Beware of Li Kashing’s supersized value trap

Shuli Ren, Bloomberg

From Chinese tech stocks to European defense shares, President Donald Trump’s second term seems to be lifting the world’s biggest value traps. One of the most prominent and controversial is the holding company owned by Hong Kong’s richest man, Li Ka-shing.

CK Hutchison Holdings Ltd. has agreed to sell most of its ports, including those near the Panama Canal and a larger unit that has operations across 23 countries, to a consortium led by New York-based BlackRock Inc. It was a major victory for the US president, who had complained loudly that China had taken over the critical waterway.

Market response was overwhelmingly positive. The $19 billion cash proceeds were about the same size as CK’s market cap before the deal was announced. That’s remarkable considering the entire port business, including in China and Hong Kong that were not sold as part of the deal, accounted for about 28% of the conglomerate’s operating free cash flow, according to the latest data available. CK’s stock rose 22% on the date the news came out, the most in over two decades.

But as the initial excitement starts to fade, investors are growing nervous, wary of a billionaire family that has a poor track record on shareholders’ returns.

The Li clan takes pride in the myriad of businesses and markets it operates in. But what kind of value-add can a diversified conglomerate offer when globalization is out of favor and geopolitical risks are on the rise? CK’s de-rating has accelerated since Trump’s first term, with the stock trading at just 35% of its book value even after the recent share bump.

The complex business dealings have made enterprise valuation an impossible task.

In a sign of deep capital market skepticism, CK seems to have trouble monetizing its assets. Its health and beauty subsidiary A.S. Watson is still privately-held, a decade after postponing an ambitious $6 billion dual listing in Hong Kong and London. Softer consumer sentiment in China, once a growth market, has become a drag. Last summer, CK Infrastructure did a secondary listing in the UK, hoping to widen its investor base. Trading volume has hardly improved since.

CK has not indicated how it plans to deploy the $19 billion from the port deal. In the past, the company did not announce special dividends or buybacks after major asset disposals, which would have pleased investors. Analysts say the proceeds could go into acquisition deals in infrastructure assets in the UK, considering CK Infrastructure’s recent interest in UK water supplier Thames Water Utilities Inc. as well as waste firm Viridor Ltd.

Though nicknamed “Superman”, Li’s aura has long faded in some investing circles. In 2015, minority shareholders revolted and blocked a proposal by CK Infrastructure to buy out another subsidiary, Power Assets Holdings Ltd., in a rare setback to the tycoon who sought to consolidate his businesses before handing over control to his elder son Victor.

This is the perhaps the last chance the 96-year-old will have to make amends with disgruntled shareholders. Instead of more empire-building, the Li family can perhaps share its winnings with outsiders. After all, stock buybacks are often the best use of corporate capital, especially when shares are trading below their fair value. That would be real superpower. [Abridged]

Courtesy Bloomberg/Shuli Ren