Having shared on an Asian Compounder: Cheung Kong Holdings / CK Hutchison Holdings, we will be sharing on the 4 key business segments of CK Hutchison Holdings. A little background of CK Hutchison Holdings is that it was formerly known as Cheung Kong Holdings. However, on January 2015, it was announced that Cheung Kong Holdings would undergo a restructuring to have its property business spun off as a separate listed entity known as Cheung Kong Property. The 4 key business segments are: Retail, Ports & Related Services, Telecommunications and Infrastructure.
Retail – A.S. Watson
CK Hutchison Retail division is the largest international health and beauty retailer in Asia and Europe with over 12,000 retail stores in 25 markets worldwide. Its diverse retail portfolio comprises health and beauty products, supermarkets, and consumer electronics and electrical appliances. It also manufactures and distributes bottled water and beverage products in Hong Kong and Mainland China. The Health & Beauty segment contributes > 90% of A.S. Watson's EBITDA, comprising of top brands such as Superdrug, Watsons, The Perfume Shop, which can be found in Europe.
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To get a rough valuation of A.S. Watson, Temasek Holdings agreed to purchase a 24.9% stake for $5.7bn in 2014. Hence, from this we are able to do a back envelope calculation, valuing the company at HK$177 billion (LINK). The main question here would be does this valuation imply a fair valuation for the company? Given that A.S. Watson's complete financials are unavailable, we doubt Li Ka-Shing would have offered Temasek anything resembling a bargain (LINK).
Ports & Related Services
Hutchison Port Holdings (“HPH”) is the world's leading port investor, developer and operator, holding interests in 48 ports comprising 269 operational berths in 25 countries. Asides from port operations, HPH has been expanding into related services such as logistics and transportation related businesses.
Based on a research report by Drewy Shipping Consultants of the top 5 port operators in the world in 2013 (LINK), this is how the throughput numbers have changed from 2013 to 2015 for these top 5 port operators.
From the data, we can see that HPH has overtaken PSA International as the world's top port operator, having a 12% market share of the world's throughput. Furthermore, according to the report, global container port throughput will exceed 840 million TEU by 2018 with the fastest growing regions projected to be Chian and Africa. Furthermore, the typical EBITDA margins within this industry is between 20% and 45%. Based on FY2015 results, HPH is enjoying c.35% EBITDA margins.
CK Hutchison Holdings owns direct majority interests in the companies that operate the networks that are branded 3, except 3 Hong Kong and 3 Indonesia. These networks are majority owned by Hutchison Asia Telecommunications, a wholly-owned subsidiary of CK Hutchison Holdings. Its operations in Europe are run by a separate division, 3 Group Europe.
The part that interests us for their Telecommunications business segment is their operations in Europe. For years, the telecommunications industry in Europe has been highly fragmented and been in a mess. Going forward, we can see a drastic change in telco landscape due to industry consolidation.
In an industry that is consolidating, what history has taught us is that companies that benefit the most from this are the ones with low gearing ratios. Looking at most of the European Telcos, Hutchison Telecommunications has one of the lowest gearing ratios and this allows them to leverage up to acquire other telcos without hurting their gearing ratios.
With regards to the infrastructure business segment, we have nothing much to share other than the fact that CK Hutchison Holdings have been focusing on accumulating certain specific infrastructures such as Energy, Utilities, and Railways. We find such assets to be of high quality, high barriers to entry and provides a very stable cash flow generation.
Having shared the 4 key business segments of CK Hutchison Holdings, we hope that readers have a better idea of the Group. Even after the restructuring, analysing CK Hutchison Holdings is by no means an easy task. Being a holding company of numerous listed and non-listed companies, valuing the Group will definitely be difficult. Some pointers we may suggest would be deriving a fair value for the key business segments using peer comparisons and taking the other smaller business segments as of book value. One key thing readers should take note of would be that CK Hutchison tends to not fully own these businesses; hence, one would have to take additional steps to just extract the portion that CK Hutchison owns. Lastly, while taking the book value may not be a exact representation of the value, we believe that this will not be an overestimation of the true value given the high replacement cost of these assets.
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