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Stephen Vines

IS HOPEWELL Holdings, one of Hongkong's most high profile companies, providing a fair impression of its earnings record?    This question is prompted by examining the company's 1992 interim results, released last week.

  Hopewell is in danger of winning an undeclared contest for the public company most likely to confuse investors about the state of its business.

  For the past three-and-a-half years it has been changing its bottom line by including profits, which other companies list as extraordinaries, in its operating profit figures.

  Thus for the half year to December 31, 1992, Hopewell has announced a 42 per cent operating profits rise, compared with the same period in the previous year.

  Further examination shows that $602 million of the $990 million described as ''operating profit'' is, as the company admits, ''exceptional gains on disposals of investment properties''.

  In other words, almost 61 per cent of the operating profit is made up of extra-ordinary items: that is to say, aspects of the business which stand outside the main earnings stream.

  It may, therefore, be better to view Hopewell's half year figures as showing an operating profits fall of $309 million.

  However, that too is misleading because the previous half's figures also include $285 million worth of extra-ordinaries.

  The better figure for that half of the year would therefore be $412 million. This still produces a six per cent profits decline.

  Are we being fair to Hopewell? Or are the company's latest figures a one-off?    They are not. Figures for the full year to June 30, 1992, claim to show an operating profit of almost $1,626 million, a rise of 120 per cent over the previous year.

  Very impressive, you may say. However, the company freely admits, in the notes to its financial statement, that a total of $528 million came from property disposal gains of the parent and an associated company.

  Strip this figure out and the operating profit falls to $1.098 billion.

  That is less impressive, leaving Hopewell with a 12 per cent operating profits rise.

  But wait, what happened in the previous year? Hopewell announced that its operating profit had risen to $740.5 million, of which almost $156 million came from the profits of property disposals.

  This brings us to the year ending June 30, 1990, the year in which the extra-ordinaries started creeping into the operating profit figures.

  Here we find an operating profit of $67.5 million, of which $262 million was an ''exceptional gain'' on the disposal of the Hopewell Group's interest in a property development project.

  Further perusal of the small print contained in the 1990 accounts shows that this property development was none other than Wu Chung House, the eyesore which stands next to the Hopewell Centre.

  The ''third party'' buying the 40 per cent interest in this property just happens to be a subsidiary of the Hopewell Group, which forked out $655 million in cash. (The group continues to list its interest in Wu Chung House at 60 per cent).

  The profit to the group was $547 million.

  However, only $262 million was actually received in the year in question, the balance presumably filtering into the following year's figures.

  Hopewell may argue that it is perfectly respectable to include all the proceeds from property disposals in its operating profit account.

  After all, this is a property developing company which sells developments as part of its normal business.

  That argument is valid to a point, but a glance at Hopewell's property portfolio suggests that the properties sold were recurrent contributors to the company's profits, whereas their sale represented a once-off profit.

  As it happens, Hopewell's interim results were issued in the same week as the full year results from Hutchison Whampoa.

  The flagship company of the Li ka-shing group is also a property developer and could also, following Hopewell's logic, have included property disposals in its operating profit figures.

  To its credit, it did not. If it had done so, it might well (at least in previous years) have succeeded in making its profit figures look far more attractive.

  Hopewell may also argue that its accounts have never been qualified for the inclusion of extra-ordinaries in the normal operating profits.

  This indeed is so. Hopewell's minority shareholders have the option to ask the auditors, Messrs Kwan Wong Tan and Fong, whether they are happy with this state of affairs.

  The facts of the matter seem to be that Hopewell has very heavy capital commitments and needs to sell some of its assets to avoid falling further into debt.

  Some of its new big earners, notably the Shenzhen to Guangzhou super highway, have yet to come on stream.

  This is not a wholly damaging state of affairs. Indeed, some more long-sighted analysts might take the view that Hopewell remains a good long-term prospect, despite its current troubles.

  I note, however, that this is not the view taken by Lehman Brothers who, last week, downgraded their Hopewell rating from being an ''outperform'' to a ''neutral'' counter.

  The wise ladies and gentlemen at Lehman Brothers may be right.

  Incidentally, Mr Gordon Wu, the company's ebullient managing director, might also add to Hopewell's stature if he stuck to realistic forecasts of what can be achieved.

  A few years ago, for example, Hopewell was telling shareholders that its Hongkong Trade Mart project would be completed by 1991: it remains little more than a hole in the ground.

  Recently, Mr Wu told a group journalists that he would jump into the Victoria Harbour if the superhighway was not completed by September 30 ''at the very latest''.

  No one wants Mr Wu to get wet, but investors might like a clearer idea of where his company is heading.

 UNFINISHED Business is a new fortnightly column which will be looking at business matters deserving further investigation. We welcome reader's suggestions and comments, which will be followed up. There is no need for suppliers of information to be identified, although we will need to verify any material received.

  Unfinished Business can be contacted in confidence by fax, marked for the attention of Stephen Vines, on this number: 565 1423 



Hopewell clouds the profit picture