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Infrastructure companies have wide moats. Many have economies of scale and their businesses are often government-sanctioned in a way that means they have very few competitors.
Due to their essential nature, infrastructure companies also possess pricing power to overcome inflation. If that comes with solid execution, then their results often exceed GDP growth. Furthermore, the qualities of infrastructure companies often make them great dividend stocks.
Of the three leading Hong Kong infrastructure stocks, CLP Holdings Limited (SEHK: 2), MTR Corporation Limited (SEHK: 66), and Power Assets Holdings (SEHK: 6), which is the best buy?
Protest stress test
A great infrastructure stock should pass any stress test that comes its way. If its stock price falls a lot when headwinds show up, the stock might not be the best buy. In terms of stress tests, Hong Kong’s anti-government protests certainly count as one.
The protests have disrupted the operations of nearly every business operating in the city and triggered concerns over a potential recession. If Hong Kong enters into recession, growth of energy consumption might not be as strong as in normal economic conditions.
Since the protests started in early June, here’s how these three stocks have performed subsequently.
Share price performance
CLP is a power utility that powers 2.6 million Hong Kong homes. It also has a portfolio of power generation assets across the Asia-Pacific region, in countries such as Australia and Taiwan. Valuations normally fall during potential impending recessions, and CLP’s stock is no exception. Its shares have fallen around 8.5% since 31 May.
MTR operates Hong Kong’s subway system. It also develops commercial property surrounding its subway stops. On the account of the protest, commercial and retail property fundamentals have weakened due to a drop in tourism to Hong Kong. Shares have fallen around 6.5% since the end of May.
Power Assets is an energy utility that invests in electricity generation and distribution as well as gas distribution. The company has investments across the world, including China, the US, Canada, the UK, and Australia. Shares of Power Assets have actually increased marginally since 31 May.
Winner: Power Assets
Dividend yield and quality
Since CLP, Power Assets, and MTR’s dividend fundamentals haven’t changed much from 2018 and the dividend data for 2019 is incomplete, so let’s use 2018 data to compare the three stocks’ metrics.
MTR had a dividend per share of HK$1.12, giving it a trailing yield of 2.7%. The company’s payout ratio was 41%.
CLP had a 2018 dividend per share of HK$2.97, giving it a trailing dividend yield of 3.4%. Its payout ratio was less than 50%.
For last year, Power Assets had a DPS of HK$8.8, giving it a trailing yield of 5.1%. Power Assets had a payout ratio of 71%.
Although Power Assets pays more of its earnings, it also has the highest yield. Since many dividend investors focus on the yield, Power Assets wins. Its payout ratio isn’t high enough where its dividend is in danger either.
Winner: Power Assets
Because trailing earnings results are often skewed due to one-time losses or gains, let’s use forward earnings estimates instead.
Although they are just estimates, forward price-to-earnings (PE) arguably reflect a companies’ core earnings power better as they are not affected by one-off results.
On this front, Power Assets trades at a forward PE ratio of 15.5, CLP Holdings trades for a consensus forward PE of 16.7, and MTR sports a forward PE ratio of 23.9. Because it has the lowest forward PE ratio, Power Assets wins.
Winner: Power Assets
Due to its stable performance since the onset of the protests, its higher dividend yield and lower forward PE ratio, Power Assets seems to me like the best Hong Kong infrastructure stock at the moment.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.