Cheung Kong’s China Property Sales Drag on Full-Year Earnings

Cheung Kong Holdings Ltd., the developer controlled by Hong Kong’s richest man Li Ka-shing, posted an 18 percent decline in property-related earnings last year amid lower-than-expected sales in some mainland Chinese cities.

Earnings from property sales fell to HK$8.4 billion ($1.1 billion) from HK$10.2 billion a year earlier, according to a Hong Kong stock exchange statement Thursday. Excluding property revaluations and earnings from its Hutchison Whampoa Ltd. unit, Cheung Kong’s profit fell 15 percent to HK$15.3 billion.

“Contribution from property sales on the mainland fell significantly in a difficult market environment,” the company said in the statement. “Sale results in some of the cities were below expectations.”

Cheung Kong derived 26 percent of its first-half revenue from China, where housing prices are in decline as the world’s second-largest economy slows. New-home prices posted a record year-on-year drop in January, according to Bloomberg Intelligence analysis of government data tracking 70 cities.

Net income for Cheung Kong increased 53 percent to HK$53.9 billion in 2014 after the inclusion of property revaluations, gains from the listing of an electricity business, and earnings from Hutchison, according to the statement.

The company and Hutchison are proposing to combine real estate assets into a new entity, Cheung Kong Property Holdings Ltd., as billionaire Li sets in motion the biggest reorganization of his corporate empire. Following the reshuffle, the property spinoff will hold more investment properties, making it the largest hotel owner and second-largest landlord in Hong Kong.

Record Prices

Prospects for Hong Kong’s property market “remain positive as a whole,” Cheung Kong said in the statement. It had HK$22.6 billion of contracted home sales in the city last year, the most after Sun Hung Kai Properties Ltd., according to Centaline Property Agency Ltd. Sun Hung Kai Properties is due to report earnings Friday.

Hong Kong residential prices rose 13 percent to a record last year despite government curbs including higher taxes and tightened mortgages. Home prices still have room to rise as interest rates remain low, Cheung Kong Executive Director Justin Chiu told reporters Feb. 3.

In Hong Kong, “we expect further progress to be achieved in property sales in 2015 as compared to 2014,” the company said. “Local construction costs and labor wages are likely to continue their rising trends, and government policy measures will remain a major factor in determining the overall market direction.”

Business Model

In the first step of Li’s corporate reorganization, Cheung Kong shareholders passed a resolution Wednesday to exchange their shares for stakes in CK Hutchison Holdings Ltd., a new holding company. CK Hutchison will then issue new shares to buy out minority owners of Hutchison and spin off its property business.

The CK Property entity may sell some of its held-for-rent properties, which tend to drag on returns, according to JPMorgan Chase & Co. analysts Cusson Leung and Leo Ng. It could sell some assets or inject them into real estate investment trusts under the group, they said in a Feb. 23 report.

If the “current business model of Cheung Kong is anything to follow, we believe CK Property is unlikely to sit on too many investment-property assets,” the analysts wrote.

Hutchison’s property portfolio complements that of Cheung Kong’s with residential developments in mainland China and rental income from prime commercial buildings in Hong Kong. Hutchison owns the Cheung Kong Center, which is home to offices of Goldman Sachs Group Inc. and the city’s securities regulator.

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