Hutchison Whampoa (HWL; 0013.HK) is one of Hong Kong’s oldest and best-known companies, but it’s still difficult to pin down. Part of Li Ka-shing’s Cheung Kong Group (0001.HK), it has interests in 54 countries over five core areas: port development and operation, telecom, property and hotels, retail, and energy, infrastructure and investment. The mainland accounted for 11% of the company’s US$39 billion in total revenue last year and 27% of its US$5.5 billion pre-tax profit. Frank Sixt, group finance director of HWL, talked to China Economic Review about how the company is leveraging the rise of the Chinese consumer.
Q: Which parts of HWL’s China business have grown the quickest?
A Our principal businesses are port and container handling and we have had a substantial position in the mainland since the late 1980s. Our retail business was relatively small – really just in south China – up until a few years ago. That is now changing dramatically. As China moves toward a more consumption-based economic model, demand for health and beauty retail distribution is very high. There are about 600 Watsons stores in China today; five years ago there would have been 10. By the middle of next year there will be over 1,000. There are two Watsons stores in Inner Mongolia, which is wonderful anecdotal evidence of the change afoot in China. The good ladies of Inner Mongolia are using the same face creams and soaps as the good ladies of Hong Kong.
Q: Your mainland property exposure has increased considerably as well, now accounting for 96% of gross floor area under development…
A: There is a landbank of nearly 200 million square feet, in which our interest is half because we operate a 50-50 joint venture with our parent firm Cheung Kong Holdings. We are in 17 different cities – not just the hot markets, but also emerging cities like Xi’an, Chengdu, Changsha and Changchun. The business has grown substantially since the introduction of property ownership law. I think it will continue to grow in the foreseeable future.
Q: China’s property market goes through cycles of tightening and loosening. How much attention do you pay to that?
A: Look at Hong Kong and you see the kinds of new cities that we and others have built. From time to time, affordability will become a significant issue, governments will react, markets will calm down and the fundamental need for housing will reassert itself. We don’t assume a steady policy environment in the mainland but the secular movement is one of urbanization and the upgrading of urban housing stock. Home ownership is an anchor of China’s switch to more consumption-driven growth. That driver overrides everything else.
Q: So you are not concerned by talk of asset bubbles?
A: The property market in China – at least in the middle-class sector we operate in – is not driven by credit. It’s driven by people putting their savings into upgrading their housing. That’s a fundamental difference [from the West] and that’s why you get a lot of talk about bubbles. I look at it more in terms of affordability. When you push beyond affordability and the market becomes totally speculative then it is likely to go through a correction. But it’s not going to be the kind of bubble that leads to a financial crisis and an economic collapse.
Q: You have mentioned the switch to consumption-based growth. From a ports perspective, does that mean HWL will be shipping goods into China rather than shipping them out?
A: It’s a slightly different business, but it’s still good. If anything, I think the pick-up in import volume in any normalized environment will more than offset a decline in export shipments.
Q: You have been quoted as saying that HWL is "just a multinational that happens to be based in Hong Kong." But to what extent is the firm a China growth story?
A: Without doubt it is. Look at Hong Kong’s economy: It is significantly dependent on favorable flows from the mainland, whether you are looking at the restaurant trade, professional services, financial markets or property markets. Hong Kong is very much part of China and so HWL too is part of China.
Q: Yet it has spent a lot on telecom, in which it has no presence in China…
A: What differentiates a HWL from a private equity fund is that we have a lot of depth of management in all of our businesses. Telecom is one of them. It’s all about where the opportunities lie, and there have not been any opportunities for private capital in China’s telecom sector.
Q: What opportunities do you see in energy and infrastructure?
A: The principal thrust you will see from us is in the oil and gas business in the South China Sea. In partnership with China National Offshore Oil Corp (CNOOC; CEO.NYSE, 0883.HK), we are producing from the Wengchang oil fields. We will also be bringing to production a fairly significant natural gas discovery, again in partnership with CNOOC. It is about 250 kilometers south of Hong Kong and will provide gas to south China and possibly to Hong Kong as well.
Q: To what extent is the partnership based on a combination of Chinese access to resources and Canadian drilling expertise via Husky Energy (HSE.TSX)?
A: There is a bit of that. Husky Energy has quite a bit of experience in deepwater exploration and this discovery was one of the first major deepwater gas discoveries.
Q: HWL has five core business areas, but it has also invested in China MediTech (HCM.AIM). Why is that?
A: China MediTech is a small group of interesting people who have been pursuing some interesting pharma and nutraceutical ideas.
Q: It doesn’t seem to be in keeping with everything else the company does…
A: We always have incubators of one sort or another, irons in the fire. For example, people often don’t realize that we own Shanghai White Cat, one of China’s oldest and best-known brands in laundry detergents and industrial cleaning products – a homegrown competitor to P&G (PG.NYSE). There are always things we own that don’t use much capital but we are working on to see if they can grow into big businesses.
Q: Of the irons currently in the fire, are there any in particular you would tip to get hot?
A: I never do that. They will tip themselves when the time comes.