CK Asset Executing On Its Diversification Strategy And Getting Little Credit For It

I wasn’t bullish on CK Asset Holdings (OTCPK:CHKGF) (1113.HK) back in July, largely because I didn’t see a big enough discount to fair value to compensate for the risk of the company’s ongoing strategic shift toward owning/operating more recurring-revenue assets in lieu of property development. CK Asset’s management team was pretty good at property development, but the track record in these new ventures is much shorter and some of the initial investment decisions have been more than a little curious to me.

The shares have since lagged the Hang Seng Index, falling about 7%, but outperforming other property developers like Sun Hung Kai Properties (OTCPK:SUHJY), Swire (OTCPK:SWPFF), and Henderson Land (OTCPK:HLDCY). I certainly didn’t have the Hong Kong protests in mind when I passed on buying these shares, and I’m not about to take credit for being right when such a significant exogenous factor came into the market.

As things stand now, though, I’m more bullish on this company and the shares. The acquisition of Greene King made sense to me, and I think I have a better sense of what management is looking to do in the future with its non-property development operations. There’s still quite a bit of uncertainty here between macro/political factors and CK Asset’s ongoing leverage to property development, but at a 25%-plus discount to my estimate of fair value and a healthy dividend, I like the risk/reward a lot more.

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CK Asset Executing On Its Diversification Strategy And Getting Little Credit For It

CK Asset Holdings's Strategic Shift Has The Shares Trading In No Man's Land

Originally created as a pure-play property development and management company (primarily from CK Hutchison (OTCPK:CKHUY), CK Asset Holdings (OTCPK:CHKGF) (1113.HK) has since elected to abandon the pure-play property strategy and is instead essentially “re-comglomerating” itself into a more diverse company with a growing array of income-producing non-property assets. Unfortunately, management doesn’t really have a demonstrated track record here and the company’s transition process is lumpy – property still generates the large majority of earnings, but the land bank is dwindling and there’s no real visibility as to what sort of income-producing assets will come into the mix in the coming years.

CK Asset hasn’t earned back any real benefit of the doubt, and the shares are down about 5% from my last report on the company. Although I do think CK Asset looks undervalued, there’s huge modeling uncertainty, since so much of the company’s long-term earnings-producing asset base isn’t even owned by CK Asset today. Buying in today could lead to significant gains in the future, but that’s really just a gamble/speculation on the management team at this point, and that’s not really my preferred investing approach.

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CK Asset Holdings's Strategic Shift Has The Shares Trading In No Man's Land

CK Asset Following A Different Path, And The Market Doesn't Like It

CK Asset Holdings' (OTCPK:CHKGF) (1113.HK) controlling Li family has laid out a relatively clear vision for what they want CK Asset to be - a diversified asset conglomerate that invests in property development, property management, and infrastructure assets. Unfortunately, this is not really in keeping with what the market wants, as many see this as turning away from CK Asset's traditional strengths and competencies, diluting returns, and missing out on the gains to be made in markets like China and Hong Kong.

That disappointment has translated pretty directly into disappointing share price performance, with the local shares down about 5% year-to-date and down closer to 10% from the time of my last article. While I highlighted some of the risks in this new strategy, I believe I underestimated how the market would respond to this shift, particularly as the market sees this as a company that is turning away from high-margin development activities and buying into income-producing properties at high multiples (which isn't entirely wrong). Although I believe CK Asset is going to have to earn back the benefit of the doubt, I continue to believe that long-term earnings growth in the neighborhood of 7% can support a fair value more than 20% above today's price, making this a more interesting contrarian call.

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CK Asset Following A Different Path, And The Market Doesn't Like It

CK Hutchison Holdings Needs To Find A New Driver

CK Hutchison Holdings (OTCPK:CKHUY) may be a Hong Kong-based conglomerate, one that is no longer involved in property development or management after a transaction that created CK Property (now CK Asset Holdings (OTCPK:CHKGF)) in 2015, but that doesn't mean it offers investors all that much exposure to Hong Kong or mainland China. Close to 60% of CK Hutchison's EBITDA comes from Europe, much of that from U.K., which makes the company considerably more leveraged to the health of the European economy and the uncertainties surrounding Brexit.

On the positive side, CK Hutchison has done a lot to improve the profitability of its telecom operations, and its Husky energy operations should be able to post much better results with the improvements in oil and gas prices. Retail is more mixed, but likely to turn up in Europe, while the ports and infrastructure operations look more sedate. All told, CK Hutchison shares look a little undervalued on a cash flow basis, but I'd like to see the company put more capital to work as a way of driving more value-creation for shareholders.

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CK Hutchison Holdings Needs To Find A New Driver

CK Asset Holdings Prizing Profits Over Property Pure-Play

When CK Asset Holdings (OTCPK:CHKGF) [1113.HK] was originally created as Cheung Kong Property, the idea is that this would be more or less a pure play on property development and management in China and Hong Kong. That lasted about a year or so, before management announced an intention to diversify beyond property and pursue more of a conglomerate-type structure with investments outside of property development or property management.

Although there are some concerns and drawbacks to this move, net-net, I think it is a positive decision for shareholders. Rather than being tied to the ups and downs of the property cycle (which is looking more “down” in CKA’s core markets), the company’s managers can see fit to recycle and allocate capital wherever the best long-term opportunities may lie. The company hasn’t abandoned property, but can now (I believe) make better long-term decisions without having to stick to a rigid mandate.

Valuing this company ahead of what is almost certain to be additional investments in non-property assets is challenging. I believe the company can generate good adjusted earnings growth (around 7%) even with single-digit ROEs, supporting a fair value of over $10.50 for the ADRs, but there are a lot of unknowns about the composition of earnings five or 10 years down the line.

I would note that CKA’s ADRs do not offer good liquidity. Investors who have the option to invest in the Hong Kong-listed shares should certainly consider doing so.

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CK Asset Holdings Prizing Profits Over Property Pure-Play