Making the right moves for shareholder benefits

Hutchison Whampoa to exit some core areas and buy more overseas assets

Acquiring low-priced overseas assets and exiting some mature businesses is Hong Kong-based conglomerate Hutchison Whampoa Ltd's strategy to maintain sustained growth for the year.

The blue chip group, controlled by tycoon Li Ka-shing, had earlier reported a better-than-expected net profit during the first six months of the year, in early August, with interim profit up 23 percent to HK$12.4 billion ($1.6 billion) from HK$10.1 billion during the same period a year ago. It was higher than the HK$10.8 billion median estimated by analysts.

The result has mainly been attributed to the company's diversification strategy, with overseas markets becoming a major source of revenue and profit.

During the first six months of the year, Europe accounted for more than 43 percent of HWL's revenue compared with 41 percent during the same period a year ago. The revenue contribution from Hong Kong, on the other hand, slipped from 16 percent in 2012 to 15 percent this year.

The earnings before interest, taxes, depreciation and amortization - EBITDA - further reiterated the importance of the European market to HWL. The European region provided 35 percent of the EBITDA for the company, up from 32 percent a year ago. Hong Kong's contribution rose by 1 percentage point to 15 percent.

HWL chairman Li Ka-shing maintained in the earnings statement: "The company would be agile in seizing investment opportunities for long-term growth and achieve new growth through the continued pursuit of quality investments both in Hong Kong and abroad to create further value for shareholders."

Because the global economy seems to be set in a recovery trajectory, it appears that Li is betting on proactive overseas asset acquisitions to secure the conglomerate's future profit growth potential.

The possible sale of his Hong Kong supermarket chain is a good case in illustrating this point.

HWL said on July 20 that it is conducting a strategic review of its PARKnSHOP supermarket retail business, which had approximately 345 stores in Hong Kong, Macao and the mainland and had revenues of HK$21.7 billion in 2012, to optimize shareholder value.

"The cash flow contributed by the PARKnSHOP retail grocery business to the HWL group is already low. Its profit contribution to the conglomerate has also declined to a single-digit growth. The investment return on the PARKnSHOP retail grocery business has peaked," says Castor Pang, head of research at Hong Kong-based brokerage Core Pacific-Yamaichi.

"Cashing the PARKnSHOP grocery retail asset and using the proceeds to invest in relatively cheap European assets can help HWL to leverage greater asset valuation growth potential," Pang says in his research report on the group.

Although PARKnSHOP is one of the dominant supermarket chains in Hong Kong, the city's retail grocery market is already saturated so market growth potential is limited.

Jardine Matheson-controlled Wellcome and HWL's PARKnSHOP are the main players in the Hong Kong retail grocery industry. The two supermarket chains between them accounted for more than 73 percent of the total supermarket turnover in Hong Kong in 2012, according to data provided by consultancy firm Euromonitor.