Disposal seen as margins play by Li Ka-shing

Cash from supermarket chain sale could be put to work in higher-growth ventures, analysts say

PUBLISHED : Tuesday, 23 July, 2013, 12:00am
UPDATED : Tuesday, 23 July, 2013, 8:00am

Selling ParknShop would allow Li Ka-shing to cash out of the saturated grocery store market and channel his resources into lucrative health and beauty ventures on the mainland or utilities businesses in Europe, say analysts.

Known for selling assets at their peak, Li's Hutchison Whampoa on Saturday said the conglomerate was making a strategic review of its ParknShop chain.

"We believe a disposal makes strategic sense, especially if proceeds are reinvested into the higher margins/growth health and beauty business," analysts at UBS said in a research note yesterday.

Credit Suisse echoed the view, saying deals like these can help the port-to-telecommunications company recycle the cash flow to expand its China health and beauty operations.

According to a Morgan Stanley report on July 8, earnings before interest and taxes margin at the mainland health and beauty unit of AS Watson - the retail and manufacturing arm of Hutchison - tripled to 18 per cent last year from about 6 per cent in 2007, thanks to store expansion. That translates into a store compound annual growth rate of 34 per cent between 2007 and 2012.

In contrast, the margin at its retail business in Hong Kong has been largely flat, at a paltry 4 per cent since 2007, according to the US investment bank.

Analysts forecast that ParknShop, which generated HK$21.7 billion in revenue from its 345 stores last year, could fetch about US$2 billion, and the due diligence process for the disposal might be completed by mid-August, after the interim results briefing on August 1.

Apart from ParknShop, Hutchison runs other retail businesses such as electronics appliance chain Fortress and duty free operator Nuance-Watson, as well as mobile operator Hutchison Telecom in Hong Kong.

"Hutch is maintaining its good asset-trading record of monetising matured assets at high valuations and reinvesting into Europe infrastructure and telecommunications assets at inexpensive valuations," analysts at Nomura said in a note yesterday, "while deleveraging ahead of an interest-rate upcycle".

Shares in Hutchison rose 0.9 per cent yesterday to HK$85.30, just about 4 per cent below its 52-week high in late May.

In 2011, Hutchison made a one-off gain of HK$44.3 billion from a spin-off of its ports assets in Singapore. But the stock of the business trust has been trading 25 per cent below the offer price of US$1.01 since flotation.

"We believe the sale of ParknShop is similar to the spin-off of the Hutchison Port Trust, at a time when the group feels that the growth in Hong Kong and southern China ports is losing steam," Credit Suisse said.

Hutchison on Saturday stressed that "it has no definite timetable" for a potential sale of its ParknShop supermarket chain and has no intention to withdraw from Hong Kong.