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Hongkong Electric Plans Overseas Growth as Net Falls (Update3)

By John Duce, Bloomberg

Aug. 5 — Hongkong Electric Holdings Ltd., controlled by billionaire Li Ka-Shing, plans to expand overseas after a government agreement in the city limiting returns led to a decline in first-half profit.

Net income fell 16 percent to HK$2.67 billion ($345 million) from a year earlier, the company said in a statement to the Hong Kong stock exchange today. That’s better than a median estimate of a HK$2.52 billion profit in a Bloomberg survey of five analysts. Earnings from operations in the city dropped 35 percent.

“We will continue to look for investment opportunities outside Hong Kong,” Chairman Canning Fok said in the statement, without elaborating. The utility expects electricity sales in Hong Kong to remain little changed in 2009.

Under a Scheme of Control agreement introduced in January, the rate of return on fixed-asset spending by Hongkong Electric and bigger rival CLP Holdings Ltd. was reduced to 9.99 percent from between 13.5 percent and 15 percent. The agreement, valid until 2018, links power companies’ returns to efforts to cut pollution for the first time.

“The results reflected the new limits on returns,” Michael Yuk, an analyst at Sun Hung Kai Financial, said in Hong Kong. “The company will have to continue its policy of investing in businesses overseas to try to lessen the impact and achieve more growth.”

Overseas Projects

The city’s second-biggest electricity supplier has invested in projects in mainland China, the U.K., Thailand, Australia and New Zealand to offset reduced earnings from Hong Kong. Earnings in its home market fell to HK$1.8 billion in the first half, while profit from overseas operations more than doubled to HK$883 million, today’s statement said.

Higher contributions from abroad have helped to counter the impact of the lower rate of permitted return, said Fok.

Shares fell 0.4 percent to HK$42.20 in Hong Kong. The Hang Index dropped 1.5 percent. The stock has declined 2.6 percent this year, while the Hang Seng gained 44 percent.
Electricity sales in Hong Kong in the first six months fell 0.6 percent, today’s company statement said. Directors have declared an interim dividend for this year of HK$0.62, the same as given in 2008.

Hongkong Electric said in March, when it announced its annual results for 2008, that 2009 would be “challenging” and the revised Scheme of Control would likely cut earnings.

Domestic operations posted a HK$7 billion profit in 2008, before the revised limits on returns were introduced, while earnings from overseas projects exceeded HK$1 billion.

The utility’s more recent overseas acquisitions include the HK$5.68 billion purchase of three power stations in mainland China from parent company Cheung Kong Infrastructure Holdings Ltd. The supplier of 20 percent of the Hong Kong’s power also acquired a 50 percent stake in the electricity distribution network in Wellington, New Zealand, last year and increased its holding to 35 percent in Northern Gas Networks in the U.K.

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