Li Ka-shing has made another bold move. His family has increased its stake in CK Asset, the family’s flagship company, from a third to nearly half. Regardless, the family still has complete control over CK Asset. The change doesn’t seem to matter much on the surface, but Victor Li, the eldest son of Li Ka-shing, is known for being a wizard in trading. So is there a reason behind the deal? Some analysts believe it is an indication of the company’s planned privatization. No one can possibly tell unless you can read the minds of Li and Li senior. But the situation of Li’s family shows how difficult it is for a local consortium to develop its business overseas.

A bold move, but no cash has been involved. It was just a paper transaction from the left hand to the right when CK Asset issued Li Ka Shing Foundation (LKSF) around 333 million new shares in exchange for the stakes of four utility companies in the UK and the Netherlands. Before the transaction, these utilities were owned by LKSF, CK Asset, CK Hutchison, CK Infrastructure, and Power Assets. All five are Li’s family business. After the transaction, LKSF no longer has any stake in these utilities but more in CK Asset. So there is no change in the control of Li’s family over its business. The key question is: what is the benefit of holding more stake in CK Asset for LKSF, or even Li’s family?

The transaction involved issuing new shares, which means the number of shares of CK Asset has increased. It seems the equity of minority shareholders will be diluted. But CK Asset promised to buy back shares equivalent to the amount of HK$17 billion and cancel them. Whether the equity will be diluted is up to the minority shareholders. If they do not accept buyback, their equity will be diluted; if they do, then it won’t. The buyback price is about 10% more than the average share price of CK Asset, so the minority shareholders do have a chance to cash in at a “high price.” However, the buyback price of HK$51 per share is only 53% of the net asset value after deducting the debt. So accepting the buyback is like allowing Li’s family to grab a bargain at half price. The intention of Li’s family to privatize the company is obvious. Whether it can achieve that is another matter. But how come the share price never catches up on the net asset value all these years?

How do we know the share price is constantly on the low side? See what Li’s family does with its money. It has been increasing its stake in CK Asset hundreds of times in the past two years. Why would it keep buying if it wasn’t for the bargaining share price? Unfortunately, not only are the investors not appreciative, they are doing everything that caused the share price to slide further down. The so-called net asset value is only a number on the book. If not selling the shares to cash in, the minority shareholders would not earn any money. No matter how I look at it, I cannot foresee Li’s family dissembling its own flagship. Regardless of how much asset it has, the share price will unlikely to increase.

People said buying stocks is buying prospects, and how much asset a company has is secondary. Many tech firms with extremely high share prices start their business in the garage and have virtually no asset. The share price of CK Asset never catches up on its asset value which forms a conglomerate discount. It is because the investors cannot see the prospect of the company. One of the reasons is the group has many businesses. The investors are worried about the management not being able to focus on improving the operational performance and figuring out its strategic direction. Also, a large group company has complex accounts. It is not easy to accurately grasp its operating status, which has put the investors off and hence the non-moving share price.

To overcome conglomerate discount, Li’s family has already done a so-called “restructuring of the century” in 2015, in an attempt to let investors understand his operating direction. The general direction of the restructuring was Cheung Kong Holdings would be focusing on property development and hotel business; CK Hutchison would mainly take care of retail (Watsons), ports, infrastructure, and telecommunications. However, CK Asset (spun off from the property holdings of Cheung Kong Holdings during the restructuring) later acquired aircraft leasing and bought in pubs scattered around the UK, neither of which is related to property development. Also, it bought the utilities of the UK and Netherlands with LKSF, CK Hutchison, CK Infrastructure, and Power Assets. Having spent all this effort to restructure but back to square one six years later. What are they trying to do?

In general, experts believe using mergers and acquisitions (M&A) strategy to expand business will cause conglomerate discount on share price, which is disadvantageous to shareholders but advantageous to management: more business brings in larger turnover. Even if there is not as much profit as expected, the management still has enough reason to raise their own salary and benefits. But this does not apply to Cheung Kong Holdings because Li’s family is not just the management but also the majority shareholder. There is no way it will ignore the shareholders’ benefit to expand the business. When Li senior was managing, he was famous for not taking any salary. Therefore it is not so much of expanding its empire to gain more wealth, but more like an opportunist taking a chance without a general direction. The group’s prospect would depend on how lucky the management is. The prerequisite is, of course, the company must have enough money.

CK Asset has money for sure. The group has HK$59.5 billion cash as of the end of last year, which is more than HK$16 per share. In the current environment with an unprecedentedly low-interest rate, keeping hold of a large sum of cash is not a wise way to make use of the fund, and it reflects the lack of direction from the management. Victor Li pointed out the utilities they took over from LKSF will bring in over HK$910 million stable dividends each year, representing an impressive cash yield of up to 5.35%. But people invest in CK Asset, not because of its stable dividends but its beautiful prospects of property development. Now investing in such prospects has turned into buying utility stocks. Of course, the share price would be affected.

Not only Li’s family suffers from lacking ways of investing funds. The Hongkong and Shanghai Bank (later HSBC) was the pioneer of overseas development back in the 70s of the last century when it bought Marine Midland Bank of New York. When the dust of Hong Kong’s future settled, HSBC needed to relocate to England. Its function as Hong Kong’s central banking institution has been taken over by Hong Kong Monetary Authority. The undeniable truth is, with the emerging Chinese banks, the room for further development of HSBC is limited. For the business to grow, it would have to look for opportunities in mature markets of the UK and the U.S. Having been out and about for half a century, HSBC went a full circle and has returned to Asia, wounded. People would not be treasured when away from home, and the same goes for the consortium. It is hard to develop its business out of Hong Kong.

Adam Smith said, “the division of labour is limited by the extent of the market.” A small market has a simple division of labor; a large market has a more detailed and complicated division and can create greater resource efficiency. But seeing the situation HSBC and CK Asset are in, the size of the business can form significant restrictions of further development. The bigger the company, the more difficult it is to develop. The management and shareholders’ interests of CK Asset are fully aligned but still could not overcome the difficulties. It will be even tougher for HSBC, with its shareholders scattered around and the management calling the shots. A hegemony of consortium expanding to oppress the consumers would only be a needless worry if the government has not openly backed the officials colluding with the business people.

Click here for Chinese version

We invite you to join the conversation by submitting columns to our opinion section: [email protected]

Apple Daily reserves the right to refuse, abridge, alter or edit guest opinion columns for accuracy, length, clarity, and style, and the right to withdraw and withhold columns based on the discretion of our editorial page editors.

The opinions of the writers do not necessarily reflect the opinions of the editorial board.

---------------------------------

Apple Daily’s all-new English Edition is now available on the mobile app: bit.ly/2yMMfQE

To download the latest version,

iOS: bit.ly/AD_iOS

Android: bit.ly/AD_android

Or search Appledaily in App Store or Google Play