By Yvonne Lee
HONG KONG--This city may have some of the world's highest
real-estate prices, but the bulky conglomerates that house property
holdings often trade well below the value of their assets.
That is why Li Ka-shing's decision to separate his Hong Kong and
China property assets from his internationally focused conglomerate
has gotten so much attention.
Like many of the family-controlled titans of Hong Kong real
estate, Cheung Kong (Holdings) Ltd.'s shares trade at a discount of
20% to 30% to their net asset value, analysts say. In the U.S.,
firms like Simon Property Group Inc. trade close to their book
valuations.
By carving out his real-estate assets into a new Hong
Kong-listed company, Cheung Kong Property Holdings, while keeping
operations ranging from European mobile-phone operators to Chinese
ports in another firm, the 86-year-old multibillionaire is "coming
out to try and address" the lack of value global institutional
investors give his Hong Kong property assets, said Jonas Kan, head
of Hong Kong research at Daiwa Capital Markets.
"In Hong Kong, family-owned companies have, until now, not been
seen by global investors as a separate investment class," Mr. Kan
said. "[Even though] these companies have decent assets worth well
over US$300 billion, they are trading at discounts to their [net
asset value], something that is rare in most of the world's stock
markets."
The conglomerate discount helps to explain why Cheung Kong
shares have doubled in the past decade, despite the fact that Hong
Kong property prices have more than tripled in that time, according
to real estate agency Centaline Property.
Mr. Li has called his move, which has added $10 billion to the
combined market value of Cheung Kong and 49.97%-owned
ports-to-telecom affiliate Hutchison Whampoa Ltd. since it was
announced, a "watershed event in the group's history." A company
that began in the 1950s making plastic flowers, Cheung Kong has
added greatly to the city's skyline and is now a major
landlord.
In 1979, Cheung Kong absorbed Hutchison, one of the trading
firms, known as hongs, that ruled business life in the city during
British rule. Hutchison, which is worth about US$54 billion,
currently has a market value that exceeds that of its parent by
nearly a third.
Mr. Li's real estate move "sets a very good example for other
holding company structures," said Cusson Leung, head of Hong Kong
research for conglomerates and property at Credit Suisse. Mr. Li
plans to put the rest of his holdings into CK Hutchison Holdings
Ltd.
Bankers say their clients from Asian conglomerates are already
looking at Mr. Li's split as a model of how to unlock value for
their companies.
The split, bankers say, allows Mr. Li a cleaner company
structure that will help with debt raising, which will help him to
broaden his European spending spree. On Tuesday, two of Mr. Li's
companies said they would team up on a GBP1 billion (US$1.51
billion) deal to purchase Eversholt Rail Group of the U.K.
While the split won't work in every case, there are several
families that dominate Hong Kong's skyline that could take note.
Britain's Swire family, which has been running its namesake
conglomerate since 1816, the Kwoks, who control Sun Hung Kai
Properties Ltd., Lee Shau-kee's Henderson Land Development Co., the
Woo family's Wheelock and Co. and Cheng Yu-tung's New World
Development Co. are the city's key property players. Mr. Cheng's
son, Henry Cheng, now runs New World. The Jardine family--who was
closely associated with Hong Kong becoming a British colony in
1842--remains a big commercial landlord but moved its listings to
Singapore before Hong Kong returned to Chinese control in 1997.
Henderson Land, which has real estate and hotel assets under the
Miramar brand, said it has no plans to restructure the company.
Henderson trades at a 33% discount to its net asset value,
according to Bocom International. The other companies, apart from
New World, which didn't respond to requests for comment, declined
to comment on the matter.
Wheelock, owner of the popular Hong Kong shopping mall Times
Square, may be alone in having seen its shares rise in tandem with
Hong Kong real-estate prices over the past decade, though they
trade at a 57% discount to net asset value, according to Bocom.
Swire, which moved slightly toward eradicating its book value
discount by listing its real estate arm separately in 2012, still
trades at a 16% discount, according to Morgan Stanley, partly,
analysts say, because Swire Properties is still held within the
parent firm.
Mr. Li has already shifted incorporation of his companies to the
Cayman Islands, a tax haven, from Hong Kong, which gives him the
flexibility to raise dividends.
"The new structure allows CK Property to get a stable income and
steady growth for investors, whereas CKH will focus on growth and
mergers and acquisitions," said Alfred Lau, a director at Bocom
International.
After the unwinding, Mr. Li and his family, who currently own
43.42% of Cheung Kong and 2.52% of Hutchison, will own 30.15% each
in CK Property and CKH Holdings.
Write to Yvonne Lee at yvonne.lee@wsj.com
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