With price volatility associated in part with the coronavirus and the recent civil unrest in Hong Kong, we got a pricing opportunity in CK Hutchison (HKSE:00001, Financial), a conglomerate with interests in ports, telecommunications, retail (AS Watson), infrastructure, energy, and several other small businesses. All four of our Funds now maintain an interest in this company. While CKH is often viewed as a Hong Kong conglomerate (and is listed on the HKSE), a majority of its earnings come from Europe (48% of revenues and 57% of EBIT in 2019). At purchase the shares were trading around 60% of a conservative estimate of the company’s underlying intrinsic value, and at roughly 6 times earnings. It paid a dividend yield close to 6% while maintaining a low payout ratio, so there may well be the opportunity to increase the dividend over the long-term. Since May 2019, there has been significant insider buying in the company’s shares, with some at much higher prices than we paid for our shares. The insiders have included various senior members of the management team including the founder Li Ka Shing and his son Victor Li (now Chairman and Co-Managing Director). There are potential catalysts for value recognition which include a potential spinoff of the company’s telecom tower assets which could possibly under certain reasonable valuation scenarios add HK$5-6/share to the company’s value, or in the longer-term a potential IPO or sale of part of its retail assets. Also, we believe that Covid-19 will have a more limited impact on CK Hutchison’s earnings, as a substantial portion of its EBIT comes from infrastructure and telecommunications (roughly 58% of 2019 EBIT), and these business have been relatively resilient. The ports business has seen some slowness with 9% year-over-year decline in TEU (volume) for the first five months, but better than the industry. Retail has borne the brunt of the virus impact due to store closures (especially in China), lower footfall and spending per capita, but should see gradual recovery as end-markets improve. Many of the stores in Europe remained open through the crisis as they are in a pharmacy/drugstore format.
From Tweedy Browne (Trades, Portfolio)'s second-quarter 2020 commentary.
