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Hong Kong billionaire Li Ka- shing announced a sweeping reshuffle of his business empire and the switch of incorporation base from Hong Kong to Cayman Islands last Friday, in a bid to boost their value and attract more investors.
The reshuffle proposal suggested that the two conglomerates under Li's control, Cheung Kong Holdings and Hutchison Whampoa, will merge and reconstruct, forming two new companies, CK Hutchison Holdings (CKH) and Cheung Kong Property Holdings (CK Property).
The two new companies, one focusing on property and the other on telecoms, retail and energy, will be incorporated in Cayman Islands and listed in Hong Kong.
CKH Holdings will manage all non-property businesses including ports and related services, telecommunications, retail, infrastructure, energy and movable assets leasing operations, while CK Property will combine the property businesses of Cheung Kong and Hutchison Whampoa in Hong Kong, the Chinese mainland and overseas.
Li stressed at a press conference on Friday that the move was for the sake of convenience to do business, dispelling speculations that the plan to incorporate the new companies in Cayman Islands rather than Hong Kong is a sign of withdrawal,
Over the past ten years more than 75 percent of listed companies in Hong Kong were incorporated in Cayman Islands or other overseas regions, he added.
The group's management explained that there are technical concerns in this regard. Since the reconstruction involves a massive trade volume and the distribution of the physical stock of CK Property, the new companies are not allowed to be incorporated in Hong Kong.
Another reason is that for companies incorporated in Hong Kong, their dividend and share distributions are enslaved to profit reserve distribution.
According to Hong Kong's Companies Ordinance, the profit and financial investment profit on sale of a holding company are not categorized as profit reserve, which in turn reduces the company's financial flexibility. However, a Cayman-incorporated company is not under such restriction.
In a statement on Friday, Li described the reconstruction as a milestone of the group's history, saying the move is in favor of increasing the shareholder value.
According to Li, the shareholder value would be raised by removing the holding company discount to fully reveal the group's value, so as to benefit the shareholders. Also, the restructuring will lead to a clearer division of business operation, which will help investors to analyze the group's businesses more accurately.
Vincent Lam, Managing Director and Chief Investment Officer of VL Asset Management Limited said that the share price discount of a holding company is generally 15 to 25 percent or more. The reorganization of Cheung Kong and Hutchison will remove a layer of holding structure which is advantageous to the share price.
With a clearer picture of the division of business operations between the two new companies after the reorganization, Lam said, shareholders and potential investors will be able to work out their investment plan base on the business profit, cash flow and net asset value.
Kingston Lin, Research Director of Fulbright Securities agreed that reshuffling will do good to the group, especially when the group's infrastructure and energy shares are performing well, while its property share is in the shade and likely to drag down the group.
