Source:
https://scmp.com/business/money/markets-investing/article/3026212/even-protesters-use-services-protest-resistant
Money/ Markets & Investing

Even protesters use the services of ‘protest-resistant’ utilities stocks, making them a defensive investment option, analysts say

  • Just about everyone showers, uses electricity and goes on the internet – even protesters
  • Utilities tend to be big dividend payers and immune to trade war, adding to their attractiveness
Veterinarians in Central on August 30 draw attention to the suffering caused to pets by the use of tear gas on protesters. Their mobile phones – used to shine a light to express solidarity – were in all likelihood juiced up via electricity providers CLP Holdings or Hong Kong Electric. Photo: Winson Wong

Fewer mainland tourists may come to Hong Kong to buy Chow Tai Fook’s 24-carat lucky piggy bracelets or Gucci handbags. Locals may stay home from dim sum restaurants, swanky malls and flat sales. But one thing is for sure: nearly all of us in this magnificent city reeling from months of demonstrations will shower, scan the internet and use electricity – including protesters.

That explains why analysts are talking about Hong Kong-listed utilities as “protest-resistant” stocks.

Some stocks have been hammered by the protests, including those of real estate companies, luxury retailers, subway operator MTR and Cathay Pacific.

But utilities – in particular, water supplier Guangdong Investment and broadband and telephone service provider HKT Trust and HKT – have held up comparatively well, and are expected to continue to do so regardless of how long the protests go on.

Hong Kong utilities and telecoms firms, either protected by regulated returns contracts or oligopolistic positions, are relatively safe from protest-related disruptions since demand and pricing of their essential services are quite stable.

They also are nearly immune to the US-China trade war and are big dividend payers.

“Telecommunications, internet services, utilities, gas and water are industries that are little affected by the protests,” said Francis Lun Sheung-nim, managing director at Lyncean Securities. “They are safer alternatives to banking, retail, property and consumer stocks.”

Notably, some of these very stocks are connected to the city’s super wealthy developers whose cosy ties with politicians in Hong Kong and Beijing have become a flashpoint in the protests, which have expanded from an unpopular extradition bill to social ills such as the lack of affordable housing.

Hong Kong and China Gas (Towngas), for example, is a unit of billionaire Lee Shau-kee’s Henderson Land. Power Assets is an international energy utility unit controlled-by tycoon Li Ka-shing’s conglomerate CK Hutchison.

Three of Hong Kong’s four mobile phone network operators are also subsidiaries of developers: Hutchison Telecommunications is a unit of CK Hutchison, chaired by Victor Li, while HKT is a unit of PCCW, chaired by his younger brother Richard Li Tzar-kai. Meanwhile, SmarTone Mobile Communications is owned by Sun Hung Kai Properties.

A quick look back at how the protests have unfolded is useful in understanding what is happening to the city’s stocks.

The protests began on June 9 with a massive peaceful demonstration and an inspiring sea of umbrellas. Hong Kong stocks pretty much chugged along, mostly weighed down by the trade war.

But then the protests took a violent turn, taking selective sectors and companies down with them. The face of the movement often became youths in yellow hard hats and gas masks, sometimes hurling petrol bombs and setting fires in their clashes with riot police.

On July 14 in the northern district of Sha Tin, surreal battles between protesters and pepper-spraying police took place in a shopping centre. Already, retail had been hurting. Late on July 21, also a Sunday, a mob of men in white T-shirts attacked protesters and passengers at the Yuen Long MTR station. Then, on August 13-14, protesters targeted the city’s international airport, leading to cancelled flights and shocking scenes of violence.

Suddenly, beginning about in the middle of July, the toll on business due to the protests became a major worry among investors, sending shares in the ensuring weeks of MTR, Cathay, Chow Tai Fook, cosmetics retailer Sa Sa, Harbour City mall owner Wharf Real Estate and others tumbling.

The Hang Seng Index as well began a slide, even though China-based companies – largely not impacted by the protests – account for more than 40 per cent of the weighting of the benchmark, meaning they provide a big cushion. Nevertheless, it is down 7.2 per cent since the Yuen Long MTR attacks.

By comparison, since the Yuen Long MTR attacks, Guangdong Investment is down 2.8 per cent and HK Trust is up 0.9 per cent.

CLP Holdings and Hong Kong Electric, Power Assets Holdings (Hong Kong Electric) and Hong Kong and China Gas (Towngas) have had significant tumbles since Yuen Long (down 7.8 per cent; down 10.4 per cent, and down 13 per cent, respectively). But other factors weighed on them, including weaker than expected interim results in Towngas’ case, and currency weakness in key overseas markets in the cases of Power Assets and CLP.

Share prices of Guangdong Investment and Power Assets Holdings, HKT Trust & HKT, CLP Holdings and Hong Kong Electric are expected to rise over the coming 12 months, according to analysts tracked by Bloomberg. Power Assets has the biggest potential upside – 18 per cent – they say. And these stocks also provide dividends.

“Hong Kong utilities, with either fixed returns or fixed contracts, are immune to political disruption,” Daiwa Capital Markets analysts Dennis Ip and Tony Wu wrote in a note late last month.

“We upgrade [them] from neutral to positive, as the political disruption in Hong Kong has drawn more fund-flow interest from other dividend-driven sub-sectors such as real estate investment trusts, amid a slump in local retail sales and inbound tourism.”

These trusts are typically backed by steady income generating assets like shopping arcades, offices and hotels.

Under 15-year agreements with the government, CLP Holdings is the sole power supplier in Kowloon, New Territories and Lantau Island, while Hong Kong Electric – a unit of Power Assets – is the only provider in Hong Kong and Lamma Islands. They both enjoy guaranteed 8 per cent return on fixed assets regardless of sales volume, but price hikes and infrastructure investments are subject to government vetting.

An oddball in the utilities crowd is Hong Kong and China Gas (Towngas), the sole supplier of piped gas to households and businesses by default.

Towngas was downgraded by analysts after it posted a weaker than expected interim profit last month.

Daiwa’s analysts cut Towngas’ rating from “outperform” to “hold” after the disappointing results, blaming its difficult 2019 on “weak mainland utilities and new energy earnings”.

Another potential interest rate cut by the US Federal Reserve this month will also bolster the attractiveness of high dividend-paying stocks like utilities, Daiwa’s analysts said.

Their top picks in the utilities universe are Guangdong Investment and Power Assets Holdings.

“We continue to view (Guangdong Investment) as our preferred pick as an inflation-hedge defensive play,” they said. “Power Assets has the highest 5.2 per cent dividend yield versus peers’ 2 to 4 per cent.”

Guangdong Investment is Hong Kong’s main fresh water supplier, sending it from the Dongjiang River in southern Guangdong province.

It booked HK$2.62 billion of revenue from water distribution to Hong Kong in the year’s first half, making up 36.6 per cent of its total.

The bulk of its other revenue came from long-term regulated businesses, including water supply and waste water treatment in mainland cities, property and hotel management, power generation and tollways and bridges investment.

Power Assets derived HK$237 million of net profit from Hong Kong – via a 33.4 per cent stake in HK Electric Investments – in the year’s first half, or 6.3 per cent of a total of HK$3.8 billion. The rest mainly came from energy utilities in Britain and Australia.

Peer CLP Holdings, Hong Kong’s biggest power supplier and a major player in India, Australia and China, was upgraded by Citi’s head of Asia utilities research Pierre Lau to “buy” from “neutral” last month.

Lau cited an expected rate cut in the US, and an expected rebound in earnings from Australia after a sharp fall in the year’s first-half.

Meanwhile, investors may want to consider putting some of their eggs in the telecommunications basket. The sector’s demand is also relatively steady although price competition is fiercer than in the power industry due to more rivals and rapid technological advancement.

DBS Group’s analysts recommend buying HKT Trust & HKT – the incumbent player in the fixed line market and the largest mobile operator – touting its about 6 per cent dividend yield and potential upside from tariff hikes in the mobile and residential broadband markets.

The firm last September raised prices of mobile plans for the first time in three years, which analysts said would help end a price war in the four-player market.

While there is no way to know when the protests will end, analysts say investors may want to consider adding to their portfolios stocks of companies that everyone depends on.

Additional reporting by Deb Price