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Cathy Holcombe

This earnings season has been punctuated by results exploding like fireworks (upside surprises) or bombs (downside surprises).

What does it mean? Three possibilities stand out:

Hong Kong corporate managers are becoming less transparent;

Accounting rules are too Byzantine; or

The analysts stink.

For once, we will not blame the analysts. It seems, rather, a combination of the first two hypotheses.

Management could have given investors a better heads-up of planned accounting treatments. One example is Pacific Century CyberWorks' write-back on investments - the main reason the bottom-line figure exceeded expectations.

Analysts said they regularly questioned the group on expected provisions for its Internet investments. Yet its management never mentioned that it had bought put options to offset the losses on shareholdings in CMGI. Or that it planned to write back HK$477 million from a backward-adjusted provision of $3.2 billion made in 2000 that was related to options Intel Corp was exercising on CyberWorks shares.

It is hard to share accounting treatment plans without running into the issue of selective disclosure. But the market could have at least known there would be gains on investments - rather than losses as were widely expected.

Surprises were also rampant in the property sector. As of Friday, for instance, Merrill Lynch had downgraded this year's earnings for the sector by 23.4 per cent based on revelations from last year's results.

Cheung Kong (Holdings) was among the developers which surprised on the downside due partly to liberal provisioning on properties.

Just as some analysts believe that CyberWorks stayed mute on its write-back plans to enjoy the cache of a 'positive surprise', some think Cheung Kong may have overdone provisions to award itself a greater 'comeback year' this year.

'The market was surprised because [it] didn't think the cost structure of one of the developments was as expensive as it turned out to be . . . it may have been a question of over-provisioning,' one analyst said.

(Not everyone holds this view. Franklin Lam of UBS said: 'There is no systematic bias to . . . surprise in the future. Most developers are at a low point and need a positive surprise now rather than later.')

New World Development came through with a positive surprise not only in the booking of profits from last year's sale of the Regent hotel - but the selling price came in as much as $500 million more than some analysts had expected.

There are kosher explanations for this, but a few analysts pointed out that New World's share price got whacked last year after it came in with below-consensus results.

Space has run out before we go to the second tier of this argument, which is that recent amendments to Hong Kong accounting rules are behind the increasing earnings surprises. That will be taken up tomorrow.



Earnings surprises may need some accounting