Title: Jackie Chan:
1-
- Jackie Chan
- Should I give them the money or the stock?
2- Wing Yee Winnie Chan
- Elaine Lam
- Patrick Ng
- Zhi Ming Vicky Wen
- Jessie Zheng
3Agenda
Background Overview
Real Estate Market in Asia
Investment Risk Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
4Cheung Kong Group
- The biggest conglomerate in Hong Kong
- Owned by the richest man in HK Li Ka Shing
- Started from 1 in 1972 to 116 in 2000
- Even in economic downturn today, still priced at
44 - Cheung Kong (Holdings), Ltd.
- Companys long-standing policy is continuously
enhance quality and introduce innovations and
initiatives to cater to changing needs and trends
in the property market, with the aim of brining
quality to our customers
5Economic Overview of China
- External demand affected by Asian financial
crisis and global economic slowdown - Domestic demand affected by increased pace in
corporate reform and weak rural income - Government engagement in expansionary fiscal
monetary policy
6Continued
- By August 2001, China regained its growth
momentum - Increase in external demand
- Property prices in Shanghai rose 30 50
7Economic Overview of Hong Kong
- Hong Kong suffered a sharp slowdown in 2001, with
GDP growth decelerating to 0.1 from 10.5 the
year earlier - Residential property prices are 65 below their
1997 peaks. They have been hurt by oversupply and
anemic demand.
8Agenda
Background Overview
Real Estate Market in Asia
Investment Risk Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
9Real Estate Industry in Asia
- China
- Many opportunities due to rapid economic growth,
rising per capita income and flood of foreign
investment. - Real estate sector is highly profitable
averaging 20 margins. - Property boom nearing bubble proportions
- In 2002, investment in real estate rose 36.6
while fixed-asset investment rose only 24 - Real estate vacancy rate at 26
- The vacancy rate in the US is only 7
- The international warning level is 10
10Real Estate Industry in Asia
- Hong Kong
- Asian financial crisis has led to economic
contraction - Falling property prices and wage rates
- Nearly half their peak
- Flooded property market
- 20,000 completed and 30,000 incomplete private
residential flats for sale on the market - Property is no longer a major investment vehicle
11Real Estate Industry in Asia
- Future Outlook
- Homes are more affordable mortgage payments
comprise smaller share of income. - Residential property prices 65 below their peak
in 1997. - The low tax rate in Hong Kong as compared to
other major international cities allow its
citizens to have more disposable income.
12Foreign Market Developments
- Joint agreements with Hutchison Whampoa to
develop properties in Mainland China. - Other foreign markets
- Singapore
- United Kingdom
13Agenda
Background Overview
Real Estate Market in Asia
Investment Risk Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
14Investment Risks of China
- Economic Risks
- Situation
- Significant growth of economy
- GDP is expected to increase to an average of 7.9
in 2003 - Domestic demand is being stimulated through an
expansionary public investment program - Concerns
- Different program carry on at the same time
- strengthening the financial system
- developing legal and regulatory framework for the
economy - promoting the role of private sector
- Risks
- Targeted long-term growth remain largely
uncertain
15Investment Risks of China
- Country Risks
- Situation
- Accession to the WTO
- Reexamining existing laws and statutes in
accordance with the framework of the WTO - Risks
- Revised laws are relatively new and untested, the
enforcement of these laws under the improving law
system of China involve significant uncertainty
16Investment Risks of Hong Kong
- Economic Risks
- Situation
- Slowly recovered economy
- 0.6 in 2001, 2.3 in 2002
- Low interest rate
- 2 per year
- Risks
- Increase in interest rate
- No more tendencies for interest rate to decrease
- However, with a slowly recovery market,
government might not plan to increase interest
rate - Investors better off
17Investment Risks of Hong Kong
- Country Risks and Concerns
- Suffering from Asia Financial Crisis since 1997
- Weakening demand of economy
- Drop in exports
- However, market has been slowly recovered since
2002 - New Risks SARS
- Currently Hong Kong and China have the highest
number of infected patients
18Investment Risks of Cheung Kong
- Currency Exchange Rate Risks
- Most of Cheung Kongs operations are located in
Hong Kong - Economic downturns in Hong Kong since 1997
- Deflation observed in the market
- However, Hong Kong dollar remained constant
because of Linked Exchange Rate System - Concerns
- A big share of business invested in China and
London - Restrictions on currency exchange might limit
Cheung Kongs ability to utilize its revenue to
fund business activities
19Investment Risks of Cheung Kong
- Company Risks and Concerns
- Reported increasing net profit during the past
decades - The increase of net profit slowed down during
recent years - Economic downturns in the world
- The real estate market in Hong Kong has become
saturated - Difficulties in obtaining larger market shares
- Losses from subsidiaries companies such as Tom.com
20Agenda
Background Overview
Real Estate Market in Asia
Investment Risk Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
21Liquidity
- Current Ratio 1 for the Past 3 Years
- High level of Liquidity
- Increasing
- Decreasing Quick Ratio
- Using cash and securities to pay off liabilities
and purchase inventories
22Leverage Ratio
- Increasing Long Term Debt Ratio
- Relies more on equity than debt financing
- Lower Debt-to-Assets Ratio
- Advantage in borrowing additional funds
- Interest Coverage Ratio
- Dramatic decrease from 88.18 to 6.87
- Negative Operating Cash Flow to Total Liability
23Profitability
- Profit Margin
- Over 100 in 1999 and 2000 but decreasing
- Low in percentage of operating profit
- Volatile
- Decreasing Return on Assets
- Return on Equity
- Decreased from 46 to 6 in 2000
24Agenda
Background Overview
Real Estate Market in Asia
Investment Risk Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
25CAPM
- Risk-free Rate 10 year Exchange Fund Notes
4.40 - Market Return Hang Seng Index 8.83
- Beta 1.079
- CAPM 9.18
26Altmans Z-score Cost of Debt
- Z-score 6.72
- EM Score 3.25 6.56(X1) 3.26(X2)
6.72(X3) 1.05(X4) - Bond Rating A
- Cost of Debt 6.2
- Cost of Debt Risk free rate Default
spread
27WACC Goldman Model
WACC
Goldman Model
28Why DDM?
- Stable Growth See following table
- Dividend long term earning power
Profitability - Dividend vs. EPS foreseeability
- Suitable for non-controlling perspective
29Justified Value of Stock
- DDM Formula
- Current EPS (1Growth of Earnings) Payout
Ratio / (Cost of Equity - Growth of Earnings) - Current EPS Obtained from Bloomberg
- Payout Ratio Most recent year
- Growth of Earnings Growth of DPS
- Cost of Equity - CAPM
30- Value of Stock Today
- HK44.60
- Justified Value of Stock
- HK26.68
31Sensitivity Analysis
- Growth Rate
- Key driver of the value of stock
- As the economic outlook improves, higher growth
rate assumption can be achieved - Equity Beta
- Linear Relationship
- Less Sensitive
32Stock Valuation Suggests
- Based on the numerical calculation alone, we
conclude with a SELL recommendation for Cheung
Kong. - However, there is more to the value of the stock
than just numbers
33Agenda
Background Overview
Real Estate Market in Asia
Investment Risk Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
34Brand Image
- Corporate Governance
- Ticker 0001
- Publicized in 1972
- Today Market Cap of HK 405 Billion
- Diversification
- Li Ka Shing
- Hong Kongs Wealthiest Man
- Worlds 23rd
- Single Largest Shareholder 36.53
- Successful Dealmaker
35Stable Dividend Growth
- Market Recession
- Average Rate for Bank Deposit
- Invest in Defensive Stocks
- Utilities, Health Care, Consumer Staples, High
Dividend Yieldetc. - Stable Dividend Distribution
- Cheung Kong 3.0 Dividend Growth
- Pay Premium for Constant Return
36Instability of Earnings Per Share
- Fluctuation of Payout Ratio
- Earnings Dependent on Associates and Jointly
Controlled Entities - 49.9 Interest in Hutchison Whampoa
- Sold off the British telecom operator, Orange PLC
resulted in 22 Billion Profit for Shareholder In
1999 - Rapid growth of EPS from 1998s 2.66 to 25.84
in 1999
37Hong Kong Property Market
- Diminishing and Saturated Market
- Government Policy
- Subsidized apartment vs. Private Flat
- Cheung Kongs Surviving Techniques
- Mark-to-Market Pricing Strategy
- Market Development China, UKetc.
38Agenda
Background Overview
Real Estate Market in Asia
Investment Risk Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
39Recommendation
HOLD
Cheung Kong Holdings
40Questions?