Willowpix CK Asset Holdings Limited ( OTCPK:CHKGF ) is controlled by Victor Li, and it trades at a significant discount to Net Asset Value. However, this discount is warranted because; The majority of CHKGF's profit is produced in its Hong Kong property business. Hong Kong property prices and rents are falling, and will likely continue to do so as Hong Kong's economy and property markets are integrated into the Greater Bay Area.
Approximately 40% of the company's capital is invested in a UK Pub business that produces a third of CHKGF's revenue. Basically, the business breaks even and does not cover its cost of capital. It appears to be a multi-decade land play designed to preserve the wealth of the controlling Li family.
A large portion of CHKGF's capital is invested in low risk / low return regulated utilities. Typically, such businesses carry a large degree of debt so that the stable regulated cash flows from such businesses can be leveraged to produce an acceptable ROE. Although CK Asset Holdings doesn't attribute debt to individual subsidiaries or operating segments, one can infer from the relatively low level of debt in the company as a whole as evidenced by its 10.
6% Long-Term Debt / Equity Ratio, that CHKGF does not pursue this course of action. Many of CK Asset Holding's assets are owned in conjunction with other investment vehicles that are also controlled by Victor Li. It is unclear who's interests are paramount - the interests of the Li Family, the interests of the minority shareholders of CHKGF, or the interests of the minority shareholders of the other Victor Li controlled companies that have ownership stakes in the same companies that CK Asset Holdings does.
Accordingly, CHKGF stock is a Sell . Rich People Are Different Li Ka Shing, the richest man in Hong Kong, is a legendary figure, so much so that he has been nicknamed Superman. Although he has a number of personal holdings, the majority of his family's wealth is comprised of three holding companies - CK Asset Holdings Limited, CK Hutchison Holdings Limited ( OTCPK:CKHUF ) and CK Infrastructure Holdings Limited ( OTCPK:CKISY ).
The assets and revenue of both CKISY and CKHUF are largely outside of Greater China, i.e. Mainland China, Macau and Hong Kong.
For example, only 13.4% of CK Hutchison's revenue comes from Greater China. CK Asset Holdings, by contrast, is usually thought to contain the legacy Hong Kong assets that the family owns or controls.
To my surprise, Hong Kong's importance to CHKGF's operations is rapidly diminishing. In 2018, Li Ka Shing transferred control of CHKGF and CKHUF to his son Victor, and Victor Li has also been the chairman of CKISY since 1996. Recently, the third generation has also become involved, when it was announced that Li's eldest granddaughter will run Civitas Social Housing PLC, a UK REIT, that CHKGF purchased in June 2023 for USD 619 million.
During the course of researching this article, I learned that Li Ka Shing personally owns 27.1% of Cenovus Energy ( CVE ), a company active in the Canadian oil sands. By some measures, the oil sands have five times as much oil as Saudi Arabia does, and I was reminded of a story I once heard.
An extremely wealthy family was looking for a mining property with proven gold reserves. It had to be in Australia or Canada, the US wouldn't work for some reason, and Africa / South America were too risky. " And what's the end game ?" "Why, we'll just let it sit for the next 50 to 100 years?" " What! " "Well, Gold is a hedge that holds it value, more or less.
We don't care about making money, or return on investment. We care about return of investment, because we're looking to put something away for our great-grand children. Bullion has to be stored in a vault, which is expensive, and even the Swiss can be pushed around these days.
We don't mind if it sits in the ground, so long as we can mine it if we ever need it." The takeaway is that rich people are different, they're just different. Going back to Maslow's Hierarchy of Needs , or even earlier, there are numerous theories and psychological studies that confirm that they have a different view towards money and wealth than the rest of the population does.
And by any measure, the Li's are extremely wealthy. So, given that Li Ka Shing's son Victor now controls CK Asset Holdings Limited, it's worth trying to understand what he, and the Li's, are trying to achieve with their control of CKHGF, and if those goals are aligned with those of the average outside shareholder or Seeking Alpha reader. Indeed, this is the whole rationale of applying a minority to discount to an equity when there is a controlling shareholder.
Do the goals and interests of the controlling shareholder, or shareholders, align with those of outside minority shareholders? To answer this question, I have made the following assumptions. First, I assume that outside shareholders are profit maximizers, interested in earning an acceptable ROE. Second, I have assumed that in general, outside shareholders aren't interested in wealth transference to unborn generations of heirs, or if they are, CHKGF isn't their preferred vehicle for accomplishing this.
Third, I have assumed that outside shareholders view risk differently than the Li's do. Finally, I assume that past investment decisions made Victor Li, that he made as the Chairman of CKISY, and that he has made since he assumed control of CHKGF in 2018, are indicative of the decisions that will be made in the near and intermediate future. The Diminishing Marginal Returns of Wealth Anyone who has studied first year economics at university is familiar with the theory of diminishing marginal returns.
The first ice cream cone someone consumes on a hot summer day usually provides a lot of satisfaction. The second cone usually provides a little less satisfaction, and by the time the tenth cone is consumed, people are sick of ice cream. In 1734, the Swiss Mathematician Daniel Bernoulli was trying to understand why people made certain bets, and just as importantly, why they didn't.
He applied the theory of diminishing marginal returns to wealth. Consider Person A. He has $500, and he's given the option of making a bet where 50% of the time, he'll lose everything, and 50% of the time, he'll be paid $2,000.
So, the Expected Value of the bet is $750, 50% of a $500 loss, and 50% of a $2,000 profit. Most of the time, someone in this situation will make the bet. After all, a $500 loss probably doesn't represent more than a few months of savings or discretionary income.
Now consider Person B, who is presented with the same odds and the same payoffs. There is only one difference. Instead of having $500 of wealth, Person B has $5 billion of wealth.
If the bet goes against Person B, once again, they will lose everything they wagered. If the bet goes in their favour, Person B will earn $20 billion. Despite the fact that this bet has an Expected Value of $7.
5 billion, and the fact that relative payoffs are the same, most people in this situation won't make the bet. For Person B, although it would be nice to have an extra $15 billion if he or she wins, there really wouldn't be a lot of difference to their life or overall happiness. However, the difference between having no money at all, or having $5 billion of wealth, would be enormous.
Limited Liability Companies address this issue. Theoretically, ten million people can collectively make a $5 billion bet by each putting up $500. With regard to CHKGF, Person B, the Li family, controls the company.
So the relevant question is, " Are the bets that CHKGF is making similar to those that Person A would make, and would want to be made, or, are they similar to the ones that Person B would make ?" Overview of CK Asset Holdings Limited CK Asset Holdings is incorporated in the Cayman Islands. As per Page 46 of its 2023 Annual Report , Victor Li, the chairperson of the company, owns or controls 47.84% of its shares.
CK Asset Holding is a leading Property Developer, Hotel Operator, and Landlord in Hong Kong and The People's Republic of China. It also has a number of developments or in locations such as Singapore and London. Tables 1 and Tables 2 show the Revenue and Contribution to Profit of each of CHKGF's operating segment, and of each geographic location.
All conversions to USD in this article are made at the HKD Currency Peg of 1.00 USD = 7.81 HKD.
This is today's exchange rate, and it is the rate that existed on December 31, 2023. Table 1: Revenue by Activity and location in millions of HKD CK Asset Holdings Limited 2023 Annual Report CHKGF owns the UK Pub Chain Greene King, which it purchased in 2019 for an Enterprise Value of GBP 4.6 billion, of which GBP 2.
6 billion was paid to equity holders, and a further GBP 1.9 billion of debt was assumed by CK Asset Holding. At the time it was purchased, Greene King had approximately 3,000 pubs.
Both CK's website and its 2023 annual report state that it now has approximately 2,700 pubs. As per Table 1, 40% of CHKGF's recurring revenue is from the pub business. When revenue from Joint Ventures are included, this figure drops to 32.
7%. Hong Kong only represents 11.8% of total revenue, and more than half of all revenue comes from the UK.
Aside from its pub business, other non-property businesses consist of stakes in a variety of companies, primarily the UK, Canada, Australia and Europe, and they are discussed in more detail below. Finally, CK purchased Civitas Social Housing PLC, a UK Social Housing business in mid 2023 for USD 619 million. This business is low yielding, but also low risk, as usually, there is government support and subsidization of tenants' rent.
Although the UK pubs and the various infrastructure and utility businesses represent approximately one-third of CHKGF's revenue, these businesses only produce 6.5% of group profits (HKD 1,157 million out of total revenue of HKD 17,885 million). Table 2: Profit by Activity and Location in millions of HKD CK Asset Holdings Limited 2023 Annual Report The UK Pub Business There are approximately nine pub chains in the UK that are a similar size as Greene King, and they are bought and sold quite frequently.
Private equity firms get involved from time to time because it is possible to employ high amounts of debt to purchase these chains. Several are owned by private individuals or families, while others are owned by breweries, who only allow their beers to be sold in their pubs. Table 3 presents information about three publicly traded UK pub companies.
As can be seen, the pub business in the UK isn't lucrative. Greene King's annual P&L per pub is only $47,000. This is in line with both J D Wetherspoon's and Mitchells' and Butlers' P&L figures, and Marston's is actually losing money.
It would appear that the attraction of Greene King for Victor Li isn't the P&L or Cash Flow its pubs generate. This article from Fortune speculates that the reason for the purchase of Greene King was the opportunity to move capital from Hong Kong and invest it in a business with a land play, in a politically stable country, at a time when the pound was depressed due to Brexit. It makes a lot of sense if you have a decade's long investment horizon, and you are more concerned with Return Of Equity in 40 or 50 years, and not Return On Equity in the ensuing period of time.
Table 3: Profitability 1 UK Pub Chains Seeking Alpha 1 All figures in USD as at December 31, 2023 UK publicly traded pub chains haven't delivered stellar investment returns in the five years since CK Asset Holdings purchased Greene King. J D Wetherspoon has lost 47% of its value over this period of time, Marston's is down 72%, and only Mitchell's & Butlers has had a positive return, 12%, or approximately 2% a year compounded..
. worse than what cash has returned. CK Asset Holding paid 4.
7 billion pounds, or approximately USD 6 billion, for Greene King, in 2019. Coming up with a precise valuation for the business today is difficult, but the information in Table 4 allows a range to be calculated. Table 4: Valuation Metrics - UK Pub Chains Seeking Alpha A.
The Average Enterprise Value per pub of the three peers in Table 4 is $2.31 million. This implies an Enterprise Value for Greene King of $6.
24 billion. Using Marston's EV/Pub implies a valuation of $4.27 billion, and Wetherspoon's EV/Pub implies a valuation of $8.
53 billion. Wetherspoon's number is far too high - its pubs gross $3.1 million and earn $63,000 per annum, versus Greene King's figures of $1.
1 million and $47,000 per annum. So $4.25 billion to $6 billion appears to be a reasonable range for Greene King's EV.
B. The average EV/Sales of the three public companies is 1.45.
This implies an EV for Greene King as a whole of $4.3 billion, with a lower end of the range being $3.06 billion, and the higher end being $6.
06 billion. Again, I think the J D Wetherspoon's figures can be discarded, and using this method, a range of $4.25 billion to $6 billion is also arrived at.
The midpoints of both ranges imply a loss of circa 20% - much better than the 72% loss Marston's shareholders have suffered, or the 47% loss incurred by J D Wetherspoon shareholders, but not as good as the small gain that Mitchell's & Butlers has produced. Utilities, Infrastructure, and Other Businesses Table 5 shows information regarding some of CHKGF's major subsidiaries, or companies that it holds significant stakes in. Not shown are other companies mentioned on its website , such as, ".
.. Park’N Fly , which is an off-airport car park provider in Canada; UK Rails , a rolling stock operating company in the United Kingdom; and Australian Gas Networks , which is a distributor of natural gas in Australia.
" A number of things should be noted. First, CK Infrastructure Holdings Limited, or CKISY, has invested alongside CK Asset Holdings. Second, with the exception of Northumbrian Water, where KKR has purchased 25% of the company, entities entirely owned by the Li family, or controlled by them, own 100% of the companies in question.
Finally, many of these companies are regulated utilities. This means that they are protected from competition. But it also means that the rates that these businesses can charge customers are subject to regulatory approval, and that there is a maximum ROE that they are allowed to earn.
So again, a similar profile - low risk, low return businesses that can be expected to still be operating 50 years from now. Table 5: Infrastructure and Utility Asset Investments 2023 Annual Reports and Press Releases of CK Asset Holdings Limited, CK Hutchison Holdings Limited and CK Infrastructure Holdings Limited China Isn't Becoming Hong Kong, Hong Kong Is Becoming China For most of the twentieth century, Hong Kong was the gateway to China. It prospered on trade flows as China became the world's workshop.
Hong Kong thrived as a financial services centre as Chinese companies looked to raise capital from western investors, and western companies looked for assistance in investing in China. That process has, for now at least, stopped. When China took over Hong Kong in 1997, the hope was that China would become like Hong Kong.
Now, however, the opposite is happening - Hong Kong is fast losing its status as an international city, and it is becoming a Chinese city. 1) The Hong Kong-Zhuhai-Macau Bridge: In 2018, the 55 kilometre (34 mile) HKZM Bridge was completed. It links Hong Kong to the former Portuguese island of Macau, and to the mainland city of Zhuhai in the Pearl River Delta.
A four-hour road journey was cut to 30 minutes, and the economies of 11 megacities with a combined population of 65 million are becoming integrated into what has been termed the Greater Bay Area. The establishment of a High Speed Rail system has been particularly important, and it now only takes 21 minutes to travel from Hong Kong to Shenzhen by train. Although Hong Kong accounts for only 12% of CK's revenue, it is responsible for over 75 percent of its profits though property sales, property management, hotels, and property rentals.
Here are some of the effects that the integration of the Greater Bay Area's economies is having upon Hong Kong. None of it bodes well for CHKGF in the near term. a) Despite having a population of 13 million versus Hong Kong's 7.
4 million, residential rents in Shenzhen are a third of the cost of Hong Kong's, and they are even cheaper in other areas of Guangzhou Province. Cross border commuting is becoming common, and, " Hong Kong’ s residential property price index fell sharply by 13.2% in Q1 2024 from the same period last year, its ninth consecutive quarter of year-on-year decline.
.." So far, there is no sign of a rebound, June 2024 saw continued declines in prices and a 30% drop in the number of transactions.
CK Asset Holdings has been forced to slash offering prices on some of its new developments. b) CHKGF is one of Hong Kong's largest retail landlords. This sector too is facing challenges.
" Hong Kong residents made 53 million trips over the border to Shenzhen in 2023, the first full year since the lifting of COVID-era border restrictions, according to government data. In March, the city experienced a record 9.3 million departures, mostly to mainland China, leaving nightlife and shopping hotspots virtually empty during the Easter holiday period.
For many Hong Kongers, Shenzhen’s draw is a superior range of shopping, dining and entertainment options at a fraction of the price. " c) Twenty five years ago, Hong was Asia's largest financial centre after Tokyo, but Singapore has now surpassed it. Although Finance still accounts for 23% of Hong Kong's GDP, and 7.
5% of its employment, Hong Kong's position is under threat. Money raised in Hong Kong for China focused Private Equity funds decreased by 81% last year, and the value of IPOs on the Hang Seng fell by 56% . There have been numerous rounds of layoffs by foreign firms in the past two years.
Obviously, this has impacted the office market, but the decline in the number of foreign ex-pats has also negatively affected luxury rental property, restaurants and nightclubs. Hong Kong's position as a financial centre owes a lot to the links between the Hang Seng and the Shenzhen and Shanghai Stock Exchanges. However, Shenzhen is the home of BYD ( OTCPK:BYDDY ) and Tencent ( OTCPK:TCTZF ), and it is the closest thing that China has to Silicon Valley.
It poses a definite threat to Hong Kong's financial services business, especially if western investment banks see no difference between the legal framework of the PRC and Hong Kong, and if they come to view Hong Kong, with 10% of the Greater Bay Area's population, as a suburb of Shenzhen. So - while property prices are equalizing, it is Hong Kong's prices that are falling to Chinese levels, not Chinese prices rising to Hong Kong levels. Graph 1 shows the performance of CK Asset Holding's equity versus two other Hong Kong Property Developers, Swire Properties Limited ( OTCPK:SWPFF ) and Henderson Land Development Company Limited ( OTCPK:HLDCY ).
All three have taken it on the chin over the last five years. Graph 1: Hong Property Developers Equity Performance Data by YCharts As per Table 6, China already accounts for half of CK Asset Holdings' property sales. This will likely increase, as CHKGF's website shows six developments underway in Hong Kong, and 14 under development in mainland China.
Table 6: CK Asset Holdings - Property Sales by Geographic Location CK Asset Holdings Limited 2023 Annual Report Going forward, it appears that CK will become a Chinese development company with operations in Hong Kong, not the other way around. As per page 20 of the 2023 annual report , "the Group had a development land bank (including developers’ interests in joint development projects but excluding agricultural land and completed properties) of approximately 74 million sq.ft.
, of which 7 million sq.ft., 63 million sq.
ft. and 4 million sq.ft.
were located in Hong Kong, on the Mainland, and overseas respectively." In other words, 85 percent of CK's land bank is in Mainland China. A Sum of The Parts Analysis On the face of it, CK Asset Holding's Greater China business looks undervalued by the market.
Most analysts have CHKGF's market value as a 30% to 40% discount to NAV. This report from DBS even thinks CK Asset Holding is undervalued by 60% . Maybe, if you don't believe in the concepts of a China discount, or that one should be applied to CK Asset Holdings.
And maybe, if you don't believe in the concept of minority shareholder discounts. As per Table 2, CHKGF's Total Profit in 2023 was HKD 12.671 billion, of which HKD 997 million was produced by the UK pub business, and HKD 160 million is attributable to the various utilities CK owns.
This leaves HKD 11.514 billion of profit, or USD 1.47 billion, being produced by the Greater China business.
Theoretically, one could buy CHKGF for USD 13.2 billion, sell the UK business for approximately $5 billion (20% less than what it paid for it in 2019), take these proceeds along with cash on hand, pay off total debt of $7.8 billion, and be left with a Greater China business with no debt, for total cost of $10.
6 billion. So, a chance to buy one of Hong Kong's leading property firms, debt free, at a P/E ratio of 7.2.
(a cost of $10.6 billion for assets producing $1.47 billion in annual earnings).
Unfortunately, there are a few problems with this scenario. Victor Li / Li Ka Shing control the company. They have no reason to do this.
In fact, they're buying low yielding property businesses and utilities in the UK and other politically stable countries like Canada, the US and the EU, not selling such businesses. It is debatable how long the current level of earnings is sustainable. Hong Kong property is three times as expensive as Guangdong property, and dropping fast.
CK Asset Management appears to have the same opinion, because it isn't committing capital to Hong Kong. Going forward, it appears that CHKGF's Asian property business will be a Chinese business with a Hong Kong stub, not a Hong Kong business with a China stub. A P/E Ratio of 7.
2 for a Chinese property development company isn't particularly attractive. Conclusion It's too early to call a bottom on the Hong Kong property market. If you're underwater, cut your losses, and recycle your capital.
The S&P 500 was up 30% last year. If you want to invest in UK Pubs or social housing businesses, there are plenty of ways to do this without taking China property risk. And you can do so with management teams, whose first goal is profit maximization, not wealth transference or wealth preservation for future generations.
If you want to invest in Chinese property, there are plenty of ways to do this too, without taking exposure to UK Pubs or utilities. Li Ka Shing is a legend, and one should never bet against him. However, one should recognize when his goals aren't aligned with your own goals.
In such cases, one shouldn't bet alongside him. Accordingly, CK Asset Holdings Limited is a Sell. Editor's Note: This article discusses one or more securities that do not trade on a major U.
S. exchange. Please be aware of the risks associated with these stocks.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha).
I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor.
Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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