JCG faces earnings squeeze

JCG Holdings Recommendation: Reduce Brokerage: Morgan Grenfell Asia Facing stiffer competition on the consumer lending side, JCG will continue to focus on its expanding mortgage portfolio. Its total lending is expected to rise by 25 per cent this year - with mortgages up 60 per cent and consumer loan growth slipping to about 20 per cent.

To achieve this target, JCG will need to make about $3 billion in new consumer loans during the year.

With its mortgages earning a gross return of 11 per cent, compared to about 50 per cent for personal loans, and the former approaching 25 per cent of JCG's portfolio in 1995, overall earnings growth will be hit by lower margins.

Share dilution from its recent share placement and warrant conversions due in late 1994 will exacerbate the effect through 1995.

Kumagai Gumi (HK) Recommendation: Buy Brokerage: Sassoon Securities The group's property development in China includes residential and commercial developments in Shenzhen, Haikou, Guangzhou and Zhuhai, and infrastructural development in the Hainan Yangpu Economic Development Zone.

Although the group is increasing its interest in property development in China, this is unlikely to contribute to profits in 1993 as many of the projects have been delayed due to unexpected market conditions.

Infrastructure work on the Yangpu project is progressing well with the construction of the power station, which is expected to start operation in mid-1994.

Kumagai is heavily engaged in property investments in China. More than 50 per cent of total earnings in 1994 will come from Chinese property investments. Outstanding contracts exceed $12 billion, more than triple the total for all of last year.

Ka Wah Bank Recommendation: Buy Brokerage: Smith New Court In an increasingly competitive market, Ka Wah stands out as the fastest growing local banking stock.

Its earnings from loans for infrastructural projects, syndication and trade finance in China are highly profitable and it has impeccable mainland ties via its parent, CITIC Beijing.

China risk is carefully controlled, with loan syndication and Bank of China underwriting guaranteeing there will be no loan defaults.

Ka Wah reported a 42 per cent surge in net profits for 1993 and this growth is forecast to continue with earnings per share growing 32 per cent and 30 per cent for 1994 and 1995.

On this basis, Ka Wah should command a premium rating. However, the company's guarded management is shy of disclosure, something investors should be aware of.

It is estimated that about 40 per cent of profits come from China. Although played down by Ka Wah, CITIC and the People's Construction Bank of China offer an enviable range of current and potential business contacts and an opening into the mainland banking market when yuan convertibility restrictions on foreign banks are relaxed.