We prefer CLP to PAH and CKI.

　　The HK utilities sector has risen 8ppt YTD and outperformed HSI Index by12ppt. It is fully valued, in our view, with ~3.4% dividend yield and ~17x 2016EPE. Key things to watch for in the next 12 months will be: special dividenddecision from PAH in May, foreign currency risk especially around Brexit votein June, M&As and potentially another round of merger for CKI/PAH, US ratehike likely from Dec, and regulatory decision for Hong Kong power Scheme ofControl (SoC) business likely in Q217. Relatively, we continue to prefer CLP(Hold) as our sector top pick, on both valuation and foreign currency exposure.

　　Large exposure to UK for CKI/PAH; GBP depreciation.

　　UK assets account for ~60% of the valuation for CKI and ~35% for PAH. OurUK economics team has a structurally bearish sterling view and expects theGBP to depreciate from 1.43 (vs. USD) currently to 1.15 by end-2017. At 1.15,there would be 11% downside risk to our target price for CKI and 6% downsidefor PAH. Share price volatility could rise with uncertainty on the UK vote.

　　Post-2018 SoC return negotiation may not reach a conclusion in 2016.

　　The negotiation for post-2018 SoC return may not reach a conclusion this yeargiven the legislative council election in September and chief executive electionin March 2017. This uncertainty continues to be an overhang, but we think apotential cut from 9.99% to 8% seems fair and well anticipated.

　　Prefer CLP among HK utilities; earnings and TP updates post 2015 result.

　　In our view, CLP is more attractive than its peers, in terms of dividend yield, PEand PB vs. ROE. It also has relatively small exposure to foreign currencydepreciation, with c.70% of its earnings from the HK SoC business. We arelargely indifferent toward CKI and PAH in terms of valuation, but CKI is betterpositioned strategically. We use SoTP valuation for the sector. Key risks:regulatory development, M&A progress, foreign currency movement.