20150109-法国巴黎银行-Restructuring_to_unlock_value_14页_762kb

Cheung Kong Holdings (1 HK) Restructuring Analysis Summary

Core Content

Cheung Kong Holdings (CK) and Hutchison Whampoa (HW) are undergoing an unexpected restructuring to unlock value and improve market valuations. The restructuring involves the creation of two new entities: CK Hutchison (CKH) Holdings and CK Property. CKH Holdings will consolidate non-property businesses, while CK Property will focus on property-related operations and be spun off and listed separately.

The restructuring is expected to be completed by the end of 1H15, contingent on shareholder approvals. This move aims to eliminate the existing holding company discount for CK, which currently has a 49.97% stake in HW, and to improve the company's financial and operational structure.

Main Points

• Reorganization Proposal:

  • CK shareholders will receive 1 CKH Holdings share per CK share.
  • HW shareholders will receive 0.684 CKH Holdings share per HW share, based on the average closing price of CK and HW for the five trading days ending on 7 Jan 2015.
  • The exchange ratio results in a 2.3% discount to the closing price of HW.

• New Entities:

  • CK Property: A pure-play property company with leading market shares in Hong Kong for property sales and leasing, and a strong presence in the Chinese property market.
  • CKH Holdings: A global conglomerate that will inherit non-property businesses, including infrastructure, energy, and retail, and will also enhance its leasing and investment segments.

• Dividend Outlook:

  • Management expects the combined per share dividend of CKH Holdings and CK Property in FY15 to exceed the total dividend per CK or HW share in FY14 (excluding special dividends).
  • A higher dividend payout ratio is planned for FY16, which is a positive catalyst for investors.

• Valuation and Investment Thesis:

  • The current deep discount to NAV for CK is at 33%, and the restructuring is expected to narrow this discount.
  • The target price (TP) for CK is HKD158.80, based on a 15% discount to the FY15E-NAV of HKD186.80.
  • The recommendation remains BUY, with the TP set at HKD158.80.

Key Information

• Share Price Performance:

  • CK has a 3.9% 12-month absolute return.
  • The stock is trading at a 0.8x price-to-book (P/B) ratio.
  • The NAV discount is 33%, which is considered a significant value opportunity.

• Financial Highlights:

  • Recurring EPS is expected to grow from HKD12.91 in 2013A to HKD16.74 in 2016E.
  • Recurring P/E is projected to decrease from 8.2x in 2014E to 7.5x in 2016E.
  • EV/EBITDA is expected to fall from 6.6x in 2014E to 5.9x in 2016E.

• Key Risks:

  • Shareholder approval: The success of the restructuring depends on approval from CK and HW shareholders.
  • US interest rate hikes: Could increase mortgage rates in Hong Kong and negatively impact the property sector.
  • Government policies: New regulations to curb housing demand could affect primary residential launches.

Catalysts

• Successful launches of residential projects in Hong Kong.
• An increase in dividend payouts.

Company Background

• Cheung Kong Holdings is one of the largest property developers in Hong Kong, engaged in property development and strategic investments.
• It holds a 49.97% stake in Hutchison Whampoa, which is a leading international conglomerate.

Key Assumptions

• HK residential price growth (mass units): Expected to remain flat in 2015.
• HK residential price growth (luxury units): Expected to increase by 5% in 2015.

Earnings Sensitivity

• In a bear-case scenario, assuming a 20% drop in HK residential property prices, the NAV discount could widen to 35%.
• The target discount to NAV is set at 15%, leading to a valuation of HKD158.80.

Financial Statements Highlights

• Recurring Net Profit is projected to grow from HKD24,182m in 2014E to HKD38,762m in 2016E.
• Recurring EPS is expected to increase from HKD15.22 in 2014E to HKD16.74 in 2016E.
• Free Cash Flow to Equity (FCFE) is expected to increase significantly in 2015E and 2016E, with HKD13,212m and HKD12,618m, respectively.
• Net Debt/Equity is expected to decline from 3.6% in 2014E to -1.0% in 2016E, indicating improved financial strength.

Conclusion

The restructuring is viewed as a positive development for CK, with the potential to eliminate the holding company discount and improve the company's valuation. The recommendation to BUY remains in place, with a target price of HKD158.80, based on a 15% discount to the FY15E-NAV of HKD186.80. Key risks include the possibility of shareholder rejection, faster-than-expected interest rate hikes, and new housing policies.