HSBC Research: The Hong Kong Utilities Sector is a Defensive Choice to Tackle Market Turbulence

HSBC Global Research report indicates that empirical analysis shows the Hong Kong utilities sector consistently demonstrates its defensive characteristics during major global conflicts. The sector has outperformed the market consistently after relevant events, beating the Hang Seng Index by 7% within 60 days following significant incidents. Excluding typical risk-averse sentiment, the bank believes the sector's core fundamentals remain solid, protected by regulatory frameworks and long-term contracts, allowing it to withstand macroeconomic uncertainties and disruptions. The bank examined the main risk factors and their impact on the sector:

HSBC Research states that fuel prices soared as Iran closed the Strait of Hormuz. However, the bank expects the impact on sector earnings to be minimal, as regulated utilities in Hong Kong, the UK, and Australia can fully pass on fuel prices to customer bills. Additionally, CLP Holdings (00002.HK) has reduced its exposure to forward contract risks since 2022 and has taken operational remediation measures, which the bank views as keeping its financial risks manageable.

The initial impact of the Iran incident may strengthen the dollar, implying that companies with a higher proportion of overseas business, such as CK Infrastructure (01038.HK) and Power Assets (00006.HK), could incur foreign exchange losses; however, overall, the bank believes the impact will be very limited.

HSBC Research maintains a "Buy" rating on CK Infrastructure, HK Electric, and CLP Holdings; it maintains a "Hold" rating on Power Assets and Hong Kong and China Gas; target prices remain unchanged (see table).

HSBC Research remains optimistic about CK Infrastructure, considering its defensive characteristics (over half of its earnings come from regulated assets) and greater potential for dividend increases—all supported by its strong free cash flow generation capability. The bank is also optimistic about HK Electric, as its business purely focuses on the regulated Hong Kong electricity market, which is highly defensive and can withstand macroeconomic and geopolitical risks. CLP Holdings may continue to increase dividends under the earnings protection provided by the regulated Hong Kong electricity market; undeniably, its organic recovery pace in Australia may be slower. The bank expects limited potential for dividend increases for Power Assets and Hong Kong and China Gas due to insufficient free cash flow generation capability, thus assigning a "Hold" rating to both