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SCMP Reporter

IF investors were hoping the rush of capital into China by locally listed companies was going to change the local stock market earnings complexion, then they had better look again.

  Credit Lyonnais Securities has completed one of the most comprehensive surveys yet on the investment exposure of local companies to the mainland.

  The work found 176 listed companies were involved in 801 projects worth in total $521 billion, of which $162 billion was attributable to the Hongkong participant.

  Some market watchers had held the hope that the increasing exposure to the mainland would lower the property content of local corporate earnings.

  The argument suggested the migration of manufacturing across the border and the growth in revenues in the sector resulting from this shift would increase the manufacturing component of Hongkong corporate earnings.

  Mainland investment would diversify the local earnings mix away from property, the argument went.

  Well this is proving to be a false view, says Credit Lyonnais.

  Indeed, local stock market earnings' reliance on revenues from property-linked activities might even increase, it is suggested.

  The work undertaken by head of research Andrew Riddick and Katherine Cowan made assumptions about the potential earnings that might be expected to be generated by the current wave of investment.

  In value terms infrastructure outstrips property investment, amounting to just less than $250 billion compared with $200 billion. Industry and manufacturing comes in a poor third, amounting to less than a third of all projects in value, worth less than $25 billion.

  However, the total number of property projects comes in way ahead of all other categories of investment, numbering 396 compared with 58 in infrastructure and 223 in industry and manufacturing.

  The value of the property projects is very difficult to judge as title in the mainland is a concept yet to find statutory backing and the valuation process itself has yet to find an industry standard means of calculating worth.

  Many of the property projects will inevitably turn out to be worthless but there will be an important number that will generate significant amounts of cash flow.

  Credit Lyonnais made a number of assumptions about the earnings flow from the various projects confirmed in the survey.

  The expectation is that earnings from current investment will kick in in 1995 and 1996.

   On a low, medium and high ranking, forecast profit generation from infrastructure in 1995 is expected to come in between $800 million and $2.6 billion and in 1996 the profit generation is expected to be between $1.2 billion and $3.2 billion.

  According to the assumptions made by the brokerage, the same figures for industry and manufacturing suggest that in 1995 this sector will kick in between $1.2 billion and $3.6 billion and in 1996 the figure is expected to be between $1.6 billion and $4.4billion.

    Property in the same exercise makes a far bigger contribution.

  In 1995 it is expected to kick in between $5.2 billion and $21.7 billion and in 1996 between $8.7 billion and $30.4 billion.

  The broker states: ''Initial China projects appear to be over-exposed to property.''   Under the scenario worked out by Credit Lyonnais it is estimated the return on assets in infrastructure will be between seven per cent and 11 per cent.

  ''This is conservative,'' the report says.

  ''Many of the power generation businesses are estimated to be providing closer to 20 per cent return on investment, given China's demand for electricity.''   Rate of return on industrial and other forms of investment are difficult to estimate but their pay-back period can be expected to be three or four years.

  However, property offers the highest potential rate of return of between 40 per cent and 100 per cent.

  ''Most companies which we spoke to privately concede that they were looking for returns in excess of 100 per cent,'' it says.

  ''In terms of timing of completion, we have been conservative as many projects will be built in stages, extending into 2000 and beyond.''   Work undertaken by other brokerages and anecdotal evidence from industry sources indicates investment by many property developers is on an extremely cautious basis.

  While many are expecting, indeed depending, on mainland earnings to kick in after 1996, these developers have chosen to take in land banks across the border on a highly selective basis, valuation of which is taken on a zero value basis on the balance sheets.

  Companies like New World Development have been testing the water with infrastructure projects and have not committed themselves to any large property projects unless they are located in prime urban areas.

  Where property projects are rolling, many of the big blue-chip developers are not the only investor carrying the can.

   In general there is a consortium of developers involved plus strong influential mainland investment content from a ministry or major enterprise.

  This would suggest that investment in property across the border by the large blue-chip developers is by no means reckless and is highly selective in both the type of project being launched and the partners taken on board.

  Without earnings from the mainland kicking in in 1995 and 1996, corporate earnings growth in Hongkong can be expected to have slipped to around 10 per cent each year.

  Revised earnings per share growth figures for these years, after taking in China linked profits, suggest earnings growth could be between 14.4 per cent and 27 per cent in 1995 and 11.9 per cent and 13.5 per cent in 1996.

  The prospective price-earnings ratio ranges are 8.8 and eight for 1995, and 7.9 and seven for 1996.

  The broker is making an assumption that on these figures the Hang Seng Index might be able to re-rate to 9,600 in 1995 and 10,834 in 1996.

  Credit Lyonnais said that in carrying out the survey work it found most companies approached were very helpful in confirming or denying rumoured projects.

   They found that in almost every case there was a strong desire on the part of the management to know what their competitors were up to in China.

  At the end of it all, the current picture being cast by Credit Lyonnais might not be totally correct and the assumptions might never be borne out.

   The broker says: ''The above scenario is very difficult to quantify or prove.

  ''However, analysing China is an ongoing exercise. Investors need to start somewhere. This work adds to the process.''   Mr Riddick said: ''Clearly even those on the ground are finding their way when it comes to operating across the border.'' 



Cosmetic change leaves complexion intact