Leaving Hong Kong Is Beside the Point: For Li Ka-shing, It's Still About Doing Business

Set aside the arguments over patriotism and capital flight, and the restructuring of the Cheung Kong–Hutchison group is, for Hong Kong's richest man Li Ka-shing, simply a more profitable deal.

No other businessman matters to Hong Kong the way Li Ka-shing does.

He owns one-seventh of all the private housing in the city. ParknShop, the supermarket chain with 70% of Hong Kong's retail market, belongs to him. So does nearly half of Hong Kong's port business.

So when this emblem of the "Hong Kong dream" decided to move his companies' registration out of Hong Kong, and to merge and restructure Cheung Kong and Hutchison Whampoa, the two operating companies that made him the city's richest man, the news shook Hong Kong's business community and the rest of Hong Kong society with it.

At 4 p.m. on January 9, a little over ten days ago, after six months of secret negotiations, Cheung Kong (Holdings) Limited ("Cheung Kong") and Hutchison Whampoa Limited ("Hutchison"), both chaired by Li Ka-shing, jointly announced a major restructuring plan:

A newly formed company, CK Hutchison Holdings Limited ("CK Hutchison"), will take over all of Cheung Kong's and Hutchison's non-property businesses, including the operation of and investment in ports and related services, retail, infrastructure, energy and telecommunications. Another new company, Cheung Kong Property Holdings Limited ("Cheung Kong Property"), will hold all of the two companies' property businesses in Hong Kong, mainland China and overseas.

Both new companies will be registered in the British Cayman Islands, a well-known offshore domicile, and the original Hong Kong-registered Cheung Kong and Hutchison will be deregistered. Once the restructuring is complete, CK Hutchison and Cheung Kong Property will list on the main board of the Hong Kong Stock Exchange. All the work is expected to be finished by mid-2015.

Put simply, the restructuring will split the Cheung Kong–Hutchison group, which has kept Li at the top of the rich list for years, into two new companies with strictly separate core businesses. What shook Hong Kong is that this group, which grew rich alongside the city and missed almost none of its great booms, will in theory no longer belong to Hong Kong.

After announcing the decision, the 87-year-old Li still smiled at the reporters in the room and said: "In short, it will definitely be good. Just trust me!" But the pledge he had repeated many times, that he would "never move the registration," was broken in the end.

Li Ka-shing's Cheung Kong and Hutchison Whampoa are close to a condensed history of Hong Kong business; they never missed a big opportunity the city offered

In Central, Hong Kong, the boxy Cheung Kong Center stands right beside I. M. Pei's famous Bank of China Tower. Since it was completed in 1999, it has been the heart of Li Ka-shing's empire. Every weekday morning several thousand employees arrive there, and so does Li himself, who, after listening to the news and playing a round of golf, never fails to come in to work.

When he started out more than 60 years ago, Li worked in far humbler conditions. In 1950 he rented factory space in Shau Kei Wan, an industrial district on the east side of Hong Kong Island, and founded Cheung Kong Plastics to make plastic flowers, then one of Hong Kong's major exports.

After the war a middle class rose across the world, with simple, unrefined tastes, and plastic flowers caught on in the 1950s. Cheap labor and a busy port made Hong Kong a manufacturing hub. Li seized the moment: within ten years he had built up starting capital of tens of millions of Hong Kong dollars and become Hong Kong's famous "Plastic Flower King."

Then came the 1960s. Hong Kong's economy was still dominated by British trading houses, which relied on the traditional port and foreign trade and shaped local commerce on a large scale. Chinese entrepreneurs who had come up in industrial districts such as North Point and Kwun Tong saw the basic conflict between a growing population and scarce land, and saw too the great wealth that industry and trade had piled up.

Almost overnight, property became the hottest business in town. In 1958 Li bought his first plot of land in North Point and founded Cheung Kong Industries. Under his management, Cheung Kong listed on the Hong Kong stock exchange in 1972; its stock code today is 00001.

What Hong Kong people still love to talk about is a takeover Li pulled off in 1979. In a masterly case of a small force moving a heavy weight, he used HK$639 million of Cheung Kong's assets to buy a controlling stake in Hutchison Whampoa, the second-largest British trading house, from HSBC, and became the first Chinese to take control of a British trading house. At the same time, by acquiring Hongkong and Whampoa Dock, he folded its cargo business into Hutchison's Hongkong International Terminals, strengthening his port business further.

The globalization of production and trade, and the maturing of container shipping, sent world freight volumes soaring. Hong Kong's prime position in East Asia, together with the first stirrings of demand from mainland China, quickly made Hutchison Whampoa the most important part of Li's fortune. After more than 30 years of restructurings, acquisitions and expansion, Hutchison's core businesses now reach beyond property and port shipping into retail, energy and infrastructure, and more than half its revenue comes from overseas operations in Europe.

Today the Cheung Kong–Hutchison group consists of two huge conglomerates with many subsidiaries, operating in 52 countries with about 280,000 employees in all. According to their 2013 annual reports, the Hong Kong-listed companies alone have a combined market value of HK$1.023 trillion.

Li Ka-shing has earned the nickname "Superman"; his sharp judgment shows at every step

Over the past half century, Li has timed his entry into property, energy, retail, the internet, finance and even aviation just right. That is one of the main reasons his personal fortune grew so fast.

In the chart below, we list the group's business expansions and changes at key points in its history. It shows that besides using his judgment to buy low and sell high again and again, Li also relied on strong cash flow to carry businesses such as telecoms, the internet and even property for long stretches, waiting a considerable time for returns.

At bottom, Li's operating businesses and his financial dealings feed each other. On one hand, financial dealing gives the operating businesses strong support: he can buy up and stockpile assets during downturns, wait calmly for recovery, and then sell at the price he wants. On the other hand, the operating businesses produce rich profits and cash flow, which give his capital-market moves a solid reputation and good prospects, making it easy to raise money on a large scale.

Take property. Hutchison Whampoa's debt-to-asset ratio has never exceeded 60%, and Cheung Kong's is below 20%, while mainland developers' ratios often top 70%. Li's financial caution and ample cash flow are plain to see.

A key link between Li's financial dealings and his operating businesses is his skill at spinning off and selling assets. By shedding businesses with thin profits and no remaining potential, and taking on businesses that need huge capital now but have bright prospects, he keeps the group's profitability high. The group stays flush with cash, the businesses that are spun off or sold gain room to act on their own, and the cycle sustains itself.

Take telecoms. From 2000 to 2009, while Hutchison's 3G business was losing money, companies affiliated with the Cheung Kong–Hutchison group were spun off or sold as many as nine times, raising more than HK$100 billion. That money kept this ahead-of-its-time idea alive until the 3G era really arrived.

Given all this, it is no surprise that Li has held the title of Hong Kong's richest man for so long.

Why is a shrewd businessman seen as the emblem of the "Hong Kong dream"?

As we mentioned earlier, Li made his first fortune from plastic flowers, which carried high profit margins. In truth, hemmed in by the city's limited space, Hong Kong manufacturing was always small-time on the world stage, however far it developed. But Hong Kong's standing in world trade as a free port was rare in Southeast Asia, a region then far less developed overall.

Look back at the Hutchison Whampoa port business Li bought then. Even today, Hongkong International Terminals is still one of the world's busiest independent container terminal operators, and Hutchison Port Holdings covers the whole logistics supply chain, from airports and railways to ship repair and other transport and logistics services, across Asia, Africa, Europe and the Americas.

In the mid-1960s, Hong Kong regained its stability and property prices climbed. Li sold at high prices the buildings and land he had bought cheaply, and turned to buying more plots with development potential and putting up buildings. By the early 1970s he owned 6.3 million square feet (585,300 square meters) of floor space, plus 350,000 square feet (32,500 square meters) of rental property, and the rent alone brought in HK$4 million a year.

From the 1980s on, living standards in Hong Kong improved across the board, opening wide gaps in demand for utilities such as water, electricity, gas and telecoms, and for retail and other services. In this period the group founded Hutchison Telecommunications, bought shares in Hongkong Electric, and took its biggest step in overseas energy acquisitions, buying part of Canada's Husky Energy. These moves laid the foundation for its big push into Europe in the 1990s and 2000s.

In recent years Li's investments have shifted subtly. While selling off large numbers of commercial property projects, he has turned his attention, through his Horizons Ventures, to technology. Artificial intelligence, big-data analytics, online advertising and new media are all fields he believes have real promise.

Yet although Hong Kong people have worried again and again that Li is "fleeing Hong Kong" whenever he sells assets or makes big investments abroad, the Li family still reaches into Hong Kong life to an astonishing degree:

• In property, Li owns one-seventh of all the private housing in the city;
• Hutchison still has 12 berths at the Kwai Chung port in Hong Kong, handling nearly half of the port's containers;
• From its base in Hong Kong, Watsons runs more than 10,000 stores across Asia, and its sister brand ParknShop holds 70% of the city's supermarket retail market;
• In consumer electronics, Fortress is the largest appliance chain in Hong Kong by market share;
• Hutchison's 3 Group is not only very active in Europe but also one of Hong Kong's main telecoms and mobile operators; add PCCW, owned by Li's son Richard Li, and the family's market share is larger still.

Hong Kong's economy has stalled in recent years, and Li had in fact been thinking of pulling back for some time

At the 1997 handover, Hong Kong's per capita GDP had already reached US$25,000, among the highest in the world. But after the Asian financial crisis, SARS and the global financial crisis struck one after another, its growth slowed sharply.

Among the "Four Asian Tigers" of that era, Singapore has clearly done better in recent years. From 2003 to 2013 its economy grew by an average of 6% a year, far above Hong Kong's 4% over the same period, and its GDP overtook Hong Kong's in 2010.

This broad economic weakness has hit the three most important parts of the group's core business directly: property, shipping and retail.

In property, a flood of mainland money and loose monetary policy have pushed Hong Kong prices to all-time highs, to the point where homes are almost unaffordable. Public housing and similar schemes guarantee low-income people a place to live, but salaried workers in the "sandwich class" in between can rarely benefit from them;

In shipping, Hong Kong lost its place as the world's busiest container port in 2005 and fell to third, behind Singapore and Shanghai. In 2014 neighboring Shenzhen overtook it too, and its days as the world's busiest port are gone for good;

In retail, as the Individual Visit Scheme for mainland tourists has been gradually relaxed and visitor numbers keep climbing, Hong Kong's total retail sales are still rising, but local residents' everyday spending is being squeezed. Stubbornly high inflation has dampened their appetite to spend still further.

From 2003 to 2013, Li also sold off assets and cashed out more and more often. In those ten years Hutchison Whampoa alone made 65 major investments, acquisitions, sales and spin-offs. Of its 40 deals in developed countries, 80% were acquisitions, while its deals in Hong Kong and on the mainland were mostly asset sales.

Tallying deal values by region shows the group's shift of assets over the past decade more directly: over the ten years, its acquisitions in developed regions totaled HK$199.5 billion, far more than its acquisitions in Hong Kong and developing regions combined. Hong Kong has mattered less and less to the growth of Li's fortune.

The restructuring is still about making business easier; Hong Kong just matters less to the business

Li called the restructuring an important milestone in the group's history. He argued that the merger would help remove the holding-company discount, unlock the companies' real value, simplify the shareholding structure and resolve overlapping businesses. Afterward, both companies will have leaner structures and invest with more flexibility and efficiency.

On January 12, the Economic Information Daily, published by Xinhua News Agency, quoted Li as telling the press conference: "It is not that I lack confidence in Hong Kong; it is to make business convenient." The basic aim of the restructuring, he said, was to balance risk and to pay dividends to shareholders more flexibly. Hong Kong company law restricts distributions of shares in kind, and the restructuring could be completed only by registering in the Cayman Islands.

Judging from the group's investments in recent years, the ports, energy, telecoms and internet businesses going to CK Hutchison, the non-property company, look like the part with more investment potential than property.

Through the restructuring, Cheung Kong Property will become Hong Kong's largest property company, with a land bank of 170 million square feet (15.79 million square meters) and interests in 14,600 hotel rooms. But look at its land purchases in recent years: apart from one residential plot bought in Shanghai in May 2012 and another in Hong Kong in November 2012, the group has acquired no new land in either place.

The ambitions of the non-property business can be glimpsed in another British acquisition by Hutchison, recently reported by The Sunday Times:

Hutchison Whampoa is in talks to buy O2, Britain's second-largest telecoms operator, in a deal that could be worth as much as £9 billion (about HK$105.6 billion), and the two sides have made initial contact. If the deal goes through, combining Hutchison's "3 UK" with O2 would create Britain's largest mobile operator, with 32 million users.

For a group that has already made overseas expansion its main focus, and whose overseas business involves almost no property and centers on retail, energy and telecoms, CK Hutchison is bound to have far more room to grow than Cheung Kong Property.

On the evening of January 9, when the group made its announcement, the price of its American depositary receipts (ADRs) in the US rose 10%, adding HK$15.8 billion to Li's net worth overnight. And once the restructuring is done and the share price, long trading at a discount to net assets, is re-rated, the 40% of his wealth that Li once said Forbes magazine had failed to count will likely push his fortune to new highs.

Cover image from Hong Kong Economic Journal