Peter's Perspective
12th January 2015 by Peter Churchouse

Superman’s Project Diamond

Last Friday Asian investors were treated to a defining corporate event from its biggest business hero.

This event was, according to news reports, codenamed “Project Diamond” and followed months of secret negotiations.

This event is the most significant in a long string of corporate acquisitions, mergers, disposals, listings, capital raisings for a company that has gone from a local Hong Kong “boy made good” story to a global power house.

The history of such activity goes back more than twenty five years.

This event will unlock value for shareholders in a group that has already delivered phenomenal value to shareholders over the longer term.

The market seems to agree. As I write this, the stock is up 13.5% so far today.

The company in question is one that featured in our September 2013 edition of The Churchouse Letter “Asia’s Finest Part III”.

As of this morning, our recommendation has returned 40%.

I’m talking about Cheung Kong (1 HK) and its 49.97% associate Hutchison Whampoa (13 HK).

The lead player in this drama is Mr. Li Ka Shing, Chairman and founder of Cheung Kong.

His nickname in Hong Kong is Superman, a title that his Warren Buffet-like performance in business justifies.

He has shown himself time and time again to be a brilliant deal maker.

This morning I did a slot on CNBC with my friend Bernie Lo and the team on this widely watched corporate restructuring (click to watch).

Peter Churchouse sits down with CNBC's Bernie Lo to discuss Li Ka Shing's Restructuring of Cheung Kong Holdings

I first started covering Cheung Kong as an analyst in 1988, though my connection to the company goes back to 1980.

It has been fun watching “the Master” at work.

First a little background for those who might not be well versed in the ins and outs of this group.

Mr Li started out making plastic flowers in early post World War Two Hong Kong. Today he controls a sprawling empire of businesses scattered around the world. Real estate is at the core of the business. Beyond this it is a soup-to-nuts conglomerate of activities including electricity, oil, energy, telecoms, ports, infrastructure, retail, technology, aircraft leasing, healthcare……. and more.

The current structure has Cheung Kong at the top, with Hutchison Whampoa held as a 49.97% affiliate. Cheung Kong directly holds a large real estate business and some other activities. Hutchison is the holder of the bulk of the other businesses, some of which are listed entities. Hutchison also has its own real estate businesses.

Mr.Li (and his family trusts) hold 43.4% of Cheung Kong’s shares.

So effectively the Li family’s holdings of the “conglomerate” businesses are indirect and well down the tree.

The proposed structure involves creating two new vehicles (both domiciled in the Cayman Islands).

One, CKH Holdings will take on all of the “soup-to-nuts” conglomerate activities.

The other, CK Property will take on all of the combined group’s real estate assets and businesses.

The Li Family trusts will hold 30.15% of the shares in both entities.

So what does it mean for you and me as investors?

First, it means that we have the choice of investing directly in a pure real estate business, OR investing directly in a broad ranging global conglomerate.

Previously investing in Cheung Kong, basically a real estate company, got you a 49.97% interest in a broad based conglomerate. Assets that perhaps you didn’t really want.

Second, it likely means that the “conglomerate discount” that Cheung Kong shares have traditionally suffered should go away, and the shares should trade at value closer to underlying net asset value.

Third, it will enable Hutchison, the conglomerate branch, to grow even more rapidly, expanding existing businesses and branching into new activities.

Fourth, the Chairman has indicated that both companies are likely to pay a higher dividend this year, and indeed raise the dividend payout ratio going forward.

Fifth, it should provide greater transparency within the group.

The valuation argument carries quite a lot of credibility.

As a property company Cheung Kong has tended to trade at a fairly hefty discount to its underlying net asset value. Investors do not give it full credit for its holding of the conglomerate Hutchison.

For example, it we strip out Cheung Kong’s holdings in Hutchison and just look at purely the assets held in Cheung Kong directly (mainly real estate), then it is trading at a discount to NAV of around 55%. That means investors in Cheung Kong are paying only 45 cents for every dollar’s worth of assets held directly within Cheung Kong.

I believe that discount will narrow following this transaction.

As this restructuring materializes, we will be covering it in more details for subscribers to The Churchouse Letter… But in the meantime, stick with Superman!

Good investing,

Peter


Peter Churchouse Peter Churchouse is a widely respected analyst and commentator on financial markets with well over 3 decades residing in Asia. He spent over 15 years as Asia Strategist and Head of Research for Morgan Stanley as well as running a hedge fund. He shares his knowledge, insight and investment recommendations through his subscription publication The Churchouse Letter, along with his free newsletter Peter’s Perspective.
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