August 21, 2014 12:00 am JST

Is Asia's richest man pulling out of China?

YASUO AWAI, Nikkei staff writer

Li Ka-shing might not be casting these clouds over Hong Kong but he is causing concern as he sells off parts of his China and Hong Kong holdings.

HONG KONG -- On May 8, Cheung Kong (Holdings) announced that it wanted to buy Australia's Envestra for 2.37 billion Australian dollars ($2.2 billion) in cash. The offer, made by a consortium formed with two group companies, represented a 16.8% premium over the closing price of the Australian natural gas supplier's stock the previous day. At the time, Envestra was five days away from being sold to its major shareholder.

     Envestra enjoys monopoly status in southern Australia's retail market, serving 1.14 million customers with a 23,000km natural gas grid.

     The utility's major shareholder was APA Group, Australia's largest natural gas infrastructure company, which had a 33.4% stake. Cheung Kong Infrastructure Holdings, one of the Cheung Kong subsidiaries involved in the acquisition, had a 17.5% interest. The other subsidiary involved was Power Assets Holdings.

     APA had made the first move back in December, proposing that it purchase Envestra through a $2.1 billion combination of cash and equity. APA wanted to expand into the downstream end of the gas business. In March, Envestra's board of directors agreed to accept the offer, though two executives from CKI objected. The company decided to hold another meeting on May 13 to gain shareholder approval.

     Then Kam Hing-lam, a CKI managing director who at one time sat on Envestra's board, made the case for Cheung Kong's counterproposal.

     Envestra suddenly postponed the planned shareholders meeting, and in late May its board unanimously agreed to accept the Cheung Kong deal.

     On Aug. 7, APA issued a statement that it would not compete against Cheung Kong and would sell all of its interest in Envestra to the Hong Kong group. "The cash offer put forward by the (Cheung Kong) consortium well-exceeded our valuation of the Envestra business, even at full ownership," said Mick McCormack, APA's CEO and managing director.

     Behind the dramatic reversal was Li Ka-shing, 86, still the head of a corporate empire and still living the "Hong Kong dream."

Looking westward

Li actually began in business by making plastic flowers. He eventually became Asia's richest individual. As of Aug. 19, he was No. 11, at $34.8 billion, on Forbes' online ranking of billionaires.

     The Cheung Kong group can be broadly divided into two parts -- property investment company Cheung Kong (Holdings) and Hutchison Whampoa, a former British-owned conglomerate, which came under the group's wing in 1979. Together, they employ 260,000 workers in 52 countries. The group's market capitalization is more than 1 trillion Hong Kong dollars ($129 billion).

     The group's companies are wide-ranging. They include: Hutchison Port Holdings, which invests in, develops and operates ports; Hongkong Electric Holdings, Hong Kong Island's sole power provider; Hutchison Telecommunications Hong Kong Holdings, a cellular service company; and A.S. Watson Group, a drugstore chain operator.

     It is almost impossible to live in Hong Kong without buying something from Li Ka-shing's business empire.

     Li also has close ties with the Chinese Communist Party and is revered as a "superman" in mainland China -- a land he no longer seems to be smitten with.

     Li's corporate group is accelerating its efforts to reduce its stakes in Hong Kong and China. Companies on Cheung Kong's shopping list this year -- Canadian parking business Park'N Fly, Italian cellphone firm Wind and Irish aircraft lessor AWAS -- are all based in the West.

Likes regulation

Isabelle Katsumata, a director of Fitch Ratings Singapore, commented on Cheung Kong's Envestra acquisition. It "is consistent with CKI's strategy of investing in regulated utilities that provide stable and predictable returns and operate in jurisdictions with mature and transparent regulatory frameworks," she said.

      To finance its acquisitions in the West, Cheung Kong is selling assets in Hong Kong and China.

      In January, the group took HK Electric Investments public in a trust initial public offering on the Hong Kong stock exchange, raising HK$24.1 billion while reducing its stake to 49.9%. In March, Li sold some 25% in A.S. Watson to Singapore state investor Temasek Holdings for HK$44 billion.

     A.S. Watson runs some 10,000 Watsons outlets in 25 countries in Asia and Europe. In China, it has the largest presence of any health and beauty chain, with a market share of around 20%. Temasek made the investment looking to boost its holdings of retailers so as to better ride Asia's swelling middle class wave. In a press conference, Li said A.S. Watson is to go public in two to three years in Hong Kong and Singapore.

     Cheung Kong is selling off its mainland China assets at an accelerated pace. In August, the group announced the sale of Hutchison Harbour Ring, with its Shanghai commercial property holdings, to a real estate company in Shenzhen.

     The group's business results also reflect the shift away from Hong Kong and China. Europe accounted for a record-high 37% of earnings before interest and tax by area in 2013, surpassing the combined total for Hong Kong and China, according to the group's latest annual report. The percentage for mainland China was 19% and that for Hong Kong 16%. The group's growing profile in Europe owes much to the steady growth of its cellphone business, under the 3 brand. Sales in Europe now account for around 40% of the total, and the region is also the most important profit machine for Li's group.

Anxiously awaiting

After succeeding in the fake flower business, Li made a name for himself as an astute real estate bargain hunter. In 1967, when Hong Kong property prices plummeted amid riots against British colonial rule, Li splurged.

     In the 1970s, Washington made an about-face and mended ties with Beijing. As a result, Hong Kong property prices surged, and Li became a bona fide mogul. Meanwhile, oil crises dealt a serious blow to Li's plastic flower business. As he employed his foresight to navigate through the rough and tumble of international politics and business, he became one of the world's most successful entrepreneurs.

     Now, with deflation having gripped the eurozone, Li is exploring Europe for businesses that can be bought on the cheap, analysts say.

     There is also talk that Li foresees the Chinese economy is nearing its peak, which would explain his moves to sell off parts of his mainland holdings.

     And some analysts argue that as Li will someday step down as the leader of his empire, he is shifting investments from China, where the rule of law often gets short shrift, to the U.S. and Europe, where there is a higher degree of legal transparency.

      "We believe Hutch will continue to spin off or dispose of assets whenever attractive prices are being offered, enabling Hutch to redeploy capital into assets that generate potentially higher returns," said Benjamin Lo, head of regional conglomerates research at Nomura International (Hong Kong).

     Whenever asked during press conferences whether his businesses will pull out of China and Hong Kong, Li says no, adding that it is normal to conduct transactions with the outside world. Still, the Chinese Academy of Social Sciences, a Chinese think tank, said in a white paper issued in May that the talk of Li withdrawing capital could affect Hong Kong's competitiveness.

     Both China and Hong Kong anxiously await Li's next move.