Restructuring of Cheung Kong Group

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Restructuring of Cheung Kong Group

• M A in Hong Kong

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Major activities

• Acquisition of 22.4 of Hutchison Whampao Ltd and
  40 in Green Island Cement in 1979
• Spin-off of International City in 1980
• Acquisition of HK Electric in 1985
• Privatization of International City in 1985

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Major activities

• Spin-off of Cavendish International in 1987
• Privatization of Green Island Cement in 1989
• Privatization of Cavendish Intl in 1992
• Spin-off of Cheung Kong Infrastructure in 1996
• Major restructuring of Cheung Kong Group in 1997

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Major activities

• The structuring of CKG involved privatization of
  Green Island cement Cavendish Intl because of
  overlapping business and the new organization
  becomes more streamlined and focused.

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Objectives

• The no. of directly listed subsidiaries of CKH
  increased from 1 (HWL) to 2 (HWL and CKI)
• Each member has a more well-defined business
  nature

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Company BackgroundA. Cheung Kong (Holding) Ltd

• CKH was incorporated in 1971 and listed on 1972
• Property development, major projects
• Kingswood Villa, 1.1 million sq feet
• Laguna Verde, 380,000 sq feet
• Tung Chung reclamation, 307,000 sq feet
• Financial Performance
• Good ROA, ROE and profit margin figures
• Net earning growth rate 10 to 24 in 1995 1996

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Company BackgroundB. Hutchison Whampoa Ltd

• HWL was established in 1977
• Major business include
• Property, residential, commercial, hotel, and
  recreational facilities mainly in HK and China.
  Major projects include redevelopment of Hilton
  Hotel, South Horizons, and Laguna City.
• Ports and related services. One of the worlds
  leading operator of container terminals. It has
  interests in ports in HK, China, the UK, Myanmar,
  the Bahamas Etc In 1996, it handled 42 of the
  container traffic passing thru HK

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Company BackgroundB. Hutchison Whampoa Ltd

• Retail and Manufacturing
• As Watson Company Ltd, Chain of supermarkets,
  personal care stores electric appliance stores
  in HK Asia
• Joint venture with Procter Gamble for the
  distribution PGs products in China
• Telecommunication formed in 1985, a major player
  in mobile telephone service in HK and the UK.
  Also engaged in satellite communications radio
  broadcasting services

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Company BackgroundB. Hutchison Whampoa Ltd

• Energy, Infrastructure, Finance other
  investment. 34.6 stake in HK Electric 49
  share in Husky Oil
• Financial Performance
• Satisfactory improvement in recent years

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Company BackgroundC. Cheung Kong Infrastructure
Holdings

• Steered by Victor Li
• Infrastructure business in China with the
  exception of ports telecommunication
• Developments, investment, power plants, toll
  roads, and bridges
• Major projects are joint ventures with provincial
  gout having contractual minimum returns or
  predetermined net returns in foreign currencies

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Company BackgroundC. Cheung Kong Infrastructure
Holdings

• Major business
• Roads and bridges. 25 toll road bridge projects
  located in Shantou, Nanhai, Jiangmen, Guangzhou
  Shanyang, total length of 382 km. By 1996, ten
  roads and bridges were operational
• Power projects. 6 power plant projects in
  Shantou, Nanhai, and Zhuhai with 2,200 megawatts.
  4 plants were in operation by 1996

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Company BackgroundC. Cheung Kong Infrastructure
Holdings

• Cement and concrete business. Thru Green Island
  Cement (Holdings) Ltd
• Financial performance. Saw substantial
  improvement in recent years

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Company BackgroundD. HK Electric Co Ltd

• Incorporate since 1890
• A major electricity supplier
• A guaranteed net return of 15 on fixed assets
  financed by shareholders funds and a minimum of
  5.5 on net assets financed by borrowings

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Company BackgroundD. HK Electric Co Ltd

• Power station on Lamma Island has a capacity of
  2,955 MW
• Domestic customers accounted for 25.3,
  commercial for 69.3, industrial for 5.4
• Financial performance. Relatively stable

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Reasons for restructuring

• Before restructuring

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Major events and financial package

• Involved all 4 publicly listed companies CKH,
  HWL, CKI and HKE
• Suspended from trading

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Major events and financial package

• Transactions
• HWL acquired additional 7,750,000 shares of HKE,
  increased its holding of HKE to 35.01. According
  to the MA code of HK, an extension to make a
  conditional offer for the remaining shareholders
  of HKE at 26.50 per share, a premium of 4.95

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Major events and financial package

• HWL would transfer its entire share of HKE to CKI
  in return for newly issued shares of CKI.
• The amount was HKD 18,743 million

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Major events and financial package

• CKH was to transfer its 966,689,000 shares in CKI
  to HWL (70.66 42.88 of the existing
  enlarged issued share capital of CKI). HWL issued
  349 million new shares in return
• The amount involved was HKD 20,445 million

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After the restructuring

• CKHs interests in HWL increases from 45.36 to
  50.17
• HWLs interests in CKI increases to 84.58
• New structure

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Concerns

• HWL owns 84.58 of CKI, public float was less
  than 25, a waiver was needed from the SEHK.
  Under the listing rule, a public float of not
  less than 10 might be approved if the
  capitalization of that company exceeds HKD 4
  billion.

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Concerns

• 24/1/1997, Deutsche Morgan Grenfell, independent
  financial advisory committee appointed by the
  HKEs board suggested to the shareholders of HKE
  to reject HWLs general offer on HKE that 26.50
  was not fair reasonable.

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Concerns

• 5/2/97, only 1.42 of HKEs shareholders had
  accepted the offer. The general offer was
  conditionally upon the acceptances of more than
  50 voting rights to HWL.

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Concerns

• 14/2/97, CKH dropped its plan to buy a major
  stake on HWL. According to the MA code if CKH
  acquired more than 5 of HWL in the preceding 12
  months, it has to extend a general offer. With
  this transaction, CKH had already more than 10
  and would revise the deal and help its interests
  of HWL under 50.

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Concerns

• Revised deal between CKH HWL

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Concerns

• 15/2/97, issued a circular with the shareholders
• 3/3/97, approval obtained from shareholders

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The analysis of the effects of corporate
announcement

• CKH
• The core business of CKH would concentrate on
  property development investment locally and in
  China
• CKHs business would improve
• Realize a gain of nearly 7.7 billion from the
  sale of CKI to HWL
• Strongly hold on HWL, the earning power of CKH
  will be increased by that of HWL

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The analysis of the effects of corporate
announcement

• HWL
• Views
• CKH increases its stake in HWL shares confidence
  in HWL
• Exceptional gain of HK 1.2 billion from the sale
  of stakes in HKE to CKI

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The analysis of the effects of corporate
announcement

• CKI
• Stock prices showed very good response from the
  market
• Views
• CKI assets further enhanced by HKE, with
  improvement in cash flow
• CKI earnings would increase with that of HKE
• HKEs technical expertise in future expansion

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The analysis of the effects of corporate
announcement

• HKE
• Views
• HKE has more opportunities to participate
  overseas project under CKI
• HKE was considered to be undervalued in the market

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Aftermath

• CKH
• Badly affected by HKSARs housing policy
• After a sharp surge of property prices in 1996,
  market became cautious
• After selling all the 894 apartments of the vista
  Paradiso in Ma On Shan, CKHs CAR rebounded from
  17.5 on 20/7/97 to 4.86 on 8/8/97

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Aftermath

• CKH
• CKH announced it 1st first year result of 1997 on
  28/8/97, the net earnings posted a 68.96
  increase
• CKHs CAR further lifted to 7.23 alter the KCR
  awarded CKH a HK10 billion contract to construct
  a commercial tower in Hung Hom with any other
  competition tenders

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Aftermath

• CKH
• In mid-Oct 1997, the SARs chief executive
  promised to increase the supply of apartment to
  5,000 units, push up the house ownership to 70
  by 2011
• As a result of Asian Financial Crisis, interest
  rates went up, bank became cautious in lending.
  Property prices dropped

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Aftermath

• CKH
• CKH announced to drop the sale price of Deerhill
  Bay in Tai Po from 12,000 to 9,568 per sq feet,
  20.27 lower
• Sentiment was further hurt by the large scale
  property defaults

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Aftermath

• HWL
• After restructuring, HWL will continue to
  concentrate the worldwide port
  telecommunication business
• HWLs earnings from development declined because
  the South Horizons Laguna City completed
• Earnings from other sectors increased
• Orange PLC continued its repaid growth to 11
  share of the overall UK market
• HWLs CAR increased from -1.45 on 26/3/97 to
  8.95 on 3/4/97

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Aftermath

• HWL
• HWLs share price hit 74.25 on 29/7/97 with a new
  mobile telephone joint venture with the Chinese
  Amy and the misstry of Posts Telecommunications
• Also, PG would increase its ownership in the
  joint venture from 69 to 8 by paying HWL
  HK5.07 billion. HWLs CAR increased from 12.51
  to 23.56
• HWL has become the 2nd mobile telephone service
  provider after HKT

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Aftermath

• CKI
• Very progressive after the restructuring
• A total of 13 projects in 1997
• Very favorable financing package by a group of
  banks, HK3.8 billion five-year loan, 39 basis
  pts more than the HIBOR rates
• 16/7/97, CKI was selected as one of HSI
  constituent stocks

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Aftermath

• HKE
• Core business has not changed, a major power
  supplier in HK
• Stock price

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END