Special report | Hutchison Whampoa

Now for the fat-cow years

Lessons in survival from an Asian corporate legend

IF YOU WANT to hear some plain talk on the relative merits of family-controlled conglomerates, listen to Canning Fok, managing director of Hutchison Whampoa, one of the region’s biggest specimens with a value of $60 billion and a worldwide empire of ports, energy, property, telecoms and retail. “There’s a school of thought in America that widely held companies have better governance,” he says. “But if you look over the last ten years that has not happened. Just look at the big banks and all the chief executives going crazy.”

Hutch itself defies categorisation. It has a reputation as Asia’s most wily asset trader. Its patriarch and chairman, Li Ka-shing, was a refugee who fled China for Hong Kong in 1940. Having started by making plastic flowers, by 1979 he had bought control of Hutch, becoming the first Chinese in charge of one of Hong Kong’s big business houses, with roots in the 19th century. In 1994-2000 Hutch played a perfect hand in the nascent 2G mobile telecoms industry in Europe and America, building up businesses and selling them for astronomical prices.

Mr Fok clearly has an eye for the markets: the view from his desk is of Hong Kong harbour and two flickering Bloomberg screens. But for the past decade the real story at Hutch has been one of patient operating improvements after one of the trickiest patches in its history. Mr Fok describes the period as “the lean-cow years”. In 2000 Hutch won 3G telecoms licences across Europe, but at a heavy cost. The low point came in 2004-05 when the group’s core cashflow turned negative and net debt rose to a peak of 38% of net capital. Mr Fok says he is proud that the group did not make a cash call on its shareholders, cut its dividend or suffer a big credit-rating downgrade.

Now “the fat-cow years are coming.” The 3G unit is breaking even, although with $41 billion invested and $320m of free cashflow, its return on capital is still minuscule. And the other divisions have boomed. Retail, mainly health-and-beauty stores in Asia and Europe, has tripled its operating profit since 2007, as has the property and hotels unit, concentrated chiefly in Hong Kong and mainland China. The infrastructure division, which runs power plants and British water utilities, has doubled operating profits. Return on equity is moving back to respectable levels. The shares have soared.

Some argue that Hutch is a giant private-equity fund, but it has much longer holding periods than the barbarians of Wall Street, and Mr Fok says it is also far more integrated. The centre is closely involved in each business. In its chosen fields the company has global scale. That makes it sound like a multinational, but Hutch is different in three respects. It is likely to remain under family control: Mr Li’s son, Victor, is deputy chairman. It does not have a global brand because it thinks there is no money in it. And it has a fascination with financial engineering. In 2011 it partially spun off its ports in Hong Kong and south China into a listed trust in Singapore. In March this year it sold a 25% stake in its retail arm to Temasek, a Singaporean investment fund. Mr Fok says the aim is to show Hutch’s shareholders what other people are prepared to pay for its assets.

Hutch eschews any grand strategic vision. There is still a lot of mileage in the core business, Mr Fok says. Entering manufacturing or finance is out of the question. The internet is not really Hutch’s thing. China presents a vast opportunity but requires great care because fierce competition often depresses profits. Instead, Mr Fok believes in following a set of rules. Emotion must play no part in decisions. Numbers should be analysed closely. And hype is to be avoided at all costs. “You have to measure opportunities objectively, otherwise it all becomes about slogans and you achieve nothing.”

This article appeared in the Special report section of the print edition under the headline "Now for the fat-cow years"

A world to conquer

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