Surge in share prices as investors cheer Li Ka-shing's business revamp
While reorganisation helps unlock the value of the group's assets, other top similar conglomerates are unlikely to follow for now
A surge in share prices in response to Li Ka-shing's sweeping reorganisation of his business empire signals that investors would welcome moves by the city's other top family-controlled conglomerates to clean up their opaque corporate structures.
Analysts were quick to identify value in the deal, mainly to come from the removal of a complex controlling structure dating back to 1997, whereby Li's Cheung Kong (Holdings) held 49.97 per cent of Hutchison Whampoa stock, which would streamline management decision-making and make it easier to leverage up the balance sheet to acquire new assets.
The question now is whether other firms will follow, as Hong Kong conglomerates trade at an average 30 per cent discount to net asset value, according to a Nomura study of seven local groups, including Swire, Hutchison and Wheelock.
The answer for now is not yet.
"What they are doing is a step in the right direction for transparency and removing conflicts of interest," said shareholder activist and investor David Webb in reference to the Cheung Kong deal.
"I wouldn't hold my breath waiting for other companies to follow suit. They have different dynamics involved and often the objective of having a layered structure is to maintain voting control without having as much economic interest at stake."
Analysts identified Wheelock, Henderson Land Development, New World Development, Swire Pacific and KWah International Holdings as having similar structures to Li's businesses.
Cheung Kong and Hutchison, the two principal arms of Li's sprawling property, infrastructure and energy holdings, both closed up more than 12 per cent yesterday following plans announced late last week to merge the two into Cayman Islands-registered CK Hutchison Holdings and at the same time spin off the property assets into a separate company.
Under the existing structure, investors were confused about how assets, revenues and decision-making were divided between Li's businesses, given the sectoral overlaps and the use of joint-venture vehicles on deals.
Cheung Kong traded at a 33 per cent discount to net asset value and the stock would rise 27 per cent as a result of the merger, BNP Paribas analysts wrote in a report yesterday.
By removing subsidiaries that too often "create poor capital structures", companies could "capture the discount and return it to shareholders", said one hedge fund manager who asked not to be named as he previously arbitraged the stock price differential between Li's group companies.
A restructuring of Henderson Group's six listed businesses could unlock similar gains for shareholders, said Alfred Lau, an analyst at Bocom International.
Henderson chairman Lee Shau-kee holds a 69 per cent stake in property flagship Henderson Land, which holds a 69.27 per cent in Henderson Investment; and a 41.5 per cent interest in Hong Kong and China Gas, which operates Towngas. Henderson Land also owns 45 per cent of Miramar Hotel and Investment and 33.33 per cent of Hong Kong Ferry (Holdings).
