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HUBC’s announcement of expansion in the Automobile sector has excited investors.

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We revise our estimates for HUBC and raise our TP by 7% to PKR161/sh to incorporate reduction in loans. However, we downgrade our stance to Neutral as the recent rally of c.46% 2024TD has priced in the positives, while the BYD venture seems overestimated by the market, in our view. However, we believe the true benefits of the venture will come through in 3-5 years whereas the expansion will constrain cash-flows in next 2-3 years, potentially leading to dividend cuts.

HUBC rallied strongly in FY24 with a total return of 178%, outperforming the KSE-100 index by c.90ppt. The stock has rallied 11% since late June 2024 following the announcement of BYD venture. Presently, its DY of 15.1% is slightly lower than the yield on 5-yr PIB of 15.4%. Hence, we are Neutral.

Downgrade our stance to Neutral on strong price rally

We have revised our FY25/26f DPS estimates for Hub Power Co. Ltd (HUBC) by 13%/14% and raised our June 2025 TP by 7% to PKR161/sh. The revision in TP is also due to the reduction in the company’s long-term financing. However, given the strong rally in FY24 of 136%, we are downgrading our stance from Buy to Neutral. We now expect DPS of PKR25.0/23.5 for FY25/26f, translating into a dividend yield of 15%/14%. The stock had an astounding total return 178% in FY24, outperforming the KSE100 index by 90ppt. We are Neutral on HUBC as we believe the market has priced in the positives, given its FY25 dividend yield of 15.1% is slightly lower than the yield on 5-yr PIB rate of 15.4%; in addition, we think market is overestimating the BYD venture at this stage (HUBC has rallied 11% since the announcement).

Coal plants to drive growth in cash-flows

As the base plant’s PPA is set to expire in 2027, HUBC’s recent expansion in coal plants will ensure its cash-flows extend till FY53. As we highlighted in our earlier report, HUBC is still awaiting PCD for its Thar coal based plants – a pre-condition for issuing dividends, set by the lenders. We think PCD may come through in FY25 and expect the first dividends of c.PKR13bn or PKR10/sh (combined) from TEL and TNPTL, by 4QFY25. Additionally, HUBC is actively exploring opportunities to diversify beyond the power business. This is evident from its expansion into the oil and gas space through Prime International (formerly Eni Pakistan) and its more recent announcement of a JV with BYD.

BYD: A promising long-term bet is presently overhyped…

HUBC recently announced to enter into a JV with the BYD Automobile to market BYD EVs in Pakistan. This has excited investors, who are hoping for a similar return to what was recently seen in Sazgar (SAZEW), which rose over 1,500% in FY24 after the launch of its hybrid vehicles. HUBC has not yet disclosed much details about the venture. We think that the project will be a cash burner in the short term and may yield big profits (for HUBC’s size) only after 2-3 years of a plant’s construction. Setting up a new plant of 50,000 units may require a minimum investment of US$300mn (PKR84bn on current exchange rate), while HUBC may have a 40-50% equity stake in the JV. BYD’s recent investment in Turkey for a capacity of 150,000 units costed c.US$1bn. Pakistan also presently lacks an EV infrastructure which might further delay full utilization of this venture.

…while financing the project could spell dividend cuts

Financing this project could be a significant challenge, especially if HUBC takes a 40%-50% stake (it will report the investment as an associate like CPHGC) which could mean an outlay of PKR35-40bn (PKR27-31/sh) over the next two to three years. We think that HUBC will finance the project from its own resources, which may lead to dividend cuts over the next couple of years, thereby reducing its dividend yield. Nevertheless, continued reforms in the energy chain should moderate circular debt buildup, in turn improving HUBC’s liquidity position during the project initiation.

Courtesy – IMS Research 


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