Citigroup: Downgrades the target price of POWER ASSETS (00006) to HKD 66.5, as management guidance indicates a cooling expectation for special dividends.

Citi's research report indicates that POWER ASSETS (00006) delivered strong earnings in the first half of the year, benefiting from sales proceeds; however, the management's guidance on the distribution of special dividends was more conservative than market expectations, prompting the bank to lower its target price. Considering factors such as adjusted return rates, increased interest income, and the weakening catalyst for special dividends, Citi raised its earnings forecasts for POWER ASSETS for 2026 to 2028 by 7% to 11%, but due to a cooling expectation for special dividends, adjusted the weighted average cost of capital, lowering the target price from HKD 70 to HKD 66.5, while maintaining a "buy" rating, optimistic about the potential upward space from mergers and acquisitions and a 4.9% dividend yield. The report noted that POWER ASSETS recorded a significant year-on-year increase of 383% in net profit for the first half to HKD 14.704 billion, which includes approximately HKD 11.686 billion in proceeds from the sale of assets such as UKPN and UK Rails. Excluding these items and the core profit contributions from UKPN, the core profit from existing assets grew by 24% year-on-year to HKD 2.228 billion, mainly benefiting from the rising return rates of regulated utility assets in the UK and Australia, as well as increased interest income from the proceeds of the sales. Citi stated that POWER ASSETS held net cash of approximately HKD 42.5 billion at the end of the first half, equivalent to HKD 19.94 per share. Management expressed a preference for using cash for mergers and acquisitions rather than distributing special dividends, due to concerns that paying special dividends would significantly reduce the companys equity base. Referencing its parent companys separation of HKELECTRIC-SS (02638) in 2015, which began distributing special dividends only after 2017-2018, Citi expects it may take POWER ASSETS 2 to 3 years to identify merger opportunities, with special dividends potentially not being realized until 2028-2029 at the earliest. On the acquisition front, the parent company, CK Infrastructure (01038), was reported last year as a leading candidate to acquire Thames Water in the UK, but the company has recently tended to pursue debt restructuring with existing creditors, leading Citi to believe that the likelihood of reaching a deal in the short term is low. Additionally, it has been reported that CK Infrastructure plans to sell EDL Energy for AUD 2 to 3 billion, and if the deal goes through, the bank estimates it could record proceeds of around AUD 500 million to AUD 1 billion.