Hong Kong company reporting season

Citic posts 46.4pc interim profit slump

China’s largest state conglomerate hurt by restructuring costs and the weaker yuan

PUBLISHED : Friday, 26 August, 2016, 2:45pm
UPDATED : Friday, 26 August, 2016, 11:09pm

Citic Ltd, China’s largest state-backed conglomerate, has posted a 46.4 per cent fall in interim profit, which officials blamed on property restructuring costs, a weaker yuan, but also the non-recurrence of a huge gain from a stake sale made in its securities unit in the same period last year.

Net profit was HK$20.2 billion for the first six months, compared to HK$37.7 billion a year ago, in line with a profit warning issued by the firm late last month of a 40 to 50 per cent decline.

First-half revenue fell 6.4 per cent year-on-year to HK$183.97 billion.

Excluding the HK$9.6 billion after-tax gain from the sale of a 3.16 per cent stake in Citic Securities and an accounting gain from a new shares issuance by the latter from the year-earlier period profit, first-half net profit still fell 28 per cent.

An interim dividend of 10 HK cents per share was declared, compared to 10 cents last year.

Listed in Hong Kong, the vast majority of Citic’s businesses are in mainland China, so the result was heavily influenced by a weakener yuan, which meant profits were worth less after being translated into HK dollars.

Five analysts polled by Thomson Reuters now expect Citic’s annual underlying net profit to rise 5.4 per cent to HK$44.1 billion.

“With the new normal of slower economic growth in China, the asset quality of Chinese banks is under pressure as they face growing non-performing loans,” Citic chairman Chang Zhenming said of its biggest profit contributor, the banking industry.

With the new normal of slower economic growth in China, the asset quality of Chinese banks is under pressure as they face growing non-performing loans
Citic chairman Chang Zhenming

Again, excluding the disposal gain, first-half net profit from financial services, primarily banking and brokerage services, dropped 7.4 per cent year-on-year to HK$21.94 billion, as lower brokerage profit from the sluggish stock market more than offset a 4.5 per cent net profit rise at Citic Bank.

“We are likely to see continued erosion of banks’ profitability and capital in the near term,” added Chang, in its filing on Friday after the morning stock trading session closed.

Net profit from its resources and energy operations, meanwhile, fell 24 per cent to HK$911 million, owing to the continued slump in crude oil, iron ore and other industrial metals.

Manufacturing saw a 25 per cent net profit rise to HK$1.64 billion, while engineering contracting increased 6.5 per cent to HK$1.06 million.

The company’s real estate operations booked a net loss of HK$4.72 billion, compared to a profit of HK$734 million last time, which it blamed on fewer projects being completed and rising costs related to property assets being restructured.

Citic inked an agreement in March to sell nearly all of its residential property projects worth some 31 billion yuan to China Overseas Land & Investment in exchange for a 10 per cent stake in the property giant, and 6.15 billion yuan worth of the latter’s commercial properties.

That’s expected to result in a net gain of HK$9-$11 billion, which will be accounted for in the second half of the year.

Vice chairman Wang Jiong told a press briefing the restructuring costs amounted to some HK$2.6 billion, mainly on compensation paid to property development and property management staff affected by job changes from the integration of its residential property business into China Overseas.

Within its mining operations, the company’s US$10 billion Australian iron ore mining project, Sino-Iron, has been hampered by years of delays and extra costs.

Chang said in March that it was aiming to slash production costs at the site, excluding asset depreciation, to between US$50 and US$60 per tonne, when all the project’s six production lines are online.

While two lines have being commissioned, Chang added in the filing that “it will be some time before we reach full capacity”.

Citic shares edged up 0.8 per cent to close on Friday at HK$12.56. They have fallen 8.5 per cent year-to-date, underperforming the Hang Seng Index’s 4.75per cent gain.