Is it up, up and away for ‘Superman’ Li Ka-shing?

The actions of Asia's richest man have long been scrutinised, but are his latest deals an indication that his time in the city is nearing its end?

PUBLISHED : Thursday, 10 October, 2013, 12:00am
UPDATED : Thursday, 10 October, 2013, 4:35pm

Wherever he goes - from the Deep Water Bay golf course he plays at dawn to the iconic Cheung Kong Center headquarters where he cuts deals - one question follows Li Ka-shing around like no other: are you abandoning Hong Kong?

Signs Li is losing faith in the hometown that helped make him Asia's richest man have been coming thick and fast since July, when his conglomerate, Hutchison Whampoa, sought to offload one of its cash cows, the ParknShop supermarket chain.

Last week, his energy flagship, Power Assets Holdings, said it would pursue a separate listing of its local electricity business, Hongkong Electric, while the Hong Kong Economic Times reported that Hutchison planned to spin off its trophy asset - the retailing unit, A.S. Watson - in the next 12 to 18 months.

Analysts said the potential spin-off of A.S. Watson, the world's largest healthcare, beauty and lifestyle chain with about 11,000 stores globally in brands such as Watson's, Rossmann, Superdrug and Kruidvat, as well as ParknShop, could generate proceeds of HK$78 billion.

Hongkong Electric, the sole electricity supplier serving almost 2 million people on Hong Kong and Lamma islands, is expected to raise HK$38 billion in the upcoming spin-off.

The sale of ParknShop may reap HK$30 billion in fresh funds.

Taken together, it raises the question of whether the tycoon nicknamed "Superman" is simply making a smart business decision: pulling out of mature and/or highly regulated markets to go where the growth is; or displaying doubts about the way Hong Kong's government, business environment and society is going.

[Li's deals] reflect growing hostility in the city's business and political landscape
Eric Wong Chun-yu, Bricks & Mortar Management

"There is a shadow of Li pulling investments out of Hong Kong," says Eric Wong Chun-yu, chairman of property investor Bricks & Mortar Management. "If one examines individual deals, the arrangements reflect growing hostility in the city's business and political landscape."

But "Superman" himself gave a different definition of investment flight when he held an impromptu meeting with editors last month.

"If [the sale of ParknShop] is interpreted as pulling out from Hong Kong, the amount [HK$30 billion] may be too small," Li told a group of Hong Kong editors whom he "accidentally" encountered during lunch two weeks ago at his canteen on the 70th floor of the Cheung Kong Center. "To me, if I sell this building, you should start to worry."

Li began to amass his fortune in the 1950s with a plastic flower business. Famously taking advantage of uncertainty amid the social unrest of the late 1960s, he began snapping up property at bargain-basement prices, later using his development profits to move into telecommunications, infrastructure and energy, port services and retailing. Forbes magazine this year put his net worth at US$31 billion.

His real estate flagship, Cheung Kong (Holdings), was worth about HK$284 billion while Hutchison was worth nearly HK$416 billion as of Friday.

Some analysts argue that the international dimension to Li's empire, which is much more diversified than that of other Hong Kong developers, provides a hedge against volatility in the local property market.

They point out that Cheung Kong suffered least among its peers in terms of share-price gain against the Hang Seng Index in the past year.

Cheung Kong share prices lagged behind the benchmark index by 4.71 per cent in the past 12 months, which was the best of the worst among counterparts such as the troubled Kwok family's Sun Hung Kai Properties at 19.97 per cent; Lee Shau-kee's Henderson Land Development at 20.7 per cent ; and Cheng Yue-tung's New World Development at 19.33 per cent.

"Li's business empire has grown so much that the Hong Kong market has too little room and is too mature to invest in," said Professor Chau Kwong-wing, an expert in real estate and construction at the University of Hong Kong. "It is not surprising to see him divest some businesses with stagnant growth and reinvest the sale proceeds in other markets with more business opportunities."

Some analysts see the invisible hand of politics complicating Li's business strategy.

"Obviously there are more tensions between developers and the Hong Kong government over housing and land policy in the past couple of years," Chau said.

A case in point is the government's decision a year ago to launch a string of measures, including punitive extra stamp duty charges on sales of flats to non-Hong Kong residents, aimed at cooling property prices.

A further, unexpected round of measures launched in February, which saw stamp duty doubled on properties sold for more than HK$2 million, provoked an outcry from developers, chambers of commerce and multinational firms. They complained that genuine buyers were being hurt along with the speculators the measures were supposed to target.

"The political factor is getting bigger and bigger in many business issues," Wong of Bricks & Mortar said. "Future home prices are virtually impossible to estimate; they defy fundamentals and are vulnerable to political interference."

He believes floating A.S. Watson and Hongkong Electric and putting ParknShop on sale make business sense. He says retailers enjoy a higher valuation at the moment as consumer spending thrives amid a low-interest-rate regime.

Brokerage firm UBS says the potential A.S. Watson spin-off implies a price-to-earnings (EBITDA) ratio before interest, taxes, depreciation and amortisation of between 20 and 24 times.

By contrast Dairy Farm, the Jardines-owned retail chain behind ParknShop's biggest rival, Wellcome, has a price-to-EBITDA ratio of 15 times.

Goldman Sachs, the investment bank that handles many deals for Cheung Kong companies, said A.S. Watson's earnings-before-interest-and tax return on assets was among the highest of any Hutchison unit last year, at 17.5 per cent, just behind the property unit's 18.2 per cent.

The bank described the chain as a cash cow that contributed 17 per cent of the group's pre-tax earnings last year, about HK$10 billion, more than covering its HK$3 billion of capital expenditure at its 11,000 stores.

"It has a global network, and retailers are among the most sought after sectors," Wong said. "The question is: where will they redeploy the proceeds?"

A similar question also hangs over the proposed listing of Hongkong Electric. Most analysts see the estimated proceeds of HK$38 billion being earmarked for mergers and acquisitions of infrastructure and energy projects outside Hong Kong.

A senior official with Hongkong Electric's holding firm, Power Assets Holdings, said the listing was a straightforward business decision, intended to draw a clear distinction in its management of assets in the highly regulated local power sector and its overseas interests.

The official said the group's overseas portfolio was growing faster than its Hong Kong unit.

In the past 10 years, Hongkong Electric's electricity sales grew 1.5 per cent or less per year - despite shrinking by up to 2.2 per cent in 2003, amid fallout from the severe acute respiratory syndrome outbreak.

Power Assets' overseas units, including two gas distribution networks and three power networks in the United Kingdom and electricity distribution services in Australia, accounted for 52 per cent of its HK$9.72 billion earnings last year.

"Frankly, the return on assets of our electricity business elsewhere is higher than the 9.99 per cent annual return we are earning in Hong Kong," the Hongkong Electric official said, citing the maximum return allowed under a government cap.

"Even our mainland portfolio is generating a return close to or slightly above that in Hong Kong."

Citi Research said a separate listing of Hongkong Electric would mean Power Assets could realise "its bond-like, low-growth Hong Kong electricity business at high valuations amid a low-interest-rate environment".

Wong, of Bricks & Mortar, said Power Assets should further diversify geographically and could also use part of the proceeds to reduce debt.

From Hutchison's perspective, meanwhile, the proceeds from the potential listing of A.S. Watson would be enough to halve the firm's net gearing to between 20 and 25 per cent, according to UBS.

That's all the more important given that that interest rates in the United States are expected to go up in 2015 as Washington tapers its programme of quantitative easing by reducing purchases of treasury bonds.

But some are more sceptical. Veteran commentator Johnny Lau Yui-siu see Li's business moves as a sign of Li flexing his political influence by showing he can move capital elsewhere.

In particular, Lau said, the possible sale of ParknShop was another wake up call to Hong Kong's anti-trust regime.

Despite the introduction of a competition law in June last year, he and other commentators fear little could be done to prevent a deal that would strengthen the ParknShop/Wellcome duopoly.

One of the eight bidders, China Resources Enterprise, already runs the Vanguard supermarket chain and would instantly become the dominant player if it took control of ParknShop's 286 Hong Kong stores. ParknShop, which also owns the Taste, Gourmet, Great and Su-Pa-De-Pa brands, controls 40 per cent of the market.

Lau also says that tighter regulation would reduce the threat of a tycoon or businessman moving assets overseas.

"The government should … strengthen its competition law so that no developers can threaten to park their investments outside Hong Kong," Lau said.