Description

CK Hutchison (CKHUY) Price - $12.47       _ (Market Cap USD$48bn/ Enterprise Value - $69bn)  

• Managed by the ‘Buffett of Asia’, Li Ka Shing  - Owns 33% of Parentco

• CKHUY is the ADR of 1 HK (HK Exch.)  Local HK-listed trades USD$40mm-$60mm/night.

• Li Ka Shing is worth over USD $35b according to Bloomberg, including $25bn of value in public entities CKHUY (underlying 1 HK as operating company) and 1113 HK (CK Property).

• Li will be transitioning to CEO role to son Victor, 52.  Li, will take on an ‘advisor’ role in the summer of 2018.  Victor has worked side by side with Li for 30 years and will be surrounded by strong leadership.  CKH is one of the most prestigious organizations in Asia.  

• Management does not take meetings from western investors or local hedge funds easily and required a meeting in HK before more consistent communication.  The company has been more willing to interact given our multi-year relationship.

• Hutchison Diversified globally but over 40% of EBITDA from Europe (of which 1/3 is UK)

• Value Breakdown (NAV analysis at back)

• 34% - Infrastructure

• Assets include tolls roads, utilities, power grids throughout Europe, Asia, Australia.

• 24% - Wireless

• ‘3 Wireless Brand’ (Italy’s largest by members, #3 UK, #1  Denmark, Sweden, Austria), HTHKH (HK), HAT - #1 Indonesia wireless carrier.

• 22% - Retail  

• AS Watson (13k small format Health and Beauty stores throughout Asia and Europe)

• Link to recent article on retail success of AS Watson concept: https://www.bloomberg.com/news/articles/2017-06-26/li-ka-shing-s-brick-and-mortar-watsons-stores-defy-online-shift

• 15% - Ports

• 275 global operating berths with 81.4mm total equivalent units moved annually.

• 5% - Huskey oil (a public Canadian E&P)

• Bond Rating

• S & P Rated  A   10 yr Bonds Trading 105 Over Treasuries

• Our estimates are well above street - recent acquisitions + return on excess free cash.

• 2017 $1.24 vs street $1.19

• 2018 $1.41 vs $1.30

• 2019 $1.48 vs $1.35

• CKHUY is trading at a PE below 9x our 2018 EPS estimate. We believe upwards revisions to estimates will remind investors of the earnings power of the assets and quality of management.

• We believe the stock can trade to 14x-16x 2020 EPS of $1.56 ($22-$25) by YE2019, returning 75%-100%, while paying investors a 4% annual dividend yield to wait ($1.85 of cash).  We also believe the company will more aggressively buy stock if the stock broke last repurchase levels of $12.20, where the company bought 5mm HK shares in the fall of 2016.

Stock chart

• Gap higher in June of 2015 was separation of operating business (CKHUY) from real estate business (1113 HK).

• Mid 2016 underperformance driven by Brexit FX hit.  Began recovering in 2h16 w/ share repurchase and close of accretive Italian wireless JV.

• 5mm shares bought at HKD94.65 in December of 2016

• 2017 recovering post Brexit, Duet acquisition close in May 2017.

Detail - Value Creating Management Team

• Management has consistently created value via improving operations, accretive acquisitions, organizational restructuring and/or aggressive return of capital.   

• May 2015 - CKHUY separated its operating companies from its real estate entities to create CK Hutchison Holdings (CKHUY) and CK Property (1113 HK).  This was an important moment as we believe the operating company should now be valued on earnings and less on NAV.

• 2016 GBP (Brexit) slams 2016 EPS but company closes (US$10bn Italian wireless deal with VimpelCom’s Wind, creating the largest Italian wireless company (by members).   The deal is already showing significant upside to guidance and street estimates.  We see $.12 of accretion to EPS in 2018, we think only 5c is in consensus.   

• 2017 - Lapping GBP hit in June and synergies running ahead at Italian wireless deal.  May 25th- closed deal to acquired Australian power grid company, which should be at least 3% accretive to 2018 estimates and was financed via a public subsidiary that was holding excess cash.

Estimates and Price Target Justification

• Our estimates are well above the street, including 2017 of $1.23 vs street $1.19, 2018 $1.41 vs street $1.30, 2019 of $1.48 vs street $1.37.   We think the company will return 35%-40% of EPS to shareholders via dividends and opportunistic share repurchase stock.  The company has some limitation in its ability to repurchase shares to about 6% of shares by HK exchange limits.  A holder cannot increase holding % more than 2% w/o being required to bid for the entire company.  A company share repurchase of over 6% would drive Li’s family holdings over 2% higher.

• CK Hutchison trades at a major discount to Berkshire Hathaway in spite of faster growth at CKH.  BRK/B trades at 21x consensus 2018 PE and 1.29x P/Book vs 9x PE for CKHUY, and .80 P/B for CKHUY.  On the other hand, we believe CKHUY can grow earnings faster and has a structurally lower tax rate than BRK/b.  Consensus expects BRK/b to grow EPS from $6.71 in 2014 to $7.75 in 2018, while we project CKHUY will earn $1.41 in 2018 vs $.98 in 2014.   

• Local HK investors have historically traded CKHUY at a discount to 2018 NAV (below). However, given successful operating and earnings growth as well as top management, we see no reason the stock should trade below 10x PE.   We expect the earnings multiple to expand as estimates revise higher.  

• We believe the stock can trade to 14x-16x 2020 EPS of $1.56 ($22-$25), returning 75%-100% by YE 2019, while paying investors a 4% annual dividend yield to wait ($1 of cash).

CKHUY - Financial Model

Catalyst

This is the last earnings period affected by Brexit. Accretion from acquisitions should become apparent. After this quarter, we should start to see positive earnings revisions for the company. We suspect this will lead to both earnings upside to consensus estimates and multiple expansion.