28 October 2016
In overhauling his empire, Li Ka-shing (right) has singlehandedly pushed up the value of investors' holdings in Hutchison Whampoa and Cheung Kong by at least half. Photos: Getty Images, Yahoo
In overhauling his empire, Li Ka-shing (right) has singlehandedly pushed up the value of investors' holdings in Hutchison Whampoa and Cheung Kong by at least half. Photos: Getty Images, Yahoo

Landmark overhaul of Li empire a classic case study

It’s mission almost accomplished for the landmark overhaul of Li Ka-shing’s business empire, announced Jan. 9, with the listing of Cheung Kong Property Holdings Ltd. (01113.HK) on the Hong Kong Stock Exchange Wednesday.

Li was quoted as saying “the job is now 99 percent done”.

The first thing to ask at this juncture is whether small and individual shareholders are sharing in the value created by the reorganization.

Let’s take a look at the changes in share prices.

The flagship Cheung Kong (Holdings) Ltd. (00001.HK) was priced at HK$124.80 a share, or HK$62,400 per board lot (500 shares), before the January announcement.

Now these shares, swapped for stakes in the newly established CK Hutchison Holdings Ltd., which inherits the 00001 code, closed at HK$118 Wednesday, or HK$59,000 per board lot.

Shareholders in the now dissolved Cheung Kong (Holdings) are also entitled to an equal number of Cheung Kong Property shares, which closed at HK$74.10, or HK$37,000 per board lot.

If a shareholder had one board lot of Cheung Kong (Holdings) shares on Jan. 9 worth HK$62,400 and he hasn’t changed his holding since, then on Wednesday he would have one board lot of CK Hutchison shares and the same amount of Cheung Kong Property shares, with a combined value of HK$96,000, for a gain of 54 percent.

As regards shareholders in Hutchison Whampoa Ltd. (00013.HK), which has now been folded into CK Hutchison, their shares were last traded at HK$87.40, or HK$87,400 per board lot (1,000 shares), before the restructuring.

They have been offered 684 CK Hutchison shares and 684 shares of Cheung Kong Property for every board lot of Hutchison Whampoa, now worth HK$80,700 and HK$50,700 respectively.

The combined value is HK$131,400, for a gain of 50.3 percent.

These impressive value increments have obviously beaten the Hang Seng index’s cumulative gains (16 percent) during the same period and are even slightly higher than those of the A shares, which have shot up 49.6 percent since January.

The performance is even more spectacular considering their heavyweight blue-chip status, and now we know that when Henderson Land Development Co. Ltd. (00012.HK) chairman Lee Shau-kee said, “it is better to purchase stocks of property developers rather than their property developments”, he is indeed telling the truth.

I think small and individual shareholders have nothing to complain about.

Undoubtedly, Li’s spin-off and reorganization have also attained another goal: eliminating the holding company discount, which is widely seen in the share prices of leading conglomerates with businesses spanning several industries and markets.

With a clearer separation of different business and corporate governance structures, the asset values of his group’s many firms and subsidiaries are now more apparent than ever.

The overhaul has also demonstrated the speed and efficiency in decision-making and execution of Li and his family, as it could take years for non-family-controlled firms to go through such a massive and complex process.

Academics and the investment community are giving a lot of attention to the deal, which serves as an example of the pros of family businesses.

Nonetheless, there are also plenty of examples of poorly run family businesses.

So the family-controlled structure cuts both ways.

Still, Li’s reorganization doesn’t only have an upside.

Some merits of his firm’s previously acclaimed operating model could be lost after the restructuring.

Among them is synergy. One of the secrets of Li’s success is the mutually complementary relations between his infrastructure and real estate sectors.

The infrastructure division typically generated, with low-interest loans, a stable cash flow, which in turn could fund the real estate business to expand countercyclically; for instance, by bargain-hunting for land when the market was at a low ebb.

Conversely, when the housing market was red hot and the property business was hauling in big profits, rather than using the excess funds to scramble for pricey plots, Li could deploy them into the infrastructure assets.

These are advantages that any “pure” property developer doesn’t have.

But on the optimistic side, given the global dominance enjoyed by Li’s infrastructure and real estate businesses as well as the resources at his fingertips, the two units are now strong enough to sail through ups and downs on their own.

It is beyond doubt one of the most significant corporate overhauls in Hong Kong and offers food for thought for intellectuals and investors as a classic case to study and draw lessons from.

This article appeared in the Hong Kong Economic Journal on June 4.

Translation by Frank Chen

[Chinese version 中文版]

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