HK tycoon sees land of opportunity
“The UK has become another Hong Kong for the group,” says Cusson Leung, an analyst at Credit Suisse.
Having acquired UK Power Networks in 2010 for $9.1bn and Northumbrian Water for $4bn last year, Mr Li’s companies bought Wales and West Utilities in late July.
His companies now provide millions of Britons with everything from gas – where Li’s companies have a market share of about 25 per cent in the UK – to electricity, sewage and water services.
An old joke in Hong Kong is that of every $10 a citizen spends, $1 goes to Mr Li. Although he is unlikely to become so dominant in the UK, Mr Li owns the large British port of Felixstowe, mobile phone company Three and health and beauty retailer Superdrug, in addition to his various utilities holdings. He is also one of the bidders for the Manchester airport group. “The UK has become another Hong Kong for the group,” says Cusson Leung, an analyst at Credit Suisse.
Robert Miller-Bakewell, a long-time utility analyst in the UK, observes that two decades into the privatisation of Britain’s utilities, a range of owners have already “had considerable success in improving performance”.
However, Mr Miller-Bakewell points out that like most acquirers, Mr Li paid a premium for the assets especially since the sellers of Northumbrian Water, for instance, included the Ontario teachers’ pension plan and Pictet, the Swiss investment firm. “Pictet has never sold cheaply,” he says.
Mr Li has been making a big bet on UK utilities in the past couple of years, which have been good to investors like him. Interest rates have been low, which means financing these deals has been inexpensive, and returns so far have been better than expected.
But “the assumption that the strong returns of 2010-12 are sustainable is debatable”, says Mr Miller-Bakewell.
It also remains to be seen whether Mr Li can extract significantly higher efficiency gains from the utilities he owns in the UK.
Macquarie’s global and infrastructure funds, which along with the Canada Pension plan, sold Wales and West Utilities last month to Mr Li’s companies, also have a reputation for being savvy investors. The company still lost £63m for the year ended March 31.
To understand why someone who constantly professes his love for China – he did so a couple of times at his recent results briefing – invests so heavily in UK infrastructure, one needs to understand Mr Li. He is a value investor who believes Europe’s troubles have created good buying opportunities. As a Hong Kong tycoon who rose from rags to riches in the former British colony, he is also attracted to common law jurisdictions and the stable regulatory environment of utilities in the UK.
Mr Li arrived in Hong Kong as a refugee during the Sino-Japanese war at the age of 12. His father died of tuberculosis, leaving the teenage Mr Li to take care of his family. The tragedy “branded on my heart forever the questions that still drive me,” Mr Li told Forbes magazine earlier this year. “Is it possible to reshape one’s destiny??.?.?.?And is it possible to enhance chances for success through meticulous planning?”
He has done both in equal measure. He opened a plastic flowers factory in 1950, then bought up lots of Hong Kong property when anti-British riots in 1967 sent prices plummeting. Property development has been a constant investment theme since, and even on Friday, Cheung Kong won a $1.2bn bid to build a residential and commercial complex on the island – the highest amount paid for a site in Hong Kong for more than a year.
Mr Li shot to prominence when Hong Kong and Shanghai Bank sold him a controlling share in Hutchison, one of the city’s largest conglomerates, in 1979. The takeover was referred to as the first handover of Hong Kong because it marked the first time a Chinese tycoon had achieved such stature – the former British colony was returned to Chinese sovereignty in 1997.
Hong Kong may be where the company’s headquarters are, but Europe accounted for just under a third of Hutchison’s earnings before interest and taxes of HK$26bn (US$3.3bn) for the half-year ended June – with the UK accounting for 22 per cent of the total global earnings before interest and tax. Mainland China, by contrast, accounted for 22 per cent of ebit. Canning Fok, managing director of Hutchison, says: “[Our investments] depend on where the opportunities are. Today, the best opportunities are in Europe.”
This contrarian view is vintage Mr Fok, who has been Mr Li’s point man through the ups and downs of the company’s early investment in 3G phone services, which took more than eight years to turn an operating profit. Mr Li’s companies have been raising cheap, long-term capital over the past few months. To pick just a couple of examples: in January and February Hutchison issued a total of $2.5bn of five and 10-year bonds. In June the company was at it again, this time in euros, issuing a total of €2.25bn.
Along the way, the company has repaid loans that would have fallen due in 2013. Frank Sixt, the company’s chief financial officer, jokes that the company need not borrow another penny from a bank through 2013, 2014 and much of 2015. “We’re not taking a chance that significant maturities will come due at a difficult financial time,” Mr Sixt says. According to the company, net debt to total capital is now 22.8 per cent, down from 31 per cent in June 2010.
When he bought Hutchison in 1979, the Financial Times observed that Mr Li had become “the most talked about businessman in a town where most of the talk is about business”. Mr Li is unlikely to reach the celebrity status in the UK that he enjoys in Hong Kong. At the results briefing on August 2, a staccato burst of cameras clicking greeted his lifting a glass of tea or even raising his hand.
But Mr Li’s decision to spend billions buying businesses such as water, electricity and mobile communications that offer a stable return in these uncertain times promises to be an interesting postscript to Britain’s acquisition of Hong Kong in the 19th century.
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