Hong Kong’s property tycoons finally unlocking value

A new generation of tycoons is unlocking value in Hong Kong’s conglomerates: good news for investors

When his grandfather died last September and then his father went on sick leave earlier this year, 37-year-old Adrian Cheng stepped up as heir apparent to the family business: a $25 billion property-to-jewellery empire.

Adrian has worked with other family members to revitalise the group’s flagship companies: property firm New World Development (NWD) and the world’s largest jewellery chain, Chow Tai Fook Jewellery.

Together they have opened shopping malls merged with art galleries, paid out special dividends, snapped up Australia’s Alinta Energy for $3.1 billion, and are opening jewellery shops in global hot spots for Chinese tourists.

Adrian represents a new generation in Hong Kong of tycoons who are starting to manage capital more actively and are gradually eroding the share price discounts investors have often assigned to family-run conglomerates.

“Millennials … are more mobile, more digital,” Adrian said, while talking to FinanceAsia about his approach to business. “I’m developing my own ideas as a cultural entrepreneur to create a new eco-system of governance and innovation for conglomerates like NWD.”

Coddled second- or third-generation taipans have not always inherited the animal spirits of their rags-to-riches forebears, who emigrated to Hong Kong from China and built business empires from scratch.

Adrian’s grandfather, Cheng Yu-tung, was born in the southern Chinese city of Shunde and fled to Macau during the Sino-Japanese war. He worked as an apprentice at the gold shop of Chow Chi Yuen, founder of Chow Tai Fook and later his father-in-law. From there he founded the family dynasty.

These tycoons, who enjoy celebrity status in the materialistic world of Hong Kong, constructed holding companies under which they amassed assets, the sheer bulk of which acted as a poison pill to deter would-be predators.

Investors reacted to that M&A defence mechanism and lack of transparency by applying a hefty conglomerate discount to the share prices of Hong Kong’s big holding companies. Property company Sino Land, for example, is trading at a 34% discount to its book value despite holding HK$23 billion in net cash, and NWD is trading at a discount of around 42%.

Source: Company
Adrian Cheng looks to attract millenials

But then many of these patriarchs were spooked by an unseemly family feud that erupted after the death of Hong Kong businessman Henry Fok in 2006, as well as the very public spat in 2011 over the fortune of Macau gaming billionaire Stanley Ho between his 16 children and four wives, according to people that know them.

So in a bid to protect their legacy and avoid such squabbles, the elderly generation have been parcelling out businesses to their children.

Cheng Yu-tun’s son, Henry Cheng, has assigned different projects to each of his children. The eldest son, Adrian, is heir to the group; his sister Sonia’s baby is Rosewood Hotels; the younger brother Brian leads NWS Holdings. There is even a role for former Deutsche banker Patrick Tsang, the husband of Cheng Yu-tung’s granddaughter, as chief executive of Chow Tai Fook Enterprises.

In another well-managed succession process, Peter Woo handed the chairmanship of property group Wheelock and Co to his son, Douglas Woo, in 2014 when the elder Woo was still in his late sixties. His daughter Jennifer oversees another family business, the retailer Lane Crawford.

That gradual unpacking of family-run businesses is creating greater transparency for investors. It’s also unlocking value because if strides are made to improve dividend policies and balance sheets, then the share prices of Hong Kong’s conglomerates could easily climb, equity analysts say.

Brokerage Daiwa Capital Markets estimates that more than $100 billion of investment value, the difference the value of their assets and the market capitalisation, could be unlocked in Hong Kong family-run property companies alone, if only they can modernise their capital management.

Threats on the horizon
The next generation of tycoons have not necessarily been handed a cushy job. As they dig into their management roles they have identified profound threats to their family businesses.

Mainland Chinese companies, for one, are becoming fearsome competitors in Hong Kong. In addition, changing consumer habits favour more nimble, disruptive start-ups. Finally, the death of older generations is wiping out the relationships that once oiled business in a Territory where crony capitalism is rife.

A few like Adrian appear to be attacking these problems with gusto.

“My Asian and Western experiences helped me bridge the best of both cultures and bring a new dimension to the community,” said Adrian, who was an undergraduate at Harvard and spent a year in Kyoto studying Japanese art and culture at the Stanford Kyoto Center for Japanese Studies.

Douglas Woo, chairman of Wheelock and Co; Hua Kuok at Kerry Logistics; Adam Kwok at Sun Hung Kai Properties, and Darryl Ng at Sino Group are among the next generation of business leaders that corporate financiers say are willing to take action to reverse the rot.

Rather than circling the wagons, these tycoons are going on the offensive to boost share prices and help their companies grow.

Family-run Hong Kong property developers not only hold the top-five positions on FinanceAsia’s 2017 Rich List by dividend payouts, but they also account for over a quarter of all the dividends on our list, as well as nearly 70% of the city’s total dividends over the review period.

To be sure, top of the list is Joseph Lau, the former chairman of Chinese Estates Holdings, after three special dividends between August 2016 and May 2017 following asset sales. This is due to special circumstances, as the ailing property tycoon, who was convicted of bribery and money laundering in Macau in 2014 and has been steadily cashing out.

The Kwok family of Hong Kong’s Sun Hung Kai Properties leapt up the Rich List in 2017 from a year earlier, receiving $468 million in cash dividends, a 25% increase on the previous year as the property developer issued its highest dividend in the company’s history.

Henderson Land, controlled by Lee Shau-kee, paid a dividend ratio of 55% in 2014; the ratio was 87% by 2016.

Overseas investment by the flagship companies owned by the top 10 Hong Kong tycoons in FinanceAsia’s Rich List series has also surged across recent years.

“[Many second generation leaders] are much more familiar with the concept of global diversification, as compared with their parents, mainly because of their education background,” said Fan Cheuk Wan, head of investment strategy and advisory, Asia at HSBC.

What is also clear is that those Hong Kong families that do not take appropriate action risk spectacular bust-ups among the next generation and gradual decline as more vigorous and innovative companies supersede them.

They may also get an embarrassing prod from increasingly vocal shareholder activists. Activist hedge fund Elliott, led by US billionaire Paul Singer, has been hounding family-run Bank of East Asia since 2015 to create value for investors and sell itself.

Family feuds
Adrian Cheng’s abrupt accession was a transparent and amicable transfer of power. But it can get ugly. The Lo family’s Great Eagle Holdings is a case in point.

Founded by the late Lo Ying-shek and his wife Lo To Lee-kwan in 1963, Great Eagle Holdings controls two public companies with a total market value over HK$60 billion ($7.7 billion).

In an open letter in May, 98-year-old Lo To Lee-kwan accused her third son, Lo Ka-shui, who now chairs Great Eagle Group, of being unfair to his siblings. According to a summons viewed by FinanceAsia, the matriarch filed a case in December against HSBC to remove the British bank as trustee because it had not carry out her wishes.

For investors in these family-run businesses a botched succession can be disastrous.

Asian companies could lose almost 60% of their market value during the transfer of power from the first generation to the next, according to research by Joseph Fan, a professor at the Chinese University of Hong Kong who specialises in studying tycoons.

“When the previous generation retires, a substantial part of the family’s intangible assets disappears permanently,” said Fan, with reference to the founder’s business connections.

The issue is more pressing in Asia than elsewhere given the preponderance of family-controlled businesses, and the coming years will be critical. According to a 2016 report by UBS, 59% of Asian family offices are expected to undergo a generational transfer of wealth within the next decade, versus 43% globally.

In that regard, Li Ka-shing, one of Asia’s richest men and chairman of Hong Kong-headquartered telecoms-to-ports conglomerate CK Hutchison, has created a blueprint for his peers, having formally laid out plans to ensure no conflict between his two sons.

His eldest, Victor, joined the family firm in 1985, was named heir apparent at CK Hutchison in 2012, and became deputy chairman in June 2015. Also in 2015, Li Ka-shing promised to bankroll his younger son Richard’s enterprises such as insurance platform FWD.

Some of the family's business associates have told FinanceAsia that they expect the patriarch to step down by the end of this year before he turns 90 in July. Given the careful succession planning, however, it will have little long-term impact on the value of the business. Victor, who is 52 years old, lives with his father in Hong Kong’s Deep Water Bay, next door to members of the Kuok family.

Whilst Li Ka-shing is still alive Victor and the Li family’s trusted lieutenant, Canning Fok, are unlikely to make any major decisions without consulting him, they added. A spokeswoman for the group did not return a request for comment.

At property group K. Wah, founder Lui Che-woo has also been very explicit about the division of assets between his children.

Eldest son Francis Lui has run Macau casino operator Galaxy Entertainment since 2003; his second son Lawrence is president of San Francisco-headquartered Stanford Hotels, while younger son Alexander runs the group’s Hong Kong properties. Meanwhile daughter Paddy Lui runs the hotel business in Hong Kong.

Unlocking property value
One key way Hong Kong’s family businesses are creating value for investors and furthering succession planning is by cashing in on the three-fold rise in the value of Hong Kong property since 2007, as measured by the Hong Kong Rating and Valuation Department.

The windfall has given the tycoons scope to pay out bumper dividends, spin off properties into separate listings, sell non-core or lower-quality assets and recycle the proceeds into higher-class buildings or cash-generating overseas assets.

“The key here is that there is more to come,” said Nicole Wong, an equity analyst at CLSA, talking about the wave of possible equity-value-enhancing measures among cash-rich Hong Kong property companies.

Henderson Land has been selling non-core assets and in May bought a commercial site in downtown Murray Road, Hong Kong for HK$23.3 billion ($3 billion), a world record price.

After making billions from the real estate market and toy manufacturing, Hong Kong’s Choi family sold a ten-storey shopping mall in Kowloon for HK$5 billion to a mainland Chinese businessman in July, pocketing a tidy profit of HK$3.52 billion.

“We think it is a good time now (to sell), as values of commercial properties and retail shops have soared,” Karson Choi, vice-chairman and second-generation heir of Early Light International Holdings, said in an interview with FinanceAsia.

Not long after the Hong Kong property sale Early Light purchased Sydney’s Exchange Centre – home to the Australian Stock Exchange – for A$340 million ($246 million).

The conglomerate is seeking to dispose of more premium properties in Hong Kong while investing at least HK$10 billion in the next three to five years in Australia’s real estate market, said 31-year-old Choi, just back from a two-week trip to Australia.

“Conglomerates and family offices [are] looking for high cash flow-generative assets in developed markets such as Australia, North America and the UK,” said Samson Lo, head of Asia M&A at UBS.

Elsewhere, Champion Real Estate Investment, which is controlled by the Lo family’s Great Eagle Holdings, appointed Savills on July 4 to sell a non-core asset, the Langham Place commercial tower in Kowloon.

Explaining the move it said it was keen to cash in while Hong Kong property prices were high.

“Such an asset sale could also open the door for a major leap in its capital management, and could result in it declaring a special dividend of HK$1/share or more,” said Jonas Kan, an analyst at Daiwa Capital Markets, in a report to investors on August 15.

Even some of the most conservative families are seeing an opportunity to raise cash. The tai-pans of the Jardine Matheson conglomerate, the Keswick family, are mulling the sale of Hong Kong’s Lot No. 1, the first property bought from Britain after the territory became a colony in 1841.

The site, which houses the Excelsior hotel, has been in the trading house, or Hong’s hands ever since.

A growing trend, that increases transparency and further unpacks the conglomerates, is spinning-out property portfolios.

The Woo-family’s Wharf Holdings, an affiliate of Wheelock and Co., proposed in August a HK$230 billion ($29.4 billion) spin off of six Hong Kong properties, including the landmark Times Square shopping mall and office complex, into a separate listing from its largely commercial properties in mainland China.

Separate listings of different business segments in effect give investors the freedom to sell part of the company at their choice of time and price. Wharf’s share price rocketed after the announcement to a record high, after trading at an average 0.66 times book value for the 12 months ending December 2016.

“It could mark the beginning of Wharf’s potential transformation into a proactive and shareholder-interest-oriented, modern corporation, and could be priced as such by the capital market,” said Daiwa Securities’ Kan.


CK Hutch again was an early mover in this respect. It spun out its real estate into Cheung Kong Property Holdings in 2015, a move designed to eliminate the holding company discount by cutting out the tiered shareholding structure and allowing greater transparency. It followed that up with an $81 million share buyback in March 2016.

CK Hutch has also been monetising its Hong Kong and mainland China portfolio since 2011, after buying bulk earlier in the previous decade. It was the largest net buyer of land in Hong Kong between 2004 and 2009 and on the mainland between 2004 and 2007.  The conglomerate is now actively recycling the proceeds into foreign investments. Overseas acquisitions agreed by Li-controlled companies since 2016 total at least $17.5 billion.

Just this year Li Ka-shing-controlled companies bought Australia’s Duet Group for A$7.4 billion ($5.6 billion) in May and agreed to buy Germany’s Ista for €4.5 billion ($5.3 billion) in July.  On the flip side, the group sold a Shanghai complex in October to a fund linked to China Life Insurance for Rmb20 billion ($2.9 billion) and its Hong Kong fixed-line network unit, Hutchison Global Communications, for HK$14.5 billion.

Victor Li: "When are you retiring dad?"

As a result of similar M&A activity over the years nearly half of the conglomerate’s revenue was generated in Europe last fiscal year. This shift to developed markets appears positive for investors.

According to a case study conducted by Chinese University of Hong Kong’s Fan, out of the 65 deals that Li’s companies made between 2003 and 2013, the 40 deals in developed markets created an average cumulative abnormal return of 2%, while the 25 deals in developing markets such as China had zero impact on market value.

CK Hutch’s shift to more developed markets and infrastructure assets is more suited to Victor’s personality, people close to him say. He is less charismatic than his father and prefers to use professional managers to manage operations, whereas his father in his heyday was much more hands on. In this way it minimises the importance of the elder Li’s social connections in Hong Kong and mainland China.

“It’s very difficult for Li to pass on his reputation and relationships to his son,” said Fan. “Not surprisingly Victor can be more successful in developed markets where property rights are better; where he doesn’t have to depend on relationships, [and] where he can find professional managers to help him.”

Chinese companies: friend and foe
The same month as Hong Kong marked the 20th anniversary of the handover of the Territory from Britain to Beijing, China’s largest shipping conglomerate Cosco Shipping agreed to buy a 68.7% stake in Orient Overseas International Ltd (better known as OOIL), from the Tung family for HK$49.23 billion ($6.3 billion).

The second-generation heir to the family fortune, Tung Chee-hwa, became Hong Kong’s first chief executive after the handover in 1997, reflecting strong ties with Beijing established when Tung secured its help to bail out his shipping line in the 1980s. The clan have maintained deep connections with Beijing since, and Tung is a vice-chairman of China’s main political body, the Chinese People’s Political Consultative Committee. The Tung family will reap $4.35 billion in cash via the sale.

While competition from China has hurt local rivals, their race to achieve economies of scale and to further Beijing’s ambitions along the Belt & Road allowed the Tung family to exit a troubled industry. Shipping rates have fallen globaly since 2000.

In the Hong Kong property market, Chinese developers have proved ferocious competitors with their higher risk appetite and a lower return requirements compared with their Hong Kong peers. However they have also added to the liquidity of the market, which many family-run developers have used to exit their earlier investments.

Chinese developers’ market share increased from 24% in 2015, to 45% by 2016, to 100% in the first two months of 2017, according to property analysts at CLSA.

To be sure, disruptive companies out of China threaten to upend some business models. Alibaba’s fintech affiliate Ant Financial said in March it was entering the Hong Kong market with the launch of a mobile wallet for local users to make payments on their smartphones in Hong Kong dollars.

But they too are providing a catalyst for change. While Beijing is clamping down on capital flowing out of the mainland and more questionable acquisitions, Hong Kong tycoons are likely to continue to find willing buyers for their non-core businesses, including private equity firms flush with cash.

Wharf Holdings sold Hong Kong’s second-largest fixed line operator, Wharf T&T, to private equity firms TPG Capital and MBK Partners for HK$9.5 billion ($1.22 billion), a steep valuation at 12.2 times Ebitda.

“We’ve seen a sea change,” in family-run companies’ willingness to sell non-core assets, said one corporate financier.

Additional reporting by Ernest Chan

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