1 HK - CK Hutchison Holdings

[thepupil]

My sophisticated investment strategy consists of scouring the universe for obscure companies run by undiscovered, unknown operators. I only invest in microcaps and am sure to always have huge earnings variance with the street before I buy a name. I only invest in the highest of quality businesses.

 

Just kidding...

 

1 HK...trades for $65. JP Morgan says NAV is $152 (17% ports, 22.5% health & beauty retail, 24% infrastructure, 5% crappy canadian energy company, 30% telecom, towers and stuff.

 

It pays you about 5% divvy in HKD.

 

It owns a bunch of stuff. It is not clearly overlevered. There's a trade war and global recession. It has assets that people think are scary now (like an irreplaceable port operation, or assets in the UK, and Europe).

 

Buy it, average down, wake up in 10 years, it'll probably have made you a good return.

 

Many bothans died to bring us this information.

 

EDIT: You can just read what his broseph wrote in 2017:

 

https://www.valueinvestorsclub.com/idea/CK_HUTCHISON_HOLDINGS_LTD/6558623601

 

He twerked his spreadsheets and claimed to have met with the company over the years, came to estimates greater than the street and did all kinds of work to say the company was worth $90 billion and should start trading on earnings rather than NAV now that all that bubblicious real estate was spun off into CK Asset.

 

Well...the stock's down a cool 33% since then and trading for $32 billion.

 

 

[Jurgis]

But China is gonna occupy HK, take over all ports, and broadcast propaganda over loudspeakers.

Everyone will wear grey, condemn Western bourgeois conspiracy and salute chairman Mao Xi.

The proletariat will be protected by the laser beam wielding space station that will be called "死星".

 

Many bothans died to bring us this information.

 

The Force will be with them always.

 

 

[johnpane]

Also available as ADR CKHUY.

[thepupil]

I have done a little more incremental work on 1 HK, enough to warrant a low conviction starter position.

 

For those who suffer through posts written by thepupil, you probably notice a few common characteristics:

 

- some sort of discount to net asset value where there are third party verifications of "value". I use "value" in quotations as I mean value in the sense that someone is willing to pay that price at this time, not necessarily "value" in terms of what a value investor would want to pay.

- a diversity of assets/businesses so as to dilute my own analysis of any one business or asset; I don't consider myself a great business analyst / predictor of earnings trajectory and therefore focus on multi-asset companies in part to dilute the impact of any one operating business on the underwriting

- contrarian, if not downright head in the sand positioning as it relates to macro risks (like buying a port company in a trade war) as I seek risk mitigation in the form of large discounts rather than positive trends/outlook/growth 

- positive carry and capital return (dividends/spin-offs/change) as opposed to all out re-investment

- decent management that is unlikely to steal the company, ideally with a history of not totally screwing up and making shareholders money

- hard assets/tangible book as opposed to more moat-y or complex operating biz's.

 

This approach has its weaknesses of which I'm well aware (one certainly could have made more dough owning constellation software or a other "compounder" type of companies than investing in what TFG/VNO/JEF/EQC/etc).

 

Long pre-amble summary: I think 1 HK fits what I like.

 

It's at a big discount to book/appraisals of NAV. I can't find any major scandals/abuses of minority shareholders (there's one report of aggressive accounting by GMT research, but I'm comfortable with it/the reasons behind it).

 

The company:

As noted earlier, JP Morgan NAV is about 150HKD per share, relative to the current price of 72HKD, so it trades for about 1/2 of NAV.

 

I've done a little more work on AS Watson, which is 22.5% of NAV. https://en.wikipedia.org/wiki/A.S._Watson_Group

AS Watson is a the world's largest health and beauty retailer with ~15,000 stores across Asia and Europe.

From what I can tell, JPM uses a $26 Billion USD total company valuation for its NAV buildout (1 HK owns 75%, so that's $20 billion to 1 HK).

 

This makes sense to me for what is a growing, profitable retailer that according to bloomberg had about $1.6 billion in LTM net income (JPM value=16x earnings); they are aggressively growing the store footprint in the Mainland. As an additional check on the valuation, Temasek purchased 25% of this company from Hutchison Whampoa (one of 1 HK's 2 predecessor companies before the empire restructured) at a $22.5 billion valuation in 2014. Revenue, store count, and earnings have all since grown over the past 5 years. Furthermore, Temasek was rumored to be in the market selling a 10% stake at a $30 billion valuation, possible buyers were a passive SWF (Abu Dhabi) and a strategic partner (Tencent). Temasek did not end up getting that sale done at that valuation, but the point is that $26 billion valuation seems fairly reasonable in that context, and creating AS Watson at 1/2 of that for the portion of 1HK that (22%) that is AS Watson is very compelling.

 

My preliminary work on 1038 HK (CK Infrastructure Holdings), most of the 24% of NAV that is infrastructure, indicates that most of the assets are concession/regulated type of assets in jurisdictions with declining cost of capital. These concessions will be re-struck over time and ROE's / earnings will come down. I don't think these assets are super attractive in terms of return, but also don't see water distribution and electricity distribution in the UK/Aus/Canada, going away any time soon. My initial thought is to do a pansy hedge on this in the amount of 10% of dollars into 1HK, so long $100 of 1HK short $10 of 1038HK, as this partially hedges these assets.

 

I don't care about Husky Energy (5%) of NAV. People who like canadian energy on this board seem to like Husky. I hope it is not worthless and that's the extent of my analysis.

 

For the 17% of NAV that is the port operation (which handle 13% of global trade), my attitude is that these assets will maintain some degree of profitability over time and are hard to replicate "good" assets, but I don't have a more refined view than that.

 

The elephant in the room is the 30% in telecom, which includes 40mm European subs and 40mm asian subs.

http://www.three.com

Overall, I kind of hate this business and would hedge it or over hedge it if it was public. They have leading share in Italy and are the number 1 or 2 in a few other geographies, but overall the company seems a jack of all trades master of none in telecom. If my perception is incorrect and others are more positive (or negative to the degree that they think it busts the 1HK thesis), I'm eager to hear. Maybe

 

Overall it is my mixed feelings about the infrastructure and telecom assets in addition to a lot (albeit very low cost) of financial leverage will keep this a sub 10% position for me, but the combination of bad sentiment, big discount, decent dividend carry, etc all lead me to have opened up a starter here <5% position with likely additions from other positions' capital return and sales. 

 

[cameronfen]

Hutchinson telecom has almost its entire market cap in net cash and is a pretty big player in a decent if temporarily challenged market in Hong Kong/Macau.  They seem to be competitively disadvantaged but quite cheap and likely to pay a special dividend at some point as CK Hutchison is where all the capital allocation is directed from.  Curious why you are so negative on them as you seem to be pretty NAV focused. 

[thepupil]

Hutchison Telecom Hong Kong Holdings (which I think is what you are talking about) is a low single digit percent of NAV and publicly traded.

 

3 Telecommunications is a much larger concern and is not publicly traded.

 

Again, i don’t know a ton about it, but just big picture being the number #4 largest telecom operator in the UK Sweden, or Denmark doesn’t strike me as a great business. They have leading share in some markets and are creating a TowerCo, which will supposedly unlock some value.

 

I am buying the stock so perhaps “kind of hate” is too negative.

 

EDIT: According to bloomberg 3G Europe has $19 billion USD of debt

 

[mjohn707]

I bought shares too.  I think it seems cheap but maybe just a little on the complicated side.  I think you're right that they're in a bunch of sort of tougher businesses, but their record doesn't seem terrible considering.  Hardly a guarantee that things will work out, but it certainly not the worst idea out there

[formthirteen]

Both CK Hutchison Holdings and Jardine Matheson Holdings are trading at 10-year low PB ratios:

https://www.gurufocus.com/term/pb/OTCPK:CKHUY/PB-Ratio/CK%20Hutchison%20Holdings (0.4 P/B)

https://www.gurufocus.com/term/pb/OTCPK:JARLF/PB-Ratio/Jardine-Matheson (0.8 P/B)

 

Looks like emerging markets are cheap...

[rosemontseneca]

Anyone else scratching their heads on this one?

 

At 46/share, I show a 10% unlevered free cash flow yield on 1H-20 annualized numbers (~14% on 2019).  I thought the Husky transaction and reports re: a tower transaction were both clear positives, but I'm not sure what it is going to take for this one to work.  Is it the perception of "Hong Kong" risk?

 

I built positions in CKH and Jardine Strategic (JS SP) earlier this year and continue to like both a lot at these levels, but not sure what I'm missing. 

[formthirteen]

In the last month or so, CK Hutchison has found ~15B worth of dollar bills lying around:

 

(Bloomberg) -- Shares of CK Hutchison Holdings Ltd. jumped the most in almost eight months after saying it’s nearing a deal to sell its tower assets in Europe to Spain’s Cellnex Telecom SA for about 10 billion euros ($11.7 billion).

...

A successful deal is likely to help CK Hutchison raise cash, cut debt and also pay for costly 5G network upgrades. The group’s core businesses such as ports and retail have been hit by a trade slowdown, slump in tourism in the wake of U.S.-China tensions, the coronavirus pandemic and political turmoil in Hong Kong.

...

Chairman Victor Li -- the elder son of the senior Li -- has been seeking ways to control spending and conserve cash after reporting a 29% drop in net income for the first half of the year. Thursday’s share rally has helped the stock pare the year’s loss to about 29%.

...

The group could use this money to meet its target of reducing the net debt-to-net capital ratio to about 20% from 25.6%, or fund potential mergers in U.K.’s telecommunications market, according to the Goldman report.

...

“The key for CKH is what it plans to use the sales proceeds for in order to improve its earnings outlook,” she said.

 

Last month, CK Hutchison agreed to sell a part of its stake in Husky Energy Inc., a Canadian asset dealing with mounting losses, to Cenovus Energy Inc. in an all-stock deal, reducing the oil company’s drag on the group’s earnings.

 

https://www.bloomberg.com/news/articles/2020-11-05/ck-hutchison-surges-on-12-billion-europe-tower-unit-sale-plan

 

“The proposed Husky merger will effectively reduce earnings volatility induced by the Canadian oil operation,” JPMorgan Chase & Co. analysts led by Cusson Leung wrote in a note Monday. “This used to be the most cyclical element in CKH’s earnings.”

...

CK Hutchison, whose operations span ports, retail and telecommunications, warned in August that profit may fall at its core businesses in the second half of the year after reporting a 29% drop in the six months through June. Victor Li, 56, also spoke of the need to conserve cash to prepare for “unexpected surprises.”

 

https://www.msn.com/en-us/money/news/li-ka-shing-cuts-husky-risk-with-2-9-billion-cenovus-deal/ar-BB1aqeDJ

[rb]

Anybody still following this? I looked at it a few years back. It's much lower than back then. Looks much cheaper now and it still has a nice looking collection of infrastructure assets.

[sarganaga]

I own it, about a 2% position. Between the Husky transaction with Cenovus and the European cell tower sale, it looks to me like they may be trying to do something to help the stock price reflect the company's value.

 

Lots will depend on how the cash proceeds of the tower sale are used. If they pay down debt, buy back shares, or pay a special dividend, GREAT. If they find some new and wonderful asset to buy, not so great. Even then, I guess we could get lucky and have them find a good deal that works out.

 

We'll see.

 

It is cheap.

[formthirteen]

I own it, about a 2% position. Between the Husky transaction with Cenovus and the European cell tower sale, it looks to me like they may be trying to do something to help the stock price reflect the company's value.

 

Lots will depend on how the cash proceeds of the tower sale are used. If they pay down debt, buy back shares, or pay a special dividend, GREAT. If they find some new and wonderful asset to buy, not so great. Even then, I guess we could get lucky and have them find a good deal that works out.

 

We'll see.

 

It is cheap.

 

I've added more, now a ~2% position. I clearly don't know what I'm doing here as there's no need for infrastructure in the future, other than Aliyun's cloud. I should have bought Softbank or Prosus instead.

[rosemontseneca]

I think it's silly cheap in almost any case other than US / China shooting war.  I own a boatload of the defense contractors (which are cheap in their own right) to hedge that. 

 

Telecom business is boring but cash generative.  The ports are fantastic assets.  Infrastructure is meh but cash generative.  Retail should grow over time.  I think the Cenovus/Husky stake will be a good cash flow contributor over time now that oil is finding its footing.

 

Buy it and collect the dividend until the market figures it out.

[sarganaga]

More tower sales details here https://www.ckh.com.hk/upload/assets/downloads/en/20201112_CKH_Networks_Tower_Assets_Investor_Presentation.pdf

 

From the transaction highlights:

 

1

• Unlocks the underlying value of the Group’s European telecommunications tower assets

• The value of which is not fully reflected in the Group’s current share price Unlock Value

 

2

• Improves the Group’s operational efficiency and results in an overall efficient capital allocation

• Transfers the operation and development of the passive tower assets to a dedicated tower operator with proven industrial

expertise

Better Operational

Efficiency

 

3

• Increased strategic focus on developing best-in-class networks and innovative product offerings, while accelerating the rollout

of 5G across our networks

• Forms a compelling long-term strategic partnership for passive telecoms infrastructure with Cellnex

• Invested in a high performing European growth stock with expected foreseeable upside

Maintain Strategic Focus

 

4

• Realises a very significant capital gain and net proceeds in the form of both cash and marketable securities, which could be

used to materially reduce the Group’s net financial indebtedness

• Subject to the Board’s decision at the time, a portion of the proceeds may be allocated to fund on-market share buyback

programs. Any such decision will be made taking into account all relevant circumstances and the best interests of CKHH and its

shareholders at the time, including negating earnings per share dilution resulting from the transactions. Further

announcements in this regard (if applicable) will be made as and when closing of a transaction occurs in 2020 and 2021

• Proceeds would reduce CKHH’s reported net debt from HK$206bn to HK$119bn

 

5

Capital Gain & Net

Proceeds

• Strengthens the Group’s financial position to support its future growth and potential M&A opportunities

• Near term positive cash flow impact to CKHGT and CKHH from significant reduction in capex from deconsolidation of CKH

Networks and interest savings (assuming debt repayment)

• Pro-forma, CKHH’s reported net debt to net total capital ratio would reduce from 25.1% to 14.9%

 

Overall this looks pretty good to me. They are selling an asset for cash proceeds that are large compared to their market value while also receiving a 5% stake in Cellnex, the acquiring company. While they mention M&A, my take on use of the proceeds is for debt reduction and maybe buybacks. There's also the improvement to cashflow.