Analysis of Financial and Control Systems in China Light and Power Co Ltd

China Light and Power Co Ltd (CLP) operates a diversified portfolio that features energy generating assets within the Asia Pacific region. The Hong Kong-based company founded in 1901, harnesses six types of energy sources. By June 30, 2017, CLP had an equity generating the capacity of 18,608MW alongside 5,159MW capacity purchase. Recently, CLP business reveals rapid expansion from electricity operations to running vertically-integrated operations powering homes and businesses in Asia Pacific regions. It allows the company provide highly-reliable electricity supply across Mainland China, India, Taiwan, Australia and Southeast Asia (Chew & Gottschalk, 2013). The delivery of sustainable solution to Asia-Pacifics energy challenge reflects in CLP positioning for growth and financial performance. This paper aims to analyze CLP financials to ascertain its profitability, solvency, liquidity and stability for its project control systems.

Liquidity

CLP business model commits to delivering long-term stability in shareholder value, social wellbeing and environmentalism through its value framework. However, operating in the power industry involves capital intensive operations demanding huge upfront investment despite lengthy payback periods. The situation demands timely, multiple tenured and diversified funding to manage and grow its business. The commitment affects its solvency being its ability to meet its short-term obligations as they arise.

Current ratio assesses the entity ability to meet its financial obligations as they fall due. The calculation of current ratio through expression of total current assets value per unit of current liabilities as derived from the balance sheet. The current ratio shows that inability of the company assets to cover its current liabilities. The company has failed to replicate the 2015 recovery after a successful initiative to increase its current assets and cut on borrowings to finance its working capital leading to a current ratio of 0.76 (CLP, 2017). The capital-intensive requirements of the industry seem overwhelming to the company operations. Attempts to address the situation shows the inability to provide cover to its liabilities sufficiently as outlined in Table 1 below. For instance, the 5% increase in its current assets in 2016 lacked grip of the 12% reduction in current assets with its current ratio worsening to 0.61. A similar pattern emerged in 2017 where 2% increase in current liabilities eroded the 8% increase in its current assets leaving the company able to cover only 65% of its short-term debt obligations.

Table 1 displaying the decline in current assets relative to the current liabilities increase from 2013 till the slight recovery in 2017.

2017 2016 2015 2014 2013

Current Assets 25,315 23,354 22,275 25,525 26,719

Current Liabilities 38,980 38,287 43,488 37,408 35,132

Current Ratio 0.65 0.61 0.51 0.68 0.76

An examination of quick ratio to ascertain the amount available to settle current liabilities reveals a strenuous pattern of its current assets. Since 2015, the company is able to pay its current liabilities on notice reveals constraints that are worsening since the gain in 2015 outlined in Table 2. Current assets are insufficient to settle in full the current liabilities despite the 8% and 7% improvement in 2016 and 2017.

Table 2 illustrating the worsening from 2013 to 2016 before gaining slightly in 2017.

2017 2016 2015 2014 2013

Current Assets 22,228 20,789 19,165 21,907 25,237

Current Liabilities 38,980 38,287 43,488 37,408 35,132

Quick Ratio 0.57 0.54 0.44 0.59 0.72

The pattern of insufficiency in the current assets to pay its short-term obligations emerges from the increased reliance on customers deposits and trade payables. Although the deposits appear increasing steadily, the company is unable to relieve off its borrowings burden to fund its working capital. While the company has successfully reduced the number of bank loans and borrowings by 38% from 13,189 million in 2015 to 8,186 million in 2017, the proportion to the total current liabilities remains steady at 28% and 27% in 2016 and 2017 (CLP, 2017; CLP Holdings, 2014). Besides, it appears that trade and other payables contribute nearly half of its current liabilities in 2016 and 2017. The results arise from its prepayment policy where the company finances its working capital using customer deposits.

Profitability

Tracking the accomplishment of wealth maximization of shareholders value involves the examination of profitability of the company. A check on profitability shows CLP ability to generate sufficient return on assets and equity. Since 2013 the company has experienced reduced revenue of 24% from 104,530 million to 79,434 million (Kadoorie, 2017). The trend coincides with reduced demand for electricity as the Hong Kong and Mainland China manufacturing slumps. However, the company cost controls yield a positive return as margin increases to 93%. The company has efficiently controlled its cost exposure as demonstrated below in Table 3 below.

2016 2015 2014 2013

Profit 17,146 22,020 14,895 8,906

Revenue 79,434 80,700 92,259 104,530

Margin 22% 27% 16% 9%

Table 3 indicating an increasing margin before declining in 2016. The company is unable to replicate its profitability in 2013 from a potential of generating nearly half of its total assets value. The total assets turnover has reduced from 49% in 2013, through to 43% in 2014 to 38% in 2015 before rising by one unit to 39% in 2016 illustrated in Table 4. It shows a challenging process for the management to utilize its non-current and current assets to generate earnings.

Table 4 displaying CLP total assets turnover between 2013 and 2016.

2016 2015 2014 2013

Revenue 79,434 80,700 92,259 104,530

Total Assets 206,233 214,207 214,663 211,685

Asset Turnover 39% 38% 43% 49%

The companys revenue has declined by twenty-four percent unlike the 3% scale down of its total assets by three percent from 211,685 million in 2013 to 206,233 million in 2016, it its assets into revenue (Kadoorie, 2017). However, the asset turnover appears to match the patterns witnessed across the industry. A similar outcome is evident of its fixed asset turnover where the companys ability have declined from 82% in 2013 down to 61% in 2016. The table 5 below reveals that the company has invested in more fixed assets. However, the 3% increase in fixed assets emerges of the industry norm as a capital intensive sector and a need to modernize and acquire sophisticated machinery needed for its productions.

Table 5 displaying CLPs fixed turnover for period 2014 to 2016.

2016 2015 2014 2013

Revenue 79,434 80,700 92,259 104,530

Fixed Assets 130,189 127,801 128,133 126,876

Fixed Asset Turnover 61% 63% 72% 82%

Nevertheless, the 21% decline in fixed asset turnover cannot explain the 24% percent decline in its revenue. The decline implies a slow-selling trend in its offering despite the company tying a lot of its capital in its fixed assets. The worse-off situation in 2016s 61% fixed asset turnover reflects from the longer period it takes customers to pay. The company appears to break off its sixty-two day conversion period to take an additional week unlike the policy between 2013 and 2015.

Table 6 indicating the receivables conversion period (2013 2016)

2016 2015 2014 2013

Revenue 79,434 80,700 92,259 104,530

Trade & Other Receivables 15,228 13,812 15,719 17,953

Receivables Conversion Period 69.97 62.47 62.19 62.69

CLP return on equity decreased in 2016 4% from 2015 17.3% to 13.3% indicating inefficiency in utilizing the shareholders equity to generate profits. The decline witnessed on return on equity appears to contradict the owners objective of maximizing returns. The decline in returns on capital after witnessing a gain of 6% in 2014 from 6.8% in 2013 and 4.5% increase in 2015 matches the operating profit pattern. The companys operating profit decreased by twenty-two percent in 2016 disrupting the increased operating profit of 48% in 2015 and sixty-seven percent in 2014. The slump in 2016 replicates in earning per share pattern where nineteen percent decline was noted. This eroded the 40% gain realized in 2015 where EPS was 6.2 up from 4.44 in 2014 (CLP, 2016). It appears that the earning per share has been on a nosedive since it increased by eighty-five percent in 2014 as displayed below in Table 7.

2016 2015 2014 2013

Operating Profit 17,146 22,020 14,895 8,906

Dividends 6,822 6,619 6,493 6,301

Dividend growth 3% 2% 3%

dividends per share 2.8 2.7 2.62 2.57

Earnings per share 5.03 6.2 4.44 2.4

EPS Growth -19% 40% 85%

Return on equity % 13.3 17.3 12.8 6.8

The decline in operating profit in 2016 from 22,020 million in 2015 to 17,146 million reported in 2016 led to increasing price/earnings ratio by four units from 11 times reported in 2015 to 14 in 2016 (CLP, 2017). This reversed the pattern where the price-earnings ratio declined from 26 times in 2013 through to 15 in 2014 to 2015 in 11. This appears inversely proportional to the operating profit pattern as revealed in Table 6.

Solvency

From Table 6, shareholders funds expressed per unit share appears to gain steadily by 12% from the 34.58 in 2013 to 38.79 realized in 2016. It aligns with the decreasing total debt-to-total capital trend as the company settles its debt. It reflects in the declining debt-to-capital, though worse off still, shows a favorable outcome. Although the company can sufficiently honor interests arising from its loans and borrowings, the company heavily relies on debt financing to operate. A replication of the interest coverage ratio pattern that appears 10 times for year 2016 and 2015 and reduction of debt-to-total capital to 31.5 from 34 shows signs to save the company from debt financing burden. However, the declining operating profit indicates likely difficulties of financing its operations in future from owners equity. Table 8 outlining return on equity and solvency of the organization.

2016 2015 2014 2013

Operating Profit 17,146 22,020 14,895 8,906

Return on equity % 13.3 17.3 12.8 6.8

Price/earning 14 11 15 26

shareholders' funds per share 38.79 36.86 34.84 34.58

Dividend pay-out 55.7 43.5 59 107.1

Interest coverage ratio 10 10 6 3

Total Debt to Total Capital 31.5 34 39.6 39.1

The company dependency on debt financing emerges of its inability to generate sufficient retained earnings from operations. The trend appears engineered from the cyclical industry trend where revenue declines with the demand from economic agents. Such outcome is not only limited to Hong Kong but also across the Asia-Pacific region between 2016 and 2015. However, a strong performance is witnessed in Hong Kong operations as indicated by 13.74% growth from 33,840 million in 2013 to 38,488 million in 2015. It reflects the trend in the sector where businesses outside Hong Kong declined from 41,757 million in 2015 to 41,459 million in 2016 (Kadoorie, 2017). However, the 0.71% decline in business operations outside Hong Kong is minimal compared to the 2.27% decline in revenue generated from Hong Kong operations displayed in figure 7. CLP management shows the ability to weather the industry trend and efficiently increase earnings from Hong Kong operations and other investme...