UBS has released a research report downgrading HKELECTRIC-SS (02638) from "Buy" to "Neutral" while maintaining its target price at HK$6. The investment bank noted that HKELECTRIC-SS shares have gained 20% year-to-date, outperforming Hong Kong utility stocks by approximately 16 percentage points, with the current price already reflecting its defensive characteristics.

The firm anticipates that as the United States enters a rate-cutting cycle, the US 10-year Treasury yield is expected to decline from the current 4.1% to 3.8% by the end of 2025 and 3.4% by the end of 2026. This shift in monetary policy could boost risk appetite and redirect capital flows toward growth stocks, potentially diminishing the appeal of defensive stocks like HKELECTRIC-SS.

UBS highlighted that HKELECTRIC-SS currently offers a forward dividend yield of 5.3%, representing a 115 basis points premium over the US 10-year Treasury yield. This premium stands more than one standard deviation below the historical average. Compared to the sector average, the premium is merely 11 basis points, significantly lower than the historical average of 89 basis points. The bank's earnings forecasts for HKELECTRIC-SS from 2025 to 2027 align with market consensus.

In contrast, UBS views Cheung Kong Infrastructure Holdings (01038) as offering more attractive valuations, with regulatory policy adjustments in the UK and Australia, along with potential merger and acquisition opportunities, providing additional growth prospects.