THE London stock exchange will get its first ''red chip'' if a proposal by Hongkong's privately held Cathay International Investment to take control of Stonehill Holdings after selling it a China property development portfolio gains shareholder approval. The British group has conditionally agreed to buy a holding company for a group of China property development and investment companies for GBP51.7 million (about HK$570 million) in newly issued Stonehill shares. The holding company to be purchased, Cathay United Investment (CUI), lists the 346-room Fu Yan Landmark Hotel in Shenzhen as its principal asset. Stonehill, a former furniture maker turned property developer, said 117 million of the new shares would be placed with institutional and corporate investors in China, Hongkong and the UK. At the same time Cathay International, which will hold 74.3 per cent of the enlarged capital of Stonehill, said it would make a general offer for the group. However, Cathay International said it aimed to maintain Stonehill as a publicly listed vehicle for further expansion. Stonehill owns and manages a trading estate in north London and has a market capitalisation of GBP2.31 million. It recorded a pre-tax loss of GBP170 million for the six months to the end of last September. Last month the group's shares were suspended at its own request at 11 pence. On completion of the deal Stonehill will become a subsidiary of Cathay International, which is ultimately owned by the Cathay International Group headed by Mr Wu Zhentao, a former Beijing government official. Mr Wu, according to Stonehill, held important positions in government scientific and financial institutions in China before establishing Cathay in 1988. The Cathay group burst on to the China investment scene last year when it announced plans for US$1.8 billion worth of investments in China. It has also been chosen to act as financial adviser by the People's Machinery Co, one of the nine mainland groups selected by the Chinese authorities for possible overseas listing. ''We intend to maintain Stonehill as a UK property sector stock with selective development in the UK and further property development in China,'' said Cathay International vice-chairman Steve Hunt in Hongkong. ''There are two reasons behind this. We wanted to be in a major international market: London certainly qualifies. And we think Stonehill has excellent assets and management that will go ahead. ''It wasn't just an academic purchase. We see Stonehill as more than a shell,'' he said. ''We are actively involved in China's commercial property development and will not restrict ourselves to southern China, although we will stick to major cities on the commercial side.'' Stonehill's immediate expansion is likely to come via CUI's involvement in the development of a large commercial complex in Guangzhou's Hai Zhu district. Management of the Landmark Hotel, scheduled to open in June, has been contracted to a joint venture comprising Cathay International and Hongkong-based Koppen Yan Zimmerman Group. Last year the Cathay group had pre-tax profits of US$487,000. It stated its net assets as US$80.4 million. To reduce substantial borrowings that will be created in the company after the takeover has gone through, and to provide a boost to working capital, the company also plans to launch a two-for-one rights issue to raise GBP4.2 million. Mr James Buchanan, chairman of Stonehill, welcomed the deal, considering it as an unrivalled opportunity to develop property interests in China and the UK. Shareholders will vote on the proposal on February 26.