Industrials

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.

(Updated )

Being boring has put billionaire Li Ka-shing in a higher-risk position.

Li, who earned the moniker Superman for his canny investing, has spent years building an empire that's almost like a trust. CK Hutchison Holdings Ltd. and Cheung Kong Property Holdings Ltd., which reported full-year results Wednesday, get most of their earnings from staid but stable assets such as infrastructure, telecoms and utilities. But being dull is coming at a cost. While shares of both rallied on Thursday, they've underperformed the broader market over the past 12 months.

Catch-Up Time
CK Hutchison and Cheung Kong Property have underperformed the broader market
Source: Bloomberg

In his hunt for steady cash flows, Li is quite often locking horns with regulators, especially in Australia, where his bid to buy Duet Group is still pending approval from the Foreign Investment Review Board. And the political climate there doesn't look great, considering the government in August blocked Cheung Kong Infrastructure Holdings Ltd. and State Grid Corp. of China from buying a majority stake in state-owned power network Ausgrid.

In Europe, meanwhile, authorities in May stymied Li's plans to buy U.K. carrier O2, while his Three business lags in its share of U.K. mobile subscriptions.

Call Me Maybe
CK Hutchison's U.K. telecoms unit lags other players in terms of its share of mobile subscriptions
Source: Ofcom/operators 4Q 2015
Note: Excludes M2M subscriptions.

Last June's Brexit vote has also made Li vulnerable to a weaker pound. CK Hutchison, whose 2016 full-year net income came in at HK$33 billion ($4.3 billion), slightly beating estimates, said the impact of Brexit negotiations, as well as new U.S. presidential policies plus upcoming elections across Europe, "remain unknown and could affect the economic environment of countries in which the group operates."

Thanks to a merger with one of its rivals, CK Hutchison's telecoms business in Italy has been performing very well, but further upheaval could lead to a slowdown in European demand that would particularly hurt ports and retail.

Boring Bets
Infrastructure and telecom made up the biggest portion of earnings before interest, tax, depreciation and amortization at CK Hutchison in 2016
Source: CK Hutchison's 2016 results

All the while, other opportunities aren't being exploited as much as they might be. Those include real estate in Hong Kong -- since November, CK Property has been consistently outbid by China's HNA Group Co. on land plots in Kowloon -- and a potential retail IPO in the city.

Investors may take some small comfort in Li's attitude toward dividends. Although CK Hutchison's average payout ratio trails those of many other Hong Kong-listed conglomerates, its final dividend per share of HK$1.95 was increased from HK$1.85 a year earlier, while CK Property agreed to raise the payout to HK$1.15 a share versus HK$1.05 12 months ago. Li also said there was a high chance the group could raise dividends in the future.

More excitement, however, may be found elsewhere.

Real estate in Hong Kong is hot and developers have benefited from a resurgent property market that has defied government cooling measures. Li said on Wednesday that Hong Kong housing prices have little chance to fall, although CK Property will have to work hard to ensure it snares a decent share of what is a shrinking land bank in one of the world's least affordable cities. CK Property's underlying profit, which excludes gains from real-estate revaluations and deferred taxes, increased to HK$18 billion, versus the average analyst estimate of HK$18.2 billion.

Gone Shopping
Retail accounts for the biggest chunk of CK Hutchison's revenue
Source: CK Hutchison 2016 results

Investors could also reap a nice cash payout if CK Hutchison were to spin off its retail business. A.S. Watson & Co. is that company's biggest source of revenue, though not profit. A 25 percent stake was sold to Temasek Holdings Pte in 2014 and a plan to list the supermarkets-to-drugstores business since aborted.

It's true that retail has been tough in Hong Kong, and Li said the business got worse over the course of the year. But it makes up the largest single component of CK Hutchison's revenue, and the health and beauty segment in particular is showing encouraging rates of growth. CK Hutchison said its retail division plans net openings of more than 1,000 stores in 2017, with 65 percent of those in health and beauty in mainland China and Asia.

Li dismissed suggestions of any Watson spinoff on Wednesday but it might be time to consider reviving those sale blueprints. At any rate, it would divert some attention away from his other adventures in telecoms and utilities.

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

(Updates to add share movement in second paragraph.)

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

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