New | Li Ka-shing's new CK Property group seen focusing outside HK, China
Tougher Hong Kong business environment will keep Li Ka-shing's newly organised firm on the sidelines as it focuses on overseas investments
Li Ka-shing's newly organised Cheung Kong Property Holdings (CK Property) will be one of the biggest real estate companies in Hong Kong, but the focus of its activities outside the city and the mainland bolsters the view of some that Asia's richest man sees tougher times ahead for his domestic portfolio.
Alvin Cheung Chi-wai, an associate director of Prudential Brokerage, said Cheung Kong had been disposing of assets on the mainland and had been largely dormant in terms of acquisitions, with a small site purchase in Hong Kong last month the only land it has bought in the city over the last two years.
"Compared with the group's increasing investment in non-property [assets] overseas, it shows its expansion in property is virtually frozen in view of the tougher business environment in Hong Kong," Cheung said.
The proposed stock market spin-off CK Property is seen by some analysts as further proof of a suspected Li plan to cut exposure to a market where developers are suffering from falling margins, rising competition and constrained price growth.
CK Property will likely sell 25 per cent of its equity initially in order to meet the stock exchange's minimum listing requirements, but Cheung believes Li is likely to offload more stock in subsequent placements future.
CK Property will own a portfolio of 17 million square feet of rental properties, making it the second largest landlord in Hong Kong after Sun Hung Kai Properties. It will also have a land bank of 170 million sq ft in Hong Kong and the mainland and 14,680 hotel rooms, according to Cheung Kong's announcement filed to the Hong Kong stock exchange on January 9.
However, CK Property is going to be saddled with higher debt and continuing uncertainties as a result of policy risks in the real estate market, say analysts.
Nicole Wong, the regional head of property research at CLSA, said Cheung Kong's inactivity in land acquisition comes at a time of limited price growth in the city's home market as construction costs soar. "In general, developers' profit margins have been reduced to 20 to 25 per cent plus from 35 per cent during the market boom," she said.
Jefferies analyst Venant Chiang said Cheung Kong had become the least active land acquirer of all major developers in the city, creating ambiguity among investors about the firm's long-term ambitions.
That in turn has stoked talk that Li is gradually moving out of Hong Kong, a claim that the billionaire has strongly and repeatedly denied.
Under the restructuring plan, all non-property assets of Cheung Kong (Holdings) and subsidiary Hutchison Whampoa are to be injected into a new company, CK Hutchison Holdings (CKH Holdings).
All property businesses will go into another new entity, CK Property, which will seek a separate listing on the Hong Kong stock exchange.
According to Chiang, without the leverage of Hutchison Whampoa's global reach, a separate property arm might lose the benefit of cheap lending when the interest rate cycle is reversed.
"There is no clarity about the pro forma balance sheet by the companies, especially given that CK Property will bear HK$55 billion of new loans as part and parcel of Cheung Kong's property business," he said.
Deutsche Bank estimates the gross asset value of CKH Holdings at HK$631 billion, while pegging CK Property at HK$389 billion.
"As there are sizeable joint-venture development projects between Cheung Kong and Hutchison in the existing structure, we believe the spin-off of the property business under the current proposal will help to improve transparency and better economies of scale going forward, which should ultimately lead to a higher valuation overall," Deutsche Bank analyst Jason Ching said.
