25 March 2019
Li Ka-shing's empire overhaul has more implications than what he said at the news conference last Friday. Photo: Bloomberg
Li Ka-shing's empire overhaul has more implications than what he said at the news conference last Friday. Photo: Bloomberg

Li empire overhaul and re-domiciliation: what they imply

Billionaire Li Ka-shing’s announcement last Friday of a restructuring of his business empire represents one of the most significant corporate overhauls in the territory since its handover. The changing political and economic landscape must be an underlying factor in his decision as Hong Kong’s future will prove eventful. The tycoon’s replies to a string of sensitive questions from the media offer food for thought.

Li’s trilogy

Simply put, the closely-intertwined steps in Li’s business shift are as follows:

1) Investors in the flagship Cheung Kong Holdings (00001.HK) will swap shares for stakes in the newly-established CK Hutchison Holdings (incorporated in the Cayman Islands on Dec. 11, 2014) and the new holding company will inherit all assets, equities and listing status of the dissolved Cheung Kong Holdings.

2) CK Hutchison will issue new shares to buy out minority owners of Hutchison Whampoa (00013.HK) — a conglomerate that spans the ports, retail and telecommunications sectors in dozens of countries — offering shareholders of the latter 0.684 CK Hutchison share for every Hutchison Whampoa share. 

3) CK Hutchison will then spin off the group’s combined property business — to be called Cheung Kong Property Holdings (also incorporated in the Cayman Islands on Jan. 2, 2015) — and list it separately on the Hong Kong bourse.

The centerpiece of the bold restructuring move is the transfer of equities and assets from a Hong Kong entity to one set up in the Cayman Islands, a territory in the Caribbean well-known as an offshore financial center.

Li stressed that efficiency and ease of doing business as well as the interests of shareholders are the main reasons behind the de facto re-domiciliation, but I figure that all of these justifications will be irrelevant without a more fundamental political consideration.

The timing

Li talked about eliminating the holding company discount, and, indeed, such a discount exists in the share prices of leading conglomerates with business spanning a number of industries and markets.

But the question is why Li, who appeared to be perfectly happy with the discount as the problem had been there for decades, wants to solve the issue this year?

As with a few other common law jurisdictions like the Britain and Singapore, Hong Kong does not allow a locally registered firm to change domicile while retaining its locally listed status. Offshore financial hubs such as Cayman Islands and Bermuda offer well-trodden workarounds to bypass the restriction. (A new company is created there to acquire all assets, issued shares and businesses of the existing company with the consent of all shareholders, and upon completion of the process, the old one could be struck off or otherwise dissolved.)

As early as 2004, more than one-fourth of the companies listed on the Hong Kong stock exchange were registered in the Cayman Islands. Why does it take more than a decade for the shrewd Li to discover an oft-used solution like this?

A sensible answer can be that Li may have smelled a rat and re-domiciliation without pulling back his investment in Hong Kong and China can be the best option.

Is Li seeing any sign of changes that may be an uncertainty to his business? Are the coming changes economic or political in nature? Will these changes turn out to be a sweeping reversion of the economic and political order in Hong Kong and China? If so, would Li’s empire be among the hardest hit?

In previous commentaries, I have pointed out that the feud and struggle for control and power between the territory’s old-line tycoons, second-tier entrepreneurs as well as capital and personnel from China will determine the shape of things in the future. Is Li’s restructuring and re-domiciliation a result of such struggles? What will happen next?

I have no inside information in this regard but I do not agree that by doing so Li is punishing the SAR government since no rational businessman will risk the future of their business and investors’ money in any way like this.

This article appeared in the Hong Kong Economic Journal on Jan. 12.

Translation by Frank Chen

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Pedestrians walk outside Cheung Kong Center in Central. The centerpiece of Li Ka-shing’s bold restructuring move is the transfer of equities and assets from a Hong Kong entity to one set up in the Cayman Islands. Photo: Bloomberg

Former full-time member of the Hong Kong Government’s Central Policy Unit, former editor-in-chief of the Hong Kong Economic Journal

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