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Monday, June 27, 2016, 15:13

Li Ka-shing: Biggest Brexit loser in HK

By Bloomberg

Brexit is bad news for Li Ka-shing.

Since Britain unexpectedly voted to leave the European Union, Li’s CK Hutchison Holdings Ltd and Cheung Kong Infrastructure Holdings Ltd have fallen more than 9 percent to be the biggest losers among companies on Hong Kong’s benchmark stock index. The city’s richest man had warned Britons against Brexit, saying it would be negative for the whole continent.

As one of the UK’s biggest investors, Li has a lot to lose. He operates Superdrug and Savers stores, ports, the Three phone service, as well as gas and electricity distribution. His Hong Kong-based flagship CK Hutchison generated 37 percent of its total earnings before interest and taxes from the country last year.

"His European exposure will prove to be difficult in the coming years, both from a currency translation perspective, as well as from a fundamental earnings and growth perspective," said Sandy Mehta, chief executive officer of Hong Kong-based advisory firm Value Investment Principals Ltd.

A plunging pound is bad for CK Hutchison’s profits. Every time the currency moves by 1 percent, the company’s recurring earnings would swing 0.5 percent in the same direction, according to Benjamin Lo, an analyst at Nomura Holdings in Hong Kong. Sterling has tumbled about 10 percent in the past two days, the most on record.

Don’t Go

"If Brexit happens, it will be detrimental to the UK and it will have a negative impact to the whole of Europe," Li told Bloomberg Television’s Angie Lau last week. "Of course I hope that the U.K. doesn’t leave the EU."

Analysts mostly remain bullish on CK Hutchison, which has the ticker ‘1 HK.’ While Morgan Stanley and Citigroup Inc. cut their ratings on the stock in the wake of the vote, there are still 13 buy recommendations compared with two neutral and one sell, according to analysts tracked by Bloomberg. They are less enamored with Cheung Kong Infrastructure, which has more neutral calls than buys.

Though Li wasn’t available to comment after the British vote, CK Hutchison said in a statement that "We are confident that our UK businesses -- which are strongly focused on providing vital goods and services to UK communities -- will continue to thrive."

The Hang Seng Index dropped 0.5 percent at 2:45 p.m. in Hong Kong, extending its loss this year to 8.2 percent. CK Hutchison headed for its lowest close in five months, while Cheung Kong Infrastructure slid 4.5 percent.

HBSC Retreats

Hong Kong retains strong ties to the UK London-based HSBC Holdings Plc and Standard Chartered Plc are two of three banks that print the city’s banknotes, along with Bank of China Ltd.

HSBC, which gets a third of its revenues from Europe, retreated 1.1 percent, extending its 6.6 percent slide on Friday.

"Global markets are in a risk-off mode now as investors are worried that the fallout from Brexit is still spreading,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co. “Given Hong Kong’s close correlation with the international markets and the fact that the listed companies have lots of business with the UK, the stocks will still be under pressure.”

Currency Pain

Hong Kong companies have other worries to contend with. The city’s economy contracted in the first quarter compared with the previous three months, while the city’s greenback-pegged currency is at a five-year high against the yuan, making its goods less appealing to mainland shoppers. The slowdown in China and an anti-graft campaign are adding to headwinds.

Cathay Pacific Airways Ltd. headed for its lowest close since 2009 after the company’s briefing with analysts on Friday spurred a wave of downgrades amid concern earnings will falter.

"Cathay Pacific’s fall is actually a typical example of Hong Kong’s waning retailing and tourism industries, which are hurt by slowing economic growth in China and globally,” said Hao Hong, chief China strategist at Bocom International Holdings Co in Hong Kong.

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