Industrials

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

It's 2053, six years after the end of Hong Kong's "one country, two systems" rule, and Li Ka-shing's elder son Victor is chairman of CK Hutchison. At 88, he's about as old as his father was in 2015, when the city's most famous businessman streamlined his empire in the wake of the pro-democracy "Umbrella Movement" and amid a growing sense of unease over Hong Kong's future. Li's newly restructured non-property flagship titled its 2015 annual report "A New Chapter Begins." But was it to be a hopeful phase, or a prelude to tough times? Here's a draft of Chairman Victor Li Tzar-kuoi 's letter to CK Hutchison shareholders:

Dear Shareholders,

It's been 38 years since my father infused our company with $133 billion in assets. In 2015, it would have taken Hungary, Ukraine or Kuwait to give up a year of their national output should they have wished to acquire what a school teacher's penniless, high-school-dropout son had built over his lifetime. Today, you're holding in your portfolios a piece of that enterprise, which has just been named by the esteemed Robot Advisers' Federation as the World's Greatest Yieldco.

Inside Li Ka-Shing's Empire
CK Hutchison's sources of revenue and profit*
Source: Bloomberg
*CK Hutchison houses the group's non-property assets worth $133 billion.

Let's reflect on this honor. Taking inspiration from that other great son of Hong Kong, Bruce Lee, our founder designed CK Hutchison as a Fist of Fury with its five fighting fingers tackling ports, retail, infrastructure, energy and telecoms, largely in parts of Europe. None of them were growth industries back then. Shipping was floundering; retail was under attack from e-commerce; energy prices were in the doldrums; and with people starting to take connectivity for granted, investing in wireless seemed pointless. What mattered was what people did with their phones; and we were pretty much nowhere on Asia's hot startup scene.

In terms of returns, infrastructure was the most troubled of those five areas. To illustrate the point, the most-discussed construction project of 2016 was Donald Trump's proposal -- before he became President -- to build a wall on the United States' southern border and get Mexico to pay for it. 

Then there was Hong Kong. Our mecca of capitalism was in the grips of an existential crisis over its future as part of communist China. The economy of the People's Republic, meanwhile, was drowning in debt. The mood was somber, and our founder caught the pointy end of protruding umbrellas more than once. A Chinese think tank accused Li of running away, while Hong Kong's people worried whether their "Superman" was turning his back on them.

But where could a business as big as ours go? No place was safe. Just as our founder was approaching 88, a number that symbolizes good fortune in the Chinese culture, Britain, which gave us 37 percent of our earnings before interest and taxes, voted to leave the European Union. The British pound fell 11 percent over two days. That was more than a 5 percent hit to our recurring earnings.  

So instead of choosing between bad options, we decided to profit from being a yield powerhouse wherever we were. And that, back then, meant stodgy, low-growth Europe, where we at least had the cover of being in relatively shock-proof, defensive industries like telecoms, waste management and water and gas supply.

Li Ka-Shing's Top 10
Hong Kong's richest man has acquired power, telecom and infrastructure assets, mostly in Europe
Source: Bloomberg
Note: Deals include both pending and completed.

Central banks had driven interest rates to below zero; and conglomerates of our size were losing their heads, acquiring companies to create an illusion of growth. We pursued an alternative strategy and played the difference between our low cost of capital and higher returns on operating assets, such as aircraft, which we leased to commercial airlines. Others bought companies and then sold their assets. My father, on the other hand, purchased real assets and sold interests in companies, like drugstore-to-supermarket owner A.S. Watson, of which he offloaded 25 percent to Singapore's Temasek.

The splash he made with Tom.com in 2000 seemed to have sated his craving for adventures in technology land. Apart from a few shrewd financial bets via Horizons Ventures on the likes of Skype, Spotify and Facebook, my father was happier to watch others go up and down the valuation elevator than bother to take the ride himself.

There used to be a saying in Hong Kong that for every dollar a person spends, 50 cents goes to Li Ka-shing. Think of somebody who worked in my father's container port, lived in his CK Property group apartment, bought a phone from his Fortress electronics chain, ran it on power purchased from his HK Electric, and made calls on Three Hong Kong, the city's No. 1 mobile-phone operator.  

Extreme inequality because of a concentration of economic power is now ancient history. Every family in Hong Kong has robot ownership rights, guaranteed by Beijing. That's how we're all more prosperous, even as we work less.

Mixed Picture
Both CK Hutchison and Cheung Kong Property have declined in 2016
Source: Bloomberg

CK Hutchison is struggling a little in this more egalitarian world; but our sister group on the property side is thriving. What's its secret sauce? After we sold properties on the mainland in 2013, the Chinese state media warned that Li would come to regret the decision. But then, Cheung Kong Property went back in the mid-2020s -- after asset values had collapsed -- and scooped up the same buildings, including the Oriental Financial Center in Shanghai, for half the price.

In the end, my father's art was no different from Bruce Lee's: timing was everything. So we've bought Star TV back from Lachlan and James Murdoch, and now my brother Richard oversees production of Chinese period drama from the International Finance Centre, home to the erstwhile Hong Kong Monetary Authority and big-name banks that no longer exist considering the city has neither its own currency, nor much of a financial center. That property we purchased 10 years ago from our rivals, the Kwok brothers. It came very cheap, really.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. If this person decided to try a different wireless service, he might have chosen PCCW, in which case the money went to my younger brother Richard.

To contact the authors of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net