Jackie Chan:
“Should I give them
the money or the
stock?”
Wing Yee Winnie Chan
Elaine Lam
Patrick Ng
Zhi Ming Vicky Wen
Jessie Zheng
Agenda
Background & Overview
Real Estate Market in Asia
Investment Risk & Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
Cheung Kong Group
•
•
•
•
The biggest conglomerate in Hong Kong
Owned by the richest man in HK: Li Ka Shing
Started from $1 in 1972 to $116 in 2000
Even in economic downturn today, still priced at $44
Cheung Kong (Holdings), Ltd.
• Company’s long-standing policy is : continuously enhance quality
and introduce innovations and initiatives to cater to changing needs
and trends in the property market, with the aim of brining quality to
our customers
Economic Overview of China
• External demand affected by Asian financial
crisis and global economic slowdown
• Domestic demand affected by increased pace in
corporate reform and weak rural income
• Government engagement in expansionary fiscal
monetary policy
Continued…
• By August 2001, China regained its growth
momentum
• Increase in external demand
• Property prices in Shanghai rose 30 – 50%
Economic Overview of Hong Kong
• Hong Kong suffered a sharp slowdown in
2001, with GDP growth decelerating to
0.1% from 10.5% the year earlier
• Residential property prices are 65% below
their 1997 peaks. They have been hurt by
oversupply and anemic demand.
Agenda
Background & Overview
Real Estate Market in Asia
Investment Risk & Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
Real Estate Industry in Asia
• China
– Many opportunities due to rapid economic growth,
rising per capita income and flood of foreign
investment.
– Real estate sector is highly profitable – averaging
20% margins.
– Property boom nearing bubble proportions
• In 2002, investment in real estate rose 36.6% while fixed-asset
investment rose only 24%
• Real estate vacancy rate at 26%
– The vacancy rate in the US is only 7%
– The international warning level is 10%
Real Estate Industry in Asia
• Hong Kong
– Asian financial crisis has led to economic contraction
• Falling property prices and wage rates
– Nearly half their peak
– Flooded property market
• 20,000 completed and 30,000 incomplete private residential
flats for sale on the market
• Property is no longer a major investment vehicle
Real Estate Industry in Asia
• Future Outlook
– Homes are more affordable – mortgage payments
comprise smaller share of income.
– Residential property prices 65% below their peak in
1997.
– The low tax rate in Hong Kong as compared to other
major international cities allow its citizens to have
more disposable income.
Foreign Market Developments
• Joint agreements with Hutchison Whampoa to
•
develop properties in Mainland China.
Other foreign markets
– Singapore
– United Kingdom
Agenda
Background & Overview
Real Estate Market in Asia
Investment Risk & Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
Investment Risks of China
• Economic Risks
– Situation
• Significant growth of economy
– GDP is expected to increase to an average of 7.9% in 2003
– Domestic demand is being stimulated through an expansionary
public investment program
• Concerns
– Different program carry on at the same time
• strengthening the financial system
• developing legal and regulatory framework for the economy
• promoting the role of private sector
• Risks
– Targeted long-term growth remain largely uncertain
Investment Risks of China
• Country Risks
– Situation
• Accession to the WTO
• Reexamining existing laws and statutes in accordance with
the framework of the WTO
– Risks
• Revised laws are relatively new and untested, the
enforcement of these laws under the improving law system
of China involve significant uncertainty
Investment Risks of Hong Kong
• Economic Risks
– Situation
• Slowly recovered economy
– 0.6% in 2001, 2.3% in 2002
• Low interest rate
– 2% per year
– Risks
• Increase in interest rate
– No more tendencies for interest rate to decrease
– However, with a slowly recovery market, government
might not plan to increase interest rate
– Investors better off
Investment Risks of Hong Kong
• Country Risks and Concerns
–
–
–
–
Suffering from Asia Financial Crisis since 1997
Weakening demand of economy
Drop in exports
However, market has been slowly recovered since
2002
• New Risks: SARS
– Currently Hong Kong and China have the highest
number of infected patients
Investment Risks of Cheung Kong
• Currency Exchange Rate Risks
– Most of Cheung Kong’s operations are located in Hong
Kong
– Economic downturns in Hong Kong since 1997
– Deflation observed in the market
– However, Hong Kong dollar remained constant
because of Linked Exchange Rate System
• Concerns
– A big share of business invested in China and London
– Restrictions on currency exchange might limit Cheung
Kong’s ability to utilize its revenue to fund business
activities
Investment Risks of Cheung Kong
• Company Risks and Concerns
– Reported increasing net profit during the past
decades
– The increase of net profit slowed down during recent
years
• Economic downturns in the world
• The real estate market in Hong Kong has become saturated
• Difficulties in obtaining larger market shares
• Losses from subsidiaries companies such as Tom.com
Agenda
Background & Overview
Real Estate Market in Asia
Investment Risk & Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
Liquidity
• Current Ratio > 1 for the Past 3 Years
– High level of Liquidity
– Increasing
• Decreasing Quick Ratio
– Using cash and securities to pay off liabilities and
purchase inventories
Leverage Ratio
• Increasing Long Term Debt Ratio
– Relies more on equity than debt financing
• Lower Debt-to-Assets Ratio
– Advantage in borrowing additional funds
• Interest Coverage Ratio
– Dramatic decrease from 88.18 to 6.87
• Negative Operating Cash Flow to Total Liability
Profitability
• Profit Margin
– Over 100% in 1999 and 2000 but decreasing
– Low in percentage of operating profit
– Volatile
• Decreasing Return on Assets
• Return on Equity
– Decreased from 46% to 6% in 2000
Agenda
Background & Overview
Real Estate Market in Asia
Investment Risk & Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
CAPM
Hang Seng Index
Date
• Risk-free Rate – 10
•
•
•
year Exchange Fund
Notes = 4.40%
Market Return – Hang
Seng Index = 8.83%
Beta = 1.079
CAPM = 9.18%
Adj. Close*
Dec-88
2,687.40
Dec-89
2,836.60
Dec-90
3,024.00
Dec-91
4,297.30
Dec-92
5,512.40
Dec-93
11,888.40
Dec-94
8,191.00
Dec-95
10,073.40
Dec-96
13,451.50
Dec-97
10,722.80
Dec-98
10,048.58
Dec-99
16,962.10
Dec-00
15,095.53
Dec-01
10,598.55
Dec-02
9,561.63
(Geometric Avg.)
8.83%
Altman’s Z-score – Cost of Debt
• Z-score = 6.72
EM Score = 3.25 + 6.56(X1) +
3.26(X2) + 6.72(X3) + 1.05(X4)
• Bond Rating = A
• Cost of Debt = 6.2%
Cost of Debt = Risk free rate +
Default spread
WACC & Goldman Model
WACC
Equity-to-Total Capital
Debt-to-Total Capital
Cost of Equity
Goldman Model
HK Risk Free Rate
4.40%
US Risk Free Rate
3.93%
SYS
0.47%
Beta
1.079
World Market Return
8.07%
88.50%
11.50%
9.18%
Cost of Debt
6.20%
Tax Rate
9.10%
World Market Premium
4.14%
WACC
8.77%
Int'l Cost of Capital
9.35%
Why DDM?
•
•
•
•
Stable Growth – See following table
Dividend – long term earning power & Profitability
Dividend vs. EPS – foreseeability
Suitable for non-controlling perspective
1996
1997
1998
1999
2000
2001
DPS
$1.38
$1.62
$1.16
$1.38
$1.60
$1.60
Growth of DPS
3.00%
Justified Value of Stock
• DDM Formula:
•
•
•
•
Current EPS * (1+Growth of Earnings) * Payout
Ratio / (Cost of Equity - Growth of Earnings)
Current EPS – Obtained from Bloomberg
Payout Ratio – Most recent year
Growth of Earnings – Growth of DPS
Cost of Equity - CAPM
Value of Stock Today
HK$44.60
Justified Value of Stock
HK$26.68
Sensitivity Analysis
Cheung Kong Holdings
Growth Rate vs. Value of Stock
Growth Rate
200.00
150.00
100.00
50.00
0%
0%
0%
8.5
8.0
0%
0%
7.5
7.0
6.5
0%
0%
0%
6.0
5.5
0%
0%
0%
5.0
4.5
4.0
0%
0%
3.5
3.0
0%
0%
2.5
2.0
0%
0.00
1.5
•
stock
As the economic outlook
improves, higher growth
rate assumption can be
achieved
250.00
1.0
• Key driver of the value of
Value of Stock
300.00
Growth Rate
CheungKongH
oldin
gs
EquityBetavs. Valueof Sto
ck
$40.00
$36.00
$32.00
ValueofStock
•
•
Equity Beta
Linear Relationship
Less Sensitive
$28.00
$24.00
$20.00
0.80
0.85
0.90
0.95
1.00
1.05
EquityB
eta
1.10
1.15
1.20
1.25
Stock Valuation Suggests…
• Based on the numerical calculation alone, we
•
conclude with a SELL recommendation for
Cheung Kong.
However, there is more to the value of the stock
than just numbers…
Agenda
Background & Overview
Real Estate Market in Asia
Investment Risk & Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
Brand Image
• Corporate Governance
–
–
–
–
Ticker: 0001
Publicized in 1972
Today: Market Cap of HK$ 405 Billion
Diversification
• Li Ka Shing
–
–
–
–
Hong Kong’s Wealthiest Man
World’s 23rd
Single Largest Shareholder: 36.53%
Successful Dealmaker
Stable Dividend Growth
• Market Recession
• Average Rate for Bank Deposit < 1%
• Invest in Defensive Stocks
– Utilities, Health Care, Consumer Staples, High
Dividend Yield…etc.
• Stable Dividend Distribution
– Cheung Kong: 3.0% Dividend Growth
• Pay Premium for Constant Return
Instability of Earnings Per Share
• Fluctuation of Payout Ratio
• Earnings Dependent on Associates and Jointly
•
•
Controlled Entities
49.9% Interest in Hutchison Whampoa
– Sold off the British telecom operator, Orange
PLC resulted in $22 Billion Profit for
Shareholder In 1999
Rapid growth of EPS from 1998’s 2.66% to
25.84% in 1999
Hong Kong Property Market
• Diminishing and Saturated Market
• Government Policy
– Subsidized apartment vs. Private Flat
• Cheung Kong’s Surviving Techniques
– Mark-to-Market Pricing Strategy
– Market Development – China, UK…etc.
Agenda
Background & Overview
Real Estate Market in Asia
Investment Risk & Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
Recommendation
HOLD
Cheung Kong Holdings
Questions?