Kingboard Chemical Holdings (00148.HK) disclosed recently it bought more shares of Cathay Pacific Airways (00293.HK) from the secondary market, taking its stake in the airline firm to 5.01 percent.
Now, the stake accumulation is quite surprising given that airline and chemical businesses have little in common. So what prompted Kingboard into investing in Cathay?
For starters, we have to understand that the fortunes of Kingboard and Cathay have been starkly different in recent years. The former is making a lot of money and has seen its share price surge, while it is the opposite for Cathay.
Kingboard has two core businesses — one is chemicals, and the other is laminates and printed circuit boards.
Laminates and printed circuit boards are essential parts in electronics products ranging from mobile phones, computers, home appliances and automobiles.
As electronic products become more advanced, they would require more printed laminates and printed circuit boards, so this unit in particular has been doing very well.
Kingboard also has an ultra profitable side business — property.
The company started building manufacturing plants in the mainland since the 1980s. It bought huge tracts of land in Pearl River Delta and Yangtze River Delta to grow its laminates and printed circuit boards business.
These land plots became extremely valuable after China’s economy took off.
Kingboard then decided to relocate its factories into inland regions and develop the vacated sites in coastal areas into residential and commercial property.
The property business generated revenue of HK$4.7 billion and net profit of HK$1.38 billion in the first half of this year, contributing more to the bottom line then the company’s core businesses.
Currently, Kingboard has a land bank of nearly 5 million square meters. It plans to launch several property projects in cities such as Shanghai and Kunshan in the coming years, which would further boost its property revenue.
Sitting on a cash pile of HK$4.6 billion, Kingboard has been exploring various options to invest its money.
In October, for instance, the group bought a commercial building in the UK.
Now, we have news of the acquisition of substantial stake in Cathay Pacific.
Boosted by strong earnings, Kingboard’s market value has soared to HK$24 billion. By contrast, Cathay Pacific saw slide in its share price this year.
While Cathay’s market cap — HK$39.8 billion — remains above that of Kingboard, it’s not too outlandish that Kingboard would want to build a stake in Cathay as the market value gap narrows.
The investment in Cathay can also be seen as a hedge for Kingboard in relation to oil price movements.
If oil prices slide, Kingboard’s chemical businesses could get dented, but the losses can be offset through Cathay as the airline would benefit from lower fuel costs.
This article appeared in the Hong Kong Economic Journal on Dec. 16
Translation by Julie Zhu
[Chinese version 中文版]
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