One man's cycle can be another's ride to riches

PUBLISHED : Friday, 28 August, 1998, 12:00am
UPDATED : Friday, 28 August, 1998, 12:00am

Consider one of the anomalies of accounting. The standard financial year is 12 months long, because this is how long it takes the earth to make one complete cycle around the sun. What this has to do with the turnover cycle of a business is a question that has no satisfactory answer.

A grocery chain, for instance, could conceivably find it useful to adopt its three-week average turnover cycle as its accounting period. A property company, in contrast, could adopt a 24-month accounting period on the grounds that this is the average interval between the purchase of a piece of development land and the sale of the completed building.

And if you were to emulate Mr Li Ka-shing, you would adopt a six-year accounting period, because this is about the length of the cycle on which he operates.

In 1979, he acquired control of Hutchison through Cheung Kong with an eye to redeveloping its Hunghom dockyard facilities, but it was not until 1984 that he finally got around to settling with the Government on a redevelopment premium for what it is now Whampoa Gardens.

In 1981, he snatched control of Hongkong Electric from the Jardines Group for its property sites, then waited almost seven years before settling the premium on what is now South Horizons .

He even took such pains over getting it right that to negotiate the premium he hired a senior Government official who would otherwise have sat across the table from him.

He does it this way because this is how the property development game works in Hong Kong. All property development anywhere in the world is a game of getting the timing right between buying, building and selling but it is more so in Hong Kong than elsewhere.

The reason is that the big variable is not the cost of the land but the cost of getting permission from the Government to build more on it than the original lease allows.

The Government can get very sticky about these lease-conversion premiums. It does not price them in direct line with the market trends. Even now, it still wants something near the gargantuan sums of money it might squeeze from developers if housing prices were at the levels of a year ago.

Having been often (and justifiably) accused in the past of giving the big developers sweetheart deals at the expense of the public, it does not want to be embarrassed again.

It is the normal cautious stance and thus what tends to happen is that the Government maintains a tough line on premiums until things get so bad and there is so little new property coming on stream that it finally must give in and lower the premiums or face a true housing crisis.

And this is when Mr Li strikes. It happens only every six years or so, and he builds his earnings for the next six years or so on it.

Along the way, he does not seem to care all that much if Cheung Kong's earnings go down for a year or two. He likes a strong share price as much as any entrepreneur, and his apparent strategy is that if he can help the share price along with good earnings then he will strive to do so.

But if the share price just does not want to go up then why bother pushing it? The record suggests that he then takes all the bad news, books the losses early, provides against diminution of value where he can and sticks it all into the profit and loss account for a year or two.

If it won't go up then send it down. He has lived through enough cycles in Hong Kong to know that good times follow bad as bad times follow good, and he has always made sure that his financial position is strong enough to endure the bad times.

What's more, a little bad news in the earnings from time to time may just help knock the government negotiators off their high perch and bring the lease conversion premiums down to the levels at which he likes to deal.

So why be fussed about the second decimal place in an interim earnings statement from Cheung Kong and Hutch? If you don't think about these two stocks as the boss does, you'll never make real money from them.