Wednesday, March 28, 2007
Thoughts on Latest Henderson Asset Shuffle
This morning on reflex I bought some shares in Henderson Investment (97), mainly as I saw it as a cheaper way to buy into Hong Kong and China Gas.
Having said this, this is not a new discovery as there's been two privatization attempts in the past for the same objective. But this time there's a new twist as HI's interest in HKCG is untouched whilst almost everything else inside HI will change hands. This will make holding HI no different from holding HKCG directly. Even dividends are said to be fully distributed dollar for dollar in the future, until and unless HI takes on other acquisitions (this is the tricky part and you'll have my guess later).
Quick math shows after two dividends (interim & special) HI will be worth 2/3 of its value or about 32b. The market value of its 38.5% interest in HKCG is worth 37b. So there's a 15% difference which one can pocket, or as I saw it an invitation to buy HKCG cheap. Of course my assumption is this time the deal will get the greenlight from the minority shareholders. I'm confident Mr. Lee after two hard lessons should have figured a way out already. So I'll let him worried about it and do his job.
Now the fun part of guessing what's behind all these and what'll happen next. But beforehand you should be warned that as I hold a position all these arguments won't be impartial and my wishful thinking will dominate.
(1) Privatization of HI
Many suggest this will be the eventual path and the current step is to clear the necessary hurdles for it to happen. This sounds very logical but doesn't make much sense. Unless Mr. Li has lost his sense this will mostly likely not happen. Privatization is only sensible when the assets can be bought cheap, which can be caused by market inefficiency or a divergence of view between the market and the owner on future prospect. But I see neither of this. After the shuffle, HI will hold nothing but HKCG's stocks. With this much of transparency, any future buyout will have to be made on market price (at least) to succeed. If this was what Mr. Li was willing to pay, this deal could have been bundled together this time, or would have been done long time ago.
(2) Future role of Panva Gas
Some say this reshuffle will cement and expedite Panva Gas's role as the flatship of HKCG's China business. It's a bit stretched on imagination to say the least how these two can be related. I'd just say I'm not sure if Mr. Lee would want to share the captain seat of his flatship with someone else. Nevertheless Panva Gas may get more assets down the road and let's watch the space.
(3) Future role of HI
This part draws my interest the most as I can't really figure out why HI is kept. There's got to be a purpose for its listing or a story to sell. The official reason is to have an more efficient operating structure for the Henderson group and to unlock the value inside HI. My logical guess is Mr. Lee and HI are thinking about selling new shares, otherwise why he would care about reflecting the real value of HI. Now if I tie in this to the part about HI paying out all dividends from HKCG until and unless there's new acquisitions, a picture starts to emerge - HI may have big acquisitions in the pipeline which will need equity financing. I'll look no further than those in HKCG.
HKCG has 4 pieces of assets: HK gas business, China gas business, China water business, and IFC interest. There's some HK development properties which will turn to cash so I'll ignore it here. The IFC interest looks a better fit to Henderson Land and I won't be surprised to see it go first. The HK gas business has nothing exciting so the candidates can only be the China gas and water business.
But why buy something one already owns? First, one need to distinguish the level of effective interest. Henderson Land owns 68% of HI but only 68% x 38.5% = 26% of HKCG. Wouldn't it be nice for Henderson to hold 68% of those China projects on the HI level than 28% on the HKCG level? Second, after the shuffle HI will only be 1/3 the market size of HKCG and hence its share price should respond faster to the growth in the China business. It'll be easier to raise capital too. HKCG also benefits from having a clear identity of a local utility play.
How soon will these happen? I'd say patience. HKCG won't be selling now as these assets are green and need funding (which it's got plenty from the HK gas business). Remember Mr. Lee has said he expected the China business to flourish anywhere between now and in 3 years' time. My guess is it'll happen when the assets start to mature but not overly ripe.
DISCLOSURE: I hold 97 at time of writing. I don't hold 3, 12, 1083 at time of writing.
Having said this, this is not a new discovery as there's been two privatization attempts in the past for the same objective. But this time there's a new twist as HI's interest in HKCG is untouched whilst almost everything else inside HI will change hands. This will make holding HI no different from holding HKCG directly. Even dividends are said to be fully distributed dollar for dollar in the future, until and unless HI takes on other acquisitions (this is the tricky part and you'll have my guess later).
Quick math shows after two dividends (interim & special) HI will be worth 2/3 of its value or about 32b. The market value of its 38.5% interest in HKCG is worth 37b. So there's a 15% difference which one can pocket, or as I saw it an invitation to buy HKCG cheap. Of course my assumption is this time the deal will get the greenlight from the minority shareholders. I'm confident Mr. Lee after two hard lessons should have figured a way out already. So I'll let him worried about it and do his job.
Now the fun part of guessing what's behind all these and what'll happen next. But beforehand you should be warned that as I hold a position all these arguments won't be impartial and my wishful thinking will dominate.
(1) Privatization of HI
Many suggest this will be the eventual path and the current step is to clear the necessary hurdles for it to happen. This sounds very logical but doesn't make much sense. Unless Mr. Li has lost his sense this will mostly likely not happen. Privatization is only sensible when the assets can be bought cheap, which can be caused by market inefficiency or a divergence of view between the market and the owner on future prospect. But I see neither of this. After the shuffle, HI will hold nothing but HKCG's stocks. With this much of transparency, any future buyout will have to be made on market price (at least) to succeed. If this was what Mr. Li was willing to pay, this deal could have been bundled together this time, or would have been done long time ago.
(2) Future role of Panva Gas
Some say this reshuffle will cement and expedite Panva Gas's role as the flatship of HKCG's China business. It's a bit stretched on imagination to say the least how these two can be related. I'd just say I'm not sure if Mr. Lee would want to share the captain seat of his flatship with someone else. Nevertheless Panva Gas may get more assets down the road and let's watch the space.
(3) Future role of HI
This part draws my interest the most as I can't really figure out why HI is kept. There's got to be a purpose for its listing or a story to sell. The official reason is to have an more efficient operating structure for the Henderson group and to unlock the value inside HI. My logical guess is Mr. Lee and HI are thinking about selling new shares, otherwise why he would care about reflecting the real value of HI. Now if I tie in this to the part about HI paying out all dividends from HKCG until and unless there's new acquisitions, a picture starts to emerge - HI may have big acquisitions in the pipeline which will need equity financing. I'll look no further than those in HKCG.
HKCG has 4 pieces of assets: HK gas business, China gas business, China water business, and IFC interest. There's some HK development properties which will turn to cash so I'll ignore it here. The IFC interest looks a better fit to Henderson Land and I won't be surprised to see it go first. The HK gas business has nothing exciting so the candidates can only be the China gas and water business.
But why buy something one already owns? First, one need to distinguish the level of effective interest. Henderson Land owns 68% of HI but only 68% x 38.5% = 26% of HKCG. Wouldn't it be nice for Henderson to hold 68% of those China projects on the HI level than 28% on the HKCG level? Second, after the shuffle HI will only be 1/3 the market size of HKCG and hence its share price should respond faster to the growth in the China business. It'll be easier to raise capital too. HKCG also benefits from having a clear identity of a local utility play.
How soon will these happen? I'd say patience. HKCG won't be selling now as these assets are green and need funding (which it's got plenty from the HK gas business). Remember Mr. Lee has said he expected the China business to flourish anywhere between now and in 3 years' time. My guess is it'll happen when the assets start to mature but not overly ripe.
DISCLOSURE: I hold 97 at time of writing. I don't hold 3, 12, 1083 at time of writing.
Subscribe to Posts [Atom]