Shares: Hong Kong utilities power on

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The Independent Online
INVESTORS looking for steadily rising income and spectacular long-term capital appreciation should seriously consider Hong Kong's quoted utilities.

Since 1975, the Hong Kong stock market has risen 35-fold (the move is much the same in Hong Kong dollars or in sterling) but China Light & Power, to take one of the quoted utilities, has done considerably better than that with the rate of outperformance accelerating in the 1980s. Nor is it the best performer of the group.

There are four stocks to choose from, or buy as a mini-portfolio: China Light & Power at HKdollars 40.75 ( pounds 3.50), controlled by the fabulously wealthy Kadoorie family, which is the monopoly supplier of electricity to Kowloon and the New Territories; Hong Kong Electric at HKdollars 17.70, controlled by billionaire Li Ka- shing's Hutchison Whampoa, which is about a third the size of China Light and supplies electricity to Hong Kong Island; Hong Kong & China Gas, at HKdollars 14.10, which supplies gas to the whole of Hong Kong and is the only one of the four utilities not subject to regulation; and Hong Kong Telecommunications at HKdollars 10.60, which has the Hong Kong telephone services monopoly though competition on local services will be allowed from 1995. HK Telecom is 58 per cent owned by Cable & Wireless at 775p, making the latter a more familiar alternative for investors seeking exposure to Hong Kong growth.

I would certainly not discourage buyers of Cable & Wireless. The group recently reported profits well ahead of expectations. A restructured management under Lord Young is sharpening the group's performance and its non-Hong Kong activities, such as Mercury, are growing faster than the Hong Kong business. Indeed, since 1988, Cable & Wireless shares have outperformed its Hong Kong subsidiary, as well as beating the FT-SE 100 by a huge margin since 1981.

Among the attractions of the Hong Kong utilities are the fact that they operate in a stable regulatory environment, which enables them to make decent profits and benefit from a growth in demand outpacing the already impressive growth rate of the Hong Kong economy. China Light and HK Electric, for example, are allowed to make a 15 per cent return on equity financed capital and 13.5 per cent on debt finance. This encourages them to invest at a healthy rate, which they need to do anyhow to meet the growth in demand. The result is steady growth in turnover, profits and dividends.

Observers suggest that a long-term growth rate of about 15 per cent is a reasonable expectation. But my guess is that they will beat that. For example, China Light & Power's share price has risen almost 80-fold since 1975, which translates into an annual rate of nearly 28 per cent. Nor does that take into account the dividend income, with China Light on a yield of 3.5 per cent on the likely payout for the year ending this September. There is no Hong Kong with- holding tax, so the full amount is remitted to UK shareholders.

Hong Kong & China Gas has been the best long-term performer with the price up a phenomenal 280 times since 1975. That must make it one of the best performing shares in the world over that period. It supplies gas made from coal and benefits from new household formation and such factors as the boom in fast-food outlets. Despite the name, there is no specific China angle. China Light & Power, by contrast, has a 25:75 joint venture with Guangdong in booming South China to bring a nuclear power station on stream next year and has other Chinese projects at the discussion stage. Hong Kong Telecommunications may seem under threat with competition expected in its local market from 1995. But the company is relaxed. Local calls are already free, and international calls from Hong Kong are the cheapest in the world.

Revenue comes from rentals but mainly from booming demand for international calls and premium services such as fax machines, where Hong Kong has the highest per capita penetration after Japan. Phone traffic with China was 44 per cent of the total last year and is growing by 35 per cent a year.

Against these powerful investment attractions are all the obvious negatives. How will the Chinese control their increasingly overheated economy; what happens when Deng Xiaoping dies; what will happen with the changeover to 'one country, two systems' in 1997? But one school of thought is that most of these worries are priced into the Hong Kong stock market which, on a p/e of 11.5 for the market as a whole, has never been lower rated relative to the US stock market.

In any case, these are all short-term worries. But the unique selling point of Hong Kong's remarkable quartet of utilities is their ability to deliver a phenomenal return to investors over the long haul.

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