The wages of spin
The streets heaved with Tom.com mania in February 2000 as the public fought to subscribe to the IPO of the Li Ka-shing-led beta site. With Li's reputation at its peak following his stunningly profitable sale (for HK$113 billion) of British mobile phone firm Orange to Germany's Mannesmann, people were willing to bet on anything with the Li imprimatur.
Hundreds of police officers were drafted in as more than 300,000 hopeful investors choked pavements, forced the partial closure of roads and put bus stops out of action. One lane of Nathan Road had to be closed to traffic.
At one point in Mong Kok, a queue of 50,000 snaked along the streets. In North Point, where 20,000 people submitted forms, part of King's Road was closed. In Tsuen Wan, an estimated 120,000 people submitted applications while 40,000 converged on Kwun Tong and 20,000 on HSBC's Central headquarters.
But the deal did not turn out so well. The share price of the company (renamed Tom Group) fell below its IPO price in the second half of 2004 and now trades significantly lower.
Since its listing, the firm has cycled through a series of business models but has yet to achieve any success or identity. It never became the 'China-related new media mega-portal' that had captured the imagination of investors. The IPO, in other words, was a dud.
Investors have not done well with initial public offerings spun off by the Cheung Kong group. Since 2000, of the many spun out assets held by Li-chaired Cheung Kong (Holdings) and its 50 per cent held Hutchison Whampoa, only two made money for those who bought at IPO (see table).
The Cheung Kong group is a huge conglomerate that could easily finance its investments from internally generated cash flows and debt. So why does the group keep returning to the IPO markets to sell various assets generally at peak-of-the-market prices and risk generating bad will among Hong Kong's investing public?
Part of the answer is that trading is integral to the culture of the group, which seeks every reasonable opportunity to sell assets profitably. Spinning off IPOs is a means to that end.
'They are asset traders. They say, 'We don't have to be any business,' there is no core business for them. If they can sell an asset at a good price, they sell,' says Julian Bu, who covers Hutchison for the brokerage firm Jefferies & Company. 'This is why there is a laundry list of listings [from the group] because that is what they do.'
The group does not just sell assets to the public via IPOs. It has been very shrewd in its disposals to other firms, such as the 2006 sale of a 20 per cent stake in its ports business to Singapore's state-owned PSA International. The deal, which was priced at a high valuation amid a bull market, generated a HK$24 billion profit for Hutchison. In 2007 it made another HK$70 billion with the sale of its Indian telecoms assets to Vodafone (of which Vodafone was widely perceived to have steeply overpaid).
'A lot of private buyers have done deals with Hutchison and many have learned you have to be careful because you can lose money,' Bu adds.
Each deal also brings the opportunity to experiment with different structures and instruments, which expands and diversifies its investor base from which it could raise capital.
Generally, the group is quick to pick up themes that are in vogue with investors. Tom.com remains the gold standard of this kind of opportunistic listing. Most of the spin-off floats that have come out of Cheung Kong and Hutchison follow the Tom.com example: a quick-fire listing that taps into a particular investor enthusiasm and then fades along with whatever fad it initially utilised.
Fortune Real Estate Investment Trust (reit), which owns some of the shopping malls of the Cheung Kong group in Kowloon and the New Territories, was listed in Singapore in August 2003. The reit market had just opened up in Singapore, and this deal tapped into early curiosity for the instrument - particularly among the yield-oriented Singaporeans.
Reits enable the group to continue to control and manage the properties, and make many types of lucrative fees out of them. More importantly, the structure gives Cheung Kong a platform to sell old properties, to recycle capital into new developments from which most of the money is made.
'Most of the value is done at the development side,' says one Cheung Kong analyst who declined to be named. 'Value is created when you create something new. It makes sense, therefore, to rotate capital from mature investments to something with a much higher potential.'
The Fortune reit is down only slightly from its adjusted IPO price. But bear in mind shareholders would have to return to the company most of the dividends they received to subscribe for the rights issues in June 2005 and September 2010 in order to maintain their shareholding levels.
Hutchison Whampoa also entered the fray last March when it listed, in Singapore, Hutchison Port Holdings Trust, a business trust (conceptually similar to a reit but holding other types of assets) that owns ports in Hong Kong and Shenzhen. Hutchison's port deal was among the first and largest to arrive in the region.
Barely a month later, in April 2011, Cheung Kong also brought the Hui Xian Reit (it part owns the Oriental Plaza in Beijing) to Hong Kong as the city's first yuan IPO, which was characteristic of the Li spin-off float. It tapped into Hongkongers' enthusiasm for all things yuan and provided Cheung Kong with another platform for property disposals.
The sale of Hutchison Port Holdings Trust and Hui Xian Reit in rapid succession, last year, raised a staggering HK$55 billion in one month. The deals probably reflected Li's views that these assets were over-valued amid concerns of a slowdown on the mainland and globally, which proved to be right based on their dismal post-IPO share price performance.
But, as always, Li found willing buyers for his deals among Hong Kong's retail investors.
'Yuan-related investments were very popular at that time [of the Hui Xian listing] and reits were popular. When you look at the Hutchison port trust, that was brought when the business trust was also popular [among investors],' says Adrian Lowe, who covers Hutchison for the brokerage Mirae Asset Securities.
Li would also be motivated to do an IPO if the success of a group company is uncertain, or success depended on open-ended investment, and the group wished to retain control and limit its financial exposure. What better way to achieve that goal than to sell new shares to the public in an IPO at a huge premium on the back of Li's stellar reputation? Certainly, the listings of Tom.com and CK Life Sciences fit that description.
The founding shareholders of Tom invested about HK$500 million before its IPO (an average of about HK$0.20 per share). The company then sold about 15 per cent of new shares to raise about HK$700 million. So the group was able to continue to control the company, and get public shareholders to provide most of the funding and assume most of the risks by selling them a minority stake. With the low entry costs and high premium paid by investors, even at current depressed share prices, the group is still sitting on huge capital gains.
CK Life Sciences, a bio-tech start-up on the mainland, caught a flutter of Li-fuelled enthusiasm among public investors when it listed in July 2002. The firm over the years has looked at various initiatives, from energy drinks to a yeast-based treatment for HIV/Aids, but it gradually drifted out of view.
Investors have had at least one Li deal pay off for them: the October 2004 listing of Hutchison Telecommunications International Limited (HTIL).
The company, which in 2004 held the Asian telecommunications assets of the group, listed at an IPO price of HK$6.01. It was privatised by Hutchison Whampoa in mid-2010 at HK$2.20.
Before that, investors in HTIL received for each share held one share in Hutchison Telecommunications Hong Kong (comprising assets in Hong Kong and Macau, and which was separately listed in Hong Kong in 2009 and now trades at about HK$3) and HK$7 in special dividends in December 2008 on top of other dividends. According to the circular issued in March 2010 in connection with HTIL's privatisation, since its IPO the company had generated a total gain of about 178 per cent, or an annualised return of about 22 per cent to the end of 2009, for its shareholders, even before taking into account the privatisation price.
Otherwise, investors in the March 2004 IPO of Tom Online, which never paid any dividends while listed, would have realised a gain of two cents (that would be wiped out if holding costs were taken into consideration) when the company was privatised in 2007.
But for sheer consistency, investors would have a hard time beating the regular returns and dividends spun out of the mother and father of the Li corporate family, Cheung Kong and Hutchison. All of which suggests a simple strategy: buy and hold the parent firms, but shun the spin-off floats. It is indicative that Li has steadily raised his shareholding in these two companies over the years.
Li's reputation as a stellar trader remains intact. Investors might want to buy what Li is buying - shares in the parent firms, Cheung Kong and Hutchison Whampoa - and not the spin-off IPOs he is selling.
Says one Hutchison analyst: 'I have always been of the opinion that when Hutchison and Cheung Kong have a deal, you don't take it. It has to be a good price [for the vendor] otherwise Hutch won't sell.'
Cheung Kong and Hutchison declined to comment for this story.