Alfred Ho
Head of Asia Equities
GaveKal Asian Opportunities Fund
1) Hutchison Whampoa (HK: 13)
This investment holding company operates six core businesses: ports and related services, property and hotels, retail, infrastructure, energy, and telecommunications which include a 50% stake in Vodafone Australia.
It is a container terminal operator, holding interests in approximately 50 ports in 26 countries. It also develops and invests in real estate projects, ranging from office buildings to residential properties.
Its diverse retail portfolio comprises health and beauty products, luxury perfumeries and cosmetics, supermarkets, consumer electronics and electrical appliances, and airport retailing. Its infrastructure business operates mainly in Hong Kong, the UK, the Mainland, Australia, NZ and Canada, while the company’s investments in energy are principally in Canada, the US, the Mainland, Greenland and Indonesia. The company also owns and operates fibre-optic fixed-line networks in Hong Kong.
For the fiscal year ended 31 December 2013, Hutchison’s revenues increased 5% to HK$256.23 billion, while net income increased 20% to HK$31.11 billion. Despite having a long-term funding gap, there is a lot to like about Hutchison’s balance sheet, including a declining net-debt to equity, strong long-term cash flow relative to reported profit, exceptional EPS growth over the last five years, with forecasts for excellent EPS growth going forward of around 14%.
2) Guangdong Investment Ltd (Hong Kong: 270)
A subsidiary of GDH Ltd, Guangdong Investment Ltd is a Hong Kong based Red Chip company listed on the Hong Kong Stock Exchange. Guangdong is primarily a utility company operating water supply projects in Mainland China and natural water to Hong Kong, Dongguan and Shenzhen regions; Electric Power Generation through coal-fired power plants supplying the Guangdong Province, Mainland China; and infrastructure businesses like toll roads and bridges.
It also invests in and develops real estate properties, operates department stores, and provides financial services. In addition to commercial buildings and shopping malls, the company also manages around 37 hotels, including two in Hong Kong, one in Macau, and 34 in Mainland China.
For the fiscal year ended 31 December 2013, Guangdong’s revenues increased 3% to HK$7.99 billion, while net income increased 30% to HK$4.43 billion.
Much of the growth was contributed by water resources projects, department stores operations and hotel operations businesses.
While weaker forecasted EPS growth reflects challenges within the China economy, the stock had averaged 13.72% ROE annually since 2004 and this is forecast to rise to 16.4%. On an equally good note, net-debt to equity is decreasing and long term cash flow relative to reported profits is strong.
Joseph Lai
Platinum Asset Management
1) Digital China Holdings Ltd (HK:861)
Listed on the main board of the Hong Kong Stock Exchange in 2001 following a spin off from the Legend Group in 2000, Digital China is the largest integrated IT services provider and the dominant mobile telephony operator in China with revenue of HKD70.319 billion in FY2011/12 (1 April 2011 – 31 March 2012).
Ranked ‘top 100’ in Fortune China 500 for three consecutive years from 2010 to 2012, the Company’s subsidiaries are principally engaged in the sale and distribution of general information technology products and systems products; and provision of supply chain services and information technology (IT) services.
Due to unfavourable market conditions, the company’s revenues for the nine months ended 31 December 2013 decreased 8% to HK$52.26 billion, while net income decreased 93% to HK$84.1 million.
However, with more than 800 million subscribers the company is well positioned to leverage off the growing urbanisation and ‘informatisation’ happening in China, especially once market conditions improve.
Lai expects data-related revenues to skyrocket from a low base. He also expects the company to regain its dominance due to a superior 4G network, with the rapid decline of 4G smartphone prices leading to rapid subscriber growth.
Return on equity has averaged 16% since 2004 and recently increased to 17.44%, while earnings per share (EPS) growth has been exceptional over the last five years. Based on 3.6x EV/EBITDA the company looks cheap.
2) Shangri-La Asia (HK:69)
This is an investment holding company which owns and operates hotels and associated properties, and provides hotel management and related services. Its associates are engaged in leasing of office, commercial, residential and exhibition hall space and serviced apartments, as well as the ownership and operation of hotels.
The company operates in three segments: Hotel operations, hotel management and property rentals throughout mainland China, Hong Kong, Singapore, Malaysia and other countries.
Due to its early entrance into the rapidly urbanising Chinese cities, the company has been able to secure premier hotel sites significantly cheaper than its competitors.
In last year or so, its earnings have been impacted by escalating construction costs and the government’s crackdown on lavish expenditure by government officials and state company employees. However, Lai expects pricing power to mirror the country’s rapidly growing urbanisation.
To take advantage of the strong outbound tourism trend, Shangri-La is also expanding outside of China. With all the properties still in the operating entity, Lai says there’s also ample room for spinning off into a REIT sector into the future.
For the fiscal year ended 31 December 2013, Shangri-La Asia’s revenues increased 1% to $2.08 billion, while net income increased 9% to $392.3 million.
”This stock is cheap relative to stated net asset value (0.8xbook). Net asset value is also under-stated, so it’s doubly cheap. The company has experienced strong long term cash flow relative to profits, and EPS growth has been exceptional over the last five years,” says Lai.
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