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Samuel Yeung

A mainland ruling aiming to cancel guaranteed returns on various infrastructure projects will have a mixed impact on the profits of SAR infrastructure conglomerates affected by the policy change, analysts report.

The SHK Financial Group last week said shares in red-chip Citic Pacific had already taken a knock because of the policy change ordered by the State Council recently.

'The share price of Citic has been de-rated for the past month due to concerns arising from the directive,' the report said.

Under the directive, regional governments were ordered to settle with foreign investors to cancel the returns on infrastructure projects they had previously guaranteed by the end of this year.

Citic owns six infrastructure projects in Shanghai, namely Yangpu bridge, Nanpu bridge, Xupu bridge, Dapulu tunnel, Yanan East Road tunnel and Hu Jia toll road, and had been guaranteed a 15 per cent investment return.

'We expect [Citic Pacific] to sell the projects back to the government at its book value,' the SHK Financial report said.

'In that case, there will be no impact to our [net asset value] estimate of HK$20.17 per share.' The net profit for next year would drop 20 per cent, however.

Citic Pacific managing director Henry Fan Hung-ling said last week that, whatever solution might be eventually adopted to resolve the guarantee problem, he believed Citic could recoup its investments at book value.

The combined book value of the infrastructure projects amounts to US$751 million, against the costs of US$630 million Citic actually paid.

Meanwhile another red-chip, Shanghai Industrial Holdings, was also believed to be one of the companies most affected by the new policy.

SHK financial analyst Maggie Choi said about 60 per cent of Shanghai Industrial's net income came from its mainland infrastructure projects.

The projects include the Yanan road project, on which the Shanghai city government guaranteed the internal return rate of 14 per cent to Shanghai Industrial in 1996.

An inner ring road is also among the projects, but the guaranteed return was not formally written in the contract.

After the cancellation of such guarantees, Ms Choi said it would not be easy for the company to find other projects with such high returns.

Comparatively, Cheung Kong Infrastructure (CKI) was considered by analysts to be one of the least affected by the new policy.

CKI holds guaranteed return contracts for projects such as Chaolian Bridge and Jiangsha Highway in Guangdong, National Highway 107 in Henan, as well as Tangshan-Tangle Road in the province of Hebei.

HSBC Securities analyst Maurien Yau said that since the mainland projects only accounted for a small proportion of CKI's earnings, she estimated the guaranteed return cleanups would take the company's profit slightly down, by 1.9 per cent, in the next financial year.

Ms Yau also expected some regional governments to probably miss the cleanup deadline as it would take quite some time to resolve all such guarantee problems throughout the country.



Citic, Shanghai Industrial hit by cancellation of guaranteed returns