CK Hutchinson Holdings: A Hong Kong Conglomerate Relying On Europe

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About: CK Hutchison Holdings Limited (CKHUF), CKHUY, Includes: CHKGF, CKISF, CKISY, CKLSF, HCM, HCTPF, HGKGF, HGKGY, HSXUF, HTCTF, HTHKY, HUSKF, TOCOF
by: Christoph Liu
Summary

While located in Hong Kong, CK Hutchison is more focused on Europe both in terms of revenue and profit generation.

Founder and long time leader Li Ka-Shing stepped down from his role last year.

The new chairman is Victor Li, the former's eldest son, who also is co-managing director.

The company is a diversified conglomerate spanning from infrastructure to retail and logistics.

Given the geographic focus, I believe that a conglomerate might not be the corporate structure most beneficial to shareholders.

CK Hutchison Holdings Ltd. (OTCPK:CKHUF, OTCPK:CKHUY) is an industrial conglomerate headquartered in Hong Kong. However, the European market has surpassed the Asian special administrative zone as the group's most important geography. I therefore believe that investors should look at the company differently than its more home market-focussed peers.

Please note: Wherever necessary, I base my calculations on share prices and exchange rates as of June 12th (1 HKD = 0.13 USD).

Overview

CK Hutchison was formed in 2015 through a merger of Cheung Kong Holdings Ltd. and Hutchison Whampoa Ltd., about half of which had already been owned by the former prior to the transaction. At the same time, the group's real estate business was spun off into CK Asset Holdings Limited (OTCPK:CHKGF). The group had been led by Cheung Kong's founder Sir Li Ka-shing since its inception (ownership of Hutchison Whampoa was acquired in 1979). However, in May of last year, his son Victor Li took over the position of chairman. He and Mr. Canning Fok lead the company as co-managing directors (the position of managing director is comparable to a CEO in Hong Kong). Li Ka-shing remains a senior advisor.

CK Hutchison is a conglomerate with interest in port operations, retail, infrastructure, energy and telecommunications, among others. While it is still headquartered in Hong Kong, after the spin-off of the real estate operations, the company's most important geography is actually Europe.

Information Colours

Colour Scheme for the graphics below (right and middle)

CK Hutchison 2018 Revenue By Geography

2018 revenue by geography, *represents contributions from Finance & Investments and Others; Source: CK Hutchison Holdings Ltd.

CK Hutchison 2018 EBITDA y Geography

2018 EBITDA by geography,*represents contributions from Finance & Investments and Others; Source: CK Hutchison Holdings Ltd.

CK Hutchison 2018 EBIT By Geography

2018 EBIT by geography,*represents contributions from Finance & Investments and Others; Source: CK Hutchison Holdings Ltd.

Businesses

The company's businesses remaining businesses are the following:

Ports

Through its subsidiary Hutchison Port Holdings Limited, CK Hutchison is a leading developer and operator of ports worldwide. The Hutchison Ports network comprises 52 ports around the world. Part of the assets are held through separately listed, Singapore-based Hutchison Port Holdings Trust (OTCPK:HCTPF), in which it only holds a minority stake (yet exercises effective control through choosing the trustee).

Notably, the company's core cell, Hongkong and Whampoa Dock Company, was the first registered company in Hong Kong in 1866. In 1994, Hutchison Ports in its current form was founded in order to manage the growing international port network.

Besides the core business, the company also offers related logistics and transportation services, including cruise ship terminals, airport operations, distribution centres, rail services and ship repair.

Ports and related services accounted for revenue of HK$35,175 million ($4.5 billion) and about 12 percent of the group's profit in 2018.

A.S. Watson Group

CK Hutchison's retail operations are bundled in its 75.1 stake in A.S. Watson Group. The remaining 24.9 percent of the company is owned by Singapore's Temasek (which has been reported to have considered a sale of parts of its ownership). ASW is the world’s largest international health and beauty retailer, operating a network of over 15,000 retail stores in 22 countries worldwide. Its brands include Watsons, PARKnSHOP, Fortress and Watson’s Wine. ASW does also operate as a manufacturer and distributor of water products and beverages in Hong Kong and Mainland China, primarily under the Watsons Water and Mr. Juicy brands. The group furthermore owns Dutch Kruidvat group, French perfumeries chain Marionnaud and a 40 percent stake in German health and beauty store chain Dirk Rossmann GmbH.

ASW accounted for HK$168,991 million ($21.6 billion) and about 18 percent of profits.

Infrastructure

CK Infrastructure

CK Hutchison holds a 75.67 percent controlling interest in Hong Kong-based infrastructure company CK Infrastructure Holdings Limited (OTCPK:CKISF, OTCPK:CKISY). Based on its current market capitalization, CK Hutchison's ownership in CK Infrastructure has a value of about $16.15 billion.

CK Infrastructure's global portfolio comprises of diversified investments in energy infrastructure, transportation infrastructure, water infrastructure, waste management, energy-from-waste, household infrastructure and related businesses. The company's most important market in terms of profit contribution is the United Kingdom, where it owns a 40 percent stake in distribution operator UK Power Networks. Further UK businesses are Northumbrian Water, Northern Gas Networks and Wales & West Gas Networks and UK Rails. CK Infrastructure is furthermore the largest shareholder of Hong Kong utility Power Assets Holdings Limited (OTCPK:HGKGF, OTCPK:HGKGY), owning a 35.96 percent stake. Power Assets controls another 40 percent of UK Power Networks, with the remainder being owned by the Li Ka Shing Foundation.

CK Infrastructure also operates in Hong Kong, Mainland China, Continental Europe, Australia, New Zealand and Canada through various subsidiaries. Victor Li is the company's chairman.

Direct Interests in Infrastructure Projects

CK Hutchison also holds direct interests in some CK Infrastructure-led infrastructure projects on the holding level. These include gas distributor Australian Gas Networks Limited, energy-from-waste company Dutch Enviro Energy Holdings BV, Northumbrian Water, Canadian car park operator Park'N Fly, UK Rails S.à r.l. and Wales & West Gas Networks.

The infrastructure segment accounted for revenues of HK$64,724 ($8.3 billion) and about a third of CK Hutchison's profit in 2018.

Husky Energy

CK Hutchison owns 40.18 percent of Canadian oil and gas producer Husky Energy Inc. (OTCPK:HUSKF). Husky Energy operates oil basins in the Canadian provinces of Saskatchewan and Alberta, as well as offshore operations off the coast of Newfoundland as well as in Asia. It also has a number of downstream operations in Canada, which, in conjunction with its Canadian onshore upstream operations, form an "integrated corridor". Victor Li and Canning Fok serve as co-chairmen on the company's board.

Based on current share price, CK Hutchison stake in Husky Energy has a market value of $3.8 billion. It accounted for about 8 percent of the company's 2018 profit.

Telecommunications

In Hong Kong, CK Hutchison holds a 66.09 percent majority interest in Hutchison Telecommunications Hong Kong Holdings Limited (OTCPK:HTHKY, OTCPK:HTCTF), which provides mobile services in Hong Kong and Macau under the "3" brand. Notably, Li Ka-shing personally owns another 8.38 percent.

Outside of Hong Kong and Macao, the company's telco operations are bundled in two divisions:

  • Hutchison Asia Telecommunications holds CK Hutchison’s interest in mobile operations in Indonesia, Vietnam and Sri Lanka. It was a separately listed company until it was taken private in 2010 by Hutchison Whampoa.
  • 3 Group Europe operates businesses in Italy, the UK,, Austria and Ireland. In Sweden and Denmark, it is the leading partner in a joint venture (60-40) with Investor AB (IVXSF, OTCPK:IVSBF).

CK Hutchison estimates that it is currently serving a combined 112.8 million customers across the world through its telecommunications businesses.

Through a 87.87 percent stake in listed Hutchison Telecommunications (Australia) Limited (ASX:HTA), it also controls 50 percent of Vodafone Hutchison Australia Pty Limited, the remaining 50 percent being owned by Vodafone Group plc (VOD).

The telecommunications segment as a whole accounted for about a quarter of CK Hutchison's 2018 profit.

Other Investments

Hutchison Whampoa (China) Ltd.

Through its subsidiary Hutchison Whampoa (China) Ltd., CK Hutchison is engaged in a number of activities in Mainland China and Hong Kong, including the provision of aircraft management, maintenance, engineering and cabin cleaning services, production and distribution of household and industrial detergent products, the distribution of consumer goods, logistics services and production and trading of rice.

In 2018, Hutchison Whampoa (China) Ltd. accounted for combined revenues of HK$35,546 million ($4.5 billion) and an EBIT of HK$2,764 million ($353 million; EBITDA of HK$5,336 million/$681 million).

Chi-Med

CK Hutchison owns 60.15 percent of Hutchison China MediTech Ltd. (HCM), or in short, Chi-Med. Chi-Med develops and manufactures pharmaceuticals and healthcare products. Its subsidiary Hutchison MediPharma Ltd. focuses on innovative therapeutics in oncology and autoimmune diseases. Its commercial platform manufactures, markets and distributes prescription drugs and consumer health products primarily in China.

CK Hutchison's stake in Chi-Med currently has a value of about $2.14 billion.

CK Life Sciences

CK Hutchison owns a 45.32 percent stake in Hong Kong-based CK Life Sciences International Holdings Inc. (OTC:CKLSF). CK Life Sciences is engaged in the business of research & development, manufacturing, commercialisation, marketing and sale of nutraceuticals, pharmaceuticals and agriculture-related products.

CK Hutchison's position in CK Life Sciences currently represents a value of about $225 million.

TOM Group

TOM Group Limited (OTC:TOCOF) is a listed Hong Kong technology and media company. TOM Group offers various e-commerce-related services, operates the Taiwanese social network pixnet and operates online media platform tom.com. It also makes strategic investments in fintech and advanced data analytics start-ups. Its media businesses comprises the publishing and advertising segments.

CK Hutchison owns 36.13 percent of the company, which currently represents a market value of $266 million based on its share price.

Hutchison Water

Through its Singapore-based subsidiary Hutchison Water, CK Hutchison invests in water and cleantech technologies and solutions. Hutchison Water manages desalination and hydro-electric projects and manages a portfolio of companies.

Financials

For 2018, CK Hutchison reported an EBITDA of HK$113,580 million ($14.5 billion; +9 percent) and EBIT of HK$72,885 million ($9.3 billion; +8 percent). After-tax profit was HK$ 46,782 million ($5.99 billion).

The company had cash and liquid assets of HK$ 144,703 million ($18.5 billion) and total debt of HK$ 352,668 million ($45 billion), resulting in net debt of HK$207,965 million ($26.6 billion). While absolute debt might appear rather high, this level of relative debt appears fairly manageable. CK Hutchison has investment grade credit ratings (Moody's A2; S&P A; Fitch A-).

The group paid an annualized 2018 dividend per share of HK$3.17 ($0.41; +11.2 percent). Based on the current share price, this amounts to a dividend yield of above 4 percent even without any dividend growth. In recent years, CK Hutchison has kept its payout ratio more or less stable at around 30 percent.

Risks and Downsides

After giving an overview of the company above, allow me to point out a few risk factors attached to an investment in CK Hutchison that I see.

CK Hutchison reports in HKD. However, only a tenth of its revenue is generated in Hong Kong. This naturally creates a currency risk (admittedly, this cuts both ways so it could also result in a positive effect).

Investors should furthermore keep in mind that Li Ka-shing, who founded the company (more precisely speaking, founded one part and acquired the other) and grew it into what it is today, is no longer at the helm. It remains to be seen whether Victor Li will be able to follow in his father's footsteps. I believe that it is still too early to judge the new chairman's performance after just over a year - especially as many members of the leadership team built by the father are still in place. However, it is certainly a possibility that he will not be able to match his father's accomplishments (which admittedly only few people in the world have ever reached). Since Victor Li took over the role of chairman, the company has notably been trailing the Hang Seng Index (HXSUF).

An additional risk I see arises from the (mainland) Chinese government's willingness to take closer control of Hong Kong, including the local economy and businesses. The new Hong Kong extradition law, in particular, would enable Beijing to get a hold of subjects in order to try them in China. That inevitably leads to considerable leverage in the hands of Chinese authorities. Keep in mind the fact that China is not a country that has adopted the rule of law to the same extent as western democracies have. While I do not wish to discuss political matters or make any political judgement, I still see this as a risk in terms of Hong Kong companies coming into a position where political interest might prevail over shareholder interests. In the case of CK Hutchison, the weight of this risk factor might be lower than with other Hong Kong companies given its more international business portfolio. Nonetheless, its existence should at least be noted.

Lastly, I am not convinced that the structure of a conglomerate is the most beneficial form for shareholders. While such corporate structures make sense when it comes to operations in emerging markets, where diversification as a means of risk reduction could be warranted, Ck Hutchison's most important market is Europe, the UK being the single most important country. Conglomerates tend to trade at a certain discount as compared to standalone companies. Therefore, I believe that CK Hutchison might rather lock than unlock the value of its parts in its current structure.

Conclusion

After the spin-off of the real estate business, CK Hutchison is no longer a play on Hong Kong first and foremost, but an international conglomerate focused on Europe. Therefore, while the company is certainly not overvalued terms of multiples and offers an attractive dividend yield, I am not convinced that it will be able to deliver above-market performance in terms of its share price while holding on to its current corporate structure.

If one is looking for a diversified entry into the Asian market with special emphasis on Hong Kong, I believe one can take a look at companies like Jardine Matheson (OTCPK:JARLF, OTCPK:JMHLY) or Swire Pacific (OTCPK:SWRAF, OTCPK:SWRAY, OTCPK:SWRBY, OTCPK:SWRBF), which I have presented previously to be the more interesting investments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: All research contained in this article was done with utmost care. However, I cannot guarantee accuracy. Every reader is advised to conduct his own due diligence and research.