Third Avenue Management Commentary on Cheung Kong
Cheung Kong reported a 72% increase in 2011 earnings per share and 16% increase in NAV per share to HK$132.20. The company’s results benefitted from gains on timely resource conversions in early 2011 consisting of sales of stakes of ports and commercial real estate assets in separate IPOs. Although many analysts exclude one-time gains like these in valuing a company, they are important in our analysis at Third Avenue as they demonstrate management’s willingness to be opportunistic in not only buying but also selling assets to increase NAV. Additionally, the large gains confirm our belief that many of the company’s assets are worth considerably more than stated book value. Cheung Kong’s underlying profit increased 15%, driven by a 26% increase in contribution from property sales and 13% increase in property leasing income.
The company also benefitted from strong results at 50%-owned subsidiary Hutchison Whampoa, whose common stock is also held in the Fund. Hutchison Whampoa’s revenue and earnings before interest and taxes (“EBIT”) increased 22% and 33%, respectively. The growth was broad based including Ports (revenue up 12%; EBIT up 14%), Retail (revenue up 17%; EBIT up 19%), Property (revenue up 7%; EBIT up 8%), Infrastructure (revenue up 67%; EBIT up 57%) and Energy (revenue up 41%; EBIT up 79%). The company appears to be taking advantage of depressed economic conditions in Europe as it made a significant acquisition its infrastructure business in 2011 (Northumbrian Water group Limited) and announced the acquisition of Orange Australia in 2012 to bolster its telecommunications operations. Cheung Kong maintained a very strong financial position, with HK$20 billion in cash and a net debt to capital ratio of only 7.6%.
Cheung Kong maintained a very strong financial position with HK$20 billion in cash and a net debt to capital ratio of only 7.6%. Cheung Kong Common traded at a 22% discount to reported net asset value at quarter end, compared to an average premium to book value of 1% over the last five years. Chairman Lee Ka-shing spent $14 million during the first four months of 2012 buying Cheung Kong Common in the open market and now owns 43.3% of the outstanding shares.