Billion Cash from Core Asset Sale — Is CKI's 5.3% USD Perpetual Bond a solid defensive pick?

CK Infrastructure Holdings Limited (1038.HK, "CKI") is a leading global infrastructure investment company. Its asset portfolio spans developed markets including the UK, Australia, Canada, and Continental Europe, covering regulated utilities such as electricity distribution, water treatment, gas networks, and renewable energy. Core assets include Power Assets (Hong Kong and Mainland China), Victoria Power Networks (Australia), and UK Power Networks (UK). By holding high-quality infrastructure assets long-term to collect stable fees and dividend income, the company effectively diversifies the geopolitical and economic cycle risks associated with any single market.

Strong UK Performance Drives Five Years of Profit Growth

In 2025, CK Infrastructure (CKI) reported total revenue of HK$41.7 billion, a YoY increase of 6.9%. Profit before tax also saw a slight YoY rise of  2% to HK$8.8 billion (see Chart 1). The increase was primarily driven by a reduction in German corporate tax rates and the robust performance of ista (an energy management services provider) following its acquisition. These factors led to a significant 58% surge in profit contribution from the Continental Europe business, reaching $960 million (see Chart 2).

Conversely, profit contributions from other business segments remained largely flat. Furthermore, a 34% decline in bank interest income (dropping to $360 million) partially offset the gains seen in the Continental Europe division. Despite the relatively modest increase in pre-tax profit, the company’s profit has consistently grown since 2020, demonstrating stable earning power across different economic cycles.

Chart 1: CKI’s Turnover & Profit before taxation

Chart 2: CKI’s Segments Profit Contribution

CKI Sells UK Power Networks to Pursue Higher-Return Investments

At the end of February 2026, a consortium led by CKI agreed to sell its entire stake in a key asset, UK Power Networks (UKPN), to the French energy giant Engie for HK$110.8 billion (£10.55 billion). The consortium acquired UKPN for £5.8 billion in 2010, in which CK Infrastructure holds a 40% stake. Factoring in years of profit contributions, the return on the UKPN divestment is substantial and is expected to contribute a one-time non-cash gain of HK$14.5 billion in 2026.

In the medium to long term, UKPN has been the company’s most vital revenue stream, contributing 17.5% of adjusted EBITDA in 2024. Selling UKPN means losing a portion of recurring income, making future growth dependent on new investment opportunities. In fact, following the UK regulator Ofgem's decision to lower the benchmark Allowed Return under the ED2 price control period (2023–2028), UKPN’s *Return on Regulated Equity (RoRE) dropped to 8.6%, which is less attractive than the 10.9% seen during ED1 (2015–2023). Given these compressed margins, selling UKPN at a high valuation allows the company to free up capital for projects with higher potential returns.

*Return on Regulated Equity (RoRE) is the return cap set by Ofgem for grid companies to protect consumers. RoRE = Allowed Return + Efficiency Incentives + Other Operational Incentives + Financing/Tax Performance.

The company has pivoted toward new energy businesses in recent years. This includes the HK$7.5 billion acquisition of Phoenix Energy in 2024 to pave the way for hydrogen development, and a HK$3.5 billion acquisition of UK wind farms. The proceeds from the UKPN sale will help accelerate this transition. Driven by the electricity demands of electric vehicles and data centres, new energy businesses benefit from favourable UK and European government policies, offering greater investment potential than traditional energy. Therefore, while the sale of UKPN may weigh on medium-term earnings, management’s investment track record suggests they can identify higher-return opportunities to fuel future revenue growth.

Post-UKPN Cash Surge, Leverage at Record Low

As of December 2025, CKI’s net debt stood at HK$13.5 billion. However, following the sale of UKPN, the company will receive nearly HK$44 billion cash inflow, shifting it into a net cash position. This means its cash reserves will fully cover its debt, significantly reducing default risk (see Figure 3).

Furthermore, while the market has expressed concerns that the cash proceeds might be used to pay out a special dividend—which would be less favorable for bondholders—the company has a track record of selling core assets without making such distributions. It is widely expected that the cash from this transaction will be allocated toward debt repayment and investing in new projects, which will further help the company deleverage and lower its debt levels.

Chart 3: CKI’s Net Debt

In the first half of 2025, CK Infrastructure (CKI) recorded Funds from Operations (FFO) of HK$3.18 billion, a YoY decrease of 4%. This decline was primarily due to the dividend payout ratio from associates and joint ventures falling from 68% in the first half of 2024 to 59%. This drop offset the positive contribution from the increase in share of net profit, resulting in narrowed cash inflows. Despite this, the Net Debt/FFO ratio remains at a healthy level of 2.2x, fully reflecting the company's robust debt-servicing capability and resilient cash flow structure.

*Funds from Operations (FFO) = Net cash inflow from operating activities + Cash dividend inflows from associates and joint ventures.

Bond Investment

In summary, supported by its globally diversified and defensive infrastructure portfolio along with ample cash reserves, CKI demonstrates strong credit reliability. Currently, there are three U.S. dollar-denominated perpetual bonds issued by CKI available on the market, offering a net current yield of around 5.2% to 5.4% (see Table 1). The issue is rated A/A (S&P/Fitch), while the bonds carry credit ratings of BBB/N.R. (S&P/Fitch), both within investment-grade territory.

Notably, the CKINF 4.850% Perpetual Corp (USD) has already entered its callable period, while the other two bonds are approaching their first call dates. Given their current prices below par (USD 100), the likelihood of CK Infrastructure exercising the call option appears relatively low. All three bonds are fixed-for-life instruments, meaning their coupon rates will remain unchanged indefinitely. As such, the issuer has limited incentive to redeem them, introducing some uncertainty regarding principal recovery. Nevertheless, despite the low probability of redemption, the bonds’ current yields remain attractive, making them suitable for investors seeking stable cash flow and who are comfortable with potential price volatility.

Table 1: CKI’s Bond

Note perpetual yield calculation differs from fixed tenor bonds; see "How to Measure the Yield of a Perpetual Bond?" for details.

Investors should also note the following key terms (see Table 2):

Optional Deferral: The issuer may delay interest payments without triggering a default. This is further categorized into:

i) Cumulative: All outstanding interest must be fully paid back to investors in a lump sum later.

ii) Non-cumulative: Deferred interest is permanently cancelled, and investors cannot claim it in the future.

Dividend Stopper: If the issuer fails to pay coupons to bondholders, the company is prohibited from declaring common stock dividends or conducting share buybacks.

Dividend Pusher: If the issuer pays dividends to common shareholders or repurchases shares within a specified observation period (3 months for CKI), it is mandatory for them to pay interest to the perpetual bondholders.

Table 2: CKI’s Bond Terms