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Victor Li

As CK group transitions from Li Ka-shing to Victor Li, monopoly should no longer be its bread and butter

Peter Guy says the group of companies founded by the legendary Hong Kong tycoon can no longer rest on its conservative and defensive strategy of investing in monopolies

PUBLISHED : Wednesday, 25 July, 2018, 12:00pm
UPDATED : Wednesday, 25 July, 2018, 5:03pm

There are only two economic reasons to own a business. One is to grow it, the other is to sell it. Anything in between invites indecision and ossification through slothful management. One exception is the Hong Kong Chinese family business, a kind of economic monarchy. Many conglomerates grew out of local property development and trading businesses whose skill sets don’t necessarily reflect the outside world. The primary rule of succession is: no matter how cumbersome it has become, the business must inevitably be run by a family member.

The outcome is a dilemma where the conservative private banking priorities of a wealthy family conflict with the risky growth priorities that investors demand of a global, listed company.

After a 30-year apprenticeship, Victor Li Tzar-kuoi, 53, inherited his father’s leadership of CK Hutchison Holdings and CK Asset Holdings this year. The two conglomerates, which operate in over 50 countries, had combined revenue last year of HK$478 billion (US$61 billion), with a net profit of HK$65 billion.

Victor Li’s father, Li Ka-shing, built his empire on his super returns in property development and utilities, where he gained a dominant and sustainable competitive advantage through defendable markets or built-in monopolies. These returns were so immense that in the ’80s and ’90s, Li’s superior negotiating skills and relationships allowed him to efficiently assemble property developments without having to buy and hold extensive land banks.

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But, it is more difficult to expand that strategy outside Hong Kong. Other governments are not so supportive of Hong Kong tycoons and national politicians can be openly hostile to Chinese money these days. The old Hong Kong attitude about only being interested in making money doesn’t mix well with today’s turbulent, big money geopolitics.

The old Hong Kong attitude about only being interested in making money doesn’t mix well with today’s turbulent, big money geopolitics

One challenge for reshaping the CK group’s position will be finding successors for the current board of directors in the near future. The current group was chosen or cultivated decades ago under Li Ka-shing. Many are approaching retirement age. Victor Li may be the new chairman, but it is unusual that he has yet to appoint his own slate of directors after he has been involved for so long.

Driving constant change is necessary to adapt in a competitive environment. That the CK group seeks to avoid fierce competition in areas requiring sophisticated marketing and innovation is a strategy that increasingly looks unrealistic and too conservative. It may be appropriate for a family office pursuing downside protection, but not for a diversified, global company.

Even Warren Buffett, who for decades maintained a strict philosophy of avoiding technology investing, eventually came around to modifying his risk profile and taking stakes in IBM and Apple and in China’s electric vehicle maker BYD.

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Historically, apart from property development, major strides by the group came under its maverick Western directors. Under dynamic and colourful managing director Simon Murray and through entrepreneur Rick Siemens, who brought the early mobile phones to Hong Kong, Hutchison’s telecom division came to life in 1984. Its visionary expansion into the mobile phone market in the UK with Orange was an early, but misunderstood move, that eventually paid off as a foothold into its present European telecom business.

In 1987, Murray’s push to acquire Husky Energy was a bold move which probably couldn’t be done in today’s nationalistic climate. Today, it is one of Canada’s largest integrated energy companies. And Watsons’ expansion into Europe’s retail store market during a downturn in the EU economy in the 2000s was led by its boss Ian Wade.

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The CK group of companies recently launched a US$9.8 billion bid for Australian gas pipeline operator APA Group. It represents its biggest overseas acquisition, applying its investment strategy of acquiring monopoly businesses. But overpaying for monopolies represents its own inherent risk.

APA’s current year forward price-earnings ratio of 37 was raised by Li’s offer to 50 times and 33 per cent higher than APA’s closing price at the time of the bid. If the acquisition is approved by regulators, the CK group would control a system that delivers about half of the nation’s gas and add to its Australian conglomerate that already includes power distributor Duet Group.

The acquisition may be suitable for the Li family’s risk-versus-return paradigm. But outside investors may seek a Chinese company to primarily succeed in China rather than diversify away from it. There are other investments and companies that offer that kind of diversification.

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Moreover, outside Australia, there aren’t many Western countries that will allow a Chinese firm to control an entire national infrastructure system. Before the Duet deal last year, the Australia government rejected CK Infrastructure’s bid in 2016 for electricity network Ausgrid due to national security concerns.

No one imagines the CK group should refashion itself into a new economy enterprise. But the group may have become too unwieldy and ultimately defensive. It could evolve into a “deal taker” rather than a “deal maker”. Transactions become too large and complicated – a victim of their ponderous weight. Arguably, no other Hong Kong, family-owned company faces the problem of unwieldy wealth like Cheung Kong.

Peter Guy is a financial writer and former international banker