Hong Kong Infrastructure Report Q4 2009

We have revised our forecasts this quarter to a slightly more bearish prognosis for 2009. We now predict that the construction sector in Hong Kong will undergo a contraction in real terms of 8.9% this year, compared with our earlier forecast of 7.3%. This is on the back of very poor data in the initial months of the year, particularly the first quarter.

Private sector generated construction activity, in particular, fared very badly. However, we are now modestly more optimistic for 2010, predicting that real construction sector activity will increase by 2.1% across the year, compared with our earlier expectation of 0.1%. Signs of a fasterthan- expected recovery in the territory’s economy – which appears to have reached an (admittedly extremely deep) trough in Q109 – drive this more optimistic outlook. The construction sector should then generate positive growth throughout the rest of our forecast period, albeit at a modest rate, of between 2.5% and 3.0% per year (2011-2013).

This quarter, we update our analysis of key infrastructure companies operating in Hong Kong to take account of H109 results. Cheung Kong Infrastructure Holdings generated a 67% y-o-y increase in net profit to HKD3.9bn in H109, boosted largely by the sale of significant assets in February. The sale was that of power plants in Jilin and Guangdong provinces for HKD5.7bn to Hong Kong Electric, a company that CKI maintains a minority stake in. Revenues (net of divestitures) in H109 fell 30% y-o-y to HKD2.22bn from HKD3.18bn. CLP Holdings, meanwhile, generated a net income of HKD3.24bn in H109. Although this represented a significant decline from HKD5.61bn in H108, the performance remains reasonable (if slightly below market expectations), given the significant global headwinds currently buffeting the infrastructure sector. Sales fell 15% y-o-y to HKD23.5bn in H109.