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SCMP Reporter

IF THE ABILITY to learn from experience is a hallmark of success, it is no wonder the New World group is struggling.

Events leading to New World's annual results last week were a curious re-run of the circus that surrounded its interim report in March.

Again the share price of group parent New World Development (NWD) plunged shortly before results day as analysts downgraded their profit estimates en masse.

Again New World denied passing any information to the analysts.

And again the downgrades proved remarkably prescient, with the company's profits coming in way below earlier expectations.

The events suggest either that New World has learned nothing from the hornet's nest it stirred up in March, or it has determined that stock exchange disclosure regulations are a charade that can be ignored with impunity.

To recap, NWD shares plunged nearly 25 per cent in a week in mid-March after several analysts slashed their interim profit forecasts by more than half. US investment bank Goldman Sachs cut its estimate to HK$300 million, only a day after saying it expected the figure to be HK$730 million.

A day later, NWD managing director Henry Cheng Kar-shun flatly denied any improper disclosure and said he would welcome any investigation by regulators.

At the same time, the company released its net profit: HK$311.4 million, a sliver from the revised expectations.

This time around, NWD's share price fell by 14.54 per cent from HK$8.25 on September 4 to HK$7.05 on September 11, the day of the terrorist attacks on the United States. It continued falling to a low of HK$4.67 on September 26. It has recovered slightly to close at HK$5.35 yesterday, but remains significantly below its pre-attacks level, unlike the Hang Seng Index.

According to earnings estimates tracked by Thomson Financial First Call, five brokerages downgraded their NWD forecasts between October 8 and 10, three of them by more than half.

SG Securities cut its forecast to HK$451.91 million from HK$1.08 billion, DBS revised to HK$440 million from HK$1.11 billion and Merrill Lynch cut to HK$414.62 million from HK$972.37 million.

Even these estimates proved too optimistic: NWD announced a full-year profit of HK$220.5 million last Wednesday, barely above the 21-year low of HK$215 million it made the previous year.

So what could have caused so many analysts to make such big revisions so near the official announcement?

Chinese-language newspapers reported in mid-September that New World management had issued a profit warning during a meeting with analysts (we must assume there was a time lag between the downgrades being issued and being logged by Thomson Financial First Call).

Not so, said New World. In an announcement on September 18 made at the stock exchange's request, the company said: 'The board noted this morning certain media reports about a profit warning . . . and about the anticipated level of provisions to be made by the group.

'The board wishes to clarify that no such profit warning or such information regarding any provisions which may be required for the financial year ended 30 June 2001 has been communicated by the company, its directors or its employees to the investment community.'

For New World's denial to hold water, we must believe that analysts independently and simultaneously decided to downgrade their forecasts in the absence of new information. For their part, the analysts say - as they did in March - that the downgrades followed guidance from New World management.

Of course, 'profit warning' has a specific meaning in the securities field - being a formal announcement made to the market at large - and the term may have been misapplied in this case. There is no suggestion that an NWD messenger passed out a sheet of figures to favoured analysts in a darkened room. There are plenty of ways to pass on a subtle message without ever touching on hard numbers.

While NWD's emphatic denial left little room for semantic loopholes, it was noticeable that the announcement referred only to the 'company' and not to the group.

The provisions in question which dragged down NWD's net profit came from its 60.79 per cent-owned subsidiary New World Infrastructure, which is also listed. New World Infrastructure does not appear to have been asked to make a similar clarification.

Analysts who received the jump on NWD's results and their favoured clients were at an advantage to the rest of the market, and got to sell before the small investor knew what was going on.

Does this matter? Relatively speaking, perhaps not. Selective disclosure is inimical to a fair market but is hardly the most pressing problem in Hong Kong, where efforts are better directed at improving the absolute level of disclosure.

At least New World did a better job this time around of 'managing expectations', as the practice is euphemistically known, having generated little of the controversy seen in March.

Then, Goldman's analysts were embarrassed by their late and dramatic downward adjustment and responded by venting their spleen on NWD management who, they suggested, should have done a better job of keeping them in the loop. Such a rare and public falling-out in Hong Kong's tight-knit investment community guaranteed healthy media interest.

One suspects New World shareholders would be delighted to be kept completely in the dark if only their company could make a decent profit.

NWD's HK$220.5 million earnings are pitifully small when set beside its assets of HK$110.29 billion and shareholders' funds of HK$58.2 billion as of June 30 last year, and represent a return on equity of only 0.37 per cent.

Analysts had thought last year was a blip but have been forced to reconsider and are now wondering what other nasty surprises the group may have in store.

NWD's debt level remains nerve-wracking, with financing costs of HK$2.45 billion bigger than its HK$2.03 billion operating profit, although mitigated by HK$912.7 million of financing income.

Lack of direction and focus permeates this low-transparency property-based conglomerate. It has dipped its finger in many pies and has a variety of listed vehicles, but they all appear to dabble in each other's businesses.

New World Services invests in construction companies (surely the preserve of NWD?), New World Infrastructure invests in technology (not New World Cyberbase?) and New World Cyberbase (no longer a group associate, with NWD having reduced its stake to 18.5 per cent) invests in property.

Long criticised for being over-diversified and over-leveraged, New World has vowed to pare back its debt and concentrate on its core business, but old habits die hard.

Last week it was reported the group would enter the mainland cable TV market. Apart from being a fresh diversification for NWD, it also faces the awkward fact that foreign participation in the sector is banned. Citic Pacific, with better mainland connections than New World, has been unable to finesse its way round this with its own cable project.

Incidentally, the NWD cable news emerged less than a week before its annual results were announced. The stock exchange says it has no need of a 'quiet period' rule since directors are forbidden to disclose price-sensitive information at any time. Anyone who follows Hong Kong corporate affairs can see how rigorously that rule is enforced.

Graphic: dev16gbz



Despite efforts to improve disclosure in Hong Kong, there is still obviously a long way to go