Uranium Shares Will Go Critical Mr
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With Grant Williams Uranium Shares Will Go Critical Mr. McGuire: I want to say one word to you. Just one word. INSIDE: Benjamin: Yes, sir. ISSUE 3 • October 2012 Mr. McGuire: Are you listening? Introduction ....................1 Benjamin: Yes, I am. Under The Radar ............10 Wrap-Up ........................20 Mr. McGuire: Plastics. Benjamin: Exactly how do you mean? Mr. McGuire: There’s a great future in plastics. Think about it. Will you think about it? © Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page. BULL’S EYE INVESTOR OCTOBER 2012 Sandwiched between the Pearl River Delta and the South China Sea lies one of two Chinese Special Administrative Regions (SAR). It measures all of 426 square miles – roughly a third the size of Rhode Island; however, whilst Rhode Island plays home to one million people, making it the second most densely populated state in America, the Hong Kong SAR crams 7 million people within its borders, which makes it the fourth most densely populated country on earth. Hong Kong is split into three well-defined areas: Kowloon; the New Territories, which extend from the coast of mainland China inland by some 15 miles; and Hong Kong Island, home to one of the world’s most spectacular cityscapes and a thriving business and trading centre which has grown up around one of the best natural harbours in the world. (The name Hong Kong actually translates as ‘Fragrant Harbour’, but believe me – I can tell you, having lived there for three years – it is anything but fragrant.) Hong Kong Island was colonized by the British after the first Opium War (1839-1842), and the boundaries of the colony were slowly extended inland, encompassing the Kowloon Peninsula and what are now known as the New Territories. Apart from a brief spell under Japanese occupation during WWII, Britain ruled Hong Kong until 1997. In that year, as a result of the Sino-British Joint Declaration signed by Margaret Thatcher and Deng Xiaoping in December 1984, Hong Kong was returned to Chinese rule after 156 years. Included in the Sino-British Joint Declaration were the establishment of HK’s SAR status and the implementation of the principle of ‘one country, two systems’, to ensure that Hong Kong’s capitalist model would endure and that it would remain outside the PRC’s socialist system for fifty years. In 1928, the city of Chaozhou (pronounced “chew-chow”) in Guangdong Province in mainland China would have seemed just about the most unlikely place in the world for a boy to be born who would grow up to become Asia’s richest person some 84 years later (and the ninth-richest person in the world); but, on June 13 of that year, that is exactly what happened, when Li Ka-shing entered the world. This boy would grow to become not only fabulously wealthy but also incredibly powerful and deeply respected throughout Asia for his philanthropic donations. Forced to leave school at 15 after the death of his father in Hong Kong, Li secured a job in a plastics factory and worked grueling 16-hour days to support his family whilst saving money in order to start his own business. By 1950, Li had acquired enough knowledge to start his own plastics manufacturing company – though he needed to borrow money from friends and family in order to do so – and he embarked upon a career that would prove the words of Mr. Braddock to be eerily profound: there really was a great future in plastics. How great? Well, there is no better illustration than the remarkable rise of Li Ka-shing. Li’s first products were high-quality, low-cost plastic flowers. After Li learned how to mix colours in such a way as to make his flowers highly realistic, his company grew to be the largest supplier of plastic flowers in Asia. It was this seemingly simple business idea that set Li on his way to a net worth of over US$25 billion. Yes, there really was a future in plastics. In 1958, the lease on Li’s factory site expired. Unable to secure an extension, he was forced to buy and develop a new site for his plant; and it was this experience that persuaded him that there was an even more lucrative future in real estate. Page 2 BULL’S EYE INVESTOR OCTOBER 2012 In 1967, Hong Kong saw a series of pro-communist riots that escalated to the point where armed militia were firing on HK police officers in the streets at Sha Tau Kok, in the northeast corner of Hong Kong, near the border with mainland China. At the height of the rioting, thousands fled Hong Kong and property prices plummeted. Flush with cash from his thriving plastics business, Li was able to buy up huge parcels of land at extremely low prices; and it was the establishment of this land bank that would prove to be the foundation of one of the largest and most powerful corporations Asia has ever seen. Li named his real estate development company Cheung Kong. In 1972, Cheung Kong was listed on the Hong Kong Stock Exchange. Five years later, the company successfully bid for development sites above two of the main MTR stations in Central Hong Kong. In 1979, Li purchased a 22% stake in the multinational conglomerate Hutchison Whampoa from HSBC, which had stepped in to rescue the company from bankruptcy. Hutchison was (and is) a hugely diversified international company that has six key business lines: Ports & related services Retail Telecommunications Property & hotels Energy Infrastructure The company also has an extensive investment portfolio. Hutchison Whampoa owns 76% of the shares of Cheung Kong Infrastructure Holdings Ltd., the largest diversified infrastructure company listed on the Hong Kong Stock Exchange. Six years after the acquisition of Hutchison, Cheung Kong acquired Hongkong Electric Holdings Limited (renamed Power Assets Holdings in 2011), which owned Hongkong Electric Company, one of Hong Kong’s two electricity providers. From those humble beginnings in plastic flower manufacturing, Li’s empire grew to the point where, today, his companies account for 15% of the market cap of the Hong Kong Stock Exchange. Page 3 BULL’S EYE INVESTOR OCTOBER 2012 Source: Cheung Kong Today, Li’s Cheung Kong group companies have a total market capitalization of HK$817 billion, or US$105.5 billion (US$1 = HK$7.75). Not bad for a high-school dropout who started out making plastic flowers. So, that’s a little background on how Cheung Kong grew to be one of the largest companies in Hong Kong, but what does the company look like today? Well, in its recent half-yearly results for 1H 2012, which were released on August 2, the company announced a net profit of HK$15.45 billion (US$2 billion) and earnings per share of HK$6.67 (US$0.86) in what it called a ‘challenging operating environment.’ The principal drag on Cheung Kong’s earnings came from Hutchison Whampoa, which saw lower net profits than in 2011, after a large one-time gain the previous year. Without Hutchison Whampoa, Cheung Kong’s profits rose an incremental 2% to HK$10.4 billion, and the interim dividend was maintained at HK$0.53 (US$0.068). The FY dividend has grown at a 7% CAGR for a decade and, although that level looks to weaken slightly to around 6% over the next three years, that still gives a healthy payout ratio of ~30%. Despite the fact that the company’s most recent set of results are unspectacular, there are good reasons to expect Cheung Kong to provide an excellent return going forward, given the historically low valuation at which it currently trades and the strong cash position it maintains, giving it the ability to make accretive purchases and replenish its diminishing land bank. Page 4 BULL’S EYE INVESTOR OCTOBER 2012 Source: Bloomberg/CLSA That land bank, and the company’s valuation relative to it, are one of the keys to Cheung Kong’s prospects. Cheung Kong’s core business is property development – specifically concentrated in the upper end of the residential property sector. Since Li’s first foray into land ownership and development upon the expiration of his lease back in 1958, the company has established itself as the largest developer of such properties in Hong Kong, with a 35% market share. The success of the empire Li has built over the last 62 years is rooted in the supply/demand equation on that small, overpopulated rock in the South China Sea, allied with an uncanny ability to buy land when the opportunity presents itself and to rarely overpay. The Hong Kong property market is not a place for the faint of heart, as governmental policies to restrict and regulate land use can cause temporary ‘shocks’ and supply/demand imbalances when new structural shifts in policy occur. There is no better example of this phenomenon than the period 1997-2003. Immediately after ‘the Handover’ to China saw British rule of Hong Kong end, Asia endured a crippling economic crisis, which began when Thailand was forced to break its peg to the US dollar. The weakness spread quickly throughout the entire region as currencies slumped, stock markets were savagely sold, and asset prices declined precipitously. In Hong Kong the property market fell 60%. As can be seen from the chart below, which shows Cheung Kong’s development projects, the company steadily increased its holdings during that downturn, picking up prime real estate at sizeable discounts as less-conservative companies were forced to liquidate holdings into what was a buyers’ market.