Has Li Ka-shing missed a trick by opting for safety rather than growth?
On Friday, the 89-year-old billionaire announced plans to retire from the Hong Kong empire he founded and hand the reins to his elder son Victor, the designated heir since 2012.
An architect of the group’s shift in focus to utilities from real estate and other more volatile industries, Victor is a good pick to manage a business that will endure through the lives of the patriarch’s great-grandchildren and beyond. Over the past three decades, 53-year-old Victor helped established a trust-like business with huge exposure to electricity, water and gas companies across Western Europe, Australia and Canada. Meanwhile, Li Ka-shing’s long-time deputy, Canning Fok, concentrated on building up global telecoms and retail operations.
The result is that three of Li’s companies — CK Hutchison Holdings Ltd., CK Infrastructure Holdings Ltd., and Power Assets Holdings Ltd. — have largely become giant yield plays. CK Asset Holdings Ltd. is the partial exception — a property-to-aircraft-leasing unit that’s been a beneficiary of Hong Kong’s long boom in real estate prices.
While stable earnings and dividends may help to preserve wealth for the next generation, such businesses are hardly sexy. Infrastructure is the biggest contributor to Ebitda at CK Hutchison, accounting for 31.7 percent last year.
This safe business is failing to draw investors at a time when the world is obsessed with technology. CK Hutchison is covered by only 15 analysts, according to data compiled by Bloomberg. The figure for technology heavyweight Tencent Holdings Ltd. is 48.
Even Geely Automobile Holdings Ltd. is followed by 42 analysts. The Chinese carmaker has less than two-thirds of CK Hutchison’s $48 billion market cap, but is fast-growing and has exciting plans in electric vehicles. Geely has been the best-performing stock on Hong Kong’s benchmark Hang Seng Index over the past two years, climbing more than sevenfold. Over the same period, CK Hutchison has been little changed.
There’s a bigger problem for Victor. Interest rates are rising as the U.S. normalizes policy after a decade of ultra-low borrowing costs, and that makes yield plays less attractive.
Add to that another challenge: The U.K. remains infrastructure unit CKI’s largest earnings contributor, accounting for 44 percent of pretax income in 2017. Those profits are vulnerable to any fallout from the country’s impending exit from the European Union.
It could be argued that Li might have been better off handing the reins to his younger son, Richard, who at least attempted to build a technology franchise. He founded satellite broadcaster Star TV in the early 1990s and, by the turn of the millennium, formed PCCW Ltd. and took over Hong Kong’s former telephone monopoly.
Of late, Richard has expanded into the more traditional areas of insurance and funds management. Still, the jury is out on whether his dealmaking is a success. Certainly, his telecom adventure was a value destroyer — though defenders could argue that the takeover’s timing was unfortunate, coming shortly before the internet bubble burst in early 2000.
The discussion is academic, with Victor’s succession set in stone so long ago. Yet wondering how things might have been different serves to illuminate how the nature of the Li empire has changed. Li Ka-shing earned the moniker “Superman” among Hong Kong investors because of his ability — and willingness — to make big, risky and often well-timed bets on asset markets.
He was a trader who moved with the times. Li turned from making plastic flowers in the 1950s, to toys, to real estate, and finally to the acquisition of British trading house Hutchison Whampoa, the platform he used to build a global business. On his own dime, he’s been an early backer of firms like Facebook Inc. and Airbnb Inc.
In bowing out, the octogenarian takes with him that swashbuckling past and leaves behind a fundamentally changed enterprise — older and more mature, with an aging board, and predictable businesses that promise stable and reliable performance but also less excitement.
CK Hutchison under Victor will do just fine. Investors just need to accept that Superman has flown.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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