Hong Kong Billionaire Li's Force Field May Be Fading

  • Series of elections in Europe may intensify uncertainty for Li
  • Billionaire’s flagship counts Europe for nearly 60% of profits

Li Ka-shing

Photographer: Calvin Sit/Bloomberg

Billionaire Li Ka-shing is so powerful, Hong Kongers quip, he emanates a force field shielding the city from dangerous typhoons that could harm his businesses. Yet Li’s magic is showing signs of wearing off after his wealth shrank by $1.3 billion in 2016 amid headwinds from Europe -- a trend that’s likely to persist this year.

After Britain’s unexpected decision to leave the European Union drove down shares of Li’s companies last year, Hong Kong’s wealthiest tycoon is preparing for more uncertainty as elections loom in the Netherlands, France and Germany that could reshape the political landscape in the region in 2017.

Click here to see a list of this year’s major European political events

"The coming year of Rooster may usher in greater political and economic challenges, but the Rooster is a symbol for self-respect, ambition and perseverance," CK Hutchison Holdings Ltd. Chairman Li, 88, told more than 2,000 of his employees at an annual gathering in Hong Kong last week. "We shall cast our eyes far and wide to identify both dynamic and stable, long-term opportunities."

Europe matters for Asia’s third-richest man as his flagship company generates about 60 percent of profits from the region in businesses ranging from mobile-phone services to cosmetic shops and ports. Britain, Li’s biggest market, continues to be a risk as Prime Minister Theresa May’s self-imposed March deadline for formally triggering the U.K.’s exit approaches.

Currency Risk

As seen with Brexit, the most immediate hit to Li’s businesses during political turmoil is likely to be currency-related as a million pounds earned today is worth about 18 percent less in Hong Kong dollars than when Britons voted to split from the EU. Banks such as HSBC Holdings Plc have cited the elections as being a key factor determining the euro’s strength this year.

"Europe is still the key market to watch out this year,"said Matthew Kwok, managing director of China Goldjoy Asset Management Ltd. in Hong Kong. "Political uncertainty in the region could be a drag to Li."

Beyond exchange rates, political upheaval could lead to a slowdown in real European demand for CK Hutchison, especially in ports and retail, according to a report from Morgan Stanley issued after the Brexit vote last year.

Asked to comment, a CK Hutchison representative pointed to statements made during the company’s interim report, where it said that despite Brexit bringing about a "considerable challenge" for the next two to three years, the group’s resilient operations in the U.K. and in Europe are expected to continue to generate stable and reasonable returns.

On the elections, first up is the Netherlands, where Li has ports, retail and infrastructure operations. In the Dutch parliamentary election scheduled in in March, Geert Wilders’s anti-establishment Freedom Party is leading the polls and a victory could result in another country threatening to leave the EU.

In France, where Li has a network of Marionnaud fragrance shops, anti-EU presidential contender Marine Le Pen has vowed to take back control of the country’s borders, economic policy, money and legislation if she wins in May. In Europe’s largest economy, where Li operates the Rossmann health-and-beauty shops, Chancellor Angela Merkel’s Christian Democrat-led bloc is leading in the polls but faces an increasing challenge from the populist Alternative for Germany party, which has seen voter support surge amid a flood of refugees in recent years.

Wealth Drop

Then there’s the U.K., which generates about two-fifths of CK Hutchison’s earnings and where Prime Minister May has yet to reveal detailed plans of how Britain will leave the EU before she triggers formal exit talks by the end of March. In June, shares of CK Hutchison and subsidiary Cheung Kong Infrastructure Holdings Ltd. fell more than any other stock on Hong Kong’s benchmark stock index within days of the vote amid concerns about Li’s exposure to the country.

The shortfalls helped reduce Li’s wealth by $1.3 billion in 2016 to about $28.6 billion, according to the Bloomberg Billionaires Index. That’s still good enough to be Asia’s third-largest fortune, behind those of Alibaba Group Holding Ltd. founder Jack Ma and Dalian Wanda Group Co. Chairman Wang Jianlin.

Li’s main listed companies in Hong Kong -- CK Hutchison, Cheung Kong Property Holdings Ltd., CKI and Power Assets Holdings Ltd. -- all fell more than the benchmark Hang Seng Index on Thursday.

Besides politics, the tycoon known as "Superman" locally for his investing acumen saw difficulties closing multi-billion-dollar deals in 2016. In May, European authorities blocked Li’s plans to buy U.K. carrier O2 and in August, Australia rejected his bid for state-run electricity provider Ausgrid on national security concerns.

CKI, CK Hutchison’s biggest profit contributor, last year carried out the fewest number of deals this decade, according to Daiwa Securities Group Inc. estimates.

Li is counting on Australia’s Duet Group to end his dry spell in acquisitions. CKI is offering A$7.3 billion ($5.4 billion) to buy the infrastructure company to expand his power and gas pipeline assets, which would be the tycoon’s biggest purchase in the nation. Such a deal would also help Li diversify away from Europe, particularly the U.K.

UBS Group AG said in a report on Dec. 6 that buying Duet would reduce the chance of CKI reviving its attempt to merge with affiliate Power Assets -- something that both companies have declined to comment on -- after the proposal was rejected by minority shareholders in late 2015. A combination would allow CKI, which already owns about 39 percent of the utility owner, access to Power Asset’s hoard of about HK$66 billion in cash.

One large deal did go through -- the merger of his Italian telecommunications assets with those of VimpelCom Ltd. -- though challenges abound.

"After years of heavy investments in Italy, the merger with VimpelCom Italy’s unit could allow Li Ka-Shing’s 3 Italia to switch from a cash-draining mode to a value-driver one," said Carlo Alberto Carnevale Maffe, a professor of business strategy at Milan’s Bocconi University. The combined entity’s main challenge should be finding a new identity and competing against Telecom Italia internationally, he said.

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More broadly, CK Hutchison’s European mobile-phone business is facing the risk of seeing revenues fall due to EU plans to cut roaming rates across the 28-nation block by spring of this year, and faces uncertainties involving net neutrality. After failing to buy O2, Li’s U.K. mobile business will need to find another way of bulking up -- the company’s CEO has previously said the carrier needs to double its customer base -- to compete with rivals that offer Internet-cable-landline packages.

To read about how net neutrality and Brexit are connected, click here

As to Li’s force field, the tycoon’s mystical powers may have wobbled last year as the number of strong typhoons hitting Hong Kong rose in 2016, according to the Hong Kong Observatory. The observatory is scheduled to release this year’s storm forecast in mid March -- a week after the Dutch elections.

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