HK Electric Investments (Stock Code: 2638.hk) IPO: First Fixed Single Business Trust

Asia's top influential business tycoon and billionaire Li Ka-Shing continues to sell his assets recently. His Power Assets Holdings (PAH Stock Code: 006.hk) will soon spin off its Hong Kong utility business operation into HK Electric Investments (HKEI Stock Code: 2638.hk) on January 29, 2014. HK Electric Investments will become the first government-regulated utility business in Hong Kong to be listed as a fixed single business investment trust, which allows Power Assets Holdings Limited (PAH) to retain control over HK Electric Investments (HKEI) through Trustee Manager even it will hold less than 50% of its total share stapled units after this IPO (initial public offering) listing.

HK Electric Investments (HKEI), headquartered in China HKSAR (Hong Kong Special Administration Region) since 1890 and previously known as HongKong Electric, is now the sole government-licensed electricity generator, transmitter and distributor for around 568K customers registered on Hong Kong Island and H.K.-Lamma Island. HKEI is basically a regulated utility, and its tariffs as well as earning level are now regulated by HKSAR government.

This HK Electric Investments (HKEI Stock Code: 2638.hk) IPO will offer 4.43 billion of share stapled units (depending on over-allocation option) with an indicative price range from HKD$5.45 (minimum IPO target offering price) to HKD$6.30 (maximum IPO target offering price), that may possibly make it the largest IPO in Hong Kong since the huge AIA Group (AIA Stock Code: 1299.hk) IPO deal in year 2010.

Upon this IPO listing, Power Assets Holdings (PAH Stock Code: 006.hk) will still hold 30% to 49.9% of the total HKEI business investment trusts. PRC Government-owned SGID from State Grid Corp of China already agreed to subscribe 18% of total share stapled units and will thus become the second largest shareholder. IPO joint global coordinators or joint bookrunners are Goldman Sachs (Asia) LLC as well as H.K. and Shanghai Banking Corporation (HSBC). Goldman Sachs (Asia) LLC is also the stabilizing manger for this IPO.

Dividend policy of HK Electric Investments (HKEI Stock Code: 2638.hk): Trustee Manger can distribute 100% of net dividends or distributions on behalf of HK Electric Investments (HKEI) Ltd. With this level of trust distributable income, the management team expects to generate a 6.26% to 7.237% annualized distribution yield for investors in 2014.

Main Risk factors for HK Electric Investments (HKEI) are:

(1) Under the existing Scheme of Control (SoC) agreement, HKSAR government Executive Council generously guarantees HK Electric Investments (HKEI) a permitted return for each financial year equivalent to:

(a) 9.99% of the total value of its annual Average Net Fixed Assets (ANFA) excluding those attributable to its annual Average Renewables Net Fixed Assets (ARNFA); and
(b) 11% of the total value of its annual Average Renewables Net Fixed Assets (ARNFA).

However, the above-stated generous Scheme of Control (SoC) agreement that gives HKEI an almost risk-free 10% guaranteed annual return depending mainly on its capital expenditure level will end by December 31, 2018, and a less-generous Scheme of Control (SoC) renewal is expected afterwards.

(2) HKSAR Environmental Protection Department (EPD) may change its Air Pollution Control Ordinance (APCO) or Fuel Mix Policy (FMP) over time;

(3) International market prices of coal, ultra sulphur diesel oil or natural gas may surge suddenly.

So do we, Mr China, think that HK Electric Investments (HKEI Stock Code: 2638.hk) is attractive for investors? Although its IPO offering price is already confirmed to set at HKD$5.45 per share stapled unit, which is the minimum target offering price level, the future growth of HKEI is uncertain and limited by Scheme of Control (SoC) agreement with HKSAR. From our above initial analysis, the best time for HKEI will soon be over upon expiration of existing Scheme of Control (SoC) agreement by 2018 and its guaranteed annual return will likely be less than 9.99% afterwards. Additionally, from PAH (Power Assets Holdings) annual financial statements, electricity sales by HongKong Electric have achieved almost zero growth during recent years. That may be why Li Ka-Shing needs to sell this asset through IPO as current valuation is still high enough at this time for him to take good profits.

Don't forget Li Ka-Shing has also sold or at least planned to sell other his businesses such as Watsons retail chain stores, ParknShop supermarkets, Shanghai Lujiazui property venture, Nanjing International Finance Center (IFC) etc recently through various selling or spin-off channels.

And we, Mr China, also think Li Ka-Shing is clever on this HKEI selling time because he now sells HK Electric Investments (HKEI Stock Code: 2638.hk) right before the interest rate hiking cycle. It is generally expected that U.S. Federal Reserve will likely raise interest rate in a year or two, and H.K. Monetary Authority (HKMA) will just follow as H.K. dollar (HKD) is basically pegged with U.S. dollar (USD). Valuation of all utility-related businesses, including HKEI, will definitely drop and such 'high-yield' stocks will become less attractive as interest rate hikes. So if you think you are more clever than Li Ka-Shing and you are interested in buying HKEI now, you can buy but we are afraid we are not.

If you do want to buy related utility business, why you do not consider to buy its mother company Power Assets Holdings (PAH Stock Code: 006.hk) instead, as PAH will use funds from HKEI IPO proceeds for its overseas power business expansions or future acquisitions.


Remark:

What is a fixed single business investment trust?

By definition, company under fixed single business investment trust may only perform investments with certain restrictions, e.g..: may invest only in securities (or any other interests) in one single entity, and also it will confer on registered trust-unit holders a beneficial interest just in specifically-identifiable property that held by the company.

Cornerstone investors of HK Electric Investments (HKEI Stock Code: 2638.hk) IPO are: PRC Government-owned SGID from State Grid Corp of China (SGCC) and OIF sovereign wealth fund from Oman Government etc. HK Electric Investments (HKEI Stock Code: 2638.hk) IPO Prospectus: Source from Hong Kong Stock Exchange (HKEx with Stock Code 388.hk).