HSBC Research: The Hong Kong utilities sector outperformed the Hang Seng Index, with CKI Holdings as the top pick

HSBC Research published a report indicating that the Hong Kong utilities sector has outperformed the Hang Seng Index, primarily driven by favorable macro factors, including interest rates and exchange rates, as well as a market sentiment shift towards defensive characteristics, coupled with inflows of capital from the south. Given that valuations are nearing a four-year high, the bank believes that any further revaluation will depend on the specific circumstances of companies driving earnings and dividends. The bank favors companies with robust fundamentals, ample free cash flow, and the potential for better shareholder returns.

The bank continues to state that CK Infrastructure (01038.HK) remains its top pick, as it owns regulated utility assets in the UK and Australia, which can withstand the impacts of macroeconomic fluctuations, and the outlook has become clearer following a series of favorable regulatory policy adjustments. The bank raised the target price for CK Infrastructure from HKD 70 to HKD 75, maintaining a "Buy" rating.

Additionally, the bank noted that due to Hongkong Electric (02638.HK) earnings and cash flow being regulated and protected, it has demonstrated strong defensive performance. Although the company faces significant refinancing needs this year, with HKD 23 billion in loans and bonds maturing before the end of 2026, the bank believes that its solid balance sheet and stable long-term cash flow will enable it to secure new financing. The bank believes that successful refinancing will further clarify future dividends, thereby enhancing shareholder confidence. The bank raised the target price for Hongkong Electric (02638.HK) from HKD 7.3 to HKD 7.8, maintaining a "Buy" rating.

HSBC Research's investment ratings and target prices for utility stocks are as follows:

Stock | Investment Rating | Target Price (HKD)

CK Infrastructure (01038.HK) | Buy | 70 HKD → 75 HKD

Hongkong Electric-SS (02638.HK) | Buy | 7.3 HKD → 7.8 HKD

CLP Holdings (00002.HK) | Buy | 83 HKD → 85 HKD

Power Assets (00006.HK) | Hold | 52 HKD → 56 HKD

China Gas (00003.HK) | Hold | 6.6 HKD