How to Share The “Hidden” Benefits of Controlling Swire Pacific?

When the real cost of any decision can only be measured by the value of the best alternative, often not known by outsiders and that must be forgone, the most needed thing investors must do is to pay attention to those decisions made by real stakeholders.

Perhaps, as one of the real stakeholders of Swire Pacific (SEHK:19/87), Merlin Swire is still attached to that decision of appointing himself as the incoming Chairman. But when he gave his opening remarks to a China business conference last year, he said he recognized that the used-to-be big business in a small city had now become “a small fish in a big pond”.

According to his words, 2018 was a year of consolidation and recovery. It implied that the coming years would be critical. Not only because he is now the living embodiment of the Swire’s value, as he is the eldest son of his late father, Adrian Swire (1932 – 2018), he also has a real sense of urgency to improve the group’s performance.

To induce someone to play the role of a Chairman, “hidden” material or emotional benefits may sometimes be necessary. In return, he may have the experience or knowledge that could yield some valuable transactions.

Here are the decisions that the group has made or planned for the future.

Gathering in of the crops

For some years, the group’s results had been affected by oil services exposures. The aviation division needs transformations. The China investments have mixed outcomes.

Be that as it may, the family might have known what was coming. It controls 82% of Swire Properties (SEHK:1972), currently worth HK$160Bn, and is already higher than its own market cap. Last year, disposals of non-core properties generated HK$10.2Bn, and will bring in HK$13.7Bn in 2019.

Freezing out the rival

Cathay might have been suffering from a lot of competition. But after the acquisition of Hong Kong Express, and by cutting the number of flights, it will not need to worry about maintaining the load factor at any cost. Although it may have the risk of loading up with debts, the future pricing decisions will become a bit more endogenous, particularly for the cargo line.

Cutting inefficiency

Privatizing HAECO at a premium that valued the engineer at HK$12Bn will increase the group’s efficiency. By the way, it has not been raising any fund for over 30 years. The company has a large skilled workforce. Some aircraft refurbishing, painting and satellite Wi-Fi setting-up jobs are in the pipeline. External client’s monies should be able to provide sufficient cash flow. That is the business model.

What does it mean for investors?

The group’s 2018 underlying profit increased 80% compared to 2017 and had total liquidity amounting to HK$43.2Bn, compared to relatively small capital and repayment commitments.

With plenty of cash standing by, the possibility seems to be higher that the family is anticipating profitable investments.

Superior voting class ‘B

The group operates a dual-class share structure. While ‘B’ shares carry the same voting rights, they are much cheaper and hence superior. For years, the family holds 70% of which, even though they only have one-fifth of the entitlements.

The ‘B’ shares are generally traded at bigger discounts, reflecting the “minority disadvantage” – that is, the value difference between the two classes, having the same voting rights but different cash flow rights, while held by outsiders instead of insiders, at present value.

How to share the benefits?

In fact, non-controlling shareholders will prefer the presence of a controlling stakeholder to reinvest better the cash generated, rather than paid it out as dividends. So long as the disadvantage can be turned into an advantage through the potential benefits of capital appreciation, as well as ongoing dividends, ‘B’ shares can share the hidden benefits at much lower costs.

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本文所提供的信息僅供一般參考之用,並不構成任何個人化的投資勸誘或建議。作者沒持有以上提及的股票。
HK MoneyClub (www.hkmoneyclub.com)