Li Ka-shing's $17 Billion Bet

Investors have pummeled the stocks of the Hong Kong billionaire’s companies as he gambles on an unproven cell phone technology.

In his 70th-floor penthouse office looking north over Hong Kong Harbor toward the Chinese mainland where he was born, Li Ka-shing talks about his rise from penniless refugee to head of a $60 billion global business empire. “I am never satisfied—like in the Olympics,” says Li, whose deal-making exploits have earned him the nickname of chui yan—Superman.

As a 12-year-old boy alone with a father dying of tuberculosis, Li swept factory floors to earn money during Japan’s wartime occupation of Hong Kong. As a young man in the 1950s, he manufactured and sold plastic flowers.

Today, Li owns the world’s largest network of container ports, including Rotterdam’s Europe Container Terminals and Hong Kong International Terminals and is acquiring, at about 2 percent of book value, bankrupt U.S. fiber-optic network operator Global Crossing Ltd. He also has a Canadian oil company, Husky Energy Inc.; 3,000-store retail chains in Europe and Asia; and real estate holdings that include Oriental Plaza, the biggest development in Beijing since the Ming emperors built the Forbidden City 600 years ago.

He’s also betting $16.7 billion on an unproven wireless Internet phone technology—the so-called third generation, or 3G—in Britain and Italy and then in Australia, Austria, Denmark, Hong Kong, Ireland, Israel and Swe- den. That makes some investors question whether Superman, at 74 and with a personal fortune of at least $6 billion based on the value of his seven pub- licly traded companies, is still invincible. “There’s a tremendous amount of skepticism among investors, even towards a man with a track record like Mr. Li,” says Fred Hu, a Hong Kong–based managing director at Goldman Sachs Group Inc. Shares in Hutchison Whampoa Ltd., the conglomerate that owns Li’s telecom interests as well as his ports and retail stores, have fallen more than 60 percent to 51.25 Hong Kong dollars on Dec. 10 from HK$136 on March 28, 2000, compared with a 42 percent fall in the benchmark Hang Seng Index. Li’s 36.9 percent–owned Cheung Kong (Hold- ings) Ltd., which owns 49.9 percent of Hutchison plus much of Li’s real estate investments, was down more than 50 percent in the same period to HK$54.25, from HK$119. Cheung Kong was the third-worst-performing stock in the 33-member Hang Seng Index in the year to Dec. 10; Hutchison was sixth worst.

Li, who responded to questions from Bloomberg News in writing and in an inter- view, says investors are wrong to doubt his strategy. “3G is not a gamble,” he says. “Peo- ple are quite wrong about that.” Li says 3G’s selling point is that it combines the convenience of mobile phones with the best of the Internet. “You have two of the most successful consumer technology revolutions in the his- tory of mankind, brought together in one device,” he says.

The 3G phone network, for which Hutch- ison is building a series of base stations and routers, will make possible transmission speeds as much as 15 times faster than exist- ing cellular phones. That will enable users to perform functions not currently available, such as videoconferencing and watching live sports events.

Li says the European phone business can break even by 2005. Some analysts disagree. “We have done the math, and we do not think it possible,” says Michelle de Lussanet, senior analyst at Forrester Re- search Inc. in Amsterdam. In a September 2002 report, For- rester estimated it would take until 2017 for Li to break even.

If Li does make money in just two years, it won’t be the first time he’s confounded the conventional wisdom. “He is the world’s best trader,” says Craig Ehrlich, an American who worked for Li for seven years before leaving to start a rival Hong Kong telecom operation, Sunday Communications Ltd. “He buys low and sells high,” says Ehrlich, who’s now vice chairman of the GSM Association, an industry group that represents 600 cell phone companies worldwide. “His timing is perfect.”

Li has earned billions of dollars for himself and sharehold- ers by trading telecom assets. In 1994, he started Orange Plc’s mobile phone network in Britain. Five years later, he sold his 49 percent stake in Orange for a $15 billion profit. In 2000, he earned a $9 billion profit when he sold his 23 percent stake in U.S. wireless operator VoiceStream Wireless Corp.

Still, the 3G investment comes at a challenging time for Li. Although he says he has no plans to retire, investors and analysts want to know who among his two sons and professional management team will eventually replace him.

Li’s younger son, Richard, 36, severed all official ties with Li’s companies in 2000 to concentrate on his own telecom- munications business, PCCW Ltd., which has since lost 95 percent of its value on the Hong Kong Stock Exchange. PCCW shares closed at HK$1.29 on Dec. 10, down from a high of HK$26.35 on Feb. 15, 2000. In March 2001, Richard Li acknowledged that company statements incorrectly said he’d graduated from Stanford University with a degree in computer science when in fact he’d never completed his studies.

Elder son Victor, 38, who shuns publicity, remains at his father’s side as deputy chairman of Hutchison Whampoa and deputy chairman and managing director of Cheung Kong.

“Mr. Li faces a transition problem,” says Franklin Lam, a Hong Kong–based managing director of UBS Warburg LLC and a real estate market analyst who in December issued a buy recommendation on Cheung Kong. “It’s a major issue. He at some stage has to retire. I want to know who will take his place.”

Li says people have been speculating about his retirement for almost 20 years. “I am happy to report that I am in good shape and can rise to the opportunities and challenges of our times,” he says. “Succession is not a concern at all,” he adds, pointing out that Victor Li already runs Cheung Kong. “Even should I or any senior management retire, it would not have any real effect.”

Even after their price declines, Li’s seven companies account for 15 percent of the market value of the Hong Kong Stock Exchange. In addition to Cheung Kong (Holdings) and Hutchison Whampoa, they are Cheung Kong Infra- structure Holdings Ltd., which builds power plants and toll roads; Hong Kong Electric Holdings Ltd., which has the monopoly to light up Hong Kong Island; Tom.com Ltd., an Internet, publishing and advertising company; biotech concern CK Life Sciences International (Holdings) Inc.; and toymaker Hutchison Harbour Ring Ltd.

Li also controls four overseas-listed companies: Husky Energy, which trades on the Toronto Stock Exchange; two Nasdaq-listed companies—Internet travel discounter Priceline.com Inc. and Israeli cell phone company Partner Communications Co.; and Hutchison Telecommunications (Australia) Ltd., traded in Sydney.

Some bankers say the market is too negative in judging Li’s plans. A Goldman Sachs report published in November says Li has a strong enough balance sheet—$16 billion in liq- uid assets plus at least $3 billion in annual revenue from his nontelecom businesses—to cover possible losses.

A few investors agree. “We believe they have a valid strategy,” says Christopher Legallet, chief investment officer of San Francisco–based mutual fund firm Newport Liberty Investment Management, who oversees more than $2 billion. “You are getting the core trading business of ports and consumer goods for a reasonable price, and you have a free option on telecoms.” In the first half of 2002, more than 50 percent of Hutchison’s $5.97 billion revenue and 35 percent of its $762 million net profit came from ports and retail. Telecommunications accounted for just 14 percent of revenue and 7 percent of net profit.

Li is helped by the perception that he treats investors fairly. “Mr. Li doesn’t switch assets between private and public companies as many other Asian families do,” says Richard Titherington, a Hong Kong–based managing director at JF Asset Management Ltd., who helps invest $500 billion for parent company J.P. Morgan Fleming Asset Management. Titherington says the profits from the sales of Orange and VoiceStream, for instance, went to the public companies.

Li is venturing into the European telecom business at a time when many other companies, crippled by the cost of acquiring licenses, are delaying or abandoning their 3G am- bitions. First to introduce the 3G system was NTT DoCoMo Inc., which rolled it out in Japan in October 2001. In Novem- ber, the company said it expected to attract only 320,000 cus- tomers for 2002 instead of the 1.38 million it had previously predicted. Li, who began testing the system in Britain and Italy in November, is the first to try his luck outside Japan.

Li invested $4.1 billion just to buy a British license for the 3G service. He has no existing network or subscriber base and will have to compete with four rivals that have more than 10 million customers each. They are Deutsche Telekom AG; France Télécom SA; MM02 Plc, the former wireless arm of BT Group Plc; and Vodafone Group Plc, the world’s largest mobile phone company. France Télécom owns Li’s former net- work, Orange, which is now the largest in Britain, with more than 13 million subscribers. “It will be very challenging for them to get critical mass in Britain,” says Fanos Hira, head of European telecom research at Bear Stearns International Ltd.

‘I am happy to report I am in good shape and can rise to the opportuni- ties and challenges of our times.’

Even Li’s partners in his British network—Netherlands- based Royal KPN NV and NTT DoCoMo, which between them own 35 percent of the business—wrote down the value of their investments in 2002. Li, who paid $2.5 billion for the Italian 3G license, expects to spend almost $10 billion more on setting up the European networks. He hopes to sign up the first paying customers by early 2003.

Li has gambled on what seemed like long shots before— and won. When he branched out from making plastic flowers into real estate, in 1967, it was during one of Hong Kong’s darkest hours. Across the border, the Cultural Revolution had plunged China into turmoil. In Hong Kong, there were riots. Investors said they feared the 1,092-square-kilometer (422- square-mile) British colony would be engulfed, and so they dumped apartments and land. Property prices plunged by as much as 50 percent, according to Peter Churchouse, advisory director at Morgan Stanley Asia Ltd. in Hong Kong. Li bought. When calm returned to Hong Kong, real estate prices recovered their former values within two years.

Li repeated the feat in subsequent downturns, including in 1989, when property prices slumped following the Tianan- men Square massacre. The result: a Hong Kong property portfolio ranging from suburban “garden cities” built on for- mer dockyards and industrial sites to his flagship building, the 70-story Cheung Kong Centre.

Li vaulted to global prominence only in 1979, when he bought control of Hutchison Whampoa and became the first Chinese to own one of the British-founded hongs, or trading houses, that had dominated the Hong Kong economy since the colony’s founding in 1841. Li further confounded the British business elite by the low price he paid. Unknown to the Hutchison board, Li had secretly been negotiating with Hongkong & Shanghai Banking Corp. to part with a 22 percent Hutchison share holding for HK$639 million—the equivalent of $82 million at today’s exchange rate and less than half of its book value, according to the board. Li also talked the bankers into accepting a 20 percent deposit, with the balance payable in two years.

“For Li, it was a brilliant deal,” says Bill Wyllie, 70, an Aus- tralian entrepreneur who was managing director, or taipan, of Hutchison Whampoa at the time. “The breakup value of the company was more than double the amount he paid, and our board was separately negotiating with would-be purchasers willing to pay a much higher price.”

Wyllie, who now runs his own business in Perth, Australia, says he bitterly opposed the sale to Li. “It was a dumb move by the Hongkong Bank, which let its shareholders down, but you have to give full marks to Li. He was a real mover and shaker who had built up a tremendous reputation because of his reliability and honesty. It enabled him to pull off what for Hong Kong was the coup of the century.” A spokesman for Hongkong & Shanghai parent company HSBC Holdings Plc declined to comment.

HSBC investors have benefited from Li’s business ever since. “I believe I have not disappointed them,” Li now says. In the annual reports of Hutchison and Cheung Kong, HSBC’s name appears at the top of the list of the companies’ bankers.

There was another reason for the bank’s decision to sell to Li, writes Anthony B. Chan in a 1996 biography, Li Ka-shing, Hong Kong’s Elusive Billionaire (Oxford University Press). The previous year, China, under new leader Deng Xiao-ping, had shown the first signs of opening its economy. “It was Li’s special contacts in China that played a prominent role in the bank’s ultimate decision,” writes Chan, associate professor at the University of Washington in Seattle.

Li was a senior adviser to Beijing on the 1997 Hong Kong handover. He sat on the committee that drafted the consti- tution for the Hong Kong Special Administrative Region and also on the body that chose Hong Kong’s Beijing-approved leader, Chief Executive Tung Chee-hwa. Victor Li, mean- while, is a member of the Chinese People’s Political Consul- tative Conference, a Beijing-appointed body that advises China’s rubber-stamp parliament, the National People’s Con- gress. Its members range from CEOs to celebrities such as movie actress Gong Li.

Good connections haven’t always helped Li avoid snags in his Chinese business ventures. Take Li’s $2 billion Oriental Plaza, a 6-million-square-foot office build- ing, Hyatt hotel and apartment complex on the busy corner of Avenue of Eternal Peace and the Wangfujing shopping street, just two blocks from Tiananmen Square. A McDon- ald’s restaurant once occupied the same location because both the U.S. burger chain and Li had been given permission to operate in the same place at the same time by different Chinese authorities. McDonald’s wound up moving, but it has taken Li 10 years to complete Oriental Plaza, from 1993 to the present.

Li is patient. Early in 2002, he and partner Singapore Tech- nologies Telemedia Pte, which is owned by the Singaporean government, offered to buy 79 percent of Global Crossing, which had just filed for bankruptcy, for $750 million. They were rebuffed by Global Crossing’s creditors, including Alcatel SA, Charles Schwab Corp.’s U.S. Trust Corp. unit, J.P. Morgan Chase & Co., Lucent Technologies Inc. and Nortel Networks Corp. Li waited while telecom assets continued to decline in value. In August, he and his partner offered far less money— $250 million—for 61 percent of the company. That bid was accepted. “When you buy something cheaper than you set out to, that is good for the company and shareholders,” Hutchison Managing Director Canning Fok said at the time. The deal is subject to U.S. regulators’ approval.

Fok said then that Hutchison would be able to link Global Crossing’s fiber-optic network with its 3G system but didn’t elaborate. Analysts see few benefits other than that 3G, like other networks, will still have to use fiber optics for intercontinental links. They say that Li, who’s sometimes called the Warren Buffett of Asia by people who admire his business acumen, did the deal primarily as an opportunistic investment in a company that values its assets at up to $12 billion. “It is a well-timed, Buffett-like move,” says Danie Schutte, an analyst at CLSA Emerging Markets, a unit of Crédit Lyonnais SA.

Li also announced in August that Hutchison had ac- quired for $1.3 billion the 1,900-store European drugstore operator Kruidvat Group, which includes the British chain Superdrug. He said the deal would increase the global buying power of Hutchison’s existing Asia-based retail business: the 1,100-store AS Watson & Co. drugstore and supermarket chain. Kruidvat stores will be used as sales and distribution points for the 3G service, he added. UBS Warburg Asia Ltd. analyst Simon Rogers, who has a buy rating on Hutchison, says that while the deal makes some sense for the retailer, he’s skeptical that consumers will relate to a drugstore’s selling phone service.

Li’s rivals say they’re content to let him test the waters for the new service while they continue to sell so-called 2.5G services. Existing 2.5G services are slower than 3G and can download text messages and pictures but not video. “I’m not going to build a 3G network just for the birds to sit on,” says Peter Erskine, chief executive officer of MM02, which has 11.5 million subscribers in Britain and plans to sell its first 3G phones in the second half of 2003.

The 3G service is also more expensive than existing serv- ices. In the U.K., Hutchison plans to charge $93–$155 a month for the service plus $618–$773 for the phone. Providers of existing services sometimes offer phones for free and charge as little as $40 a month.

Li expects to have 1 million phones available in both Britain and Italy by the end of 2003. In November, Hutchison began testing the system. Hutchison spokeswoman Laura Cheung declined to comment on how it was going.

To manage the telecom business, Li relies heavily on Fok, a 51-year-old Australian-trained accountant, and Frank Sixt, 51, a Canadian lawyer who is group finance director. Briton John Meredith runs Hutchison’s ports, and country- man Ian Wade is head of the company’s retail division.

“He’s been willing to go outside his family and his country to find the best talent,” says fund manager Legallet. “The com- pany is being run by professional managers these days.” Still, Legallet says, he’s concerned about what will happen when Li retires. It’s unclear whether Richard Li will play a role.

Richard earned $525 million for his father while still in his 20s when he sold his father’s 64 percent stake in Asia’s first satellite TV network, Star TV, to Rupert Murdoch. Richard raised his profile when his PCCW won a $28 billion takeover battle against Singapore Telecommunications Ltd. for Cable & Wireless HKT Ltd.—the biggest M&A deal of 2000 in Asia, excluding Japan. Li says his son told him about the Cable & Wireless deal only hours before it was announced. The collapse of PCCW’s share price and the disclo- sure that he never graduated from Stanford gained Richard less-favorable publicity. “Dr. Richard Li, please give us our money back,” read a sign at a 2001 Hong Kong rugby tournament, ridiculing the Stanford incident.

Right now, Superman shows no sign of wanting, or needing, to hand over to either of his sons. He says he gets up at 5:59 a.m., listens to the news, plays golf for an hour and a half and then works a 12-hour day without pausing for a rest. He says he sets his watch 20 minutes fast to en- sure he’s always on time. He also spends time giving away money, having donated more than $600 million to medical and educational causes. And while he waits for the 3G project to get into full swing, this lifelong value investor has also piled $69 million into some downtrodden stock: his own.

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