Swire Pacific: An Interesting Asian Investment

One of the most interesting ways to invest in Asia is through some of the big conglomerates that have great exposure to growth businesses in that part of the world. You get some of the stability of a mutual fund, but none of the costs, and very often you also get a pretty decent yield, as well as a "conglomerate discount," if the sum of the parts is worth more than the whole.

Up to now, the company that I held with this in mind was KepCorp, also called Keppel Corporation (KPELY). This is a firm in Singapore that owns big chunks of a bunch of promising companies, including the world-leading shipyards for drilling rigs, lots of land projects throughout Asia, and a piece of a refinery company, among other things. And in some ways, Naspers (NPSN, for now) can be considered a part-Asian conglomerate, thanks to their investments in Tencent and in other, smaller businesses in the region.

On Thursday I added another one to my portfolio, Swire Pacific (SWRAY).

Swire is another big conglomerate, an old British family business based in Hong Kong and trading on the Hong Kong exchange (0019 if you want to look it up directly). I can't begin to tell you about all of its businesses in this brief writeup, but in truth it is pretty concentrated on property and aviation, which makes it much less confusing than some of the really huge conglomerates like Jardine (SHLY.PK.).

The main things that it's involved in are:

Cathay Pacific (CPCAY). It is the largest holder of Hong Kong's airline (about 40% now), which now owns the Chinese Dragon Air and has a tight mutual ownership arrangement with China Air. Cathay is consistently rated as one of the top airlines in the world, and dominates many of the transpacific routes. I expect it'll have a great year not only with the Olympics coming, but also with all of its increased sharing with Dragon Air that gets them directly into cities across China.

There is allot of competition here, but this has been a successful business for a long time (it also includes a separate, and very profitable aircraft maintenance and engineering operation, as well as some cargo operations). You can also buy Cathay separately, although you'd be a minority shareholder standing behind China Air and Swire,which between them own something like 60% of the company.

Hong Kong and Chinese land and development. The biggest part of Swire's business is office towers in Hong Kong, closely followed by mixed use, retail and residential developments both in Hong Kong and in a few cities in China. It owns some premiere office towers, with 95%+ occupancy rates, as well as many malls that are like magnets for the mainland Chinese who come to Hong Kong for the shopping (and hopefully fly Cathay). Unlike some of the big Hong Kong companies who ran in fear when Hong Kong reverted back to China, believing that its assets would be repatriated, Swire essentially took the Chinese at their word, stayed put. It seems to me, that it has benefited significantly from holding its valuable Hong Kong assets, and taking the opportunity to expand in China over the past few years.

Swire Pacific Offshore is an oil services company. It has 60+ ships that serve offshore oil platforms around the world, including the standard anchor handlers and the like, among them two massive ice-class vessels that are going to work for the Sakhalin Island fields off Siberia. This business is booming right now, though it admits that the medium term prospects are not necessarily as certain, due to allot of new ships hitting the market in the next year or two. I expect it'll be in good position to serve the huge amount of oil work going on right now offshore China, but this is a fairly small part of its portfolio.

And there are a mix of other companies, the largest of which is a Coke bottling franchise that covers about half of China, Hong Kong, Taiwan, and a big chunk of the Western US (Nevada, the square part of Idaho, pieces of some other states). This is a potentially, very high growth business in China as the consumer gets a bit more pocket money, and a great cash generator in Hong Kong, Taiwan and the US.

This is one that I expect to hold on to for quite some time, and I think it's well-positioned for growth without being too leveraged to what seem like bubblicious parts of the Chinese economy. Its profits have been heavily boosted by asset sales in the last two years, so be careful about judging ongoing prospects. Its"ongoing business" profit was about 8,700 HK dollars last year, but overall profit according to its accounting was $HK 22,500 thanks to some asset sales and revaluation of its real estate portfolio. Cash from operations was about $HK 5,700 (all of this off of a market cap of about $HK 83 billion, which puts them a bit over $US 10 billion).

The PE on 2006 earnings of $HK 14 a share is roughly 6, thanks to those extraordinary items, which represents about 20% growth over 2005 earnings (which also had similar extraordinary items). Using its "underlying earnings" per share, which takes out the non-recurring stuff like the property revaluations, by my calculations gives them $HK 6.70 a share for a trailing PE of about 13. It pays a very decent dividend of something in the neighborhood of 3%.

If you're at all interested in this one, note that there are two share classes - B shares essentially get a fifth of the earnings/dividends of the A shares, and are priced to match. For U.S. ADRs, both A and B share versions are available, but since the A ADRs have a 1:1 match, and the B ADRs have a 1:5 match, it ends up being the same for U.S. investors. A shares are much more liquid, and usually look a hair more expensive as a result (although so few B shares trade that you won't necessarily get them at the prices quoted).

Disclosure: The author owns shares of Swire Pacific that were purchased as ADRs at $11.75.