Riding on the Global Infrastructure Wave -
Cheung Kong Infrastructure's Strategy and Success Story
二 零 零 六 年 十 一 月 三 十 日 — 香 港
Asian Infrastructure Congress 主 題 演 講 全 文 ( 衹 提 供 英 文 稿 )
甘 慶 林 先 生
集 團 董 事 總 經 理
CKI's Roadmap for Growth
Good morning ladies and gentlemen,
It is an honour to be here today amongst so many industry leaders in the global infrastructure arena. I am pleased to have the opportunity to tell you the story of Cheung Kong Infrastructure, commonly known as "CKI" in the infrastructure and financial circles.
As I take you on CKI's journey of growth this morning, I hope to share with you the unique characteristics of infrastructure investment and how our company has developed in this arena.
To understand about the business of CKI, let's start with the role of infrastructure. It is no exaggeration that infrastructure underpins economic development and is crucial to all communities.
As a highly capital-intensive business, the barriers to market entry in infrastructure are high. In a lot of cases, complex risk management and assessment is required. By their very nature, infrastructure projects are long-term ventures with strong asset backing.
Around the world, infrastructure development is growing rapidly and becoming a much sought-after industry. It has been reported that in just the energy and power sector alone, mergers and acquisitions for the first three quarters of 2006 were worth over HK$3,000 billion. In the United States, one of the biggest infrastructure deals this year was worth more than HK$170 billion, while in the United Kingdom a water asset was purchased for more than HK$120 billion recently. Clearly, this is a business that is very capital intensive with large sums of money involved. Investors have traditionally either invested in these projects directly, requiring significant capital outlay, or invested through infrastructure stocks such as CKI.
Infrastructure is a complex business - it's not just about financial viability. Successful infrastructure companies need to consider a host of factors in their investment market, such as politics, fiscal policy, legal framework, interest rates, currency and foreign exchange, taxation, GDP, consumer purchasing power, availability of capital, population etc.
There is currently an emergence of a number of infrastructure investment opportunities as more government organizations around the world are outsourcing projects and the Public Private Partnership (or PPP) model becomes increasingly popular. At the same time, the number of keen investors in this area is also rapidly rising as more enterprises and funds are lured by the relatively stable cash returns and inflation hedge offered by infrastructure projects.
For an infrastructure company to be successful, it should have very strong financial resources and capital to fund investments. Good project management capabilities are also highly important to oversee these huge, complex and capital intensive projects.
In addition, infrastructure investment companies must have a clear policy on how to assess and mitigate risk. A number of major infrastructure players have grown their businesses and made their reputations with their opportunistic approach to investment. Others are more conservative. Take for instance at CKI, we take a prudent approach to risk management. While our priority of risk management may mean that we turn down projects that do not meet our stringent investment criteria, this helps ensure that the probability of success in all of our ventures is higher. A real plus for CKI in the eyes of many investors and shareholders is that we are not prepared to overpay for projects, especially since a lot of money is involved and the infrastructure market seems quite overheated recently.
Before I talk about how CKI has grown over the years, I would like to show you something from our archives as a starting point. I am about to play to you CKI's corporate video produced ten years ago. I think this is a good illustration of the company that we were, our roots and our strategy, and then I'll share how far we've come since then.
That was about ten years ago, shortly after CKI's listing in June 1996. CKI became a constituent stock of the Hang Seng Index within a year of listing, quite a record achievement at that time. Also shortly after listing, we received an "A-" rating from Standard and Poor's, which has been maintained ever since. We have recorded year-on-year growth across a number of key performance indicators.
For the first year after listing, CKI reported profit of HK$854 million. In 2005, profit reached over HK$6 billion, representing an increase of over 6 times in the last ten years. Total assets have grown by around 3 times to reach HK$44.6 billion. As for the company's market capitalization, it has doubled to HK$55 billion. Our share price was HK$12.65 when we listed. At the end of last year, CKI closed at HK$24.40, nearly twice the IPO price, outperforming the Hang Seng Index which recorded 55% growth during the same period.
There are four major utilities stocks listed in Hong Kong and a legion of analysts, from the likes of Deutsche Bank, JP Morgan, Macquarie Bank and Morgan Stanley, have rated CKI as their top pick among them. The reasons for this is our broad and diversified portfolio of infrastructure investments, stable and predictable profit and continued growth for the last decade. A lot of investors consider the growth potential of CKI to be quite appealing, given the company's strong financial platform, substantial war chest and track record of making astute investments over the last ten years.
When CKI was first listed, our business scope was concentrated mainly in Hong Kong and Mainland China. Since then, we have come of age as an international infrastructure player, with investments in Hong Kong, Mainland China, Australia, the United Kingdom, Canada and the Philippines. Our operations now span electricity generation and distribution, gas distribution, toll roads, water treatment and distribution, infrastructure materials and environmental initiatives.
By way of background to the scope of our businesses, CKI began as a company focused on materials, energy and toll roads in Hong Kong and Mainland China. In Mainland China, we have invested over HK$10 billion in a diverse range of projects. Our energy investments have a total electricity generation capacity of 3,800 MW, while our toll road projects span over 500 kilometres in different provinces across the country.
Our materials business includes cement, asphalt, concrete and aggregates operations. Through the operating companies of Green Island Cement and Alliance Construction Materials, CKI is the market leader in Hong Kong's materials industry.
In 1997, CKI acquired a controlling stake in Hongkong Electric, the sole electricity generator and distributor to Hong Kong Island and Lamma Island for more than a hundred years. Hongkong Electric is one of the most reliable electricity suppliers in the world with an exceptionally outstanding supply reliability in excess of 99.999%. This dependable source of electricity makes Hong Kong the envy of many major cities in the world that have suffered from power blackouts in the past and is the cornerstone of the territory's economic development.
After firmly establishing our businesses in Hong Kong and Mainland China, we commenced our story of diversification and globalization by expanding into new markets and new industries.
We began our expansion programme with the Australian market in 1999 through the acquisition of a 19.97% stake in Envestra Limited, the largest listed natural gas distributor in the country with a distribution network that serves approximately 960,000 customers and spans over 18,700 kilometres. Building on this momentum, we amassed a broad portfolio of electricity assets in Australia, including: CitiPower, which distributes electricity to over 280,000 premises across the central business district and inner suburban areas of Melbourne; Powercor, the largest electricity distributor in the state of Victoria that serves 643,000 customers and approximately 65% of the state; and ETSA Utilities, the sole electricity distributor in the state of South Australia that serves approximately 768,000 customers.
These investments have made us the largest power distributor in Australia and their success culminated in the listing of Spark Infrastructure on the Australian Stock Exchange at the end of 2005. Spark Infrastructure has a fully paid up market capitalization of more than HK$10 billion.
In addition to energy, we have transportation projects in Australia - namely the Cross City Tunnel and Lane Cove Tunnel in Sydney.
In water, CKI has a 49% stake in AquaTower, the exclusive potable water supplier of four regional towns in Victoria, Australia.
As our Australian investments reached a critical mass, we further diversified our global footprint in 2004 by expanding into the gas sector in the United Kingdom. CKI won the tender for Northern Gas Networks Limited, which serves a total population of 6.7 million.
We also acquired a 100% stake in Cambridge Water, a water distributor that supplies a population of approximately 300,000 in Cambridgeshire, home to the world-famous Cambridge University. Apparently, according to local wisdom, the reason why so many brilliant students graduate from Cambridge is because of the water that they drink.
Overall, the total net asset value of CKI's investments are approximately HK$18 billion in Hong Kong, HK$7 billion in Mainland China, HK$7 billion in Australia and HK$3 billion in the United Kingdom.
Our expansion initiatives, often implemented in conjunction with other Cheung Kong Group companies, such as Hongkong Electric as in the case of ETSA, CitiPower and Powercor in Australia and Northern Gas Networks in the United Kingdom, as well as CK Life Sciences in the case of AquaTower in Australia, have been fruitful.
Equally, our initiatives to realize the value of our projects have been rewarding. A few toll road and power projects in Mainland China have been successfully divested and Spark Infrastructure was listed on the Australian Stock Exchange last year.
CKI has maintained a leading position in the markets that we operate due to five major achievements.
One - Diversified Portfolio
We have built up a strong portfolio of quality assets across a number of industries in the infrastructure arena, which span across the globe. This has helped to diversify our risk profile.
Two - Global Network
CKI's strategy has been to devote our resources and time into building and growing our expertise in each market we operate in, starting with Hong Kong and Mainland China, then Australia and now the United Kingdom. By clustering our investments, we have been able to attain more synergies between our businesses and magnify our market leadership position. In addition, as part of the Cheung Kong Group, which has businesses in 56 countries across the globe, we are able to leverage on synergies with our sister companies. Being one of the largest foreign investors, the strong presence and market position of the Cheung Kong Group in CKI's key markets has been highly beneficial in accelerating our development.
Three - Secure Investments
When it comes to selecting projects, we favour regulated cashflow. The bulk of our acquisitions in recent years have been of assets in developed markets with regulated cash flows. Currently around 90% of earnings come from regulated businesses. Such projects provide us with stable earnings and calculated risks that we are comfortable with. CKI's preference is to invest in existing projects which can provide immediate cashflow rather than greenfield projects which tend to be riskier in terms of construction risks and time delay. Our prudent investment philosophy is well-respected throughout infrastructure and investment circles.
Four - Expertise
When it comes to building an international business, essentially our management approach is to think global and act local. Our success in the markets in which we operate lie in our commitment to local expertise. With both a macro and micro take on the countries and industries in which we operate, we have acquired expertise in the fields of law, customs, finance, taxation, project management and human resources. Our CKI team comprises of many talented and loyal individuals with an international perspective and transferable expertise. In our operating companies, we have nurtured local talent and promoted them within our ranks. For example, Basil Scarsella, who was CEO of ETSA Utilities in Australia, now heads Northern Gas Networks in the United Kingdom; Bob Stobbe was the CFO of ETSA in Adelaide, then Powercor/CitiPower in Melbourne and is now the CEO of Spark Infrastructure in Sydney; and Bill Shurniak, a Director of Hutchison Whampoa and Husky Oil, as well as Chairman of CKI's Australian electricity businesses from 1999-2005, now chairs our gas operations in the United Kingdom.
Five - Strong Balance Sheet
We have acquired a decade of experience in making prudent investments, garnering extensive market understanding and building up vital connections with experts in the fields of finance, regulation, construction and operation. In the last few years, CKI has been invited to participate in almost all major infrastructure projects available in the market. With our strong financial platform, over HK$8 billion cash on hand and a net debt to equity ratio of 3%, we are in an excellent position to pursue more investment opportunities and participate in more new projects in the future.
CKI's key strengths can be summarized as follows: continued growth, strong financials, local and international expertise, global network, and a diversified investment portfolio. We take a long-term perspective on our investments and are committed to enhancing the value of our assets.
CKI has achieved ten years of continued growth by focusing on delivering long-term, predictable cash flow. With a reputation for thorough due diligence and innovative deal structures, we are well placed to sustain our leading market position. We are probably one of the few infrastructure companies in the world that is "able and willing" to participate in some of the mega-infrastructure projects available. CKI has been profiting in various areas of business, including acquisitions, organic growth, consolidations and divestments.
Looking forward, the opportunities in the global infrastructure industry are immense.
As well as generating organic growth in our existing businesses, we will continue to pursue new investments that accord with our prudent investment criteria. We look for good returns and calculated risk. With skill sets that are constantly expanding, CKI will explore new corporate finance initiatives and divestments to further enhance the value of our business.
With our strong market position and formidable financial might, we are well placed to generate continued growth and returns in the future. From a personal perspective, I have seen CKI grow from a Hong Kong and Mainland China-focused company to a global enterprise with investments in some of the world's largest markets in the past ten years. I am very pleased about what our colleagues have achieved, and am excited about what's to come in the future. We are highly confident of maintaining our growth momentum in the coming ten years. I hope to see you all again in a decade, with more great news and development to report.