CKHUY - CK Hutchison: Buyback Drought Draws Attention Despite Value Unlocking Potential

2024-01-16 06:55:53 ET

Summary

• CK Hutchison hasn't repurchased any shares in over a year, and the share buyback drought might last till late March when the company reveals its full-year FY 2023 financial performance.
• There are corporate actions that the Company could take to unlock the value of its shares such as doing a secondary listing in Europe.
• I keep my Hold rating for CKHUY unchanged, considering both the absence of share repurchases and the potential value-unlocking corporate actions.

Elevator Pitch

I still have a Neutral view and Hold rating for CK Hutchison Holdings Limited ( CKHUY ) [1:HK].

CK Hutchison's Hong Kong-listed shares and OTC shares have increased marginally by +0.5% (source: S&P Capital IQ ) and +0.9% (source: Seeking Alpha ) following the publication of my earlier August 18, 2023 article . In the August 2023 write-up, I highlighted CK Hutchison's lower-than-expected dividend distribution for the first half of 2023 and potential events that might bring about a favorable re-rating of the stock's valuations.

For the current update, my focus is on CK Hutchison's share buyback drought and the possible value-unlocking initiatives that the company could consider adopting to enhance its valuations. I stick with a Hold rating for the stock, considering the absence of buybacks and the potential for shareholder value enhancement such as a secondary or dual listing.

Readers should be aware that the average daily trading values for CK Hutchison's Hong Kong-listed and OTC shares were $15 million and $2 million, respectively in the last 10 trading days as per S&P Capital IQ . The company's relatively more liquid shares listed on the Hong Kong Stock Exchange can be bought or sold with US brokerages like Interactive Brokers.

Absence Of Share Repurchases For The Past One Year

At the time of writing, CK Hutchison hasn't bought back any of its own shares for more than a year. The last time the company did share repurchases was on December 8, 2022 , when it bought back 210,000 of its Hong Kong-listed shares.

According to Hong Kong Economic Times' prior August 2023 news article (Chinese language source), CK Hutchison's managing director was quoted (translated using Google Translate) as saying at the 1H 2023 results briefing that "repurchases may be considered for the rest of the year, but the action and scale will be dependent on the market environment." The company's management commentary might have raised expectations that there is a good chance that CK Hutchison will allocate at least a certain proportion of its excess capital to share buybacks in 2H 2023 which wasn't the case.

The company is expected to announce its full-year FY 2023 financial results on March 18, 2024, as per consensus estimates taken from S&P Capital IQ . Hong Kong-listed companies aren't allowed to execute share repurchases for a month before their earnings disclosure. This implies that CK Hutchison won't be buying back the company's shares between mid-February and mid-March. In other words, there is a very narrow window in the mid-January to mid-February time frame where share buybacks are still possible. As such, CK Hutchison's share buyback drought is likely to continue till the middle of March this year at the very least.

CK Hutchison had traded at consensus forward P/E and historical trailing P/B multiples in the 5.2-6.8 times and the 0.28-0.40 times (source: S&P Capital IQ ) valuation range, respectively in the last year. It is worth watching CK Hutchison's disclosures on capital allocation at the FY 2023 earnings call in March, as the company has a high bar to convince investors that there have been more compelling opportunities to invest its excess capital apart from its own shares.

There Are Actions That Could Be Taken To Unlock Value

Late last month, Reuters published a commentary piece on CK Hutchison titled "The Li Clan Will Deal Their Way Out Of Value Trap." A change in "primary listing to another exchange" and privatizing CK Hutchison "with the help of a private equity group before breaking it up" were identified as two potential value-unlocking moves that the company's controlling shareholder (the Li family) could consider.

CK Hutchison won't be the first Hong Kong-listed company to contemplate a potential listing outside of Hong Kong. Prada S.p.A. ( PRDSY ) ( PRDSF ) [1913:HK] is thinking of a "dual-listing in Milan" as reported by The Financial Times last year. Separately, Samsonite International S.A. ( SMSOF ) ( SMSEY ) [1910:HK] is considering a "secondary listing" as per Hong Kong financial news portal AAStocks' January 9, 2023 article citing a report from Morgan Stanley ( MS ). CK Hutchison generated 6% and 39% of its 1H 2023 operating income from Mainland China/Hong Kong and Europe, respectively. Therefore, there is a strong case to be made for CK Hutchison listing its shares overseas to boost its valuations.

On the other hand, a privatization of CK Hutchison makes a lot of sense as well. As indicated earlier in this article, the market values CK Hutchison at a mid-single digit P/E multiple and less than half of book value now, which implies that there is motivation for CK Hutchison's controlling shareholder to take full ownership of the company by paying a reasonable premium to the stock's current price. If CK Hutchison subsequently becomes a private company under the complete control of the Li family, it will be easier and quicker (without the need for minority shareholder approvals) for CK Hutchison to make the relevant business and asset allocation (e.g. divestments or spin-offs) decisions going forward.

In summary, CK Hutchison's shares won't stay cheap, if the controlling shareholder is willing to engage in corporate actions that unlock value for existing shareholders.

Concluding Thoughts

In my view, the current risk-reward for CK Hutchison is balanced, which translates into a Hold rating for the stock. The shareholder capital return catalyst for the company is less likely to materialize in the very near term, but there is tangible value unlocking drivers for CK Hutchison like privatization or a secondary listing.

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