Liquid Asset: Time To Buy This Hong Kong Water Play? By Robert Guy
As Hong Kong sweats through another hot and humid day, it shouldn’t come as a surprise that piping water to its 7 million inhabitants is probably not that bad a business.
Daiwa is out this morning with an initiation report on Guangdong Investment (270.HK), the operator of the Dongshen Water Supply Project which is responsible for the supply of water to Hong Kong, as well as Shenzhen and Dongguan across the border in southern China. The broker rates the stock an outperform with a
HKD12.80 share price target, implying around 7% upside.
While the upside won’t get speculators’ blood pumping, for longer term investors looking for a defensive stock it could make sense to add to the portfolio. Here’s why Daiwa likes the stock in a nutshell;
Some 60% of GDI’s 2015 PBT came from its Dongshen Water Supply project, for which GDI stands to receive a predetermined amount of revenue (in HKD) from the HKSAR Government over 2015-17E. Thus, we think GDI is less vulnerable to the impact of China’s slowing economy, and CNY depreciation risks, compared to its peers in the China water sector. GDI also owns other defensive businesses such as sewage treatment and road projects in China.
Although there is a risk that GDI’s revenue could be reduced if the HKSAR Government were to renegotiate the lump-sum payment amount for the next contract period (2018-20E) with the Guangdong Government, we believe the likelihood of a price cut is low, given the HKSAR Government has an incentive to maintain a stable water supply given the fierce competition for water from other Guangdong cities. The threat of a more expensive substitute supply of water on the back of the development of desalination technology is not a near-term problem, in our view.
The broker also likes that 43% of revenues are in Hong Kong dollars – which are pegged to the U.S. dollar – and 95% of costs are in Chinese yuan. This provides a favorable natural hedge against yuan depreciation.
Guangdong Investments’ share price performance has been spectacular: the stock is up 184% over the past five years compared to the Hang Seng Index which is flat over the same period. However, the stock, which offers a yield of over 3%, doesn’t come cheap. Nevertheless, Daiwa says the stock’s valuation is not “overly demanding”;
The stock is trading currently at a 12-month forward PER of 15.7x, meaning its valuation has still not reached the previous peak of 17.1x in May 2015, even with its acquisitions in late-2015, or the value-adding Private-Public-Partnership (PPP) road project obtained in June 2016 (10% IRR expected by management), which should add 6% extra revenue to GDI for 10 years starting from 2017E.
As we forecast an EPS CAGR of 8% for 2015-17E, and given the market’s expectation of further CNY depreciation, GDI’s premium over the other China utility stocks is likely to be sustained in the near term.
Barron’s Asia’s Isabella Zhong wrote positively about the stock in mid-May, highlighting it as a good defensive pick for Hong Kong investors worried about the threat of recession. The stock has rallied 12% since.
Source: Barron's Asia
http://blogs.barrons.com/asiastocks/201 ... ater-play/
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