Cheung Kong’s Profit Without Unit Rises on Rental Income Boost

Cheung Kong Holdings Ltd., the builder controlled by Asia’s richest man, said 2012 profit excluding contributions from unit Hutchison Whampoa Ltd. rose 6 percent as rental income growth offset a decline in home sales.

Profit excluding Hutchison increased to HK$19.1 billion ($2.5 billion) from HK$18.1 billion a year earlier, Cheung Kong said in a statement filed to Hong Kong’s stock exchange. Net income fell 30 percent to HK$32.2 billion, beating the HK$25.7 billion average estimate of 11 analysts surveyed by Bloomberg.

Li Ka-shing’s developer may face pressure this year after Hong Kong’s government stepped up curbs aimed at preventing a bubble in the world’s most expensive housing market. Cheung Kong this month became the first developer to cut prices at its apartment project in response to the curbs, with Deutsche Bank AG forecasting home value in the city may decline as much as 20 percent over two years.

“Because of the price cut, profit margin will probably be lower,” Lee Wee Liat, a Hong Kong-based analyst at BNP Paribas SA, said before today’s earnings. “That’s why they’re trying to offset this with a bigger volume.”

Shares of Cheung Kong rose 2.3 percent to close at HK$113.20 today, narrowing its decline this year to 4.9 percent. The earnings statement came after the market closed.

Rental Income

The lower net income last year was also due to a lack of one-time gain in 2011 that came from Hutchison spinning off its port business.

Earnings from property rentals for Cheung Kong, landlord to Goldman Sachs Group Inc. and Barclays Plc in the city, increased to HK$1.98 billion last year from HK$1.7 billion a year earlier. Rental rates for retail properties in Hong Kong also gained, reflecting rising demand from tourists and domestic spending, it said.

The underlying profit was also helped by an increase in profit from its infrastructure businesses, which rose to HK$1.04 billion from HK$130 million a year ago, the statement showed. The company’s acquisitions of utilities assets in the U.K. contributed to the gains.

Property Sales

By contrast, contribution from property sales fell to HK$10 billion from HK$11.2 billion a year ago. The company last year booked sales in projects including La Splendeur and Le Chateau.

Hong Kong’s home prices have doubled in the past four years on record low mortgage rates, a lack of new supply and an influx of mainland Chinese buyers, raising concerns that housing is becoming unaffordable for the general public. Chief Executive Leung Chun-ying has made available more land for public housing and imposed extra tax on foreign homebuyers since taking over in July.

Cheung Kong last month raised HK$1.4 billion selling all 360 rooms at its Apex Horizon hotel project. Following the sale, the government said in a statement it will inspect the development to ensure the rooms aren’t being used as residents.

A day later the government doubled the stamp duty tax on all properties of more than HK$2 million and raised mortgage down-payment requirements, its first set of measures aimed at non-residential properties, including hotel rooms, offices, shops, and carparks.

Cutting Prices

Home transactions in Hong Kong will probably fall below 3,000 this month because of the government measures, according to a forecast by realtor Midland Holdings Ltd. That would be the lowest level since 2003, when Hong Kong was near the end of a six-year property price slump.

Cheung Kong will cut prices at the One West Kowloon project by 11 percent after raising its overall home sales target by 10 percent for 2013, Executive Director Justin Chiu said March 7.

The company is cutting prices because it has to take the lead to cooperate with the government, Chiu said in a March 23 interview.

Cheung Kong sold 3,336 new homes for HK$26.2 billion last year, both highest among Hong Kong developers, according to data compiled by Centaline Property Agency Ltd., the city’s biggest closely-held realtor.

“They’re trying to cut prices in exchange for a bigger volume,” Cusson Leung, Hong Kong-based analyst at Credit Suisse Group AG, said before earnings were announced. “And we are also seeing less aggressive pricing by other developers with their new projects as well.”

During the year, Cheung Kong sold their apartments at an average price of HK$7.9 million, while Sun Hung Kai Properties Ltd., the city’s biggest builder by value, sold 1,654 homes at about HK$13.4 million per unit, according to Centaline’s data.

Down Market

Other developers are responding to the curbs in different ways. Sun Hung Kai and New World Development Co. in the past month cut sales target by 8 percent and 12 percent for the fiscal year ending June.

Cheung Kong will pay an final dividend of HK$2.63 a share, unchanged from a year earlier.

Li, 84, has in the past two years said that if buyers need to borrow too much, they shouldn’t buy properties. He also warned property speculators and signaled his concerns the surge in Hong Kong home prices may not be sustainable.

Nicknamed “superman” by the local media for his investing prowess, Li forecast in 2007 that China’s stock-market bubble would burst and in 2009 predicted the rally in Hong Kong home prices. The Shanghai Composite Index lost 65 percent in 2008, the most among the world’s 10 biggest stock markets.

Li, who opened a plastic flower factory after World War II, began investing in Hong Kong real estate in 1967 after riots from China’s Cultural Revolution depressed prices to build Cheung Kong into a company with a market value of $34 billion.

Li, who’s 15th on the Bloomberg Billionaire Index with a net worth of $26.8 billion, in July transferred a one-third stake in a family trust that controls both Cheung Kong and Hutchison Whampoa from son Richard to elder brother Victor, as he seeks to consolidate succession planning.

Hong Kong’s richest man said in August that he will offer financial support to allow Richard Li to build businesses outside of the family’s Cheung Kong Group of companies.