Hong Kong tycoon Li Ka-shing’s CK Infrastructure says Covid-19 induced ultra-low interest rates will pressure returns

CK Infrastructure, the infrastructure and energy flagship of Hong Kong tycoon Li Ka-shing’s business empire, said on Wednesday that “ultra-low” global interest rates induced by efforts to fight the coronavirus outbreak will squeeze the return rates of its projects.

“Of particular challenge to CKI will be the series of regulatory resets, which will be coming up in 2020 and over the next few years,” Victor Li Tzar-kuoi, Li’s eldest son and the company’s chairman, said in a filing to Hong Kong’s bourse. “Lower allowed returns resulting from ultra-low interest rates globally and tough stances by regulators will inevitably result in lower revenues.”

The company’s net profit for last year amounted to HK$10.5 billion (US$1.35 billion), up 0.7 per cent from 2018. Excluding foreign exchange rate fluctuations, its underlying profit grew 6 per cent, CKI said.

The US Federal Reserve on Sunday made its second surprise interest rate cut in two weeks, totalling 1.5 percentage points, to near zero, as it sought to rescue a US economy hit hard by the extreme quarantine measures required to contain the coronavirus outbreak. Lower interest rates mean lower costs of debt, which are a significant component of infrastructure developers’ operating costs. But during periods of low interest rates, lower debt costs also give governments room to ask utilities to lower their tariffs, which could reduce their revenue and rate of return.

CKI’s profit from Britain fell 12 per cent to HK$4.63 billion, contributing nearly half of its total. Excluding the impact of a weaker pound sterling and cessation of the recognition of certain non-cash revenue commencing last year, its profit grew 8 per cent. A major portion of the company’s UK business is subject to return rates that are set by the country’s government, through a transparent process which includes an appeals mechanism for project owners.

The adjustments will take place between this year and 2023, starting with Northumbrian Water this year. “The terms of the determination as set by the regulator for the new regulatory period are significantly more stringent than in previous periods,” Victor Li said of the mains water and sewerage services provider’s situation. “The final outcome will be dependent upon the upcoming appeal.”