Citic Group, the central government's first overseas investment arm, faces an arduous journey in restructuring its Hong Kong-listed flagship Citic Pacific and restoring it to its former glory. Observers said Beijing might first need to beef up Citic Pacific's top management as new chairman and managing director Chang Zhenming held the two positions in addition to his roles as vice-chairman and assistant president of Citic Group. Christopher Cheung Wah-fung, the chairman of the Hong Kong Securities Professionals Association, said it was good corporate governance to have separate persons assuming the two positions. 'As Citic Pacific previously also had different persons for the two roles, I believe it would eventually appoint a person to act as the managing director,' Mr Cheung said. A source close to the company also said it was good practice to separate the two roles, hinting a managing director may be appointed. On March 25, Citic Group appointed director and assistant president Zhang Jijing, as well as director and chief financial officer Ju Weimin on to Citic Pacific's board as non-executive directors. This came after Citic Pacific said in October last year its former deputy managing director Leslie Chang Li-hsien and executive director Chau Chi-yin resigned to take responsibility for their roles in high-risk and complex currency bets executed without proper authorisation. Citic Pacific booked HK$14.63 billion of losses on the bets last year, although its biggest exposure - on the Australian dollar - was cut to about A$3 billion (HK$16.6 billion) after Citic Group assumed about two-thirds of its Australian exposure of HK$9.3 billion. Even with Mr Zhang and Mr Ju's appointments, Citic Group's representation on Citic Pacific's board is still a minority, given it has 10 executive directors and nine non-executive directors. Previously, only Mr Chang was a non-executive director and Li Shilin - a vice-president of Citic Group - was an executive director. An official in the central government liaison office in Hong Kong said normally the way for state-owned companies to appoint executives was via internal recommendation. 'With the improved transparency, hiring a headhunter has also become an alternative, but still it is just one of the ways of hiring,' said the official. While executive appointments are important, analysts are more concerned about Citic Pacific's future direction, particularly whether Citic Group will inject any assets, sharpen its business focus and reduce overlaps with other units in the group. Citic Pacific was previously largely left to the devices of the family of then chairman Larry Yung Chi-kin and their allies. The conglomerate was criticised by analysts as lacking business focus, which made it difficult for them to analyse it effectively, resulting in undervaluation of its assets. Previously, management considered iron ore mining, special steel production and property development its core businesses. One possible direction is for Citic Pacific to focus on special steel and iron ore development. Special steel contributed 42 per cent of its operating profit in the first half of last year. Its US$4.2 billion iron ore project has yet to generate profit. If this path is chosen, it could see it gradually divest its property, infrastructure, aviation, power generation, telecommunications and consumers goods distribution businesses, partly to sharpen its focus and partly to reduce its heavy debt load. China Everbright Securities analyst Patrick Chow said this was easier said than done given the current depressed market conditions. The mainland's power industry suffered from industrywide losses last year, and the outlook is uncertain given a breakdown in this year's coal price negotiations. Citic Pacific's minority stake in Cathay Pacific would also be difficult to offload, given the aviation industry's weak profitability and that Beijing may not want to sell to foreigners. Selling property assets may be easier, given Citic Group's already large portfolio of property business that chairman Kong Dan said in 2007 was a target to be spun off on the stock market. Citic Pacific in October last year said it was in talks to sell consumers goods distribution unit Dah Chong Hong Holdings, but Mr Chang said in November it had no intention to sell any of Citic Pacific's assets after it received a rescue package from Citic Group. Mr Kong said last month Citic Pacific would be 'a key non-financial business platform' of Citic Group and that the group may inject some of its quality assets into Citic Pacific. Top asset Contribution of special steel to operating profit in first half of 2008: 42% Group structure Citic Pacific is incorporated in Hong Kong. Its largest shareholder is Citic Hong Kong (Holdings), a wholly owned subsidiary of Citic Group. Its major businesses are special steel manufacturing, iron ore mining which supplies the raw material needed to make special steel, and property development on the mainland. Citic Hong Kong (Holdings): 29% Management: 22% Private and institutional investors: 49% Citic Pacific Special steel Iron ore mining Property Aviation Civil infrastructure Power generation Other businesses Listed subsidiaries
