China's cash-rich giant poised for more Hongkong acquisitions

CHINA International Trust and Investment Corporation (CITIC) Hongkong's managing director Larry Yung Chi-kin is on the acquisition trail.

Following this month's $10.4 billion Hongkong Telecom sale, the biggest corporate deal in the territory since 1990, the head of Hongkong's biggest red-chip is preparing to spend a $4 billion war chest.

When Mr Yung proposed switching a 12 per cent stake of Hongkong Telecom from parent CITIC Hongkong to CITIC Pacific earlier this month, analysts focused on what the deal would mean for listed CITIC Pacific.

But a bigger question is what will mainland parent CITIC Hongkong buy next? ''CITIC Hongkong really needed the money to invest in other places. This was the right time,'' said Mr Yung.

He said CITIC Hongkong would invest in more infrastructure projects in China and Hongkong.

''We have a single focus. Now we are thinking about infrastructure in China, plus real estate in China, mainly in Shanghai.'' In the territory, CITIC Hongkong plans to invest in infrastructure projects such as the Western Harbour Crossing and land fill projects.

But Mr Yung hinted at other big acquisitions in the territory.

Was CITIC Hongkong interested in, say, Hongkong Land? Mr Yung laughed at reference to the hostile takeover bid against Jardines launched by a CITIC-backed consortium in 1988.

''I don't want to replace the British interests here. It is very important that after 1997 if Britain will continue to have prosperity, we need to internationalise, and British interests in Hongkong are still very important.'' ''If Jardines wants to sell, then okay, we'll negotiate the price,'' Mr Yung said.

However, he emphasised that he had not been in any talks with the British hong. His deputy Mr Henry Fan explained: ''Our policy has always been one of co-operating with but not replacing British or other interests. That's why we co-operate with Cable and Wireless and Swire.'' Mr Yung said that any investments in infrastructure or major acquisitions would have to wait until the dispute between Governor Mr Chris Patten and Beijing was resolved.

But Hongkong's best connected businessman declined to speculate on when the Governor and Beijing would resolve their differences.

Although CITIC Hongkong has a pipeline to Beijing's State Council, Mr Yung emphasised that he had no special knowledge on Beijing's views, or how the stock market might react to future developments.

''No one can estimate whether the stock market will go up or down. For a few months, maybe six months no one can guess. Maybe today the Hang Seng Index could be 6,000 and tomorrow 5,000. No one knows.'' In less than three years, Mr Yung, a keen fisherman, has seen CITIC's market capitalisation grow 50 times and acquired assets including Dah Chong Hong and stakes in Cathay Pacific, Dragonair and Macau Telecommunications company, Companhia de Telecommunicacoes de Macau.

As managing director of CITIC Hongkong and chairman of CITIC Pacific, Mr Yung has steered the Hongkong Telecom deal, something which benefits both firms.

It resulted in $4 billion in profits and cash flow for CITIC Hongkong: the Hongkong Telecom shares, which were purchased at just over $4.48 in March 1990, are being sold at $7.80.

It is also very sweet for CITIC Pacific, which picks up the assets at a 20 per cent discount to market price.

CITIC Pacific is issuing $7.1 billion in new shares to acquire a 12 per cent stake in Hongkong Telecom, plus two electric power plants in China.

Mr Yung, who flies to Shanghai this week to thrash out details for property and infrastructure projects, belongs to one of China's most famous entrepreneurial families.

His father Mr Rong Yiren, dubbed the ''red capitalist'', is the founder and chairman of China International Trust and Investment Corporation (CITIC).

The deal will lift the company's market capitalisation to about $25 billion, while also boosting both earnings per share and underlying net asset value.

Mr Yung disputed the notion that the timing of the Telecom injection meant that CITIC Hongkong was taking a negative view on the market. After all, he is personally subscribing to 30 million new shares in CITIC Pacific.

Mr Yung explained that timing of the acquisition depended on the relative share prices of CITIC Pacific and Hongkong Telecom.

The company had originally considered injecting the Hongkong Telecom shares at a 15 per cent discount to market price, rather than 20 per cent.

Mr Fan explained how management and merchant bankers had carefully monitored the relative share prices of CITIC Pacific and Hongkong Telecom.

They wanted to ensure that the deal would meet the two pre-conditions governing all injections from CITIC Hongkong into CITIC Pacific. The assets would have to be priced so that they did not dilute earnings per share or underlying net asset value per share.

Mr Yung bridles at the most common criticism of CITIC Pacific; that it is a passive investor.

He said many analysts had focused on the passive stake in Hongkong Telecom while overlooking power stations in Jiangsu and Henan provinces.

''Don't neglect one thing,'' he said, leaning forward for emphasis. ''Those two power stations together are very powerful and they are handled by ourselves from the start.'' Mr Yung was previously an engineer who built power stations all over China during a 14-year career with the Ministry of Power and Water.

Mr Yung and his colleagues located the sites and are building the plants.

Mr Yung detailed the revenue stream from the Ligan plant in Jiangsu.

The project to build two coal-fired plants, which will begin operation in June, while the third will kick in October.

Together they will generate US$1.2 billion in revenues annually.

Power stations form a big part of CITIC Pacific's future plans.

''China needs more power stations,'' said Mr Yung. ''Power stations will give the company a fixed income that is very stable for a long time. When you have fixed income then you can think about other ideas.'' But Mr Yung appears to take greatest pride in the ''star team'' of engineers that he has assembled to work for CITIC Pacific.

Some staff have been pinched from the Ministry of Power and Water while others are former classmates from Tianjin University.

Securing strong recurring income is central to CITIC Pacific's growth strategy since its founding in February 1990.

In three short years, the company has grown over 50 times to a market capitalisation that will reach $25 billion with the Hongkong Telecom deal.

Throughout its meteoric growth, the listed company has acquired assets from parent CITIC Hongkong on favourable terms with no dilution in earnings per share or net asset value.

While brokers agree that the big chunk of Hongkong Telecom was injected on favourable terms to CITIC Pacific, some are disappointed that the company will be so heavily reliant on passive investments, instead of core businesses.

Mr Kam-ming Wong of Warburg Securities estimates Hongkong Telecom will account for 34 per cent of CITIC Pacific's expected profits of $1.875 billion in 1993.

About 60 per cent of the company's earnings will come from passive investments.

''There is limited scope for them to do anything with their holdings in Cathay Pacific, Dragon Air and Hongkong Telecom,'' said Mr Wong. He argues that CITIC shares should not be trading at their current price of net asset value, but at a deep discount.

A discount deeper than the 41 per cent discount of Jardine Strategic Holdings.

''At least Jardine Strategic has management influence over the underlying companies. Looking at CITIC, I don't think they have any significant say regarding Hongkong Telecom,'' he said Mr Yung and Mr Fan do not dispute that the Hongkong Telecom stake is a purely passive investment.

However, Mr Yung maintains the company is following an ongoing strategy of balancing injections with organic growth.

According to long-term plans, core holdings will contribute about 70 per cent of earnings while investments in other stakes will contribute about 30 per cent. Much of this strategy depends on gaining more business in China, where the company has unparalleled connections.

Analysts agree that even after the retirement of founder Mr Rong, CITIC will remain plugged in.