The Sydney Airport Holdings Ltd (ASX: SYD) share price jumped 2.3% to $7.34 this afternoon on speculation that the Chinese government may be interested in financing Sydney's proposed second airport at Badgerys Creek.
The new Western Sydney Airport will now need to be financed by the Australian government or other backers such as the Chinese after the board of directors at Sydney Airport rejected the chance to build the second airport themselves.
The new airport is expected to begin operations in 2026 with total cost estimates varying widely, although as a minimum initial commitment the government has committed $5.3 billion over the next 10 years as part of the 2017 Federal Budget.
It's almost certain much of the remaining funds will be raised via government-backed debt issues and potentially foreign investors such as the Chinese government.
The news is likely to have supported Sydney Airport shares as it goes to show how infrastructure businesses like airports remain hot assets globally thanks to their defensive earnings streams, reasonably high yields in a low rate world, and monopoly like status.
Investors though should consider though whether the yields available from the likes of Sydney Airport (current trailing yield 4.2%) are sufficient to compensate for the substantial risks of equity investing.
One of the biggest determinants of share market valuations is interest rates as the net present value of shares is largely calculated as a function of estimated future cash flows adjusted for the time value of money. As interest rates rise then the attractiveness of Sydney Airport's cash flows may diminish as superior risk-adjusted yield opportunities appear elsewhere. For that reason I'm not a buyer of shares in Sydney Airport or other bond proxies like Transurban Group (ASX: TCL).
