Noble House sounds its final retreat

THE vote of no confidence in Hong Kong was resounding. The Jardine stable, as expected, has finally decamped from the Hang Seng Index en masse. Dairy Farm, Mandarin Oriental and Hongkong Land voted on the future of the territory with their feet last week, joining Jardine Matheson (JM) and Jardine Strategic (JS) in pulling out of the HSI to avoid any potential takeover threats. Only Jardine International Motor Holdings (JIMH) remains to wave the flag as a publicly listed company, but as a 74.99 per cent subsidiary of JM it is hardly vulnerable. There is also speculation that JIMH will be absorbed back into the group either by JM or the Singapore-listed Cycle and Carriage which is 24 per cent owned by JS. The departures will leave gaping holes in the HSI with five, not two, new companies now being sought as replacements. Property groups First Pacific and Henderson Investment and red chip Guangdong Investment are tipped as likely candidates to replace Jardine Matheson and Jardine Strategic, while Amoy Properties is front-runner to replace Hongkong Land. 'Given the business nature and its presence in Hong Kong, Amoy should be the ideal stock to replace Hongkong Land,' said Eugene Law, research director of Standard Chartered Securities. The replacement is hardly like with like. Although both are property counters, Hongkong Land's market capitalisation stands at $60.7 billion while Amoy, the listed properties investment arm of Hang Lung, is worth $24 billion. Shangri-La Asia, the hotel group which listed last year, is the hot favourite to replace Mandarin Oriental. Analysts said it was unlikely another stock other than Shangri-La, controlled by Robert Kuok Hock Nien, publisher of the Sunday Morning Post and South China Morning Post, which could be substituted for Mandarin Oriental. However, the Shangri-La group's recent listing means its track record is short for a Hang Seng Index company. 'Sometimes they [HSI Services] will grant exemptions to those stocks which are suitable to become index stocks. For example, Cathay Pacific and Hongkong Telecom were included in the index when they had traded for only a short period of time,' said Mr Law. Dairy Farm remains a difficult stock to replace because of its unique business nature and size. Mr Law suggested it was not necessary to pick a stock from the retail sector to replace Dairy Farm if HSI Services found no similar replacements. 'They can choose from the commerce sector or the banking sector,' said Mr Law. Possible candidates included Guoco Group, Johnson Electric and Dah Sing Financial. Joining the index will be a major coup for the company. Index status means stocks will be more favourably regarded by large offshore investors with a subsequent boost to a company's share price. But there is more at stake than just as a replacement in the Hang Seng Index. There is a certain cachet in stepping into the shoes of a hong. Although the Jardines group assets remain firmly entrenched in the territory, its corporate identity now straddles London, Bermuda and Singapore. By default it loses its political clout as well as a reputation as a maker and breaker of markets - a role it has taken for granted for more than 160 years. From the time of the opium wars to the present controversy over the franchise for Container Terminal Nine (CT9) and the souring of Sino-British relations, Jardines has been a major player in both the stock market and Hong Kong's economic and political scenes. Although the newcomers will never wield the same power as the Jardine group at its pinnacle, they will still boost their standing in terms of power politics. Jardines' influence in recent history can best be seen in the 1970s. Apart from the existing properties and operations (Hongkong Land, Dairy Farm, Mandarin Oriental and Jardine Matheson), the group owned public utilities ranging from Hongkong Electric to the Hongkong Telephone Company (the forerunner to Hongkong Telecom) and a stake in Wharf. The hong had expanded rapidly during the decade under the leadership of David Newbigging, taipan of the group as well as legislative and executive council member. Mr Newbigging joined Jardine at the age of 20 and rose rapidly within the ranks of its management to become a protege of the Keswick family, which controlled Jardines. He was appointed managing director of the company in 1970 and was named chairman in 1975, at the age of 41. Through the early part of the 1970s, the group acquired Hongkong Land, property firm Humphrey Estates and Finance, Dairy Farm and City Hotels, the owner of the Mandarin Oriental in Hong Kong, and built up a stake in the Wharf group. Hongkong Land aggressively engaged in takeover activities and was investing heavily in building up a prominent land bank in Central during the 1970s. In 1980, Hongkong Land made a crowning $3.3 billion bid for Wharf, then known as Hongkong and Kowloon Wharf and Godown, to obtain 49 per cent of the company. But Sir Pao Yue-kong decided to take over the role of challenger and entered the takeover battle. In the end, Hongkong Land walked away a loser in the battle but gained about $1 billion in profits in the sale of its 10.1 million shares to Sir Yue-kong. The decade of expansion eventually caught up with the group, prompting a major corporate restructuring in 1984 after the group almost went bankrupt as a result of heavy debt and a property crash. THE group recovered but never again was able to regain its former strength. This was graphically illustrated in 1988 when Hongkong Land, the biggest property owner in the territory, became a focal point for takeover speculation. Four of the Chinese property giants, Cheung Kong, New World Development, Henderson Land and CITIC Pacific, had been building a stake in the company following the 1987 share market crash. Most saw it as a prelude to a full bid. But the Keswick family was able to ward it off by a unique arrangement with the four under which Hongkong Land bought back eight per cent of its stock from them in return for an undertaking they would not make a takeover bid for Hongkong Land for seven years. The agreement will expire next year and this is seen as one of the key reasons for the Jardine Group moving to remove Hongkong Land from takeover contention. The first move dated back to 1984, when Jardines announced it was moving its domicile from Hong Kong to Bermuda to avoid the application of the takeover rules, sparking a widespread move among locally listed companies to change their domicile. The Stock Exchange of Hong Kong was quick to change the rules to extend the corporate governance to those Bermuda-registered companies. On May 16, 1990, Jardine Matheson announced its primary listing was to go to London as a method of further isolating itself from Hong Kong corporate governance. Jardines argued that securities regulations in Hong Kong should not apply to groups with overseas domicile. But the debate ended in favour of the regulators in the summer of 1990. Jardines then moved to gain exemption from takeover laws in Hong Kong after failing to reach agreement with Hong Kong's regulatory authorities but announced earlier this year it would de-list from the local market completely. The move by Hongkong Land, Dairy Farm and Mandarin Oriental last week completes that lead.