CLP’s Marked-to-Market Hedge Losses Hit the Bottom Line but Do Not Impact Our FVE and Outlook

CLP Holdings indicated that it is currently sitting on a marked-to-market non-cash loss on its Australian forward contract energy purchases of around HKD 2.5 billion. We have adjusted our model to reflect this news but have otherwise made minimal changes to our assumptions following CLP's first quarter update. No financial numbers were otherwise provided, as per CLP's normal practice. As we had already lowered our assumptions in March to reflect continued high fuel costs as the Ukraine war is prolonged, we've not made further changes. We think the impact of the likely weak 2022 earnings are already reflected in CLP's share price, but we also believe that there are unlikely to be near-term catalysts that would lead to share price outperformance against peers in the near term. Looking through the cycle and our expectation for oil and gas prices to normalize, we believe CLP is undervalued as at May 17, 2022. With no material change to our cash flow estimates for CLP, our fair value estimate remains at HKD 84.