As China lists big businesses in Hong Kong, some investors query reform credentials

Fri Mar 28, 2014 5:15am EDT
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By Denny Thomas and Matthew Miller

HONG KONG/BEIJING (Reuters) - China's move to list one of its biggest state-run conglomerates in Hong Kong has left some investors questioning whether Beijing's choice is about improving corporate management and welcoming foreign investors or cementing its own control.

CITIC Group Corp CITIC.UL, China's state-run flagship investment company, is to transfer its main operating assets to its majority-owned, Hong Kong-listed industrial conglomerate CITIC Pacific Ltd (0267.HK: Quote). The deal, valued at $42 billion, comes just a few months after China's Communist Party promised to promote use of free markets to bolster growth in the world's second-biggest economy.

The day after welcoming a deal that folds huge assets from steel to property companies into their firm, CITIC Pacific's minority investors were more skeptical, sending the stock lower. CITIC Pacific plans to pay for the biggest injection of assets into a listed company in Hong Kong's history with an unspecified combination of new shares for existing holders and cash.

Rather than relinquishing control, in the short term CITIC Group could raise its stake in CITIC Pacific from 57.51 percent to close to 90 percent, according to Breakingviews calculations. While it's unclear whether or when CITIC Group might ultimately reduce its holding, the transaction highlights the complexities that China may face in convincing markets that it can successfully open up more state-owned assets to foreign investors.

"If you go to market with confusing messages, lack of clarity about structures, you can often put a big chunk of investors off side," said Sydney-based Shane Oliver, head of investment strategy at AMP Capital, which manages $120 billion. "Then it's much harder to retain them," said Oliver, whose fund has exposure to Hong Kong and China shares.

After rising more than 13 percent on Thursday on the back of the deal announcement, partly on short-covering, CITIC Pacific shares slid to the bottom of the pack on Friday. The stock was down 5 percent at 0801 GMT, making it the worst performer in the benchmark Hang Seng Index .HSI, up 1.1 percent.

As CITIC Pacific slipped, some investors also questioned whether the new assets it is receiving will revive confidence in a company hammered in recent years after miscalculating the huge cost of developing a mine in Western Australia. In October 2008, the stock lost half its value in one day after sour bets on the direction of the Australian dollar resulted in nearly $2 billion of losses.

"Early gains were driven by the excitement of the deal, people have become more down to the earth again as they need to see how well the assets will be in future," said Ben Kwong, chief operating officer of regional brokerage KGI Asia.   Continued...

A Hong Kong flag (R) flutters outside CITIC Tower, the corporate headquarters of CITIC Pacific Ltd in Hong Kong March 27, 2014. REUTERS/Bobby Yip