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SCMP Reporter

Sprawling Hong Kong conglomerate Wharf (Holdings) seems an unlikely play on China's entry into the World Trade Organisation but that is the way the market is treating it these days.

When China and the United States were at each other's throats over the spy-plane incident this month, Wharf's share price suffered on fears WTO entry could be delayed.

'According to management, they believed that the more pronounced share price drop in the past two days was due to rising tensions between the US and China,' GK Goh Research vice-president K.Y. Ng said.

There are two reasons for linking Wharf to the impact of China's accession to the WTO.

Firstly, about 34 per cent of Wharf's operating profits last year came from logistics operations, primarily from 55 per cent-owned port operator Modern Terminals.

Management was 'very optimistic on China's WTO entry having a positive impact on the port operations', Mr Ng said.

Secondly, Wharf is the dominant landlord for top grade office space in Tsim Sha Tsui.

Beijing's WTO entry would spur a surge in demand as overseas companies sought to establish SAR bridgeheads to tap the vast potential in the China market.

'Management still expects the group's grade-A office rentals to grow 15 per cent this year, notwithstanding a slowdown in the US economy.' Mr Ng said. 'This was mainly due to the WTO factor and limited supply of grade-A office space in Tsim Sha Tsui.'

Property investment was by far the biggest contributor to Wharf's bottom line with 44.96 per cent of operating profits.

There are other reasons to think the share price boat should come in for Wharf.

It has cut its heavy holdings of shares from HK$7 billion to $1.8 billion. In particular, its stakes in listed Beauforte Investors Corp and Cross-Harbour (Holdings) have been sold, allowing net debt to be slashed from $29 billion to $19.5 billion.

'The treasury sell-down improves earnings transparency and gearing and simplifies Wharf's structure, allowing investors to focus on operational improvements,' UBS Warburg said.

For eight years Wharf has been ploughing money into its communications and media operations in the shape of fixed-line phone firm New T&T and pay-television operator i-Cable Communications.

Last year these units finally made a positive contribution, providing a tiny 0.35 per cent of operating profits after a $267 million operating loss in 1999.

SG Securities takes a bullish view on i-Cable as a 'strong earnings driver'.

It could provide as much as 7 per cent of Wharf's profit this year and 14 per cent by 2003, according to a forecast by SG analyst Robert Sassoon.

I-Cable's subscribers grew 15 per cent last year to 530,000.

Wharf, which has been suffering in the global retreat from stocks, closed at $18 on Thursday, leaving plenty of upside potential - or so say bulls such as Mr Sassoon.

Factoring in a 35 per cent discount to a net asset value (NAV) per share of $33.30, Wharf should be trading at $25.60, they said.

UBS Warburg is even more bullish with a target price of $27.50.

However, not everybody is taken by the Wharf story.

Whether the company is a buy or sell depends on the NAV the analysts calculate for it and the discount applied.

DBS Securities analyst Alice Hui takes a tougher line on her estimate of forward NAV, putting it at $27.80.

Wharf had historically traded at a 34 per cent discount to its NAV, putting its fair price at $18.35. Ms Hui rates the company 'underperform'.

'We believe the company's improving fundamentals have already been largely reflected,' she said.

While putting a short-term buy on the stock, Daiwa Securities also cautions that Wharf's dominant position in Tsim Sha Tsui office space could come under threat from Sun Hung Kai Properties' Kowloon Station development.

Key Figures

Week's close:

12,989.47 (+ 602.86)

Turnover (daily average):

$8.35 bln

Volume (daily average):

5.23 bln shares

Week's high:

13,018.57

Week's low:

12,061.55

April futures:

12,985 (+ 545)

May futures:

12,970 (+ 547)

Graphic: wharfgbz



WTO entry seen having impact on group's port and property operations