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Wharf weathers the storm with telecom business sale

Wharf (Holdings) Ltd.'s HK$9.5 billion sale of its telecom unit Wharf T&T may be just a prelude to more structural changes, as the family-controlled conglomerate continues its operational review amid Hong Kong's changing business environment.

In 2015, Wharf (Holdings) began mulling options for its communications, media and entertainment division, which contributed approximately 1% of the group's operating profit in that full year. The division primarily comprises Wharf T&T and the yet-to-be-sold television broadcaster i-Cable Communications Ltd.

The latest all-cash sale of Wharf T&T, scheduled to be completed by Nov. 23, comes as the group's more significant Hong Kong investment property business, which accounted for around 70% of its 2015 operating profit, encounters challenges.

With a sharp drop in the number of mainland tourists in Hong Kong and their shifting interest from luxury to more modestly priced goods, the performance of the landlord's flagship shopping malls Harbour City in Tsim Sha Tsui and Times Square in Causeway Bay — has deteriorated. In the first half, retail sales at Harbour City decline 14.7% year over year to HK$13.3 billion, while sales at Times Square slumped 15.7% to HK$3.9 billion.

While the sluggish retail sales environment persists, the divestment of noncore business line Wharf T&T provides the group a boost, according to Bright Smart Securities analyst Harry Yuen.

"The selling price of HK$9.5 billion is fairly higher than market expectations of HK$7 billion to HK$8 billion," he said in an interview. "This cash stream is a positive for the group's operation and development in the future."

But in the short term, the disposal is unlikely to push up the share price, which is hovering around HK$57 and already reflecting gains from the potential sale after management flagged it in July, the analyst said. "Management has not yet indicated payment of any special dividend from the sale, so that investor expectation is not that high. Any potential significant increase in share price would depend on whether there will be any special dividend if the group sells the remaining i-Cable operations," he added.

Wharf (Holdings) also owns shipping terminals, hotels and investment properties in Hong Kong and on the mainland. It also holds about 25% in Chinese residential developer Greentown China Holdings Ltd. and more than 8 million square meters of land in 15 Chinese cities.

The conglomerate, with HK$444 billion of total assets, belongs to an even larger business empire, Wheelock and Co. Ltd., which has another two property arms focused on property development in Hong Kong and luxury residences in Singapore, as well as high-end distribution and retail businesses, including Lane Crawford and City'Super.

Due to the group's sprawling corporate structure and ongoing operational review over the years, there has been market speculation that the Wheelock group might reorganize in a similar fashion to that restructuring by Cheung Kong, which moved its real estate assets into one company and left other non-property businesses in another.

A structural change of this scale could take place in Wheelock and Wharf (Holdings) in the next few years after the family-controlled empire's successor is fully in place, according to Macquarie analyst Raymond Liu.

Peter Woo, who inherited the businesses from his shipping tycoon father-in-law Pao Yue-kong in the 1980s, passed the chairmanship of Wheelock to his 36-year-old son Douglas Woo in 2014. A year later, he handed the chairmanship of Wharf (Holdings) to a longtime group veteran, Stephen Ng.

"As a young chairman, Douglas still needs to show his capability of managing such a big company," said Liu. "He has a three-year plan to improve the business performance. What he is doing now is to focus a lot on building the Hong Kong property development business to show that he is one of the top five property leaders in the city."

Once Douglas Woo has established his track record, he will know the Wheelock and Wharf (Holdings) businesses well enough to completely take the helm and reorganize the empire into a better structure, the analyst said.