Cathay stake sale bolsters confidence in Citic Pacific

PUBLISHED : Wednesday, 19 August, 2009, 12:00am
UPDATED : Wednesday, 19 August, 2009, 12:00am

Citic Pacific's decision to offload its stake in Cathay Pacific Airways signals a return to basics for the Beijing-controlled company, which took a big hit from ill-timed currency bets last year.

The move away from the fickle aviation market to focus on bread-and-butter operations such as speciality steel, iron ore mining and mainland property has been generally welcomed by analysts.

Citic Pacific, which reported a deficit of HK$12.66 billion last year on massive losses from unauthorised currency bets, reaped a HK$1 billion disposal gain from its sale of a 14.5 per cent stake in Cathay to Air China and Swire Pacific for HK$7.35 billion. It will retain a 2.98 per cent stake in Cathay after the disposal.

'Investors are generally confident of the new management team's ability to restructure the company,' said Billy Ng, an analyst at JP Morgan. 'The Cathay disposal will further reinforce this confidence.'

Shares of Citic Pacific plunged as much as 9.8 per cent yesterday but pared losses to close 1.31 per cent down at HK$22.55. The benchmark Hang Seng Index reversed an earlier fall and ended up 0.84 per cent.

JP Morgan revised the steel-to-property conglomerate's target price up 70 per cent to HK$25.50 and doubled this year's earnings forecast to HK$4.28 billion after the disposal.

Mr Ng said the deal was positive for Citic Pacific, as the disposal would allow it to focus on its core business and reduce debt gearing to 70 per cent from 84 per cent. He expected the firm to continue to offload its non-core assets to reduce debt further.

It sold an Inner Mongolia power generation company for 1.98 billion yuan (HK$2.25 billion) in April.

Citic Pacific's new chairman, Chang Zhenming, said in May that the company was conducting a review of its development strategy and might sell non-core assets. He said speciality steel, iron ore mining and mainland property development would be the firm's future focuses.

Non-core businesses of Citic Pacific include its 57 per cent stake in the trading and distribution arm of conglomerate Dah Chong Hong, tunnel assets, power plants, a 53 per cent holding in Citic 1616 Holdings and telecommunications assets such as Citic Guoan and Macau Telecom.

Goldman Sachs raised Citic Pacific's earnings forecast this year 95 per cent to factor in the disposal gain, but cut its profit expectation for next year and 2011 by 5 to 11 per cent to factor in the resulting loss of profit contribution from Cathay.

It said the disposal would allow the company to reallocate resources to strengthen its core businesses.

Elizabeth Allen, a senior credit officer at rating agency Moody's Investor Service, said the disposal proceeds would help Citic Pacific 'better manage, albeit slightly, the deterioration evident in its credit profile over the past few years'.

However, the action was not sufficient - at this stage - to affect its ratings and outlook.

Moody's said Citic Pacific's Ba1 corporate family rating was unchanged and its credit outlook remained negative.