Cheung Kong (Holdings) Limited

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Cheung Kong (Holdings) Limited

China Building
29 Queen’s Road Central
Hong Kong
(5) 526 6911
Fax: (5) 845 2940

Public Company
Incorporated: 1972
Employees: 16,000
Sales: HK$2.78 billion (US$356.49 million)Stock Exchange: Hong Kong

Cheung Kong (Holdings) is among Hong Kong’s leading property and investment development companies. It is expanding its network into North America and Europe as Hong Kong nears its transfer to Chinese government in 1997. Cheung Kong is the flagship company for the property-to-telecommunications empire built up in Hong Kong by Li Ka-shing, who started his meteoric rise in business around 1960 by making plastic flowers.

Known to his colleagues as K.S. Li, the Hong Kong tycoon was born in Chiu Chow, in southern China, in 1928. He controls, through a series of interlocking stock market holdings, over 14% of stock registered on the Hong Kong exchange. Besides residential property developments, Li owns a land bank of 22.5 million square feet.

Cheung Kong (Holdings) also includes highly profitable cement, quarrying, and ready-mixed concrete operations. At the end of 1972, after its first year on the Hong Kong stock market, the company had a total of 40 sites in its property portfolio, with a total floor area—after development—of about 2.4 million square feet of residential and commercial space.

Among the projects Cheung Kong had onstream were a number of residential developments. Typical of these was the development of the Castle Peak Hotel, in the colony’s New Territories. Originally occupying a site of over 84,000 square feet, the former hotel was doubled in size and turned into several six-story, expensive blocks of flats with a total floor area of over 167,000 square feet.

The company also planned to develop a number of warehouses and factories, as well as offices. Recognizing the static nature of the Hong Kong property market in 1973, Li Ka-shing informed his shareholders that his company would look to increase its supply of regular rental income from its properties, to protect their interests.

This increased effort at boosting rental income paid off a year later in 1974 when Hong Kong’s property market slipped into depression. Cheung Kong’s development plans continued undeterred, with a 10% rise in profits to HK$48.2 million, against profits of HK$43.7 million a year earlier.

This improved performance was encouraged by rent reviews which boosted income. One example was Regent House, on Queen’s Road Central. Cheung Kong had planned to redevelop the property, but put back plans after the rental income increased to HK$4.6 million, from about HK$3 million, per year. Because it would take three years to develop the site, and would cost HK$16 million, a loss of some HK$13.8 million from leaving the building vacant was not thought feasible, particularly when depressed conditions in the colony made the prospects of any future developments doubtful.

The continuing downturn in fortunes hit Cheung Kong’s profits in 1975, which dipped 6% to HK$45.6 million. In that year, the company saw the fruits of a joint venture into which it had entered the previous year with the Canadian Imperial Bank of Commerce. The joint venture, Canadian Eastern Finance, acquired for HK$85,000 a site along the Hong Kong harbor of some 864,000 square feet. On 53,000 square feet of the site, the company planned to build ten expensive residential units, each 24 stories high, and a car park. On the rest of the site, recreation facilities—including a swimming pool and sports ground—were planned.

At the end of 1975 Cheung Kong had some 5.1 million square feet of commercial and residential space. This property portfolio jumped by more than 20% in size over the next year to stand at a total of 6.35 million square feet at the end of 1976. Of this space, 3.62 million square feet were said by the company to be in residential property, while 1.04 million square feet and 1.65 million square feet were bound up in commercial and industrial space, respectively.

Improving market conditions in Hong Kong in 1976 helped boost the company’s profits that year to HK$58.8 million, a rise of 29% over the previous year. The renown Li Ka-shing was gaining in the Hong Kong financial community was confirmed a year later, in 1977, when Cheung Kong announced its profits up a further 45% to HK$85.55 million. This improvement coincided with a 38% rise in total space in the company’s property portfolio, to 10.2 million square feet in size.

Among the company’s new properties was the celebrated Tiger Balm Gardens, a site of 150,000 square feet originally developed by the inventor of Tiger Balm, an ointment used to cure a number of minor ailments. Cheung Kong bought the site with the aim of building high-class residential units, a practice for which it was becoming widely known in the colony.

In 1977 the company also diversified into the hotel trade. It acquired Wynncor Limited, which owned the 800-room Hong Kong Hilton Hotel and shopping arcade, and nearly all of the 400-room Bali Hyatt Hotel.

While Hong Kong’s local property market was improving, Li Ka-shing warned in 1977 that various restrictions from the emerging European Common Market, based in Brussels, which included anti-dumping measures against Asian electronic products, were affecting export prospects for Cheung Kong. The reason was that Hong Kong’s industry sector was felt to be tied in fortunes to that of the local property market. When the first failed, the second was certain to feel the effects.

In 1978 the company’s profits continued to rise. Total profits for the year reached HK$132.6 million, a 55% increase over the previous year. In that year, Cheung Kong sold a number of properties not producing sufficient rental income, including sites in the Kwun Tong region of Kowloon, and on Hennessy Road. The company was now gaining wide renown throughout Hong Kong, as demonstrated by the publicity given to each pre-let of its completed properties. The value of rents reached by each pre-letting—the practice whereby a property developer signs up a tenant for the building or property he is about to build—would give the local property market an indication of the going-rates to follow.

As Li Ka-shing told his shareholders that year: “In both prestige and business expansion, the group has entered a new era, and it is my opinion that 1978 has been an exceptionally important year in the group’s development.” Li cautioned that the effects of high interest rates in Hong Kong and abroad would affect the local property market. He added, however, that mortgages and property developments would provide a useful hedge to investors against threatened inflation. Also in 1978, Cheung Kong took a 22% stake in Green Island Cement, increasing its holdings on the construction side.

In 1979 the company saw a 91.6% rise in profits to HK$254.1 million. Among the developments then under construction was a joint-venture project with four other property companies to build an office development on the Hong Kong Macau Ferry Pier. With a 20% interest in the Shun Tak Centre, due for completion in 1984, the final complex was to include a total 1.5 million square feet of office space.

In the same year, Cheung Kong purchased a substantial share stake in Hutchison Whampoa, a group whose interests included electricity, communications, wholesaling, and distribution. Hutchison was also involved in manufacturing, quarrying, and concrete markets.

The initial stake in Hutchison was for 90 million shares in the group, or 24.4% of outstanding shares, bought for HK$693 million. The company increased its stake in Hutchison to 30% by the end of the year.

At the same time, Li Ka-shing warned shareholders that continuing high interest rates in the colony, and emerging rent control restriction, led him to believe that the local property market was showing signs of leveling off. Continuing economic difficulties in the Hong Kong economy continued to color the business climate for Cheung Kong in 1980. Li Ka-shing, nevertheless, maintained an optimistic air. “There is a slight slackening in the property market,” he told shareholders. “But this phase will pass with a lowering of interest rates and an upturn in trade. I am, therefore, cautiously optimistic about the future of the Hong Kong property market.”

The 1980 profit rise of 176%, to HK$701.3 million, gave grounds for this optimism, but also reflected first-time profit contributions from Hutchison Whampoa and Green Island Cement. In addition, the Hong Kong Hilton Hotel increased its profits for 1980 by 34%, compared with the previous year.

During 1981 Cheung Kong began amassing an overseas portfolio that would grow over the coming years. Overseas investments totaled HK$125 million in value, or 3% of the group’s total assets. These included a number of commercial buildings in the United States with 950,000 square feet of space, and a shopping center with over 370,000 square feet of freehold space. This growing overseas portfolio was motivated by continuing recessionary conditions in the Hong Kong property market, and anxiety about any fallout from fears of 1997, when control of the colony would revert to China.

At the time, Li Ka-shing signaled to shareholders that it would be difficult, given the current trading conditions, to maintain in 1982 the same high level of profit recorded in 1981. In that year, profits were raised 97% from the previous year’s level, to HK$1.38 billion.

Li Ka-shing’s profit warning turned out to be timely. A decline was suffered across the board by the company at the end of 1982. Overall profits declined by 62% to HK$525.6 million. Profits at the Green Island Cement company tumbled by 65%, and were affected, according to the company, by a slowdown in the colony’s construction industry, bad weather, and large imports of Japanese cement. Even more difficult problems were projected for 1983.

Hutchison Whampoa, on the other hand, increased profits by 20%. Yet even here Cheung Kong forecast reduced profits for its subsidiary in 1983. At the Hong Kong Hilton Hotel, profits were 10% lower than in 1982, reflecting strong competition from new hotels coming on stream in the colony, and a fall in the worldwide tourist trade owing to recessionary pressures in Europe and the United States.

Li Ka-shing had few words of consolation for his shareholders at the time. As he saw the local property market during 1982, “Property prices plunged and hesitation on the part of investors combined with generally weakening purchasing power left the market in a very depressed state from which appreciable recovery is unlikely in the short term.”

Matters did indeed deteriorate still further in 1983. The speculator-led boom in property prices and rents of the previous few years came to an abrupt halt, curbed by high interest rates and political tensions surrounding the future of the colony. As a result, Cheung Kong’s annual profits fell 22% to HK$408.8 million. Green Island Cement became loss-making as the Hong Kong construction industry faced depression conditions.

Investors in Hong Kong were maintaining a wait-and-see attitude as conditions in the United States and European markets began to improve. At the same time, the property market was expected to lag behind as lower interest rates allowed for growth worldwide, and therefore investment in commercial and residential properties throughout the colony would be delayed.

This situation was confirmed by Cheung Kong’s 1984 profits of HK$213.5 million, a fall of 47% compared with a year earlier. The company at this time was making fewer property acquisitions than usual for future developments. Two notable acquisitions were a site of 12,600 square feet on Queen’s Road Central, destined to become a 130,000-square-foot office complex; and an 18,000-square-foot site in Repulse Bay, which was to provide space for a 36,000-square-foot, 12-story luxury residential complex.

A long-awaited improvement in earnings for the company came in 1985 when profits reached HK$551.7 million, 158% higher than the previous year. The effects on earnings from the three-year-long recession appeared to be over. The company insisted that prices for residential property were on the rise, although the demand for commercial and industrial holdings had not yet meant substantially higher prices.

At this time, Hong Kong appeared to throw off some of the anxiety that had gripped the colony after the signing of the Sino-British joint declaration in December 1984, signaling a return to Chinese sovereignty in 1997. Many Hong Kong residents had been hesitant to buy homes or rent offices until the ink on the newly signed agreement was completely dry.

For Li Ka-shing, fears over investing for the future in Hong Kong were partly allayed by his influence among Chinese leaders in Beijing. The entrepreneur was not a man to be ignored when, for example, Hutchison Whampoa imported each year 850,000 tons of coal from China, or 14% of the country’s annual output. Li Ka-shing was also at this time working with China International Trust and Investment Corporation, China’s investment bank, to build a US$10 billion electricity plant in China’s eastern province of Jiangsu.

Large profit gains resulted in 1986, when Hong Kong’s economy grew by 9% over the year. Cheung Kong reported earnings of HK$1.28 billion, an increase of 128% on the year before. The improvements was helped by the completion of a number of developments, and by the company’s sale of Hong Kong’s Hilton Hotel for HK$1.03 billion to Hongkong Electric, which Li Ka-shing also owned.

Cheung Kong announced at this time a reorganization of its management structure. In particular, Hongkong Electric’s utility and non-utility businesses were to be split. The non-utility holdings—including the Hong Kong Hilton Hotel and a 43% stake in Husky Oil of Canada—were to become part of a new firm, Cavendish International Holdings.

The Cheung Kong/Hutchison/Electric group had by now become very important in Hong Kong. Shares in Li Ka-shing’s empire accounted for 15% of all shares traded on the Hong Kong stock market.

Cheung Kong moved ahead in 1987, producing profits of HK$1.58 billion, 23% over earnings posted a year earlier. The number of properties for development that the company was acquiring continued to increase. They included an 8.8 hectare site and a 15.5 hectare site which together would require up to HK$9 billion in investment before yielding more than 17,000 residential units, and two large shopping centers with total floor space of 1.22 million square feet. Profits at Hutchison Whampoa reached HK$2.62 billion. The property market in Hong Kong suffered slightly from the effects of the worldwide stock market crash of October 1987, but the underlying strength of the Hong Kong economy helped steady the local property market and increase demand for residential and office space.

A shortage of office space in Hong Kong contributed to strong profits for Cheung Kong in 1989. Earnings were posted at HK$2.09 billion, a 33% increase over the previous year. On the strength of improved earnings, the company announced that it would purchase all outstanding shares in Green Island Cement (Holdings) not already owned by Cheung Kong. Li Ka-shing told his shareholders in his 1989 accounts that he was optimistic about the outlook for the colony’s property market, and that demand and prices for properties were likely to hold up.

The Hong Kong government announced the building of a new airport for the colony, for which Cheung Kong received lucrative contracts. In 1989, the company posted profits of HK$2.77 billion, 33% up over earnings a year earlier. At the same time, Li Ka-shing saw the colony’s property market entering a period of consolidation. This was reflected in profits for the first six months of 1990 when Cheung Kong’s earnings rose only 3% to HK$948 million.

Around this time, Li Ka-shing made a HK$484 million profit when Cheung Kong sold its 4.8% stake in Cable and Wireless, the U.K.-based telecommunications giant. The company, having bought the stake in 1987, profited from a rising Cable and Wireless share price, and the relative strength of sterling in the intervening period. For the future, Li Ka-shing’s fortunes appear assured owing to his increasing influence in Hong Kong, and the efforts of his companies to diversify into China, Europe, and North America.