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Politics may get the better of Li Ka-shing's new Europe focus

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Hutchison Whampoa Chairman Li Ka-shing   © Reuters

Hong Kong -- Li Ka-shing's overseas infrastructure venture could be hurt by a reduction in Chinese government support, analysts say, following the tycoon's decision to divest some of his assets in China.

     Hong Kong's richest man has been making a series of deals that refocus his business away from China and into Europe, sparking a round of attacks by China's state-controlled media. Nicknamed "Superman," 87-year-old Li chairs Cheung Kong Hutchison Holdings (CKHH) -- a multibillion dollar business conglomerate ranging from supermarkets in Hong Kong and ports in Myanmar, to telecom services and utilities in the U.S. and Europe.

     On Sept. 4, CKHH announced it would merge two of its key units -- Bermuda-registered Cheung Kong Infrastructure Holdings (CKIH) and Power Assets Holdings (PAH). When completed, PAH will be delisted and removed from the company registry.

     In other words, all listed companies under the CKHH umbrella have switched their base from Hong Kong, or mainland China.

     Last month, Li's Cheung Kong Property Holdings reportedly attempted to sell off a commercial complex in Shanghai's Pudong area for 20 billion yuan.

     A company spokesperson denied suggestions that CKHH was retreating from Hong Kong and mainland China, saying the merger was merely a business decision, although this has sparked a heated debate among media at home and overseas.

     Market worries following the controversy hinge around the fact that much of Li's overseas investments in developing countries are related to ports and infrastructure buildout -- a sector that often involves some forms of politicking.

     Data show that one of CKHH's units, Hutchison Port Holdings, owns a network of 52 ports, in 26 countries across six regions. If the state media criticisms do reflect souring views in Beijing, Li's business empire could find its growth constrained if Chinese government support is cut.

     Thomas Chan, head of the China Business Centre and director of public policy research at Hong Kong Polytechnic University, said Li's move has dragged him into a dilemma.

     "On one hand, his retreat has disappointed Beijing. On the other hand, he needs government support in his overseas venture," Chan told the Nikkei Asian Review in an interview.

     "Large corporates often have to deal with politics when they do business. That's an unwritten rule, but that's the reality," he said, adding that this could place Li's conglomerate at a disadvantage in bidding for projects in infrastructure -- a sector that in Asia is blighted by a massive funding gap of $8 trillion which needs to be filled by 2020, according to the Asian Development Bank.

     Meanwhile, companies from Dubai and Singapore, major competitors in the Asian ports business, are still enjoying substantial support from their governments  for expansion in the region.

     Politics still play an important part in many large-scale infrastructure projects in developing countries -- be it port, railway or dam construction.

     "There is no other thing more important than this," says Joseph Fan, a professor at the Chinese University of Hong Kong (CUHK) who researches family-run businesses and Li's career, adding that politics even overrides a company's scale and talent pool.

     Many of Pakistan's major infrastructure deals in recent years have been conducted at the government level. The country's $1.65 billion Karot Hydropower project on the Jhelum River east of Islamabad will be financed by China's $40 billion Silk Road Fund, which was established to fund infrastructure projects.

     The strategic, deep-sea Gwadar Port in southwestern Pakistan is owned by the state-controlled Gwadar Port Authority and operated by state-run China Overseas Port Holding Company.

     CKHH's businesses have been broadly less successful in developing markets such as China, India and Israel compared to in advanced markets including Europe and North America.

     Fan's 2013 research shows that of 65 projects CKHH invested in globally over the last decade -- some 40 projects in developed countries such as the U.K. -- resulted in an average of 2% accumulative abnormal return. However, its investments in developing countries including China led to an average of 1% loss to the group.

     In China the private sector still contributes to a large part of the country's economic success.

     To ensure that private businesses act in the best interest of the country, says Fan, it is not uncommon for governments at different levels across the country to allocate business opportunities and critical resources, such as land and electricity, to businesses that are "loyal" and "supportive" to the government.

     "This type of non-market base allocation may crowd out businesses that do not play this game well." He added that probably Victor Li Tzar-kuoi, Li's son and successor at CKHH, is like many of Hong Kong's next-generation, or foreign, business leaders in not playing the game as well as his parent.

     Li's recent asset transfers from China could well reflect a shift in CKHH's comparative advantage, "from relationship-based to market-based dealings," Fan said.

     Victor Li has demonstrated a different leadership style from his rags-to-riches father. Formerly a student [Rebecca S1] at Stanford University in the U.S., the 51-year-old deputy chairman has a more international outlook, and is therefore more likely to thrive in places with sound legal protection and international business standards, Fan points out.In the recent media furore over CKHH's Western moves, two views dominate. Some mainland Chinese media have said Li has the freedom to invest in any markets he finds lucrative. Others have condemned him for not being "grateful" enough to repay for the favorable treatment he has enjoyed thanks to his close connections with Chinese officials. More importantly, his retreat comes at a time when the Chinese economy has been experiencing a slowdown.

     Some observers, however, say the role of politics in the Li family's overseas infrastructure venture is overstated.

     Lorraine Tan, director of equity research in Asia at Morningstar Research, said the group's recent moves were driven by mutual business strategy and were not government-led.

     "As a result, I don't expect both CKHH and CKIH to feel any impact on their growth plans from reduced China government support, whether perceived or real."

     Tan's rationale is that most of CKIH's global infrastructure acquisitions have been through tenders or were outright purchases from the original shareholders.

     The company has also adopted a strategy to invest in regulated infrastructure assets or utility-like activities where competition is limited and there is more stable pricing power.

     For example, it has not made any acquisitions or meaningful investments in China since the expansion of its Zhuhai power plant in 2007, due to competition in the Chinese power sector -- the same reason it is absent from the power generation market in Australia.

     Lowering government support is also unlikely to have an impact on CKIH's existing investments, although it could affect its upcoming bids on infrastructure projects that are heavily depended on government support, said a Hong Kong-based political risk consultant.

     The enormous scale of CKIH's investments also means that in the long-run, it will be less influenced by short-term political swipes.

     Looking ahead, the prevailing wisdom is that Li's companies will focus on investments in the West, especially in public utilities such as electricity, and in new technology.

     Tan expects Li's companies to focus on expanding their 3 Group mobile services and infrastructure acquisitions in Europe.

     CUHK's Fan echoes the view. CKHH's foray into Asia's port and infrastructure business will be slower than expected

     because construction projects such as port building, like manufacturing, are labor-intensive. "Anything related to labor is sensitive because labor can be disappointed. When the government steps in, it becomes political," he said.

     "I don't see Victor Li has the same level of comparative advantage as his father developing ports in emerging markets. Even if actually they are doing it, I am not positive on that," Fan added.

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