What do minority investors see in family-run CK Hutchison?
Hong Kong’s other tycoons are very under-diversified compared to Li Ka-shing, who has been criticised for his divestments from China
Lost in the controversy and recriminations over Li Ka-shing’s divestments from China is the observation that Hong Kong’s other tycoons are very under-diversified compared to him. After this year’s restructuring, shareholders saw a more streamlined Cheung Kong group structure where the interest of shareholders and the Li family are better aligned. However, bigger challenges face his son Victor Li Tzar-koui, who will eventually succeed his father.
The swashbuckling investment style displayed by Li-Ka Shing from the 70s to the 90s has necessarily evolved into a more measured view towards risk. The group has also benefited from its monopoly or oligopoly situations in Hong Kong. Although CK Hutchison Holdings can’t replicate the same level of aggressive pricing and competitive power around the world that they have enjoyed in Hong Kong, they can buy into regulated monopolies such as electricity generation.
Seeking and buying into reliable cash flows, revenues and predictable capital expenditures are the key features of the group’s international acquisitions today. They steadfastly avoid business risks and competitive activities such as the need to market, build brands or invent.
Back in the early 1990s, a banker once told me, “there is no strategic thought or inclination at all in the Cheung Kong/Hutchison group”. Back then, group strategy was an entirely opportunistic, asset trading affair. But after decades of growth, it has become more difficult to find very undervalued assets.
Its focus on buying infrastructure or utility operations around the world represents a natural evolution to address the central issue of reinvestment risk while preserving capital and limiting downside.
As long as CK Hutchison sticks to businesses that do not require innovation and outstanding management, they can centralise decision making around the family owners. Warren Buffett has said he prefers investing in businesses that need to jump one-foot hurdles rather than 10-foot ones. Owning easy-to-understand businesses that anyone can run has proven successful for other investors in the past.
But Buffett also warned that leaving your children too much wealth inflicts a curse and terrifying burden upon their lives that can lead to ruin. This is why he intends to give away most of his money and leave Berkshire Hathaway to be run by professionals. However, even in the 21st century, wealthy Chinese families refuse to consider the option of professional managers. Their implacable view is that control of the business must stay in the family at all costs.
However, CK Hutchison’s key managers, some of whom are board members, must face retirement in the near future. And, there are few clues as to who will be Victor Li’s lieutenants in the future. And they will be vital to maintaining and executing its investment discipline.
The importance of this strategy is evident in a recent and rare interview of one of Li’s closest officers Canning Fok Kin-ning in the Financial Times. The writer described how the group’s modest London offices were adorned in threadbare carpeting and its decisions were made by the family and a few key executives. Indeed, it is a waste of time, salaries and stock options to support plush offices and a bloated executive corps.
But, then investors should ask: what is the future attraction of investing in CK Hutchison Holdings for the minority investor? It has become a publicly listed, family investment office whose conservative policies are designed to suit the family owners.
While Berkshire Hathaway, like CK Hutchison, is dominated by one elderly man, the difference is that the former has elaborated its investment principles far clearer than the latter. Buffett intellectually treats his shareholders like his partners or members of his church congregation. CK Hutchison, like many listed Asian companies, still treat minority shareholders as a source of financing.
How CK Hutchison relates to its shareholders and stakeholders is important in the future as it expands internationally and operates in foreign markets where western levels of transparency are expected. Hong Kong has also changed as people demand that the company live up to its responsibilities as the city’s biggest corporate citizen.
Outside of the company’s annual meeting, protesters demand that Li Ka-Shing promote social equality. He used to be admired only for his money-making prowess -- that was all you needed to succeed in this city. But, Hong Kong people are demanding more social responsibility from their current and future tycoons. Whether or not the company shares these concerns will define its future as much as its global strategy.
Peter Guy is a financial writer and former international banker