster said acquisition “is not a priority” for the firm, which considers greenfield projects development to be its strength.
To be sure, CLP has been conducting feasibility studies to build a major coal-fired plant in India adjacent to its operating natural gas-fired plant, and is in talks on project financing and power sales agreements on a major proposed coal-fired project in Ho Chi Minh, Vietnam.
CLP is not alone in facing operational challenges and currency risks after expanding overseas.
Power Assets, which sourced 69 per cent of its profit from the United Kingdom, also took a hit on its profits from a sharp drop in the value of the pound after the nation’s people voted in a referendum in favour of exiting from the European Union.
The weaker currency, together with lower UK tax credits were blamed for the less than expected 17 per cent decline in profit last year.
Still, Power Assets’ UK investments are mainly power, natural gas and water businesses that are protected by regulated inflation-adjusted returns, and hence are more immune to an economic slowdown.
“We expect the impact on Power Assets to be purely on its profit and loss accounts on [the translation of the weaker pound to Hong Kong dollar],” said Dennis Ip, head of utilities and renewables research at Daiwa Capital Markets in a report, adding that its profit this year could fall by 6.5 per cent for every 10 per cent devaluation of the pound against the dollar.
Even Towngas, which was widely recognised for its expertise in gas clients servicing in Hong Kong, did not have a smooth sail when it ventured across the border to develop city-gas distribution businesses with partners over two decades ago.
“It was not easy to work with state-owned enterprises,” its managing director Alfred Chan Wing-kin told the Post last year in an interview.
“For example, you cannot fire people even if you think they are inefficient or incompetent. We can only gradually change their culture and mindset by sending a few Hong Kong staff to work with them and organise training sessions for their staff in Hong Kong.”
Towngas’ mainland Chinese customers have risen to over 23 million this year, compared to around 13,000 in 1997.
Looking back, Lancaster said the stability of natural resource-poor Hong Kong’s electricity regulatory framework had been “a cornerstone of its strength,” even though it has been criticised for failing to introduce competition that allowed the two operators to make excessive returns.
To counter, he cited Australia as an example of the downside of a competitive energy market that has experienced “regulatory turmoil” in recent years.
“Australia is blessed with abundant energy resources, but it has seen steep rises in electricity prices and less than reliable supply in some places,” he said.
“In Hong Kong, we can bring about change and innovation into the electricity system, and can still benefit from stability in our regulatory framework.”
To that end, CLP and Hongkong Electric are under obligations to introduce incentives for consumers to save energy and cut usage in peak consumption periods, which will help reduce the need to build more power plants and contain tariff hike pressure as the city uses more natural gas to replace cheaper but more pollution-prone coal.