The value case for Hong Kong’s Hutchinson Whampoa

I am extremely interested in Li Ka Shing’s flagship conglomerate Hutchinson Whampoa, which now trades at an unprecedented 40 per cent discount to net asset value.

Hutchinson Whampoa’s global interests include the world’s leading container shipping ports, luxury hotels, retailing, property empire, infrastructure assets and telecoms. Hutchinson is a global and not merely a “Hong Kong/China” proxy since it has major interests in Britain, the US, Europe and emerging Asia.

This quest for diversification and its six different units accounts for the firm’s “conglomerate discount”, despite its chairman Li Ka Shing’s role as the greatest and richest (non-Scottish!) taipan in the history of the Crown Colony and SAR Hong Kong. Li Ka Shing has often traded assets with great success in Hong Kong (selling a 25 per cent stake in his retailer Watson to Singapore’s Temasek), investing capital in high growth areas like mobile telecom and issuing special dividends after asset sales.

It is inevitable that the crash in crude oil would impact Hutchison Whampoa since energy is one of its six strategic business units and at least 13 per cent of the group’s bottom-line. Hutchison owns Husky Oil in Canada, which is hugely exposed to Alberta oil sands and high-cost drilling and exploration projects that is now at risk.

Investor sentiment towards Hong Kong retail has also suffered due to the recent political protests in Central/Wanchai. I believe Hutchinson Whampoa could well offer value at HK$85, where it would trade at a forward valuation multiple of only 11 and a price/book value of 0.78.

The 40 per cent discount-to-net asset value, or NAV, has historically been a profitable level to accumulate Hutch though I concede the energy massacre will result in a fall in the conglomerate’s NAV, possibly to as low as HK$120.

This means downside risk in Hutchison Whampoa could be near HK$78 if the current global market correction turns into a panic. This rise in the US dollar also pressures the shares due to its vast investments in 3G networks in Europe and infrastructure assets in UK.

The swift, brutal fall in oil prices in positive for Asian oil importing economies even though a 50 per cent fall in Brent has now reignited worries about global growth and deflation. The events of 2008-09 — the failure of Lehman the seizure in the commercial paper market, the interbank money market squeeze — have had a traumatic impact on global fund managers. This could have a negative impact on sentiment to Hong Kong in 2015, the Year of the Goat. However, higher deflation risk means a greater willingness for the Peoples Bank of China to cut interest rates.

This is all the more probable since Chinese consumer price inflation has fallen to 1.5 per cent due to weak domestic demand, a property bust and now the free fall in oil and metal prices. Beijing could well be forced to initiate a fiscal stimulation package to make sure China meets the Politburo’s 7.5 per cent GDP target.

The prospect of reform, monetary easing and fiscal stimulus is hugely positive for the Hang Seng China Enterprise Index. I would not be surprised to see the Hang Seng index in Hong Kong trade in a 21,000-26,000 range in 2015.

China’s most attractive sectors are e-commerce/Internet (Alibaba, Baidu), mass market Macau (Galaxy), autos (Great Wall), insurance (Ping An) and banking (CCB). Hong Kong and China equities as an investment theme cannot be ignored in Year of the Goat.