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Opinions and views from expert CFOZone members.


Jan 19
2011

The "Superman" of Hong Kong

Posted by nicklord in Deals

nicklord

 

Li Ka-Shing's Hong Kong conglomerate Hutchison Whampoa (known locally as Hutch) always tops the list of the best managed companies in Asia. This is less to do with its operational management and always to do with its financial management. Its success also flies in the face of conventional wisdom that conglomerates dilute shareholder value through a lack of focus.

The Financial Director of the company is Frank Sixt and he has an unrivalled ability to drive shareholder value through shrewd corporate finance. The latest deal that was announced on Tuesday is classic Hutch. And it shows why investors, bankers, rating agencies and regulatory authorities all just love the company.

The deal will see the company put the ports it owns in Hong Kong, Macau and Shenzhen into a trust and then list that trust on the Singapore exchange. These ports generated HK$10.3 billion of revenue in 2010 and earned HK$5.3 billion in profit. That means they are running at a 51 percent profit margin. Not only are they highly profitable, they are highly mature: the Hong Kong port has 60 percent market share while the Shenzhen port has nearly 50 percent market share.

These assets are throwing off vast amounts of cash but have less scope for growth. It therefore makes sense to offload them. This frees up the balance sheet and allows Hutch to redeploy the cash into new growth areas. So far, so obvious. What makes this stand apart is that Hutch has chosen to use a trust structure in Singapore as the listing vehicle.

Singapore vies with Hong Kong to win listings and it has emerged as the centre of the REIT market in Asia. By putting ports into a new Business Trust structure, Hutchison can offer equity investors the bond-like returns that these ports will deliver: high yields backed by strong cash flows from dominant assets. It is also tax efficient for both the issuer and the investors. Moreover, the listing will be around $6 billion in size, as much as the total value of all IPOs in Singapore last year. This ensures it will be a must-have stock for any Asian investor.

Finally, Hutch can keep management control of the assets by owning the company that manages the trust. Given the expected demand for the 25 percent stake, this should allow Hutchison to revalue upwards the remaining 75 percent which it will still own. It can also use that management company for future expansion. This is classic corporate finance and could only be done by a conglomerate that has its finger on the pulse of what markets want.

"Using a business trust structure gives us an opportunity to offer new investors a much more attractive combination of current yield and growth than achieved through a typical corporate structure," said Frank Sixt on a conference call yesterday.

If there is a concern, it is that the underlying assets might face a slow down if the rebounding Asia-US trade route slows down again. But this will be felt in the dividend distributions of the trust and not on a corporate balance sheet backed by more brittle debt. So not only is it a capital raising exercise, a balance sheet boosting deal, a diversification of financing sources and a nifty piece of PR, it is also a smart piece of risk management. No wonder Li Ka-Shing's nickname in Hong Kong is superman.

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