Analysts urge clear strategy for red chip

GUANGDONG Investment is one of the stock market's favourite China plays, but analysts say that, although its strong group earnings growth is attractive, it needs a clearly defined corporate strategy.

The Guangdong government-controlled company reported an 11-fold profits rise to $160.21 million for calendar 1992. Fully diluted earnings per share rose 183.46 per cent to 13.32 cents.

The result was slightly behind market expectations. Analysts expressed further disappointment, complaining that the dividend of six cents, up 50 per cent, was too low.

Parent Guangdong Enterprises is a private company owned by the provincial government of Guangdong and Guangdong Investment represents one of the latest developments on the Hongkong stock market.

Mainland Chinese penetration of the stock market is growing with the use of back-door listings. An example of the way things are done is the celebrated activities of mainland steel-maker Shougang Corp, which has three locally listed companies under its direction.

The intrigue and complicated merchant banking linked to these listings makes for good news articles and rabid market speculation, but the takeover groups themselves have little or no defined strategy.

This lack of clear investment plans is something most of the mainland-associated Hongkong listings have in common.

Even the grand-daddy of China listings in the territory, CITIC Pacific, has suffered from a fair amount of institutional investor confusion. Criticism of the State Council-controlled holding company suggests it is merely a passive investment holding group and does not deserve a premier rating.

As groups, mainland linked listings tend to be government-owned or backed, with a rag-bag of investments in their portfolio that do not hang together well.

In itself, each parcel of earnings potential held within each of the mainland groups' corporate folds normally offers real value and makes the holding company an attractive buy.

But the apparent synergies between the subsidiary holdings bears only face-value consideration.

Guangdong Investment is one of the better bets among Hongkong's emerging red chip community, as its businesses held within the portfolio appear sound and in general are good cash generators.

The group divides its operations into property investment and development, tourism and hotels, and industrial investment. These divisional headings are so broad that they defy any attempt to devise a concise, coherent definition of strategy.

Under industrials, the group has lucrative businesses in brewing and Zhongshan Weili Washing Machine. In property, it has development plans in Panyu and rising income from holdings in Guangzhou, Shenzhen and Hongkong.

The tourism and hotel division has a hotel in Shenzhen and Guangdong Tours, which organises overseas trips for mainland citizens to Hongkong, Singapore, Malaysia and Thailand.

The group is making interesting investments that are riding the Guangdong economic boom. It says its priorities are to build on partnerships, accrue more recurring income and place the interests of shareholders first. Let's hope it can live up to its intentions.