Li Ka-shing’s CK Asset Sounds Profit Alarm as COVID-19 Crimps Business

The property conglomerate chaired by the son of Hong Kong’s richest man has warned shareholders to expect a fall in profits for the first half of the year, marking the first time the company has issued a profit warning since being spun off from Li Ka-shing’s business empire in 2015.

CK Asset Holdings announced to the stock exchange on 14 May that it expects a “material reduction to the group’s profit attributable to shareholders” for the first six months of 2020.

The company, which had a market capitalisation of HK$156 billion ($20 billion) as at 19 March 2020 with real estate holdings predominantly in Hong Kong and mainland China, said that it attributed this expected drop in earnings to the impact of the “ongoing COVID-19 situation and market conditions” which have squeezed its property sales and hotel operations in the Asian financial hub, and put a dent in the earnings of its UK pub business.

The market value of the conglomerate’s holdings in its three listed real estate investment trusts, which draw rental income from commercial property in Hong Kong and mainland China, had also taken a hit, according to the announcement.

Known as Cheung Kong Property Holdings until its name was changed in 2017 to reflect its diversified investment strategy – CK Asset also holds interests in aircraft leasing, infrastructure and utility assets – the company took over Hutchison Whampoa’s 0113 code on the Hong Kong stock exchange five years ago.

Falling Property Sales

The Hong Kong-listed company, which in August last year paid £4.8 billion ($5.8 billion) for UK brewer Greene King, said it was “prudent” to draw shareholders’ attention to the situation because it has the “potential to affect the group’s immediate future financial performance”.

In a general meeting on the same day as the announcement was made, Victor Li Tzar-kuoi, Li Ka-shing’s elder son and CK Asset’s chairman and managing director, said the group’s financial position was stable and healthy with a gearing ratio in low single digits.

With the company’s property development business in Hong Kong and mainland China representing the bulk of its business and accounting for 57 percent of its full-year profit in 2019, the company’s performance in this segment had already been squeezed by last year’s anti-government protests in Hong Kong.

Postponing Development Launches

HK$11 billion ($1.5 billion) in homes at CK Asset’s Barrett Road development, which were due  to go on sale in September last year, were postponed and still have not been launched onto the market.

With homebuyers disappearing from the market due to the lockdown in Hong Kong and mainland China during recent months, developers had postponed launches and offered discounts to boost sales. Falling home prices have also put pressure on the property firm with prices in Hong Kong’s luxury residential market declining by 8.6 percent since reaching a peak one year ago, according to a report released two weeks ago by JLL.

CK Asset revealed in its bourse filing that despite China being the first location hit by the COVID-19 plague, during the first three months of the year falling property sales in its Hong Kong operation have been partially offset by better sales on the mainland.

Despite CK Asset’s positive report from its mainland operation, official data released on Friday showed property sales across China falling 19.3 percent in terms of floor area over the first four months of the year when compared with the same period in 2019.

Surviving the Crisis

As CK Asset cautions investors, outside analysts have remained sanguine on the listed developer’s prospects for 2020.

In a report released last month by Standard and Poor’s, the ratings agency predicted that CK Asset had “sufficient cushion to withstand potential reduced cash flows due to the COVID-19 pandemic”.

The New York-based firm said that the conglomerate has ample cash on hand to cope with current market conditions and a “healthy debt maturity profile”, with HK$60.3 billion in cash at the end of last year and HK$6.8 billion of debt maturing in 2020.

S&P said that it expected the company’s non-development businesses, which include its hotel operations and UK pubs, to see a significant reduction in cash flow, but highlighted that these businesses only accounted for five percent of the company’s profit last year.

Plunging Retail Sales at Watsons

In a separate statement, the Li family’s other major holding firm, CK Hutchison, which owns health and beauty chain AS Watson, said its retail earnings may fall 50 percent in the first half of 2020 compared with last year.

The Hong Kong-listed giant, which was formed as part of the same restructuring of Cheung Kong Holdings and Hutchison Whampoa that gave rise to CK Asset Holdings, owns 15,700 Watsons stores in 22 countries worldwide.

With its outlets in China having reopened already, sales on the mainland bounced back to 80 percent of their pre-lockdown levels in April, said Canning Fok Kin-ning, CK Hutchison’s co-managing director, in a statement released following a shareholders meeting on 14 May.