Company Reports

We downgrade our fair value estimate for CK Hutchison to HKD 60 from HKD 74 due to reduced earnings forecasts primarily from ports and telecom. Port earnings have been hit by the throughput decline and reduced storage income, which has been normalizing from the elevated 2022 levels as supply chain disruptions of that year improve. Telecom earnings have been hit by inflationary costs although tariff increases in the second half of the year should help cushion this impact into 2024. Free cash flow generation has also been hit by spectrum auctions with new spectrum acquired in Sweden in September for SEK 1.2 billion. The balance sheet has improved with net debt/EBITDA reducing to 2.8 times in 2022 from 4.5 times in 2018, supported by proceeds from tower asset sales. We expect leverage to increase slightly in 2023 due to lower earnings and free cash flow, but should improve again over the following years due to an earnings recovery. We retain our no moat rating for the stock because our view is that only its ports business, which represents around 25% of its value, has a moat. Despite this, we believe the stock is undervalued, trading on a forward price/earnings ratio of only around 6 times.

Conglomerate CK Hutchison Holdings is expected to continue focusing on acquisitions, spinoffs, and cost-containment to raise its profit. We think efforts to improve customer retention at its drugstore chain Watsons and the tweaks in its telecom activities will help drive profit. The steps toward recovery from the coronavirus pandemic in China and Hong Kong should help short-term growth, but this may be offset by rising inflation.

CK Hutchison and Vodafone have announced the details of the proposed merger of their U.K. telecommunications assets into a merged entity named MergeCo for now, in which CK Hutchison would own a 49% stake and Vodafone would own a 51% stake. Upon closing, Three UK and its subsidiaries will cease to be a subsidiary of CK Hutchison and will be deconsolidated from the consolidated financial statements of the company. As a result, the total assets and liabilities of the group are expected to be reduced by HKD 15.69 billion and HKD 15.73 billion, respectively, resulting in an expected increase in the group’s net assets of HKD 40 million. From a valuation perspective we estimate that if the U.K. telecom assets of the group increased in value by 50% as a result of the merger this would add around 5% to our valuation for CK Hutchison. However, we retain our existing fair value estimate for CK Hutchison of HKD 74 per share for now as the merger still needs approval from the Competition Markets Authority, which has had concerns in the past about the effects of telecom mergers on competition and consequently on telecom pricing. It will need to offset these concerns against the promise of a more profitable merged company that will increase investment in telecom networks and services than two less profitable ones, and on the potential for the larger merged company to provide more competition to the incumbent operators.

CK Hutchison’s 2022 result was solid at a consolidated level, with reported revenue increasing by 3%, net profit increasing by 10% and the dividend up 10% to HKD 2.93. After accounting for one-offs (mainly asset sales and impairment charges) underlying EBITDA was flat in reported currency terms and up 7% in local currency terms. Telecom was again the key disappointing segment, but this was largely offset by strength in ports and retail outside of China. As such, we nudged our fair value estimate down to HKD 74 from HKD 75. CKH remains relatively attractive as a value play but its telco segment struggles are an overhang in the absence of further consolidation in Europe. Nonetheless, CKH’s share price should find support as it trades on an attractive dividend yield of over 5% currently, coupled with an active share buyback policy.

Conglomerate CK Hutchison Holdings, or CKH, is expected to continue to focus on acquisitions, spinoffs and cost containment in order to raise its profit. We think efforts to improve customer retention at its drugstore chain Watsons, and the tweaks in its telecom activities will help drive profit on our view that activities are normalizing postpandemic. The steps toward recovery from the pandemic in China and Hong Kong should help short-term growth.

CK Hutchison’s, or CKH's, first-half 2022 contained many of the same themes as 2021 with the ports segment very strong, retail slightly below expectations, and the telco operations again reporting weaker-than-expected profitability. We think inflation and keen competition in the telco and retail space will eat into near-term margins. As such, we cut our fair value estimate to HKD 75 from HKD 78. CKH remains relatively attractive as a value investment but its telco segment struggles are an overhang in the absence of further consolidation in Europe. Nonetheless, CKH’s share price should find support as it trades on an attractive dividend yield of over 5% currently, coupled with an active share buyback policy.

Conglomerate CK Hutchison Holdings, or CKH, is expected to continue to focus on acquisitions, spinoffs and cost containment in order to raise its profit. We think efforts to improve customer retention at its drugstore chain Watsons, and the tweaks to its portfolio of telecom activities will help drive profit on our view that activities are gradually normalizing post pandemic. The next six months, however, could still present some challenges in China and Hong Kong, given the omicron variant spread.

We revise our projection for CK Hutchison's, or CKH's, 2022 earnings, removing a one-off gain and lower our financial expenses forecast. We tweak some assumptions after considering the possible impact from port and retail operations disruptions in China from the COVID-19 lockdowns. Our fair value estimate remains HKD 78. As CKH has not provided further clarity on its possible one-off gains related to its British telco tower assets sales and the merger of 3 Indonesia with Indosat Ooredoo, we believe it is difficult to provide accurate projections for this figure. This doesn't change our cash flow estimates. Forecast DPS is smoothened out to reflect a 2.5% annual growth. CKH remains attractive but we have a preference for infrastructure subsidiary CKI Holdings, given its inflation resistant earnings.

Conglomerate CK Hutchison Holdings, or CKH, is expected to continue to focus on acquisitions, spinoffs and cost containment in order to raise its profit. We think efforts to improve customer retention at its drugstore chain Watsons, and the tweaks to its portfolio of telecom activities will help drive profit on our view that activities are gradually normalizing post pandemic. The next six months, however, could still present some challenges in China and Hong Kong, given the omicron variant spread.

It was a mixed 2021 performance for CK Hutchison, or CKH, with the ports segment beating expectations, retail in line, but weaker-than-expected profitability from telco operations. We think inflation and keen competition in the telco and retail space will eat into near-term margins. As such, we cut our fair value estimate to HKD 78 from HKD 80, which also reflects drops in the market values of listed investments such as Hutchmed. CKH remains relatively attractive as a value play but its telco segment struggles are an overhang. Strategically, it needs to find merger partners in the U.K. telco space so the change in regulatory views toward telco operator consolidation in the U.K. could be positive. Nonetheless, CKH’s share price should find support as it trades on an attractive dividend yield of about 5% currently, coupled with an active share buyback policy. Dividends stay attractive in 2022 with profit from its U.K. tower assets sale.

Conglomerate CK Hutchison Holdings, or CKH, is expected to continue to focus on acquisitions, spin-offs and cost containment in order to raise its profit. We think efforts to improve customer retention at its drugstore chain Watsons, and the tweaks to its portfolio of telecom activities will help drive profit on our view that activities are gradually normalizing post pandemic. The next six months, however, could still present some challenges in China and Hong Kong, given the omicron variant spread.

Conglomerate CK Hutchison Holdings, or CKH, is expected to continue to focus on acquisitions, spin-offs and cost containment in order to raise its profit. We think efforts to improve customer retention at its drugstore chain Watsons, and the tweaks to its portfolio of telecom activities will help drive profit on our view that the brunt of the coronavirus impact is largely isolated to 2020.

While it’s way too early to say that CK Hutchison, or CKHH, has reversed its relative underperformance of the past few years, its share price has held up relatively well year to date, gaining 9.4% versus a flat Hang Seng Index. We think this points to the company’s defensive attributes, which are mainly a sustainable positive free cash flow, share buybacks and active capital management. We currently maintain our HKD 80 sum-of-parts based fair value estimate, and we think the shares are attractive in the present volatile environment. We expect CKHH’s dividend per share, or DPS, to grow 31% in 2021 and 6% in 2022, which implies a current dividend yield of 5.5% and 2022 of 5.8%. This includes our assumption for an annual buyback equating to 1% of total shares.

Conglomerate CK Hutchison Holdings, or CKH, is expected to continue to focus on acquisitions, spin-offs and cost containment in order to raise its profit. We think efforts to improve customer retention at its drugstore chain Watsons, and the tweaks to its portfolio of telecom activities will help drive profit on our view that the brunt of the coronavirus impact is largely isolated to 2020.

CK Hutchison's, or CKH's, European and Hong Kong telco operations division is showing a collectively sluggish top line down 2% for the nine months year-to-end September over the year-ago period. Its quarterly management update by the telco group indicates that this is mainly driven by ongoing competition in Italy. We expect that this will be offset by a currency tailwind on the CKH level and leave our core assumptions unchanged for 2021. We do, however, tweak our 2022 top-line forecast lower for 3 Italia's challenges to linger and some currency headwind. Also, management guides that the sale of the British tower assets will probably be completed in early 2022. This leads us to shift one-off gains, which we estimate at HKD 14.5 billion associated with this sale to 2022 but we note that gains related to its merger of its Indonesian business with Ooredoo could add to 2021 profit. We estimate net profit to be HKD 43.9 billion and HKD 51.6 billion in 2021 and 2022, respectively, inclusive of one-off gains. All in, there is limited impact to our fair value estimate, which remains at HKD 80 for CKH. Share buybacks have so far totaled 0.5% of the capital base in 2021, which doesn't move the needle much so shares outperformance is still in need of a catalyst.

While we see the merger with Ooredoo Indosat, or OI, as a positive boost to CK Hutchison's, or CKH's, Indonesian mobile telecommunication operations, it has minimal impact to our earnings outlook and fair value estimate for CKH. We estimate that CKH's 2022 profit may be lifted by less than 1% but it's still a good move as otherwise CKH's Indonesian mobile business is likely to stagnate in the face of intense competition. We should see improved scale from necessary investment in its 5G network. The announced merger caps negotiations that started last year so it should come as little surprise. We leave our fair value estimate unchanged at HKD 80 for CKH. CKH remains attractive to investors looking for value and shelter from market volatility.

CK Hutchison, or CKH, saw a decent first half recovery driven by its ports and retail segment activities. Telecom operations were flat with Indonesia suffering from the delta variant and Italy seeing reduced revenue on lower wholesale income from Iliad. On the whole, we have made some tweaks to our full-year forecast mainly to include noncash charges of HKD 19.0 billion. As a result, our 2021 profit forecast is reduced 29.9% to HKD 63.6 billion (profit of HKD 33.5 billion less one-off items) while subsequent years are lowered by 4%-5% on reduced currency tailwinds. Given that the charges have no impact on our free cash flow forecast, our fair value estimate is unchanged at HKD 80. We're hopeful that 3 Group starts to see a sustained improvement in revenue and returns given the investment being made into its services. Market reaction is positive with the bump up in the interim dividend to HKD 0.80 per share from HKD 0.61 in first half 2020 reflecting the climb back to prepandemic level.

Conglomerate CK Hutchison Holdings, or CKH, is expected to continue to focus on acquisitions, spin-offs and cost containment in order to raise its profit. We think efforts to improve customer retention at its drugstore chain Watsons, and the tweaks to its portfolio of telecom activities will help drive profit on our view that the brunt of the coronavirus impact is largely isolated to 2020.

Although CKH Holdings', or CKH's, 2020 net profit of HKD 29.1 billion and DPS of HKD 2.31 fell short of our expectations, the deviation was mainly due to larger impairments on the CKH level for Husky Energy and lesser tower sales gains reflected in 2020. Group EBITDA margin slipped to 28.7% in 2020 from 32.5% in 2019 but operating cash flow held up much better than we anticipated on strong working capital management. Overall, we raise our profit outlook and our fair value estimate rises to HKD 80 from HKD 78. We think CKH remains attractive at the current price level, particularly with ongoing activities to strengthen its telco market position via mergers and a share buyback policy to provide support.

Conglomerate CK Hutchison Holdings, or CKH, is expected to continue to focus on acquisitions, spin-offs and cost containment in order to raise its profit. We think efforts to improve customer retention at its drugstore chain Watsons, the merger of Husky Energy and Cenovus, and the tweaks to its portfolio of telecommunication, or telco, activities will help drive profit on our view that the coronavirus impact is largely isolated to 2020.