Hong Kong Rents Hinder Billionaire Li’s Supermarket Sale

Soaring Hong Kong rents helped make Li Ka-shing Asia’s richest man. They’re now becoming a hindrance as he looks to sell the city’s No. 2 grocery chain.

His biggest company, Hutchison Whampoa Ltd., is seeking $3 billion to $4 billion for its ParknShop supermarkets and has asked potential buyers to submit bids by Aug. 16, according to people with knowledge of the process.

Hong Kong’s surging rents and a slowing grocery market could deter buyers from offering top price for the chain that sells everything from eggs to pork chops to whiskey. Shop leases have doubled over the past four years in the city, according to property agent Savills Plc. And broker Cushman & Wakefield Inc. last year said Hong Kong’s Causeway Bay area had overtaken New York’s Fifth Avenue as the world’s most expensive district for retail rents.

Meanwhile, with the grocery market approaching saturation, sales growth in the industry slowed to 7.9 percent in May from last year’s annual increase of 11 percent and a 2011 peak of 13 percent, government statistics show.

Bidders “are going to be pretty cautious,” said Benjamin Lo, an analyst at Nomura Holdings Inc. “A buyer must take into account the rising costs, especially the high rents in Hong Kong, as they are going to affect the retailer’s profitability.”

A price of about $3 billion would be “reasonable” given ParknShop’s 2012 sales of $2.8 billion, said Jason Song, an analyst at Guotai Junan Securities Co. in Hong Kong. Morgan Stanley analysts estimate the chain could be valued at $2.5 billion to $3 billion.

Hutchison Whampoa shares dropped as much as 1.8 percent to HK$91.20 today in Hong Kong trading, before closing 1.2 percent lower.

Cultural Revolution

ParknShop gets most of its revenue from Hong Kong’s $6.6 billion supermarket industry, where it has more than 270 of its 345 outlets, including higher-end stores Great and International that sell imported cheeses, wines and condiments.

It has prime locations at residential and commercial complexes developed by Li’s property company Cheung Kong Holdings Ltd. It is, for instance, an anchor tenant in Whampoa Gardens, a sprawling development of apartment buildings and malls.

Nicknamed “Superman” by Hong Kong’s media for his investing prowess, the 85-year-old Li ranks 15th on the Bloomberg Billionaires Index, with a net worth of $28 billion.

His family fled to Hong Kong from China in 1940 to escape Japanese invaders. Li worked as a factory apprentice before building a plant that made plastic flowers. He bought property in Hong Kong in 1967 after rioting incited by the Cultural Revolution depressed prices and again after the Tiananmen Square crackdown in 1989.

No Parking

Home prices have almost quadrupled over the past decade and Cheung Kong is the city’s second biggest property developer by market value. Li has a 52 percent stake in Hutchison, which has businesses from retail to telecommunications.

ParknShop has 33 percent of the Hong Kong grocery market, trailing Wellcome, controlled by Singapore-listed Dairy Farm International Holdings Ltd, with 40 percent, according to researcher Euromonitor. CR Vanguard Supermarket, run by China Resources Enterprise Ltd., a state-backed mainland conglomerate, ranked third with 7.8 percent.

The chain’s first store opened in 1973 in Hong Kong’s Stanley beach area, one of the few neighborhoods in the congested city where shoppers can actually park near stores.

ParknShop’s 60 outlets in mainland China have struggled due to competition from rivals such as Sun Art Retail Group Ltd. Its mainland operations reported declines in revenue and operating earnings in 2012, according to Hutchison’s annual report.

Private Equity

China Resources Enterprise might benefit most from a ParknShop purchase as the Vanguard operator would gain cross-selling opportunities, logistical advantages, and an opportunity to jump ahead of Wellcome, according to Kim Eng Securities Ltd. China Resources Enterprise declined to comment.

In a statement last month, Hutchison said it is conducting a strategic review of ParknShop and there is no assurance the process will result in a sale. If the conglomerate doesn’t get a good price, it could keep the chain, Nomura says. The company declined to provide an update on its review this week.

ParknShop also has steady cash flow that could attract private equity funds, according to Cusson Leung, an analyst at Credit Suisse. Private-equity firm KKR & Co. is evaluating a bid, two people with knowledge of the matter said last month.

‘Right Time’

The world’s biggest retailer, Wal-Mart Stores Inc., which has outlets in China and none in Hong Kong, has no plans to roll out stores in the city as operating costs including rents are “too high,” its Asia chief executive officer, Scott Price said after a conference last week. He declined to say whether the company has any interest in ParknShop.

Hutchison is expected to use funds from any ParknShop sale to boost its European telecom operations and reduce debt, analysts say. It could also increase investment in its Superdrug and Watson’s chains, which sell cosmetics and health products.

Li correctly forecast in 2007 that China’s stock-market bubble would burst and in 2009 predicted the rally in Hong Kong home prices. With the grocery industry slowing and valuations still high, this could be the right moment for Hutchison to bail out of supermarkets, Morgan Stanley analyst Praveen Choudhary said in a note to clients.

“Now is the right time to sell,” he said.

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