Li’s rumoured Hong Kong asset sales keep business community guessing

Last updated: October 21, 2013 5:58 am

Li’s rumoured Hong Kong asset sales keep business community guessing

By Paul J Davies and Demetri Sevastopulo

Li Ka-shing can still create waves in Hong Kong. The octogenarian one-time “superman” of Asia’s tycoon elite might have lost some of his political clout on the island, but his business decisions are watched as closely as ever and pored over in Hong Kong for their greater significance. A string of sales efforts are behind the latest bout of speculation that Asia’s richest man is getting out of the island’s economy. Power Assets, a sub-company of his Hutchison Whampoa conglomerate, is spinning out its Hong Kong electricity supply business in a listing valued at up to $5bn. His property empire, Cheung Kong, has sold the Kingswood Ginza shopping mall in the new territories.ParknShop, one of two dominant supermarket chains, and one of Mr Li’s most prominent local brands, had been up for sale since the summer with a price tag of $3bn-$4bn, but that deal was pulled at the weekend as bidders were not prepared to match the asking price.

Hutchison said on Friday night that it would now consider a stockmarket listing for all or some parts of its broader AS Watsons retail group, which includes ParknShop and another well-known Hong Kong brand, the electrical goods chain Fortress.

The bulk of the business, though, comprises its health and beauty retail chains, including Watsons in Hong Kong, and its very fast growing Chinese arm, which is driving the 500-per-year new store opening rate. Through acquisitions in recent years, Watsons has already become a global business that owns Superdrug in the UK and Marionnaud in France.

There are plenty of reasons why Mr Li, whose empire stretches from ports and property to telecoms, might be pessimistic about the city. Last year, like most local tycoons, he backed the wrong horse in the Hong Kong chief executive race.

CY Leung, the winner who is perceived to be less friendly to tycoons than his predecessors, has introduced policies that could harm their core property businesses. Then, this year, striking dockworkers protesting outside Mr Li’s Cheung Kong headquarters depicted the tycoon as the devil.

Mr Li insists that selling his Hong Kong assets is nothing more than a “commercial” decision.

Analysts were surprised by a potential sale of all of Watsons because the main motive for selling ParknShop was to free up funds and management time to concentrate on the much faster growing Watsons business.

However, John Chan, analyst at Standard Chartered, is among those who think reported valuations of $32bn-$40bn for all of Watsons are too high, but he sees a spin-off “as an effective way to unlock shareholder value”.

Analysts think the entire business could still be comfortably worth more than $25bn. Hutchison says it “will not consider giving up control of any of the businesses”, but it could still raise up to $10bn comfortably.

One banker close to the group adds that a Watsons sale does not fit with the profile of the other mooted sales. ParknShop, the Hong Kong electricity supply business and even Kingswood Ginza are constrained in terms of where future growth will come from.

Still, Watsons may not be the best growth option available for Hutchison, according to analysts at JPMorgan. Lucy Liu, at JPMorgan, has noted that Hutch’s retail businesses are no slouches with headline earnings growth of 10 per cent expected over the next two years, but that its European telecoms businesses, based around the “3” brand, will grow earnings at 20-35 per cent.

Telecoms is one of the main areas where Hutchison Whampoa continues to talk about investing, although it has been active in utilities and energy, such as its deal to buy a Dutch waste collection and incineration business for €950m in July.

The question as always is what such European assets should be worth.

Analyst Jonathan Galligan, at CLSA, says: “The big struggle the group is dealing with right now is: what out there is good value? Don’t underestimate their ability to just reinvest in existing businesses.”

But other groups too have been putting assets on the block. New World Developmentand Great Eagle, two property companies, are selling or have sold hotel buildings into listed trusts.

One of the things suggested by these sales is that there is less potential growth in Hong Kong and more potential growth in a recovering Europe.

This is politically a very sensitive statement to make in Hong Kong, but from an investment point of view some analysts think it makes a lot of sense.

But from Mr Galligan’s point of view, it is a fool’s errand to read too much into the sales, both real and rumoured.

“One of the things this group is very good at is saying ‘let’s put something out there and see what people will bid for it’,” he says.

“If you get an offer at or above your estimate of its future value, you would sell.”