[ET Net News Agency, 8 August 2019] Moody's Investors Service said that CLP Holdings
Limited (CLPH) weak earnings for the first half of 2019 were in line with expectations,
and have no immediate impact on its A2 issuer rating or stable outlook.
"CLPH's operating earnings dropped 31% year-on-year to HK$5,474 million ($698 million)
in the first half of 2019, while its revenue decreased by 6%, driven mainly by intense
competition in Australia's retail market and a lower permitted rate of return in Hong
Kong," said Ivy Poon, a Moody's Vice President and Senior Analyst.
Intensified market competition, an uncertain policy environment, and volatile wholesale
markets resulted in a challenging operating environment in Australia and led the company
to record an HK$6,381 million impairment on the goodwill of its Australian retail
operations in 2Q 2019.
Although the impairment was non-cash and a one-off item, it signals potential weakness
in the Australian business' cash-generating ability.
The impairment charge reflects the company's expectation that the performance of its
Australian businesses will deteriorate, underpinned by a reduction in the retail tariff
following (1) a regulation change that caps retail electricity tariffs; and (2) the launch
of new marketing initiatives to cope with intensified market competition.
"Although unfavorable business conditions in Australia over the next 12-18 months will
likely dent the company's profit before tax by around HK$500-HK$600 million, we have
already factored this into our rating for CLPH," added Poon.
Meanwhile, the permitted rate of return for CLPH's Hong Kong business was reduced to
8.00% from 9.99% in October 2018, resulting in lower earnings in 1H 2019. However, Moody's
expects the financial impact of the lower regulatory rate of return will be manageable
because it will be partly offset by CLPH's growing asset base and improved financial
flexibility.
Looking ahead, Moody's expects CLPH will record funds from operations (FFO)/debt of
26%-30% and debt/capitalization of 31%-33% during 2019-2021.
Although these projected metrics are slightly weaker than the 34% and 32% achieved in
2018, they remain appropriate for the company's A2 rating. (KL)