Jake's View

Li Ka-shing's stake in investment property is far less than what it seems

Contrary to Beijing think tank’s fears, the Cheung Kong boss is far less active in the market than it seems and a pull-out would have little effect

PUBLISHED : Tuesday, 13 May, 2014, 1:03am
UPDATED : Tuesday, 13 May, 2014, 1:03am

Li Ka-shing's apparent move to reduce his investments in Hong Kong could damage the city's economic competitiveness, says a study by a central government think tank.

SCMP, May 10

And just how would it have that result? Let us first consider the nature of property development, Mr Li's primary business.

It is a very capital intensive business, often requiring multibillion-dollar payments for land with the money only to be recouped several years later from sales of completed developments and with the developer carrying the risk of market movements throughout.

But while risky for the developer, it is not always capital intensive for him.

The Hong Kong practice is for the developer to borrow the money for the land purchase from a bank and then finance construction from pre-sales of units in the development. He may not have to put up any of his own money at all.

Of course if it all goes wrong and the property market falls after he has bought development sites at the top of the market, he may need deep pockets to stay solvent.

Mr Li's genius, however, is in calling the up and down turns of the market better than most other developers. He has never really had to reach deep into his pockets because of having called the market badly wrong and banks have always been happy to advance him money.

He is also far less active in property rentals than other big players in property. His flagship, Cheung Kong (Holdings), for instance shows only HK$28.7 billion of investment property in its latest accounts. The equivalent figure for Sun Hung Kai Properties is HK$281 billion.

Thus I cannot see how the Hong Kong property market would really suffer all that badly if he were to pull his money out of it. He really does not have as much money in it as his stature in this town suggests.

The bigger question, of course, is whether he will sell out of Hutchison and Hongkong Electric, the two biggest holdings he has through Cheung Kong.

The short answer is that he has already long asset stripped them of their lucrative property development sites.

Hongkong Electric, in particular, is now only a slow growth power company with restricted earnings, in financial terms little better than a safe and solid bond, which is a form of investment that has never had much attraction to Mr Li.

Hutchison still has the potential of being the biggest player in any redevelopment of the Kwai Chung container port once we recognise that this port business is in terminal decline and cannot really compete with ports across the border.

Mr Li may keep Hutchison for that property project but he never bought the company for its supermarkets and mobile phones and there is no reason why he should be particularly loyal to them now. His personal attributable interest in the stock is no more than about 20 per cent anyway.

I think this Beijing think tank, the Chinese Academy of Social Sciences, is looking at it the wrong way. In an efficient market economy no one is so big that the economy's competitiveness will suffer if he sells out. No one has such superior insight as consistently to know better than the market what the fortunes of that economy will be in the future.

Mr Li has threatened several times in the past to leave Hong Kong and never done it. Good luck to him if he does. I am sure he would wish Hong Kong no ill if he stages an exit and I am sure we will suffer no ill.

Message to Ashley Alder, chief executive of the Securities and Future Commission: Sir, we are waiting to hear from you whether your rough tough regulators will take formal action against the transport secretary for deliberately hiding crucial price-sensitive information on MTR Corp from the investing public.

He is a director of the company, he has publicly admitted the offence, and you have new legislation on hand to stop that sort of thing. Come on, swing that big stick. Let's see you do it. Prove to us that you don't just pick on small fry.