Rivalry between Hong Kong and Singapore can be fierce.
So the news that one of Hong Kong’s top companies is planning to list its port operations in Singapore is causing plenty of controversy. On the face of it, the deal looks like an embarrassing loss for Hong Kong – and a major gain for its rival.
The Hutchison Ports Holding Trust is expected to raise as much as US$6bn. That’s more than the total number of initial public offerings (IPOs) in Singapore last year. It would also set a new record for the city-state’s biggest IPO. The current record is held by Singapore Telecoms, which raised S$4bn (US$3.1bn) in 1993.
But Singapore investors shouldn’t feel too proud. Why not?
Because in many ways, this float reflects everything that’s bad about Asian markets. And it’s something that frankly, Singaporean investors might be better off without…
How 25% can leave you in complete control
The new listing will hold the Hong Kong, Macau and southern China port assets of Hutchison Whampoa, a major conglomerate controlled by Li Ka-shing, Hong Kong’s richest man. It will be structured as a business trust. This is a type of company that can be publicly listed in Singapore, but not Hong Kong.
The main advantage of a business trust from an investor’s point of view is that dividends can be paid out of cash-flow rather than earnings. The distinction might sound arcane. But with a capital-intensive business such as ports, it’s quite significant. High depreciation means that accounting earnings can be substantially lower than operating cashflow. So being able to pay dividends based on cashflow means that the payout can be greater.
But from the point of view of Li, there’s an added advantage. Like real estate investment trusts (Reits), which you may be more familiar with, business trusts don’t have internal management teams. Instead they have an external manager.
The “trustee manager” in this case will be Hutchison Ports Holdings, the current owner of the assets. It is controlled by Li, with a 20% interest from the Singapore government-owned Port of Singapore Authority.
Under Singapore business trust rules, trustee managers can only be removed from their position if 75% of the trust’s shareholders vote in favour of doing so. So the advantage of this set-up for Li or any owner considering doing the same thing is easy to see.
They can float a majority stake in their assets, yet retain complete control over them by installing one of their own divisions as manager. And they need only keep hold of a relatively small stake to ensure that the manager can’t be changed.
Asia’s own Gilded Age
While this is a new twist, arrangements like this are only too common in many Asian markets. Many major business are controlled by a few tycoons who structure their affairs with cross-holdings, pyramid structures and different classes of shares to ensure that the can retain control while having as small an economic interest as possible.
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Another of Li’s interests is Hong Kong Electric Holdings, one of the territory’s two electricity generators.
Hong Kong Electric Holdings is about 38%-owned by Cheung Kong Infrastructure –
• which is in turn about 85% owned by Hutchison Whampoa;
• which in turn is about 50% owned by Cheung Kong;
• which is Li’s central holding company – and Li himself owns about 42% of Cheung Kong.
All of these stakes are large enough to exert effective control over the next company down. As a result, Li can control a business four levels removed with a personal economic interest equivalent to around 7% of its shares.
This kind of set-up doesn’t guarantee that outside shareholders will be abused. But it does make it more likely. That’s why it’s less commonly seen in Western markets these days, despite similar practices – and worse – being widespread a century or so ago. A combination of pressure for stronger shareholder rights and the decline and death of many of the robber barons who founded these businesses ultimately led to much better, cleaner markets. We still see plenty of scandals and frauds today, but if you look back at market history, they seem almost tame by comparison.
Obviously, markets like Hong Kong and Singapore have much higher standards today than New York did during the Gilded Age. But there’s still room for improvement. Discouraging these kinds of structures that separate control and ownership would be a good start.
So Singapore shouldn’t be celebrating that it’s got an IPO that Hong Kong lost out on. It didn’t get it for reasons that reflect well on its market. Politicians in Hong Kong certainly shouldn’t be pressuring their regulators to change the rules and allow structures like this, as they now seem to be doing. And potential investors should think carefully about who’s really getting the best deal out of this IPO.
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