CK Hutchison: Fair Value Estimate Cut to HKD 60 Due to Weak Ports and Telecom Earnings Forecasts

We downgrade our fair value estimate for CK Hutchison to HKD 60 from HKD 74 due to reduced earnings forecasts primarily from ports and telecom. Port earnings have been hit by the throughput decline and reduced storage income, which has been normalizing from the elevated 2022 levels as supply chain disruptions of that year improve. Telecom earnings have been hit by inflationary costs although tariff increases in the second half of the year should help cushion this impact into 2024. Free cash flow generation has also been hit by spectrum auctions with new spectrum acquired in Sweden in September for SEK 1.2 billion. The balance sheet has improved with net debt/EBITDA reducing to 2.8 times in 2022 from 4.5 times in 2018, supported by proceeds from tower asset sales. We expect leverage to increase slightly in 2023 due to lower earnings and free cash flow, but should improve again over the following years due to an earnings recovery. We retain our no moat rating for the stock because our view is that only its ports business, which represents around 25% of its value, has a moat. Despite this, we believe the stock is undervalued, trading on a forward price/earnings ratio of only around 6 times.