Cheung Kong Recommendation: Sell Brokerage: Schroders DURING the past two years, Cheung Kong has slowed down its process of replenishing its residential landbank.
Nevertheless, this does not insulate the company against the decline in residential prices as properties (including those held through listed associates) still account for about 40 per cent of Cheung Kong's net asset value. More importantly, its largest exposure in the sector comes mainly from the Kingswood Villa project in Tin Shui Wai.
As the location of Tin Shui Wai is very inconvenient, property prices there are more vulnerable to downward pressure when the market corrects itself.
Cheung Kong's investment strategy is also unclear to investors. While part of the funds generated from property development are being reinvested in the Hongkong property market, a substantial portion is being invested in many different sectors. These include property and infrastructure projects in China, minority stakes in second liner stocks, a stake in CITIC Pacific, and additional holdings in Hutchison.
Cheung Kong seems to have recognised the weakening in the residential market, and has taken steps to reduce its exposure there. However, the company is unable to identify suitable substitutes for investments. The lack of good investment opportunities available is likely to affect the company's profitability in the medium to long term.
