III. Industry Environment Analysis
Porter’s Five Forces
Porter’s five forces model can help to understand the external forces within an industry, key survival factors and attractiveness of the industry.
Interfirm Rivalry
Hong Kong property industry is monopolized by several large developers like Chung Kong Ltd, Sun Hung Kai Properties Ltd and Henderson Land Development Co. Ltd. Due to the fact there are high demand for flats, an increasingly growth in property industry has shown, but financial crisis lead to decline its transactions. Big developers need to make their property to be distinguishable among competitors like providing further facilities to attract buyers like clubhouse, swimming pool and parking areas, in order to acquire more market share.
Threat of entry
There is a low legal barrier to enter Hong Kong property market, but there is a higher entry barrier to enter China and foreign market because of the regulations differences. Entry barriers contains many factors including famous developers like Sun Hung Kai Properties Ltd with good reputation, they gain trust from buyers and build up loyalty. Due to scare supply of land in Hong Kong, it leads to extremely high land price, and new entrants do not have enough power to win in the land bidding.
Buyers’ Power
Buyers have a little influence on market property prices. As the property industry is not really big as of today, chances for customers will switch to alternatives property will not be high. But the property developers still use some methods to attract the customers’ attention like unique design, facilities and good after sales service.
Threats of substitutes
There are threats of substitutes in property industry like public housing provided by Hong Kong government, offering affordable housing for lower-income families, who have much less requirements about living environment. Also, there is a maximum income requirement for public housing application. Although public housing and property provided by big property developers fulfill similar function, people who suits and whom they are targeting are of different social status
Suppliers Power
Supplier group is powerful because most lands are provided by the government. Since there are scarce supplies of lands in Hong Kong, government doesn’t have many lands to sell to property developers, land bidding is competitive and intense.
Key survival factors
Cheung Kong Holdings Limited continue to merge and accommodates with many international companies world-widely, it makes CKH have good potential in continues growth, investment, expand its core business and acquire more market share. And CKH is strong enough to pursue more developments around the world and have more future growth.
IV. Competitor Environment
Future objectives
The future objectives of Hong Kong‘s conglomerates are being the largest company at the particular industry. There is a saying ‘if you cannot beat it, join it’. In Hong Kong competitive environment, it means if the company cannot be the industry top one, acquires the industry top one. The ultimate goal is add value to own corporation.
Strategies and capabilities
Development of real estate involves a lot of construction. One of CKH competitors, Swire Group is the owner of Gammon Construction Limited. (Swire Pacific, 2012)
Owning a construction company can enjoys economic of scope, which can lower the cost of constructing new buildings. It is a vertical diversification and this will add value to the corporation
Swire group is one of CKH competitors. Swire group developed Taikoo Shing in 1970; it is one of the largest private housing estates, offering over 12000 residential units and its target market is middle-class citizen. Swire group also build a shopping center near the estate, named Cityplaza. It is the largest shopping center in Hong Kong Island (Swire Pacific, 2012).
The strategy is the residents of the housing estate will often shop at the shopping center nearby. Therefore great revenue will bring to the shopping center. It is a revenue-enhancement synergy. To carry out more enhancements to this synergy, the brands inside the shopping center is even under the same company. Unfortunately the Swire group doesn’t have any restaurant, supermarkets etc, so it cannot add more value.
Acquiring other business in other industry will add value to the corporation, but also preventing other business to become monopoly in the industry. For example, Jardine Matheson Holdings is the owner of Wellcome while Cheung Kong Holdings is the owner of Park’n Shop, both of them are the leading brands in supermarket industry. Jardine Matheson Holdings also owns Mannings and Cheung Kong Holdings owns Wastons, both of them are the leading brand in healthcare retail industry (Jardines, 2012) . The Competitors are preventing one brand grow too big and lead the whole industry. Their method is, if someone acquires the top brand in the industry, one should acquire the second largest brand in the industry to compete with it, preventing monopoly. If monopoly is settled for a period of time, it is hard for other competitors to break into the market because the brand image already deep planted in everyone’s mind.
V. Internal Environment Analysis and SWOT
CKH believe every company it acquired will add value to the corporation. For example Cheung Kong Holdings developed Whampoa Garden in 1985; it is one of the largest private housing estates, having over 10,000 units and its target market is middle-class citizen. (Cheung Kong Holdings Limited , 2011) It includes the one of the largest shopping center in Hong Kong ‘Wonder worlds of Whampoa’. The reason why CKH has to build private estate and shopping center together is because the resident of the estate will shop at the shopping center nearby. It is revenue-enhancement synergy. Using the resident of estate as a customer for the shopping center will generate more value. Moreover, CKH acquires Hutchison Whampoa Limited, expanding the classes of its business, including, supermarket, health care retailer and electronics retailer (HWL, 2012). These shops will be in Shopping center, enjoying low rent and attracts customer, creating more value to the value chain. In addition, hotels are also built near the shopping center to bring more customers to it. These estates and shopping center will also need security, cleaning and management services, and CKH has its property management company for it. To conclude, the value chain of CKH has a large revenue enhancement and economic of scope to reduce cost.
Strength
Diversification of business portfolio
Regardless of main investment in property development, CKH and its subsidiaries have also expanded its business in different segments ranging from telecommunications, infrastructure development, distribution of electricity and life sciences.
For instances, the Hutchison Whampoa as one of subsidiaries of CKH has engaged in property and hotel world-wide. Until 2011, it has increased up to around 99 million square feet of attributable landbank which 97% is in the Mainland and the rest in Singapore and London. This landbank contains 50 projects in 24 cities. Besides, the ownership interests of hotel have increased up to 12 in Hong Kong and the Mainland.
Powerful financial capability
With better management and remarkable investment in each business layers, the company’s profits continue to grow. In 2011, the net profit was recorded HKD46,259(million), an increase of 70% compared with that of 2010. As a result, its return on investment has risen to 8.55% which implied that the amount of returns from all type of investments has increased.
In addition, from consolidated statement of cash flow, the cash and cash equivalents in 2011 was recorded HKD19,894(million) which is slightly lower than that of 2010 (HKD25,147). It is because of high proportion of cash used for investment which also implied that the company will gain more in the foreseeable future.
With well-established capital structure and robust cash balance and marketable securities in hand, CKH should surely have no problem in meeting any debts. Hence, it can also make use of these sufficient financial resources to meet its commitments and grasp every business opportunities
Weaknesses
Heavy dependence in the Mainland and Hong Kong
CKH mainly operates in Southeast Asia and generate nearly all of its earnings from Hong Kong and China. In 2011, the company generated approximately 70% of its revenues from Hong Kong and around 25% from the mainland. Therefore, CKH is vulnerable to negative factors such as a decrease in buyer demand, economic recession and government policies. Tighten policies are force to slow down the growth rate of property market in Hong Kong. For example, implementation of government-subsidized home plan would lower the property prices and hence driven down CKH’s net returns. In addition, China government has increased the interest rate on property market in order to restrain speculation. High interest rate lead to high property prices which would discourage potential buyers.
Heavy concentration of investment on Hong Kong and China would definitely put the company at risk.
Opportunities
High earnings visibility from various investments
CKH has 27 projects scheduled for completion in 2012 which would help to increase its property sales segment growth. Several big projects including La Grande Ville Phase 2 and The Greenwich Phases 2A,2B and 3A in Beijing; CROWN by the Sea in Hong Kong and Marina Bay Financial Centre Tower 3 in Singapore. Those projects would surely give a considerable returns to the company. Furthermore, the total floor area under CKH’s control was around 88 million square feet and this is anticipated to grow firmly following the gradual completion of all 27 projects in 2012. From cash flows statement, CKH spends over 16,420 million on net investing activities which is 737% higher than the previous year. Such giant increase in expenditure is resulted by new investment in associates in 2011. Together with strong management structure, such property expansion is expected to give high earning visibility.
Well-positioned and good performance of all subsidiaries
CKH has a strong presence in several areas apart from core business property development, all those subsidiaries like Hutchison Whampoa and Cheung Kong Infrastructure Holdings Limited have performed very well through acquisition. Taking over Orange Austria by Hutchison 3G Austria are also going to create efficiencies and ideal returns. CKI has made two acquisitions of companies which were Meridian Cogeneration Plant in Canada and e Northumbrian Water Group Limited in England. They are expected to push on CKI’s gain. By showing constant acquisitions done by CKH’s subsidiaries together with robust cash on hand by initial public offer of units in Hutchison Port Holdings Trust listed in Singapore, the liquidity of the parent company was strengthened and wished to help to capture golden business chances over the world.
Threats
Intensifying competition in China market
In Hong Kong, the number of competitors is limited. CKH and SHK are nearly dominating the whole property market. However, China such a giant market involves innumerable competitors across the property markets. CKH first need to face intense price competition, new market entrants might offer relatively lower price to the buyers which could adversely affect the company’s financial condition and operation results. Besides, CKH need to confront peer competition due to unceasing increase in number of developers engaging in property industry. Market share would be surely eroded and diluted. As a result, financial performance of the CKH would be badly affected.
Impairment caused by government policies
The property prices were continuously increased during 2009, but it was driven down to the lowest in November 2011 because of buyer’s fear of continued recession. Experts claimed that the prices in housing market would continue to decline due to reintroduction of a government-subsidized home plan by Hong Kong government. Further, the Transport and Housing Bureau has carried out several guidelines to enhance transparency and clarity of sales brochures of property information. The information should be declared within five working days. Such tighten policies by Hong Kong government are going to badly influence property sector. CKH is no exception to be one of the victims.
VI. Strategic Intent and Mission
Vision
Since Hong Kong GDP growth is expected to be moderate in 2012, Cheung Kong Group is still positive about its' long-term investment on all core businesses, trying to maintain and maybe increase profit gains in three to four years time. As one of a diverse company in 53 countries, Cheung Kong Group will also corporate with charities to accommodate minority groups’ needs in the community.
Mission
In concern of making long term profits out of its' core businesses, it is the mission of Cheung Kong Group to maintain the stability of them; innovate new ideas about how to keep core businesses active and competitive. Keep open minded to all chances of making profits globally and diversely is also one of the main concerns of the company.
VII. Recommendations and alternatives
CKH is lacking a company that engages in restaurant business. There are no currently no restaurant in the value chain. CKH can set up the restaurant business itself and added into the value chain. The new brand can use the resources that are available now, for example, the food from Parkn shop. The brand can also enjoy low rent in the shopping center and hotels, also the existing customer of them. Cross selling to existing customers is one of the revenue enhancement synergies.
Unfortunately, there are some disadvantages for setting up the new brand. First it will be difficult at first since CKH don’t have any experience in catering business. Second, the competitive environment of catering is very tough. The new brand might found it to develop the brand image. Third, the new brand is might take a long period of time until it start break even or gain profit.
CKH should do its best: Acquisition. Acquiring the leading brand in the catering industry will be much earlier than setting a brand itself. Acquiring brands in catering industry will getting all the resources that acquired company has, for example, the reputation of the brand, the profit made, the employee training, store decoration, suppliers etc.
VIII. Implementation
Acquiring other company has two methods. First is negotiating with the target company, see if it will sell its company at certain price. Second is quietly buy shares of the target company to be the largest shareholder. The first method is the suggested strategy since CKH an adequate capital reserve and method two is a lot troublesome.
After acquiring the catering business, CKH should open new branch in its shopping center, the reputation of the new brand would attract more customers to visit the shopping center, and the new brand can also enjoy lower rent. The new brand can also be the catering brand of CKH’s hotel business, so that CKH don’t need to buy catering services from outside. Economic of scope is applied therefore cost is reduced.
Reference
CKH, 2012, CHEUNG KONG (HOLDINGS) LIMITED. [online] Available at ; http://www.ckh.com.hk/eng/index.html Accessed 12 Aug 2012
CHEUNG KONG HOLDINGS LIMITED , 2011. Annual report 2010-2011. [Online]
Available at: <http://www.ckh.com.hk/uploaded_files/news/492_e_content.pdf>
[Accessed 12 Aug 2012].
Hutchison Whampoa limited , 2011. Annual report 2010-2011. [Online]
Available at: < http://202.66.146.82/listco/hk/hutchison/annual/2011/ar2011.pdf>
[Accessed 12 Aug 2012].
Financial Times: Cheung Kong Holdings Ltd Market data
Available at: < http://markets.ft.com/Research/Markets/Tearsheets/Financials?s=1:HKG>
[Accessed 12 Aug 2012].
HWL, 2012, Hutchison Whampoa limited. [online] Available at;
http://www.hutchison-whampoa.com/en/global/home.php Accessed 12 Aug 2012
Jardines, 2012, Jardine Matheson Holdings Limited. [online] Available at;
http://www.jardines.com/ Accessed 12 Aug 2012
Swire Pacific, 2012, Swire Group. [online] Available at;
http://www.swirepacific.com/eng/global/home.php Accessed 12 Aug 2012
by
marcochris (student)
