Citic Pacific shares dive 55pc after loss warning

PUBLISHED : Wednesday, 22 October, 2008, 12:00am
UPDATED : Wednesday, 22 October, 2008, 12:00am

Reeling giant's potential loss on currency bets exceeds its value

Citic Pacific shares lost more than half their value yesterday after the blue-chip company shocked markets by warning of a huge potential loss from unauthorised currency bets.

Shares of the Hong Kong arm of the mainland's biggest state-owned investment company - which had been suspended from trading - plunged 55.1 per cent, to HK$6.52, shrinking its market capitalisation to HK$14.3 billion - less than the HK$15.5 billion it says it stands to lose.

Brokerage firms cut their ratings on the company and their targets for its share price.

The company has faced a barrage of criticism following its disclosure on Monday. Citigroup analyst Anil Daswani decried its 'cowboy' hedging policy. Lawmakers and market watchers condemned its delay in reporting the case and sceptics suggested insider trading might be involved.

Ratings agency Moody's Investors Service cut its rating on Citic Pacific debt and said it would be on review for possible further downgrading.

The slump in the stock, the biggest since 1990, cut Citic Pacific's market capitalisation by HK$17.54 billion and brought its decline this year to 85 per cent.

Yesterday's plunge reduced the value of chairman Larry Yung Chi-kin's 19 per cent stake by HK$3.3 billion. However, he continued to buy shares in the company yesterday, along with the parent, Citic Group, said managing director Henry Fan Hung-ling. He did not disclose how many shares they bought.

Mr Fan stressed that the company had followed legal advice on when to report the case, as it needed time to investigate and seek solutions.

A spokesman for Hong Kong Exchanges and Clearing said it did not comment on individual cases.

Citic Pacific entered toxic foreign exchange forward contracts as the Australian dollar was rising. It wanted to lock in the price it was to pay for a A$1.6 billion investment in an Australian iron ore mine.

These contracts, known as 'foreign exchange accumulators', automatically terminate if the Australian dollar reaches a cap. But there is no protection if the Australian currency falls, which left the company with potentially unlimited losses.

Citic's bets turned out to be wrong in the face of the global financial meltdown. The Australian dollar has fallen about 30 per cent from a 25-year high reached in July.

A loss of HK$808 million has been incurred from terminating some leveraged currency contracts, and the company is sitting on further potential 'mark-to-market' losses of HK$14.7 billion based on the exchange rate of one Australian dollar to 70 US cents on Friday.

If the Australian dollar dropped to 50 US cents, losses could widen to HK$26 billion, US bank Citigroup warned.

Another US bank, JP Morgan, said a standby loan facility of US$1.5 billion provided by parent Citic Group would ease Citic Pacific's short-term liquidity concerns but the damage to the company's reputation was significant and it would take a long time to restore investor confidence.

Changing fortunes

In April, company chairman Larry Yung's 19 per cent stake was worth: HK$13.8b

Yesterday, the value of his stake had dropped to HK$2.7b