Old habits die hard for Chinese phoenix Guangdong Enterprises

The fall of Guangdong Enterprises Group in 1998 speaks much about today’s efforts to engineer reform at state enterprises

PUBLISHED : Friday, 08 August, 2014, 9:56pm
UPDATED : Tuesday, 28 April, 2015, 11:23am

While doing research into state enterprise reform, Money Matters found on the shelf a dust-covered book titled Chinese Phoenix - the Debt Restructuring of Guangdong Enterprises Group.

Those who have been in the market long enough will recall the pain caused by the US$6 billion default of this window company of the Guangdong provincial government in 1998.

Two hundred banks suffered, resulting in the shutdown of the loan market to mainland enterprises for almost three years until the completion of the debt restructuring in 2001.

It cost the Guangdong government 30 billion yuan, according to the book's author Wu Jiesi, who was subsequently appointed the company's chairman after leading a successful debt restructuring.

"There will be no more saviours. The future of the company is in our hands. We are determined to reform … and give the company a new life," Wu wrote in the book.

Thirteen years on, how are things going?

If the numbers of its listed flagship Guangdong Investment are anything to go by, old habits die hard.

The numbers look great on paper, thanks to the concession agreement in 2000 that gave the company control of the monopoly supply of water to Hong Kong. Guangdong Investment's net profit multiplied almost 10 times since 2001 to reach HK$4.9 billion last year. So has its share price.

The details show otherwise.

Its 2013 annual report reveals HK$5 billion worth of financial assets available for sale. There is no information on the nature and return of these financial assets. Shareholders are not even told who is managing them.

"These financial assets are placed by the group with a number of licensed banks [on the mainland] for a term of no more than one year. The principal sums are denominated in [yuan] and guaranteed by those banks upon the maturity date," its report said.

From this, it sounds very much like financial products with mainland banks.

Much has been written about how money from financial products that pay higher than deposit returns is eventually channelled into high-risk shadow banking.

Guangdong Investment should know about the horrors of financial risk. Its managers should remember the days in the 1990s when foreign bankers blindly offered cheap loans to the company and other state-owned enterprises, assuming a Beijing bailout in the event of any problems. They should also remember how the company was caught out when the 1997 Asian financial crisis hit.

Any private company manager who experienced this would be wary of risk. Not so for those managers milking a cash cow such as the monopoly water supply to Hong Kong.

Hong Kong pays Guangdong Investment a guaranteed sum regardless of consumption. It was HK$3.7 billion last year and HK$3.9 billion this year.

Hong Kong even finances the supply's renovation by providing an interest-free loan of HK$2.3 billion on which Guangdong Investment repays HK$118 million annually for 20 years.

The water supply business generates not only 60 per cent of Guangdong Investment's profit but also significant cash flow.

That flow turned the company from a high debt position into a net cash one, cutting finance costs from HK$1.5 billion to HK$60 million between 2001 and 2013.

It also allowed the company to invest in offices, hotels and shopping centres, riding the last property boom.

Under Wu's leadership, Guangdong Investment closed various loss-making businesses, laid off 3,000 people and posted for all to see the monthly credit card expenses of every manager.

By the time Wu left in 2005, the company had trimmed its staff size and administration expense by 50 per cent and 35 per cent, respectively.

However, costs rebounded after the Wu era, with staff size, employee bill and administration expenses rising by 21 per cent, 168 per cent and 193 per cent, respectively.

This is against a 79 per cent increase in operating profit if one excludes the gain from revaluation of real estate, the sale of businesses, and the difference in finance costs.

What does Wu say now, or has he voted with his feet?

Wu quit the government to join a private property developer as its chief executive. He now runs a private equity firm.