19 November 2018

Exit strategies and the Tao of tycoon Li

From his planned sale of supermarket business ParknShop to a series of property selloffs in China, tycoon Li Ka-shing has stirred up confusion and conjecture across Hong Kong and the mainland in the last six months with his exit strategies.

The latest development is the sale last month of a large commercial property in Nanjing, Jiangsu province, for 3 billion yuan (US$496 million). Wang Shi {王石}, chairman of realty pacesetter Vanke (000002.CN, 200002.CN), believes Li’s move sounds the death knell for the developer era while Alibaba chairman Jack Ma {馬雲} bluntly insists that Li’s time had already passed.

Some observers have read political messages into the transactions, suggesting that Asia’s perennial richest man will abandon Hong Kong because political strife has rendered the territory no longer business-friendly. Li has been moved enough to deny the rumors several times.

A look beyond the conspiracy theories reveals a rationale behind Li’s sales – to shed businesses that no longer guarantee satisfactory returns and to reallocate resources to maximize earnings, according to Beijing-based Caijing Magazine. It’s a strategy many Chinese enterprises would do well to learn.

Li’s ParknShop has a big presence in Hong Kong but a retailing business in a small economy does not offer great prospects when virtually all the room for growth has been tapped. The chain is also a nonstarter on the mainland, pulling out of Shanghai and Guangdong in 2012. So one thing is for sure: ParknShop won’t be the most lucrative business under the Hutchison Whampoa (00013.HK) umbrella, one of Li’s two listed flagships. 

It’s hardly surprising then that Li would try to spin off his supermarkets, particularly when he has reportedly achieved a 15-plus percent yield with other assets, mostly public utilities that he has acquired in Europe over the last few years.

Then there are Li’s sales of a number of commercial properties on the mainland, including a shopping mall in Guangzhou and office towers in Shanghai. These transactions are also in line with growing concern about a combination of rising asset prices, general economic fatigue and Beijing’s efforts to whittle down excessive investment. There is a view that the realty market is substantially oversupplied, and Li’s retreat, especially from the commercial property sector, could reflect foresight.

On the overseas front, Li is moving into top gear for a shopping spree in Europe, where the tepid recovery from the debt crisis presents an ideal opportunity to snap up assets. When the European economy finally pulls out of bottom, Li is poised to make the most of a rebound in asset prices there.

Li has displayed a hearty appetite for public utilities in Europe and for some obvious reasons: not only can the power, gas and telecommunications sectors guarantee stable returns, usually 15 percent or more, they are a safe hedge against uncertainties in demand and largely immune to economic upheavals.

The rebalancing of investment across Hong Kong, China and Europe may also reflect Li’s desire to trim Hutchison Whampoa’s borrowings ahead of an expected rise in bank interest rates due to the US Federal Reserve’s exit from quantitative easing.

Furthermore, with its strong market presence, the proposed separate listing of retailing arm A.S. Watson Group stands a high chance of a nice price-earnings ratio and thus of boosting Hutchison Whampoa’s net asset value per share, as an analyst told Caijing. Power Assets Holdings Ltd.’s (00006.HK) plan to float its utility arm by selling share-stapled units of HK Electric Investments Ltd. is believed to have similar attractions.

– Contact the writer at [email protected]



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