Energy & Resources

Profits set to flow

What is driving GDI’s HK$100 billion market valuation?

Wanlu-Lake-w

Wanlu Lake: supplies Hong Kong

Bank of East Asia’s chairman David Li isn’t viewed as an active investor in stocks. Yet the veteran banker has been taking a keen interest in Guangdong Investment (GDI), a state-owned enterprise described by some analysts as one of the best of the “Greater Bay Area concept stocks”.

Since June this year Li has raised his stake in GDI six times, spending nearly HK$42 million ($5.4 million). So much so that Apple Daily wondered whether the 80 year-old might have invested more money in GDI over the period than in the Hong Kong bank that he chairs.

Li, who owns a 0.35% stake in GDI, is no stranger to the company’s business. He has served as an independent director since 1998, after helping the Guangdong government to restructure $4 billion of debt in the controversial company that preceded it (then better known as GITIC).

GDI has since become one of the lower profile SOEs on the Hong Kong bourse. Yet it has been delivering stable returns for its investors, with its share price increasing 14 times over the past 20 years. And a punchy 60% rise since 2017 – when the State Council first unveiled the Greater Bay Area (GBA) concept – has taken its market value beyond HK$100 billion for the first time.

There’s good news from bond investors too. According to Securities Daily, GDI’s non-listed parent Guangdong Holdings has just raised Rmb600 million ($84.61 million) to finance the development of a new high tech zone in Dongguan, one of the nine mainland cities designated as members of the GBA. Highlighting the group’s perceived creditworthiness, the coupon paid on the 10-year issuance is just 4.4% (real estate developers typically pay double digits, if they are allowed to sell bonds onshore at all).

Investor confidence stems from the strong cashflow generated by GDI’s utility businesses, Securities Daily said. The company owns a 95% stake in the Dongshen Water Supply Project, which supplies water to a number of cities in the GBA from the Dongjiang basin system in Guangdong (see WiC353 for more on Hong Kong’s reliance on Dongjiang, which provides 80% of its water).

The water project was the key asset injected into the group during the restructuring 19 years ago. It contributed almost two-thirds of its HK$13 billion in revenues last year, although analysts also see potential in some of GDI’s property and highway businesses, on the assumption that the GBA’s economy will develop strongly in the years ahead.

The recent rally in GDI’s share price means that it is now valued higher than the other big utilities in Hong Kong, Apple Daily noted, trading at more than 20 times its 2018 net profit.

GDI negotiates its water supply contract with the Hong Kong government in three-year terms. The current contract expires by the end of next year, so negotiations are likely underway for a new deal. The last contract cost Hong Kong taxpayers HK$13.4 billion, or a 20% hike on the previous deal. A steady increase in the water prices paid in Guangdong in recent years, as well anticipated increases in demand from the region’s economy, could give GDI the leverage to ask for a higher price again.

Some of the Chinese newspapers have also been giving the Dongjiang water project more prominent coverage. The giant pipelines started pumping water to Hong Kong in 1965, China News Service reported last month, providing more than 25 billion cubic metres of fresh water to the city over the past 50 years.

Part of this message is that while Hong Kong has been the main beneficiary, sacrifices have been demanded of people living near Wanlu Lake, the key contributor in the Dongjiang basin. Restrictions on economic development in the region have ensured a potable supply for Hong Kong but held down local residents’ potential incomes. The unwritten subtext is that the water won’t be so cheap beyond 2020.


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