Hong Kong companies: control freaks

Hong Kong companies: control freaks

Make a note of these names: Wharf Holdings, Henderson Land and Hang Lung. In 1987, these Hong Kong giants were among those reported by the Financial Times to be interested in seeking, along with Li Ka-shing’s Cheung Kong and Hutchison Whampoa, dual-class share structures. The storm stirred by these blunt bids for control stopped any of them doing so. It also ushered in the ban that far more recently, helped produce Alibaba’s contorted proposal, dismissed by Hong Kong, to instead control its board via a partnership. Now the Alibaba ruckus is pushing Hong Kong to debate how it can attract such exciting companies. But one look at how its biggest companies are already controlled suggests Hong Kong needs to think also about how it could make its existing market more enticing.Investments where outsiders are the minority are hard to get excited about. Such along-for-the-ride deals are common in Asia and leave shareholders to put up or get out. Hong Kong’s tycoon families exert control over all of the above companies through a series of part-owned vehicles that leave their economic interest far short of their voting rights. Factor in too China’s state-owned, but listed, enterprises and only a fifth of the Hang Seng’s top half is not either family-run, state-owned or otherwise controlled. Investors don’t usually care much about control until something goes wrong. But they should consider performance. Sales growth in the Hang Seng has averaged 15 per cent a year for the past decade, easily beating the 5 or 3 per cent managed by S&P 500 and FTSE Eurofirst 300 members respectively. And Hong Kong’s bottom line growth is better too: profits have risen 13 per cent versus the 9 and 8 per cent in the others. But both US and European groups squeezed out costs to produce better profit growth while Hong Kong companies were less efficient. And there isn’t much Hong Kong investors can do about that flabby performance.

LEX NOTE ON HONG KONG FROM 2 APRIL 1987

The sight of rising trade barriers around the US is calculated to chill the exporters of Tokyo, but it cannot do much for the nerves in Hong Kong either. The Hong Kong stock market has in fact been sliding with the best of them, but yesterday that had more to do with reaction to the cheeky two-tier share structure which Jardine Matheson appeared to have slipped past the authorities, closely followed by Mr Li Ka-shing.

Despite talk of legal advice, and the possibility that some of the details may be tampered with, the exchange has probably missed an important opportunity to assert its limited authority, even if it does raise the drawbridge against a rush of imitators. Jardine’s plan to offer four new B shares for each existing ordinary A share, with the Bs valued at one-tenth the As, is a foolproof way of retaining or even expanding family control while issuing more paper for expansion. The merely temporary wrath of the institutions and a hefty downward adjustment of the As is no doubt worth bearing for such a prize. Unfortunately, the idea of the Hong Kong market imposing effective sanctions against either Jardine or Hutchison does not ring true.

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