Citi: Lowers target price for CKI HOLDINGS (01038) to HKD 70, management guidance indicates cooling expectations for special dividends.

Citi released a report stating that CKI HOLDINGS (01038) posted strong earnings in the first half, benefiting from sales gains; however, management's guidance on the distribution of a special dividend during the earnings call was more conservative than market expectations, leading the bank to lower its target price. Taking into account factors such as return rate adjustments and currency fluctuations, Citi adjusted its earnings forecast for Cheung Kong Infrastructure from 2026 to 2028 by 4% to 8%, and increased the weighted average cost of capital due to the weakening catalyst for the special dividend, reducing the target price from HKD 73.5 to HKD 70, while maintaining a "Buy" rating, optimistic about the potential upside from acquisitions. The report noted that Cheung Kong Infrastructure's net profit in the first half rose significantly by 389% year-on-year to HKD 21.252 billion, which includes approximately HKD 15.271 billion in sales gains from assets such as UKPN and UK Rails. Excluding these items and the core earnings contribution from UKPN, the core earnings from existing assets increased by 15% year-on-year to HKD 3.291 billion, primarily benefiting from the rising returns from regulated utility assets in the UK and Australia, as well as an increase in interest income from the proceeds of sales. Citi stated that Cheung Kong Infrastructure held net cash of approximately HKD 33.9 billion as of the end of the first half, equivalent to HKD 13.45 per share. Management indicated in the earnings call a preference for using cash for acquisitions rather than distributing a special dividend, due to concerns that issuing a special dividend would significantly reduce the companys equity base. Referring to the same group company POWER ASSETS (00006), which began distributing a special dividend only after spinning off HKELECTRIC-SS (02638) in 2015, Citi expects that Cheung Kong Infrastructure may take 2 to 3 years to identify acquisition opportunities, and a special dividend may not materialize until as early as 2028 to 2029. In terms of acquisitions, Cheung Kong Infrastructure was reported last year as a leading candidate to bid for Thames Water in the UK, but the company has recently leaned towards restructuring its debt with existing creditors, and Citi believes that the likelihood of reaching a deal in the short term is low. Additionally, it has been reported that Cheung Kong Infrastructure plans to sell EDL Energy for AUD 2 billion to 3 billion; if the deal goes through, the bank estimates that it could record approximately AUD 500 million to 1 billion in sales gains.