CK Hutchison has a deal to sell its Panama Canal ports to BlackRock. But Beijing doesn't like it. By Andrew Bary

When a BlackRock infrastructure fund agreed to buy the Panama Canal ports that had drawn the ire of President Donald Trump for what he called Chinese control of the waterway, it looked like the end of that episode. Less attention was paid to the seller, Hong Kong--based CK Hutchison Holdings, or how the deal would be received by Beijing.

The transaction, which is due to be completed in early April, would be a windfall for CK Hutchison, netting it over $19 billion in cash for the Panama Canal terminals and other ports around the world. The price is equal to about 85% of the company's market value for a business that generated less than 15% of its profits.

But the high-profile sale could be in jeopardy because Chinese leader Xi Jinping is displeased that CK Hutchison didn't consult him before negotiating the deal, according to a recent Wall Street Journal article. The controversy it produced has thrown the spotlight on a company that isn't familiar to U.S. investors but should be.

CK Hutchison owns extensive international infrastructure assets in everything from electric power and natural gas to renewable energy and water. It also controls a large group of retailers that sell health and beauty-care products throughout Asia, notably AS Watson. It also owns a sizable European wireless telecommunications business, led by 3 Group Europe, and has a 17% stake in Canadian energy company Cenovus Energy. It has a cheap stock and a billionaire founder who draws comparisons to Warren Buffett.

Li Ka-shing, 96, took a small plastics business that he started in Hong Kong about 75 years ago and built one of Asia's great companies and personal fortunes. His family trust owns about 25% of the company and he serves as a senior adviser, while his son, Victor Li, 60, leads the company.

The more-liquid Hong Kong--listed shares, which trade at about 45 Hong Kong dollars, have the ticker symbol 1.Hong Kong, reflecting the company's historic importance to the city's financial markets. The U.S.-listed shares (ticker: CKHUY), which are equivalent to one Hong Kong share and now trade at about $5.80, fetch just seven times projected 2025 earnings, carry a roughly 5% dividend yield, and trade for about a third of the company's book value and estimated net asset value, or NAV.

"CK Hutchison is trading at a very substantial discount to what we think the stock is worth," says Simon Shi, deputy director of research at Kopernik Global, an investment firm that holds the stock. He thinks the company's asset value is four times its current market value of $22 billion.

Citigroup analyst George Choi, who has a Buy rating on the stock, has a similar view. He pegs the company's asset value at nearly HK$130 per share, or nearly three times the current stock price. His price target is a conservative HK$56.80, still a 27% gain from the recent close. Conglomerates often trade at a discount to their NAVs to reflect complexity, but the discount on CK Hutchison is unusually steep.

CK Hutchison stock popped 35% after the deal was announced in March. Choi wrote that it would be "significantly value-enhancing" if completed, based on the preliminary terms. He had valued the ports at a sizable discount to the deal value.

Assuming it gets that deal done, CK Hutchison will be left with a lot of cash and three large businesses: telecommunications, retailing, and an infrastructure business that consists principally of a 76% interest, now worth $12 billion, in the Hong Kong--listed CK Infrastructure Holdings.

CK Hutchison is arguably cheap for a reason. Many international investors won't touch Hong Kong companies due to China risk, including CK Hutchison, even though it generates over 85% of its revenue and profits beyond Greater China. The political risk is real, as Xi's reported displeasure with the Panama deal shows, though the Chinese government has no ownership interest in the company.

The risk is reflected in shares of CK Hutchison, which are down 50% over the past seven years, and the discount to NAV, which has risen to more than 60% from 25% over that period, Citi's Choi estimates.

CK Hutchison's earnings performance has also been mixed, with pretax profits down 1%, to $7 billion, in 2024, the company recently reported. In a subdued comment on the outlook, Victor Li called the operating environment "volatile and unpredictable." The company has sizable debt of $33 billion, but net debt, which accounts for its cash holdings, is about half of that amount. It has single-A credit ratings, indicating comfort by the agencies with its debt levels.

Despite understandable concerns, the Li family has navigated Hong Kong and Chinese politics for decades. That means it may find a way to get the ports deal done without alienating China.

Kopernik's Shi views the Li family's ongoing role as a positive. "We like to partner with management whose interests are closely aligned with ours," he says.

It's easy to imagine how a bullish scenario could play out for CK Hutchison, which has dropped over 10% since its initial port-sale pop. If the deal gets done, the company could use the proceeds to pay down debt and buy back a lot of stock. It could also consider listing elsewhere, perhaps in London.

Trump's trade policies haven't been a problem for Chinese stocks, which are up 20% year to date. That trend could continue, especially if U.S.-China relations thaw.

CK Hutchison could also consider a partial breakup, which might include selling its valuable infrastructure business. Global investors are hungry for those assets, as the high price of the ports deal attests.

It isn't often that investors get to buy a quality asset at 35 cents on the dollar. If CK Hutchison were based almost anywhere else but Hong Kong, it probably would trade at a higher valuation.

It's an opportunity too good to miss.

Write to Andrew Bary at andrew.bary@barrons.com

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March 21, 2025 21:30 ET (01:30 GMT)

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