Hutchison & Cheung Kong
Date : AUG 20, 2001
Tony Measor
There was our stockbroker in Malaya during the 1960s which was owned by a public company. Whilst the partners of the stockbroker did very well, and grew off the fat of the land, the company did poorly and each year recorded losses.
The explanation was quite simple. If a deal was successful it would be taken up by the partner, and if it was a failure then of course it would be put into the company¡¦s account. This was a matter of heads I win and tails you lose. Both ways I must win.
In this case the trading was in the stock market, but it could as easily apply to the property market. For example one forms a subsidiary company, a painless process, with nominal directors, and then trots along to a government auction and snaps up a choice property. If one can fog up on who owns the shell company then you are at liberty to decide some time later whether this purchase was for oneself, if it was promising, or if it needed to go to the company, if there was too much risk attached to this development.
One is not alleging that this was the case when Cheung Kong sent an anonymous employee to the recent government auction, but it could be a fear that the press, or other suspicious sceptics, might express, and this is another reason why public companies should behave more openly and honestly than Caesar¡¦s wife.
There have been times when Cheung Kong has not been totally open towards its minority shareholders. One can remember the cases of Cavendish Land and China Cement, and sometimes a purchase, say of Husky Oil, which was shoveled into group companies even though the company had not dabbled in this business at all up to then. The incredibly bad decision for Li Ka-shing to underwrite derivative options on his companies, Cheung Kong and Hutchison, in his own stable, and then by some accident or other the shares closed at their worst for the year when the options were due to expire, was possibly the most brazen obscurity of intention, and aroused indignation amongst all minority shareholders.
Nonetheless Li Ka-shing has done very well for his shareholders. Since 1991, the profit of Hutchison Whampoa increased from $4.3 billion, to $34 billion in 2000, although that had included $25 billion in exceptional capital profits, whilst profits of Cheung Kong had risen from $5 billion to nearly $20 billion during this particular period, and again capital profits had played a large role in this, because Hutchison, of which Cheung Kong owns 50%, is the largest part of its profit.
Profit for Cheung Kong during 1998 had suffered a relapse falling from $17.6 billion in 1997 to only $6 billion during 1998, and this anticipated a drop in Hutchison¡¦s profit from $117 billion in 1999 to a still very respectable $34 billion during 2000.
Profits for these two major constituents of the Hang Seng Index will be announced on Thursday this week, and their final figures will depend very largely on the provisions which Li will decide. There will need to be a huge reserve made for Hutchison¡¦s overseas telecommunications stocks, including shares in Vodafone and Deutsche Telekoms, which have been tobogganing downhill.
Taking Hutchison¡¦s 2000 balance sheet, the net assets were stated at $250 billion. Only two years before, at December 1998, they were disclosed at $85 billion, and that difference is largely telecoms related. Fortunately Li had been able to capitalise for cash some of the investments, that in Vodafone and possibly some in Deutsche Telekom and VoiceStream. There are further commitments, shown as contingent liabilities for the venture into 3G, but one must wonder how this will be treated and whether reserves and provisions will need to be made.
In my own estimation, and this is quite arbitrary, I would imagine that Hutchison¡¦s net asset value would be in the region of $170 billion, and that would require provisions, losses or reserves of about $80 billion. This would still leave net assets at double their worth at end 1998, of $85 billion, and would put Hutchison¡¦s own NAV at about $40 per share. If these figures are realistic, then the market will be in for a very nasty and big surprise.
Cheung Kong, of course, will react but not nearly as dreadfully as the shares of Hutchison.
On the other hand major provisions are not disastrous as they are normally just one-off deductions. The important part of earnings is the recurrent annual income, and that for Hutchison seems to be in the region of $15 billion, being about $18 billion before taxation, minority interests and capital adjustment. This would mean that an asset value of $170 million, or $40 per share, would be far too cheap for an investment purchase. At the same time I would consider that $70 per share would be a dangerous level to buy when the results are due, which could well be disastrous and could wreak havoc with the share price.
A price of $60 per share for Hutchison would value the company at over $250 billion, and this would be the upper limit to what I would recommend should be paid for this stock in current circumstances. Nevertheless, it would still be a good speculative buy because the 3G investment will, if one can be sufficiently persevering, quite likely revive the erstwhile speculative interest and maintain high liquidity in the share market.
If Hutchison were to fall to around $60 then Cheung Kong would still be a bit cheaper at $60, as its other interests besides Hutchison could be gained for a mere additional $15 billion.
If my surmise is right, then the Hang Seng Index, following the unsurprising results of China Mobile, results of which had been predicted by Quamnet over the past nine months, may help to force the index lower. At this stage the Tracker Fund becomes a buy, as this can be seen to move by 50% over the next three years. I am confident that the index will reach 18,000 within three years, and could reach it much sooner.
China Mobile, 941, is still a growth stock within a growth industry, so although it had been pushed to ridiculously high levels, as few American brokerages can factor in growth to share prices and their answers to simple sums can be wryly amusing, taking the cases of Blodgett and Mary Meekin. China Mobile¡¦s profits will grow at a rate of about 20%, and this would entitle them to trade at a PE of 20 times, perhaps as an upper limit 20 times earnings, which will make a price of $25 look to be quite attractive, and the price now is not all that far off this objective.
If the Hutchison results, and I would expect Li to increase rather than to decrease rates of provision as he is a generally cautious man, especially when it comes to big items, were to panic the market and bring Hutchison back to under $60, then one will be able to buy Tracker Fund at $11 without having to consider it twice.
Nevertheless even at $12 for Tracker Fund it is inexorably and thoroughly safe, but so can also be described most of the other component constituents to the HSI. [End]
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