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Deep-dive 2022-2: CK Hutchison
The best-run conglomerate in Hong Kong at a ~50% NAV discount
CK Hutchison (1 HK) is a defensive conglomerate with assets across Europe and Asia.
Hong Kong businessman Li Ka-Shing built up the company himself, from humble beginnings as the Cheung Kong plastic factory in the 1950s. Under the leadership of Mr Li, it then ventured into real estate during the Hong Kong riots of 1967. He then made a major coup in 1979, buying Hong Kong port operator Hutchison Whampoa at half its liquidation value, entirely financed by the seller HSBC.
Today, Cheung Kong and its two successor companies - CK Hutchison and CK Asset - have become stable conglomerates. Li Ka-Shing stepped down in 2018 but stays on as an advisor to the group. His son Victor now runs the show on a day-to-day basis and the company remains better run than most other Hong Kong-based conglomerates.
CK Hutchison’s has exposure to infrastructure, telecom, retail, port services and energy. They are all defensive industries. The over-arching strategy is to focus on oligopoly assets with limited competition and high returns on capital. New investments in biotech, software and other innovation industries are in their early stages of development and have not become major successes.
The growth potential of CK Hutchison’s key assets appears to be low to moderate. Victor Li sees potential in the health & beauty retail segment, with average payback periods of just one year. There might be potential to add value by buying & selling European telecom assets. And while CK Hutchison’s growth potential is weak, the company’s free cash flow generation continues to be strong.
The stock is down over 50% since the peak in 2015. Part of the issue is weakness in the group’s infrastructure segment due to regulatory resets in the current lower interest rate environment. Another problem has been COVID-19, with a temporary drop in oil prices and weak foot traffic in the group’s health & beauty stores.
Another perceived problem is Li Ka-Shing’s relationship with Beijing. The Communist Party wants him to reinvest his capital in mainland China. Yet he has been reluctant to do so, with CK Hutchison’s entire mainland China + Hong Kong exposure now only 13%. To combat Beijing encroachment into Hong Kong politics, CK Hutchison has become incorporated in the Cayman Islands, reducing the risk of expropriation in the name of “common prosperity”, as some investors fear will happen.
Using the current market values of subsidiaries with a 25% conglomerate discount yields a theoretical intrinsic value of about HK$85/share. However, many CK Hutchison subsidiaries trade at bargain prices as well. If you apply market multiples to each of CK Hutchison’s segment operating profits, the calculated intrinsic value will be closer to the 2015 peak than today’s share price of HK$55/share.
There is a significant amount of debt. It appears that the debt burden is sized appropriately, sitting mostly with subsidiaries and non-recourse to the parent. CK Hutchison’s low borrow rate and strong credit ratings suggest that creditors are comfortable with current debt levels. High debt levels may prove to be a blessing given building inflation pressures. But at the same time, if interest rates rise significantly, CK Hutchison’s defensive bond-like assets could well underperform.
Near-term catalysts include planned buybacks from the recent EUR 10 billion European tower sale, a recovery of the retail segment from COVID-19 as well as the impact of higher oil prices on subsidiary Cenovus Energy. A weaker US Dollar vs the Pound, Euro and Renminbi could also benefit the company.
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Disclaimer: Asian Century Stocks uses information sources believed to be reliable, but their accuracy cannot be guaranteed. The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. You are advised to discuss your investment options with your financial advisers. Consult your financial adviser to understand whether any investment is suitable for your specific needs. I may from time to time have positions in the securities covered in the articles on this website. Full disclosure: I do not hold a position in CK Hutchison at the time of publishing this article. This is disclosure and not a recommendation to buy or sell.
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