Li Ka-shing’s CKI Relies on Consortiums to Keep Debt Low

Li Ka-shing’s CKI Relies on Consortiums to Keep Debt Low

Tycoon’s Utilities Arm Bands Together With Associate Companies to Buy Overseas Assets


Nov. 20, 2013 4:56 a.m. ET


Hong Kong’s utilities companies have been snapping up assets from London to New Zealand in the past few years, but while electricity company CLP Holdings Ltd.0002.HK +0.72% ‘s debt exceeded its equity in 2011, tycoon Li Ka-shing‘s Cheung Kong Infrastructure Holdings Ltd. has kept its debt levels low. Since the 2008 financial crisis, CKI has spent more than US$22 billion on overseas acquisitions, according to Dealogic, to reduce its reliance on the domestic market, where returns on selling electricity are capped. Hong Kong’s other electricity producer and distributor, CLP, has spent just US$2.3 billion, but unlike Asia’s richest man, the company owned by the Kadoorie family can’t count on associate companies to take on debt to fund overseas purchases.Mr. Li controls tens of listed-companies, including blue-chip property flagship firm Cheung Kong Holdings Ltd. 0001.HK -0.89% and Hutchison Whampoa Ltd. 0013.HK +0.52% , which owns CKI, drugstores, supermarkets and Canadian oil firm Husky Energy Inc.HSE.T +0.13%

When buying assets overseas, CKI usually bands together with its 39%-owned associatePower Assets Holdings Ltd. 0006.HK +1.29% , which provides electricity on Hong Kong Island, Cheung Kong Holdings, and Mr. Li’s Li Ka Shing Foundation, which invests in charities.

Thanks to that strategy, CKI’s net debt as a percentage of its total equity has stayed around 4.4% on average since 2008, according to FactSet, and its net profit totaled 9.4 billion Hong Kong dollars (US$1.2 billion) in 2012, almost double what it was five years ago. In contrast, CLP, which goes it alone, has seen its debt-to-equity ratio hover around 84.3% and its net profit fall 22% over the same period.

While CKI has focused on European assets, CLP has been active in Australia and Asia. In 2011, its debt ratio soared to 107% after it spent US$2 billion to buy an Australian electricity retailer from the New South Wales government. On Tuesday, it agreed to spend US$1.8 billion to buy out Exxon Mobil Corp.’s XOM -0.78% stake in power plants in Hong Kong, illustrating its continued strategy of focusing at home and on markets in the Asian-Pacific region. HSBC Holdings HSBA.LN +0.30% PLC is one of the advisers on the deal.

CLP said it is an investor and operator in the Asian-Pacific region’s energy sector and doesn’t intend to expand its operations to other regions.

In June, CKI, Power Assets, Cheung Kong Holdings and the Li Ka Shing Foundation agreed to buy Dutch waste-management company AVR Afvalverwerking BV. More such assets are expected to become available in Europe as cash-strapped utilities and governments put them on the sale block.

By forming a consortium, Mr. Li’s CKI usually buys less than a 51% stake and can book a lower debt level, said William Lo, portfolio manager at Ample Capital Ltd. By buying a non-controlling stake, CKI can book its proportional share of profit without including the asset’s liabilities on its balance sheet.

Liabilities at CKI’s associate companies, which include Power Assets and jointly controlled entities, totaled HK$340 billion at the end of 2012, up 17% from HK$291 billion at the end of 2011, and more than triple the HK$104 billion at the end of 2008. But these liabilities don’t go on CKI’s balance sheet either, because its stake in each company is less than 51%.

By making acquisitions in conjunction with its associate companies, CKI has room to buy more mega-size assets but still enjoy a low debt level, analysts said. But with interest rates trending up, CKI’s ability to get attractive returns from buying into utilities may be limited.

“We are concerned that investment returns on overseas assets will fall when interest rates rise,” Mr. Lo said.

Mr. Li’s companies rely on bank loans to fund the majority of overseas deals, and “CKI may need to raise equity to fund future acquisitions if the borrowing costs of its associates and jointly controlled companies are rising.”

Power Assets, CKI’s Hong Kong electricity associate, is planning to raise as much as US$5 billion in the first quarter of next year from a Hong Kong initial public offering of its power plants and electricity distribution in the city to raise cash to buy global power assets, people with direct knowledge of the deal said earlier.

CKI is considering paying more than $2 billion for Fortum Oyj’s FUM1V.HE +0.12%electricity distribution business in Finland, people familiar with the matter said earlier this month. It is unclear whether it will bid for this project alone or with Power Assets or the Li Ka-shing foundation.

CKI declined to comment.

“With more governments in Europe looking to privatize public utilities to improve their efficiency while reducing their financial burdens, CKI has more acquisition opportunities than it did before the financial crisis,” said Gary Chiu, head of utilities and renewables research at Macquarie.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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