On July 31, 2014, Cheung Kong Holdings (OTCPK:CHEUY) (0001.HK) reported its interim results for the first half of 2014. Net profit attributable to shareholders rose 59% to HK$21.4 billion ($2.76 billion). The results benefited from a HK$8.0 billion ($1.0 billion) non-recurring gain from the separate listing of its Hong Kong electricity business. Core operating income (which excludes the impact of changes in the fair value of investment properties and the share of profits from listed associates) had risen by 15% to HK$7.3 billion ($940 million). The company benefited from a solid contribution from property sales, following improved buyer sentiment in the Hong Kong market and the launch of new projects. Earnings from property sales (including share of results of joint ventures) rose 22% to HK$4.7 billion ($610 million); despite shrinking profit margins caused by more aggressive competitor pricing due to weaker demand and government measures to cool the property market.
Earlier in March, Hutchison Whampoa (OTCPK:HUWHY) (0013.HK), in which Cheung Kong holds a 49.97% interest, announced the sale of a 24.95% indirect equity interest in A.S. Watson Holdings, its retail business, to Temasek Holdings, Singapore's sovereign wealth fund. The total consideration had been HK$44 billion ($5.7 billion), which Hutchison had used to return value to shareholders via a special dividend. Cheung Kong, as its controlling shareholder, has used its proceeds to pay its shareholders a special dividend of HK$7.00 per share ($9.03 per ADR) on May 14, 2014. This special dividend is paid on top of the interim dividend of HK$0.638 per share ($0.823 per ADR).
In September 2013, I presented the case that Cheung Kong Holdings was undervalued on a sum-of-the-parts (SOTP) basis (see article, "Cheung Kong Holdings: A Classic Conglomerate Valuation Dilemma"). Although shares in the company have risen by 19% since the publication of that article, the company remains undervalued. During that period, Cheung Kong has shown increased profitability, reduced its net debt, and its 49.97% stake in Hutchison Whampoa has risen in value. An updated SOTP valuation would imply that Cheung Kong is at least 21% undervalued. When we exclude the value attributed to the 49.97% stake in Hutchison Whampoa, Cheung Kong's remaining assets are undervalued by at least 39%. But to err on the side of caution, we should be mindful of the downside risks associated with tightening monetary policy and a slowdown in the Hong Kong and China property markets.
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