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

Lackluster Assets And No Real Dynamism Continue To Weigh On CK Hutchison Holdings

It's hard enough for conglomerates to get their due, but when the assets in question aren't even that exciting, it makes it even harder to make money. That's been my issue with CK Hutchison (OTCPK:CKHUY) for a while now, as I just can't muster much enthusiasm for a so-so collection of assets in telecom, retail, infrastructure, and energy spread across the world. I wasn't all that fond of the value proposition back in January, and the shares have fallen about 15% since then - lagging not only the Hang Seng but also other conglomerates like Swire Pacific (OTCPK:SWRAY) and CITIC Ltd. (OTCPK:CTPCY).

Unfortunately, there's nothing in management's recent commentary that suggests they see much need for change. CK Hutchison isn't in the business of capital recycling and there don't seem to be many moves afoot to significantly improve any of the constituent parts of the business. I do believe the shares look relatively undervalued now, but it takes more than just a low valuation to make stocks work and my confidence level in CK Hutchison management is not high right now.

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Lackluster Assets And No Real Dynamism Continue To Weigh On CK Hutchison Holdings

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