Description

CK Hutchison (CKH) has been written-up once before in 2017, I think it's due for an update as it has gotten significantly cheaper.  I'm happy to explain each business more in the comments, and the old VIC write-up also has some better background information.

Background

CK Hutchison is one of the two listed vehicles of Hong Kong based billionaire Li Ka-Shing (the other one being CK Assets).  Li KS is one of Asia's richest man and has a reputation of being a shrewed businessman/investor.  He's mostly retired now and son Victor Li is at the helm, though I believe he's still consulted in major decisions.  

CK Hutchison is created in 2016 when the group restructured to create two vehicles - one focus on non-real estate (CK Hutchison) and one focus on real estate (CK Assets).  The lines have blurred a bit as CK Assets has not found good opportunity to deploy capital in real estate, and has invested excess cash in yielding assets like aircrafts, infrastructure, pubs, etc, but real estate vs non-real estate is still the primariy differentiation.  CKH's primary businesses today are ports, retail, telecom, infrastructure, and energy.  Roughly ~13% of EBIT comes from China and HK combined, and ~58% comes from Europe.

Why Does the Opportunity Exist

I believe there's a list of reasons that has continously played out since 2017 causing the stock to go from "discounted" to "severely discounted". 

• During the 2016 restructuring there were promise made on increasing payout that have largely not materialized
• CK Assets investing outside of real estate, and CKH disposal of some infrastructure projects to CK Assets to fund their Italy telecom merger further created mandate confusion between the two entities
• It's exposure to UK dampened sentiment in the post-Brexit years 
• COVID has not been kind to its retail business
• It's Italian telecom business has been a mess.  It extracted singificant synergies through a merger to creat the local #1, but the anti-trust pushback was harsher than expected and CKH ended up needing to help create a new local #4 that competed aggressively in the market
• Large exposure in Europe have not been in favor this year due to the Ukraine war and the subsequent fallout
• Late, perceived China/HK/US political risk has caused global investors to orphaned the HK market

In sum, there's always a reason to hate CKH.  Good things have happened along the way too (I'll discuss some of it later), but the market have largely dismissed the good and embraced the bad.

I believe there are potential in several directions for things to improve, not all of it will happen but at this valuation it only takes a few.

• I believe the old guards' retirement will free up Victor Li to take a more active role in pushing the group forward.  Long-time executives in CKH, Canning Fok and Frank Sixt, are in their 70s and should retire soon.  While Canning have enjoyed a good relationship with old-man-Li, his relationship with Victor is fraught.  One only needs to listen to the earnings webcast to feel the uncomfortable dynamic between the two.  I personally believe a lot of indecisions and inaction of the gorup has been bogged down by the dynamics of the two men
• I believe the retail business, AS Watsons, will be IPOed soon once we have a couple of years of normalized retail environment.  They seemed to have been preparing for the IPO pre-COVID (some media leaks, plus putting the MD of retail on earnings calls) but that got shelved because of COVID
• More share buybacks are coming from the proceeds of the telecom tower disposals
• The've created structure around the European telecom business for an eventual IPO as well
• Important to note that CKH has redomiciled to Cayman Islands.  HK/China risk is more perceived than actual.  If they have to sell the HK/China assets, they can and will even at a discount if it causes issue for them in owning the international assets.  They can also easily change the listing to another market if it comes to that
• If nothing happens, then we are sitting with a 6% dividend yield and a 10yr track-record of the company compounding book value at ~7% we estaimted (the longer-term 30+ years track record is more amzing than that, but let's leave that for upside)

I will go into the SOTP later, but headline numbers is enough to see how ridiculous the valuation is at this point.  Less than 5x P/E, more than 6% dividend yield, for a portfolio that comprise of largely infrastructure-like assets.

Businesses

Ports: CKH owns 80% in Hutchison Port Group (20% held by Singapore PSA).  HPG is a top 5 global container port operator with an annual throughput of ~63m TEUs.  Revenue growth for this business is fairly stable with some variation due to global trade flows.  Margins are stable with EBITDA margin in the mid-30s, and estimated ROIC are in the low teens.  

Retail: CKH owns 75% of AS Watsons (Tamesek bought 25% in 2011), a global operator of health & beauty stores.  These stores mostly retails cosmetics, OTC drugs (prescriptions in some jurisdictions), health products, and daily necessities.  #1 in China (30% market share), #1 or 2 in other Asia countries (Singapore, Taiwan, Malaysia, Philippines, Thailand) with 15-40% market share, and #1-2 in Europe (Germany, UK, NL, Belgium, Poland, Hungary, Ukraine) with 20-60% market share.  

Infrastructure: CKH owns 76% of another publicly listed vehicle CK Infrastructure.  CKI invests mostly in electric grids, gas distribution, water utilities, and other infrastructure-type assests primarily in UK, Australia, Hong Kong and Canada.

Telecom: Through the "3" brand CKH operates mobile networks in Italy, UK, Ireland, Sweden, Denmark and Austria.  It is #1 in Italy and Ireland, and #3-4 in other European countries.  CKH also has telecom assets in Hong Kong, Australia, and Indonesia which recently merged with a competitor to create a local #2.  CKH recently sold its European telecom tower to Cellnex for a combination of stock and cash, and now owns 5% of Cellnex.  Of note this was highly accretive financial engineering as it in effect disposed of EBITDA that analysts were valuing at 7x at a value of 29x.  We estimated this deal added $17/share to NAV estimtaes.

Energy:  In 2021 CKH merged its sub-scaled and troubled equity stake in Husky Energy a larger Canadian E&P Cenovus, and now owns ~16% stake in Cenovus.

Others:  Stakes in other publicly listed port operators Hutchison Port Holdings and Westport Holdings, stakes in Hutchison China MediTech, CK Life Science, 50% MRO JV with China Southern, a European cosmetics retail chain Marionnaud.

Valuation

SOTP in round numbers.  Of note I'm using market value of CKI for sake of simplicity, but I think the value of CKI is roughly ~2x current stock price.

Catalyst

• Canning Fok & Frank Sixt retiremet, Victor bringing people he trust
• IPO of retail
• IPO of European telecom
• Share buyback