Li Ka-shing’s flagship sees profit rise, warns of recession risk

(Aug 4): CK Hutchison Holdings Ltd’s profit rose 4.3% in the first half of this year, boosted by its global operations even as the conglomerate founded by billionaire Li Ka-shing warned of rising risks from a worldwide recession.

The flagship company of the CK Group reported net income of HK$19.09 billion (US$2.43 billion) for the six months through June, according to a statement Thursday. Total revenue advanced 8.1% to HK$229.6 billion from the same period last year. It raised the interim dividend to HK$0.84 a share, compared with HK$0.80 a year before.

CK Hutchison, with interests across telecommunications, retail, ports, real estate and infrastructure, relies on Europe for more than half of its revenue and on China for about 20%. The globally diverse portfolio makes it more resilient to regional risks, with a post-virus recovery in most parts of the world helping to counter the impact of Covid Zero lockdowns in China.

The company still faces challenges from ongoing supply chain disruptions as well as its heavy reliance on Europe at a time when the euro and British pound are slumping against the US dollar. That’s hurting the company’s bottom line as it reports earnings in the US dollar-pegged Hong Kong currency.

“Expectations for growth this year and next have been and are being revised substantially downward, with heightened risk of recessions expected in several of the markets in which the group operates,” Chairman Victor Li, Li Ka-shing’s eldest son, said in the statement. He added that the group is well-placed to maintain a growth trajectory and keep delivering solid performance.

Since March, recurring Covid outbreaks across China have seen the country shutting down its larger cities including Shenzhen and Shanghai, gutting the local economy with store closures and logistics disruptions.

CK Hutchison’s China health and beauty operations, which accounted for 13% of its retail revenue last year, have been battered by the movement curbs. It reported a 60% fall in earnings before interest, taxes, depreciation and amortization, or Ebitda, in the first half of the year.

The solid performance in Europe and the rest of Asia, however, was a silver lining. The entire retail segment reported a 10% fall in Ebitda for the first half of the year.

Globally, a stronger dollar remains one of the group’s major challenges. Based on its 2021 results, a 10% depreciation in the British pound against the US dollar would lead to an Ebitda decline of about HK$2.5 billion, Citigroup analysts led by George Choi wrote in a report in June, citing management estimates. A similar depreciation in euro would result in an Ebitda fall of HK$3.1 billion, Choi wrote.

Reinvigorate prospects

The group’s stock price has persistently underperformed this year, trading 31% below analysts’ 12-month consensus target price.

The company will pursue telecom consolidation opportunities and was in talks with competitors in places including the UK, Sweden and Denmark, Canning Fok, co-managing director, said at an analyst briefing Thursday. He didn’t elaborate on the nature of deals.

To reinvigorate growth prospects, CK Hutchison and the wider CK Group have also been monetizing some of their assets.

The UK’s antitrust authority in March cleared CK Hutchison’s sale of its British mobile masts, paving way for the completion of a larger sale of its European towers to Cellnex Telecom SA for 10 billion euros (US$10.2 billion) that was announced in 2020. The deal is expected to complete in August 2022, the company said in the Thursday statement.

Last month, the CK Group agreed to sell a minority stake in its UK utility Northumbrian Water to KKR & Co for 867 million pounds (US$1 billion). The deal is expected to add gains attributable to CK Hutchison’s shareholders of about HK$1 billion.

London building

In March, the group’s real estate arm CK Asset Holdings Ltd agreed to sell the landmark building that’s been UBS Group AG’s London headquarters for US$1.6 billion. CK Asset disposed of its aircraft-leasing business for US$4.28 billion late last year, exiting an industry that’s become especially volatile and unpredictable during the Covid-19 pandemic.

CK Asset posted a 55% rise in net income to HK$12.9 billion. It raised dividend to HK$0.43 per share from HK$0.41 last year, the firm said in a statement Thursday.

The outlook for the real estate arm is gloomy. Hong Kong’s residential property market is under pressure due to rising interest rates and a stagnant housing investment demand. Home sales in July fell 57% in value from the year before, government data show. Goldman Sachs Group Inc. expects home prices to drop 20% slump by 2025.

A weakening local economy and slump in IPOs is subduing demand for office spaces and hurting CK Asset’s office leasing business.

Hong Kong Island’s grade A office vacancy climbed to 10.1% — the highest since 2006 when Centaline Property Agency Ltd. started tracking the data. Demand slack and excess supply is going to make it harder for CK Asset to lease its new office tower Cheung Kong Center 2 at high rents.