Mak­ing the right busi­ness moves for share­holder ben­e­fits

Hutchison Wham­poa to exit some core ar­eas and buy more over­seas as­sets

China Daily (Hong Kong) - - BUSINESS INSIGHT - By OSWALD CHAN in Hong Kong oswald@chi­nadai­lyhk.com

Ac­quir­ing low- priced over­seas as­sets and ex­it­ing some ma­ture busi­nesses is Hong Kong- based con­glom­er­ate Hutchison Wham­poa Ltd’s strat­egy to main­tain sus­tained growth for the year. The blue chip group, con­trolled by ty­coon Li Ka- shing, had ear­lier re­ported a bet­ter-than-ex­pected net profit dur­ing the first six months of the year, in early Au­gust, with in­terim profit up 23 per­cent to HK$12.4 bil­lion ($1.6 bil­lion) from HK$ 10.1 bil­lion dur­ing the same pe­riod a year ago. It was higher than the HK$ 10.8 bil­lion me­dian es­ti­mated by an­a­lysts.

The re­sult has mainly been at­trib­uted to the com­pany’s di­ver­si­fi­ca­tion strat­egy, with over­seas mar­kets be­com­ing a ma­jor source of rev­enue and profit.

Dur­ing the first six months of the year, Europe ac­counted for more than 43 per­cent of HWL’s rev­enue com­pared with 41 per­cent dur­ing the same pe­riod a year ago. The rev­enue con­tri­bu­tion from Hong Kong, on the other hand, slipped from 16 per­cent in 2012 to 15 per­cent this year.

The earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­za­tion — EBITDA — fur­ther re­it­er­ated the im­por­tance of the Euro­pean mar­ket to HWL. The Euro­pean re­gion pro­vided 35 per­cent of the EBITDA for the com­pany, up from 32 per­cent a year ago. Hong Kong’s con­tri­bu­tion rose by 1 per­cent­age point to 15 per­cent.

HWL chair­man Li Ka- shing main­tained in the earn­ings state­ment: “The com­pany would be ag­ile in seiz­ing in­vest­ment op­por­tu­ni­ties for long-term growth and achieve new growth through the con­tin­ued pur­suit of qual­ity in­vest­ments both in Hong Kong and abroad to cre­ate fur­ther value for share­hold­ers.”

Be­cause the global econ­omy seems to be set in a re­cov­ery tra­jec­tory, it ap­pears that Li is bet­ting on proac­tive over­seas as­set ac­qui­si­tions to se­cure the con­glom­er­ate’s fu­ture profit growth po­ten­tial.

The pos­si­ble sale of his Hong Kong su­per­mar­ket chain is a good case in il­lus­trat­ing this point.

HWL said on July 20 that it is con­duct­ing a strate­gic re­view of its PARKnSHOP su­per­mar­ket re­tail busi­ness, which had ap­prox­i­mately 345 stores in Hong Kong, Ma­cao and the main­land and had rev­enues of HK$21.7 bil­lion in 2012, to op­ti­mize share­holder value.

“The cash flow con­trib­uted by the PARKnSHOP re­tail gro­cery busi­ness to the HWL group is al­ready low. Its profit con­tri­bu­tion to the con­glom­er­ate has also de­clined to a sin­gle-digit growth. The in­vest­ment re­turn on the PARKnSHOP re­tail gro­cery busi­ness has peaked,” says Cas­tor Pang, head of re­search at Hong Kong-based bro­ker­age Core Pa­cific-Ya­maichi.

“Cash­ing the PARKnSHOP gro­cery re­tail as­set and us­ing the pro­ceeds to in­vest in rel­a­tively cheap Euro­pean as­sets can help HWL to lever­age greater as­set val­u­a­tion growth po­ten­tial,” Pang says in his re­search re­port on the group.

Al­though PARKnSHOP is one of the dom­i­nant su­per­mar­ket chains in Hong Kong, the city’s re­tail gro­cery mar­ket is al­ready sat­u­rated so mar­ket growth po­ten­tial is limited.

Jar­dine Mathe­son- con­trolled Well­come and HWL’s PARKnSHOP are the main play­ers in the Hong Kong re­tail gro­cery in­dus­try. The two su­per­mar­ket chains be­tween them ac­counted for more than 73 per­cent of the to­tal su­per­mar­ket turnover in Hong Kong in 2012, ac­cord­ing to data pro­vided by con­sul­tancy firm Euromon­i­tor.

Hong Kong’s re­tail mar­ket scene has also been clouded by the adop­tion of a man­dated min­i­mum wage and, cou­pled with the pos­si­bil­ity of the stan­dard work­ing hour leg­is­la­tion, could raise la­bor costs for su­per­mar­ket chains.

Amid the highly de­vel­oped mar­ket and the an­tic­i­pated ris­ing cost of do­ing busi­ness, it is rea­son­able for HWL to con­sider ex­it­ing the ma­ture su­per­mar­ket chain busi­ness and mov­ing on to other busi­ness as­sets with high growth po­ten­tial, say an­a­lysts.

They say the sale of PARKnSHOP could fetch be­tween HK$23.4 bil­lion to HK$31.2 bil­lion, based on the val­u­a­tion of an­other su­per­mar­ket chain, Well­come, con­trolled by Dairy Farm In­ter­na­tional Hold­ings Ltd, listed in Sin­ga­pore.

In ad­di­tion, the pro­ceeds from the PARKnSHOP sale could also pro­vide ad­e­quate am­mu­ni­tion for HWL to pur­sue ag­gres­sive over­seas busi­ness as­set ac­qui­si­tions. If PARKnSHOP can be sold at $4 bil­lion, it will mean that the lo­cal su­per­mar­ket chain can be val­ued at a mul­ti­ple of 1.4 times sales, higher than the lo­cal-listed Wu­mart Stores Inc’s 1.1 times mul­ti­ple, but less than Well­come’s 1.65 times mul­ti­ple, ac­cord­ing to Bloomberg data.

Li has al­ready sold many ma­ture busi­ness as­sets to un­lock much­needed cash to fund fu­ture busi­ness growth. In 2011, HWL booked a gain of HK$44.3 bil­lion from pack­ag­ing its ports as­sets in the Pearl River Delta re­gion into Hutchison Port Hold­ings Trust, which is listed in Sin­ga­pore.

Data com­piled by Bloomberg show the com­pany has an­nounced $4.7 bil­lion of as­set ac­qui­si­tions in the past two years, in­di­cat­ing the con­glom­er­ate is ready to snap up more over­seas low-priced as­sets.

“Af­ter the eco­nomic re­ces­sion in the last few years, there are many cheap busi­ness as­sets in Europe. Ac­quir­ing cheap Euro­pean busi­ness as­sets is a proven di­ver­si­fi­ca­tion strat­egy for HWL to ex­pand in those prof­itable busi­nesses,” says Pa­trick Shum, in­vest­ment man­ager of Ten­gard Fund Man­age­ment In­vest­ment.

“More­over, the ex­tra­or­di­nary gain from the PARKnSHOP sale can help lift the profit level of HWL by giv­ing a one-off gain to the con­glom­er­ate.”

The ports-to-telecom­mu­ni­ca­tions con­glom­er­ate has been on a shop­ping spree in Europe since the start of the global fi­nan­cial cri­sis of 2008, par­tic­u­larly eye­ing Euro­pean telecom­mu­ni­ca­tion and in­fra­struc­ture as­sets that can fuel profit growth in the com­ing years.

HWL in June agreed to buy Tele­fon­ica SA’s O2, Ire­land’s sec­ond-largest mo­bile op­er­a­tor, for 850 mil­lion eu­ros ($1.1 bil­lion). The con­glom­er­ate also held talks with Tele­com Italia SpA for a po­ten­tial merger of their Ital­ian mo­bile-phone as­sets.

In Jan­uary this year, the con­glom­er­ate said its sub­sidiary Hutchison 3G Aus­tria com­pleted the ac­qui­si­tion of the whole busi­ness of Or­ange Aus­tria from Mid Europa Part­ners and France Tele­com-Or­ange.

Start­ing from 2010, HWL has been more ag­gres­sive in clinch­ing var­i­ous over­seas in­fra­struc­ture busi­ness as­sets. In June this year, HWL’s listed sub­sidiary Che­ung Kong In­fra­struc­ture Hold­ings Ltd (CKI) ac­quired a waste-man­age­ment busi­ness in the Nether­lands. In Jan­uary this year, CKI also ex­panded into New Zealand’s waste-man­age­ment busi­ness.

In Septem­ber 2012, CKI ac­quired a re­new­able en­ergy power trans­mis­sion busi­ness in Aus­tralia. It also held sub­stan­tial in­ter­ests in the UK wa­ter util­ity busi­nesses af­ter it pur­chased the UK Wales & West Util­i­ties and Northum­brian Wa­ter Group in 2011 and 2012.

“The Euro­pean in­fra­struc­ture as­sets can be­stow more sta­ble in­vest­ment re­turns to the group in the long run. That is why HWL is ea­ger to join the band­wagon now,” says Dickie Wong, di­rec­tor of Hong Kong- based Kingston Se­cu­ri­ties Re­search.

“Sell­ing PARKnSHOP at a good price might be a quick way to cash in, rather than list­ing the chain,” Wong says. “This is be­cause main­land­based su­per­mar­ket op­er­a­tors may bid for the PARKnSHOP su­per­mar­ket chain at a higher price than HWL ex­pects in or­der to en­ter the Hong Kong gro­cery re­tail mar­ket.”

The exit from the Hong Kong gro­cery re­tail busi­ness can also help HWL fo­cus more on its health and beauty re­tail op­er­a­tions, which have a big­ger global foot­print and of­fer higher mar­gins com­pared with the su­per­mar­ket busi­ness.

BOBBY YIP / REUTERS

One of Hutchison Wham­poa Ltd’s of­fice tow­ers in Hong Kong.

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