Cheung Kong Holdings
Recently, I have been researching on characteristics of asian compounders, comparing them with companies the like of Berkshire Hathaway. Warren Buffett has always mentioned that to judge whether a company is a compounder is by looking at the growth rate of the book value of a company over long periods of time. Putting it into perspective, if we were to look at Berkshire Hathaway’s book value per share since inception on 1964 to 2014, it has an CAGR of 19.4% or an overall growth of 751,113%!
What of Asia?
Is it possible to use such characteristics to discover an Asian Compounder? One such company that we discovered was Cheung Kong Holdings, otherwise now known as CK Hutchison after the restructuring.
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Taking a look at Cheung Kong Holdings from 1991 to 2013 (before the restructuring), the book value per share inclusive of dividends has an CAGR of 12.3% or an overall growth of 1,343.3%. Comparing such growth rates with Berkshire Hathaway over the same time frame, the CAGR is 14.2% and an overall growth of 1999.5%. In our view, such characteristics does qualify Cheung Kong Holdings as an Asian Compounder.
Things To Think About
While we are unable to get historical prices of Cheung Kong Holdings, it would be interesting to track the CAGR of the market value of the share inclusive of dividends vs the CAGR of the book value per share to assess the cheapness of the company. We believe that the CAGR of the market value of the share inclusive of dividends should lag behind the latter. This being due to the holding company discount. However, in the long run, the stock price should converge towards the growth of the book value per share.
Furthermore, this leads us to our next point about Cheung Kong Holdings. While Cheung Kong Holdings / CK Hutchison is fundamentally a holding company, Li-Ka Shing has shown to be one who will constantly unlock the true value of the holding companies. Previously, Cheung Kong traded at a steep discount to its NAV due to the double discount present – one layer of discount on Hutchison Whampoa and another layer of discount on Cheung Kong’s stake in Hutchison Whampoa. With the merger with Hutchison Whampoa, it removed the double discount inefficiency. Furthermore, with the restructuring, it allows CK Hutchison Holdings and CK Property to have non-overlapping assets and independent business plans. This eliminates confusing cross-ownership of assets and allows analysts to better understand and value the company – CK Hutchison Holdings.
To end things off, we believe Cheung Kong Holdings / CK Hutchison Holdings does present the characteristics of an Asian Compounder and on deeper research may present itself as an interesting undervalued company.