Swire Pacific: Is it Worth Buying Shares?

Hong Kong’s stock market has long been characterised by tycoons and conglomerates. Local tycoon Li Ka-Shing is also known as “Superman” among local investors given his legendary investment nous.

However, there are also the older conglomerates which have their origins in the days of British colonialism. Among them is Jardine Matheson Holdings Limited (SGX: J36), which is now listed only in Singapore.

Investors in Hong Kong, though, will be more familiar with the other giant: Swire Pacific Ltd (SEHK: 19). It owns stakes in a range of businesses, from its real estate spin-off Swire Properties Limited (SEHK: 1972) to the city’s flagship carrier Cathay Pacific Airways Ltd (SEHK: 293).

However, for investors, is it worth buying given the near-30% year-to-date drop in its share price?

Profit drags

The main issue I have with a conglomerate such as Swire Pacific is that it’s inherently inefficient for shareholders.

It’s no surprise that conglomerates are known to possess what is called a “conglomerate discount”. This is because as a whole, the entity trades at a discount to the sum of the parts (i.e. what the individual businesses are worth alone).

Swire is no exception to this. Fundamentally, its metrics have been at best just average over the past decade.

In fact, since 2010, it seems to be on a downward trajectory. This has been particularly true of return on equity (ROE), which was an abysmal 3.3% in 2019 (see below).

Meanwhile, its dividend per share (DPS) actually has a five-year compound annual growth rate of negative 5.1%.

Swire Pacific dividend

Source: Swire Pacific 2019 earnings presentation

Buy the best businesses

As investors, we should be focused on investing in the best businesses, regardless of geography or sector. The same should also be true of a conglomerate.

However, it seems that Swire Pacific is putatively intent on being in sectors that are persistently lossmaking.

One example is its Marine Services division, which in 2018 contributed about HK$5 billion (US$644.8 million) in losses – albeit with a one-time impairment charge. In 2019, this figure only narrowed slightly to a loss of HK$3.63 billion.

For investors in Asia, I believe avoiding conglomerates and the “conglomerate discount” can help avoid long-term losses in the stock market.