IPO to grow

Hutchison Whampoa: It’s hard to fault the financial logic in Hutchison Whampoa’s plan to list some of its port operations. The tougher question is what the Hong Kong-based international conglomerate should do with the possible $6 billion proceeds. Investors have been pushing for Hutchison to pay bigger dividends. But de-gearing and investing in growth look the wiser course.

Hutchison should get a valuation boost by making its China ports business more visible as a new stock listed in Singapore. The unit's implied enterprise value is 12 times 2012 EBITDA, compared to 18 times for China-focused peer Cosco Pacific, according to Standard Chartered research.

Now is also a good time to extract some value from the business. The recovery in global trade has boosted container traffic. But ports in Hong Kong and South China are maturing, as Chinese manufacturers relocate to the hinterlands.

How to spend the proceeds is a nice strategic problem. Some investors have asked Hutchison for higher dividends, as a turnaround in its telecom business improves its cashflows. A special dividend may please them. But Hutchison has other priorities. Deleveraging is one. The net debt to EBITDA ratio of 4.4 times for 2010 is somewhat high versus its peers, says rating agency Fitch.

Above all, Hutchison needs to invest in growth. Profit and revenue growth of its ports in other parts of Asia and Central America have outpaced those in Hong Kong and China. Hutchison has been gaining container traffic share in those regions by applying an efficient operating model refined in Hong Kong. Latin America, where trade growth is robust and infrastructure needs modernisation, is another attractive market. M&A looks sensible here. Even the 183-year-old Watsons pharmacy and beauty business has big room for expansion in China as its middle class rises. The company had only 700 retail stores in China as of June 30, versus 6,500 stores in Europe. The retail chain has been mostly relying on organic growth. Acquisitions could accelerate expansion.

Hutchison’s current 2.1 per cent dividend yield is in line with other Hong Kong conglomerates. Improved growth prospects and a stronger balance sheet, along with some opportunistic deals, should feed into sustainably higher dividends in time.