Power Assets Holdings Ltd (SEHK:0006) is one of the largest investor in power and utility-related businesses. The company has a global portfolio of utility assets from United Kingdom, Australia, New Zealand, China, Netherlands, Canada, Thailand, and Portugal.
Power Assets Holdings is majority owned (38.87%) by CK Hutchison Holdings Limited, linked to none other than the billionaire, Li Ka-Shing. It is listed on the Hong Kong Stock Exchange.
TICKER SYMBOL: SEHK:0006
MARKET CAP: HK$ 168 Billion (Updated 20 April 2016)
MARKET PRICE / SHARE: HK$ 78.50 (Updated 20 April 2016)
THE BUSINESS: Power Assets Holdings
Power Assets used to be the main power generation operator in Hong Kong through its subsidiary, Hongkong Electric Company. Hongkong Electric Company has been operating in Hong Kong for more than 125 years. It operates the entire value chain of power generation for Hong Kong, from generation, transmission to distribution. The company has a total capacity of about 3,737 MW and served more than 572,000 customers.
However, in recent years, Power Assets has grown from a Hong Kong electricity supplier to a global player with investments in energy transmission and distribution across four continents. And this was demonstrated in their recently pared down stake in Hongkong Electric Company to an investment holding company wholly owned by Qatar Investment Authority for over HK$7.6 billion. At the end of FY2015, Power Assets only had a 33.37% stake in the company.
Today, Power Assets Holdings can be seen more as an investment holding company, with significant stakes in some of the world’s major utilities corporations.
Here are some details of their key assets in the United Kingdom and Australia:
• UK Power Networks – 40%
UK Power Networks owns and manages 3 out of the 14 regulated electricity distribution networks in the UK. Combined with other private networks managed, the company has a total of about 187,300km of network length and services more than 8.2 million customers.
• Northern Gas Networks – 41.29%
Northern Gas runs one of the 8 regulated gas distributed networks in the UK. The company transports about 13% of the UK’s gas, serving about 2.7 million customers.
• Wales & West Utilities – 30%
The company distributes gas to about 2.5 million customers in Wales and South West England.
• Seabank Power – 25%
Seabank Power is a power generation company with two power plant. In total, the company has an installed power of 1,134MW.
• Australia Gas Networks – 27.5%
A leading gas distributor in Australia, the company owns about 24,600km of pipeline, serving about 1.2 million customers.
• SA Power Networks – 27.93%
SA Power Networks is South Australia’s only electricity distributor, serving about 852,000 customers.
• Victoria Power Networks – 27.93%
The company serves about 1 million customers through its electricity distribution networks in the state of Victoria.
• Transmission General Holdings Australia – 50%
It is a small transmission company connection a wind farm in Victoria to the main electricity grid.
KEY STATISTICS (FY2015)
Net Revenue: HK1.3 Billion
Net Income: HK$7.7 Billion
Total Assets: HK$135.36 Billion
Earnings per Share: HK$3.62
Dividend per Share: HK$ 2.70
Net Income Margin: NA%
1. Cash, Cash, Cash
After disposing of its majority stake in Hongkong Electric Company, Power Assets Holdings is now sitting on more than HK$68 billion in cash and just HK$9.4 billion of debt. The company has no limitation on where is can make its investments. Therefore, the company has the flexibility to reinvest these cash into higher return projects globally.
Interestingly, over 94% of their FY2015 top line revenue of HK$1.3billion was generated from interest income! Generally speaking, that is the interest earned from their cash from their Cash and Equivalents held in their bank accounts.
Additionally, in Power Assets Ltd Annual Report 2015’s Chairman’s Statement it was stated, “If no sizable investments is expected by the upcoming Annual General Meeting, a Board meeting would be convened to decide on the payment of a special dividend“. That might be something that existing shareholders might be looking our for!
2. Demand for energy
Demand for energy is still growing. It is expected that electricity demand would rise more than 66% from 2011 to 2035. Moreover, this growth might be even stronger in developing nations. With a strong balance sheet, Power Assets has the luxury to find the best possible investment out there for shareholders.
And this also includes development in renewable energy. In 2015, Power Assets acquired Iberwind, a major wind energy developer in Portugal adding to the Group’s wind energy portfolio in China.
3. Low operating Expenses
Now that it has sold off its majority investment in Hongkong Electric, the company has very low operating expenses.
There is no significant cash flow needs for its operation and its business model of taking minority investments in multiple assets is highly scalable.
1.No Operating Business
That being said, since the company no longer has any operating business, its financial statements have a lower degree of information from an investor’s point of view.
Why so? Essentially, we are not able to easily ascertain the operating and balance sheet strength of its investments. As investors, we are reliant on what management disclosure policy.
As Warren Buffett said “Risk comes from not knowing what you are doing” and with less clarity in the business, it might be ‘riskier’ from that perspective.
2. Related Party Transactions
The major shareholder of Power Assets has the plan to merge their two listed units; Cheung Kong Infrastructure Holdings and Power Assets Holdings.
Although the plan has been rejected by minority shareholders (given that both companies are in the same industry with similar shareholders), shareholders might have to pay more attention to related party transactions.
Sidenote: By itself, Related party transactions are not negative. On the contrary, if related party transactions are done well, they are actually very much beneficial to the companies.
3. Hong Kong’s Future Attractiveness
With Power Assets’ recent sale of a 16.53% stake in Hongkong Electric Company for over HK$7.6 billion, what does this say for the future of the Hong Kong Utilities business (Almost all of HK Electric Investments and HK Electric Investments Limited’s revenue came from Hong Kong)?
Coincidently, it was reported that Li Ka Shing had been trimming his property portfolio in China over the last few years. I guess we all know that Li Ka Shing – one of the most savvy businessman around has a reputation for always coming out better for most of his deals!
1. Cheung Kong Infrastructure
2. CLP Holdings
3. HK Electric Investments
Investor Relations Department: email@example.com
Telephone (852) 2122 9122
Facsimile (852) 2180 9708
Postal Address G.P.O. Box 338, Hong Kong
Address Rooms 1913-1914
19/F, Hutchison House
10 Harcourt Road
TOP SHAREHOLDERS DIRECT INTEREST (31 March 2016)
1. CK Hutchison Holdings Limited – 38.87%
2. Capital Research and Management Company – 7.95%
3. Vontobel Asset Management – 2.78%
Morningstar – Income Statement
Morningstar – Balance Sheet
Submit your email address for important market updates and FREE case studies! We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Value Invest Asia capacity and do not in any way represent those of our employers and other related entities.