Cheung Kong (Holdings) Limited is among Hong Kong's leading property and investment development companies. It has expanded its network into North America and Europe, consolidated its holdings, and begun building a portfolio of contracts and interests in China as Hong Kong prepared for 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. The company's collection of more than 100 subsidiaries and joint ventures are organized principally under four main listed companies. In addition to flagship Cheung Kong, the company's major holding is Hutchison Whampoa Ltd., of which the company owns nearly 50 percent. Hutchison is one of Hong Kong's major "hongs," or conglomerates, with holdings ranging from retailing to container terminals to telecommunications, energy, and property and financial investments. Cheung Kong Infrastructure (CKI) Holdings Limited, organized in October 1996 and led by Li's eldest son and likely successor, Victor Li, groups Cheung Kong's infrastructure subsidiaries and interests, primarily in road-building, toll roads and bridges, and power plants on the Chinese mainland. The final piece of the Cheung Kong empire is its stake in the electric monopoly Hong Kong Electric (HKE). In January 1997, Cheung Kong restructured its business, providing, among other features, for a full takeover of HKE by Cheung Kong.
From Plastic Flowers to "Superman"
Known to his colleagues as K.S. Li, the Hong Kong tycoon was born in Chiu Chow, in southern China, in 1928 and later emigrated to Hong Kong. In 1950, Li set up Cheung Kong as a business manufacturing plastic flowers. But the company's real growth started in the late 1960s, when Li bought his first building. In less than 30 years, Li built an empire controlling, through a series of interlocking stock market holdings, over 14 percent 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 percent 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 percent 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 percent 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 percent 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 percent to HK$85.55 million. This improvement coincided with a 38 percent 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 percent 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 reputation 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 percent stake in Green Island Cement, increasing its holdings on the construction side.
In 1979 the company saw a 91.6 percent 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 percent 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 percent of outstanding shares, bought for HK$693 million. The company increased its stake in Hutchison to 30 percent 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 Kashing, 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 percent, 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 percent, 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 percent 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 percent 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 percent to HK$525.6 million. Profits at the Green Island Cement company tumbled by 65 percent, 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 percent. Yet even here Cheung Kong forecast reduced profits for its subsidiary in 1983. At the Hong Kong Hilton Hotel, profits were 10 percent 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 percent 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 percent 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 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 percent 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 percent 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 percent over the year. Cheung Kong reported earnings of HK$1.28 billion, an increase of 128 percent on the year before. The improvements were 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 percent 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 percent of all shares traded on the Hong Kong stock market.
Cheung Kong moved ahead in 1987, producing profits of HK$1.58 billion, 23 percent 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 percent 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 percent 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 percent to HK$948 million.
Around this time, Li Ka-shing, nicknamed "Superman" in the colony, made a HK$484 million profit when Cheung Kong sold its 4.8 percent 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. By the beginning of the 1990s, Li's overseas holdings amounted to some 20 percent of his companies' assets, with forecasts to raise that stake to more than 30 percent. Meanwhile, Li, together with son Victor, ventured into satellite broadcasting, founding Star TV. In 1993, Li sold two-thirds of that company to Rupert Murdoch for US$525 million.
Preparing for the Chinese Handover in 1997
As the 1990s began, Li pledged to remain in Hong Kong after the colony's handover to China in 1997. Cheung Kong's strategy leading to that event seemed to confirm this, as Cheung Kong stepped up its investments and projects on the mainland. In 1995, Li transferred more than 30 percent of the company's assets to the Cayman Islands; this move, however, was largely seen as a means to avoid Hong Kong's inheritance tax as Li prepared to hand over the company to his sons. In the year before, Victor Li was named a deputy manager of Cheung Kong, while younger son Richard, engaged in building his own conglomerate in Singapore, was named a deputy manager of Hutchison Whampoa.
In 1993, Cheung Kong strengthened its economic, as well as political position by teaming up with CITIC Pacific, the Hong Kong arm of the Chinese government-owned investment vehicle led by Larry Yung, son of China vice president Rong Yiren, in a HK$9.65 billion takeover of Miramar Hotel & Investment Co. At the same time, Li hedged his political bets by joining with Deng Zhifang, a son of the late Deng Xiaoping, and Shougang, the third-largest steelmaker in China, to take over Kader Investment. Another investment, with China National Non-ferrous Metals Corp., allied Li with Deng's son-in-law, Wu Jianchang, a vice president of that company. These deals helped boost Li's Chinese investments to nearly HK$20 billion. On the basis of these and other deals, Cheung Kong's profits surged past $16 billion for 1993.
After adding the HK$2.2 billion purchase of the 665 King's Road North Point site in 1994, Cheung Kong announced plans the following year to redevelop the colony's Hilton Hotel, as well as a purchase of 40 percent of the colony's last walled village, a 50,000-square-foot site targeted for redevelopment. Next, again working with CITIC Pacific, Cheung Kong won a HK$7 billion contract to develop the Tsing Yi airport railway station near Kowloon. In late 1995, Cheung Kong, in a joint venture with Hutchison Whampoa and the Kowloon-Canton Railway Corporation, was awarded the property development rights, worth as much as HK$8 billion, for the Hunghom area. Cheung Kong's earnings were rising steadily, climbing to HK$10.11 billion in 1994 and to HK$11 billion in 1995.
While Cheung Kong showed no signs of slowing down in 1996--the company won the rights to build the Tuen Mun River Terminal, a project worth HK$1.14 billion; the company also received an exceptional gain of more than HK$4 billion after the public listing of Hutchison Whampoa's UK mobile and telecommunications subsidiary Orange--Li also took steps to restructure the company for the impending handover. In June 1996, the company spun off its Hong Kong and mainland infrastructure holdings as a separately traded subsidiary, CKI, under leadership of Victor Li, which raised more than HK$3.6 billion through sales of nearly 300 million shares. Then, in January 1997, Li restructured all of the holdings of the Cheung Kong Group in a series of ownership shifts among its four principal subsidiaries.
Under the restructured holding company, CKI became principally specialized in the company's Chinese infrastructure projects, including a nearly completed 140-kilometer toll highway running south of Shantao. Cheung Kong's share of Hutchison, meanwhile, advanced past the halfway mark, to 50.2 percent, while Hutchison's share of CKI moved up to 84.6 percent. This meant that Hutchison also added CKI's 35 percent of Hong Kong Electric, triggering a mandated takeover bid for full control of HKE. The restructuring was widely regarded as a shrewd repositioning of the company in the final months leading to the Hong Kong handover. Meanwhile, Victor Li's role as a principal architect in the restructuring signaled the coming to an end of Li Ka-shing's reign as Hong Kong's "Superman." The elder Li, who had previously suggested that he would retire prior to the July 1997 handover, instead indicated that he would step down in January 1998. In any event, the Li family's financial dominance of Hong Kong was expected to continue long after the colony's transition to Chinese control.
Principal Subsidiaries: Hutchison Whampoa, Ltd.; Cheung Kong Infrastructure; Hong Kong Electric; The Green Island Cement (Holdings) Limited Group; Anderson Asia Quarry Group.