A chat with a taipan
The man bankers talk to
It's 10.27am on a rain-drenched morning in mid-June, less than two weeks before the handover of Hong Kong to China. It is the annual general meeting of a China-backed company in one of the territory's top hotels.
The company is a record-breaker. When it listed in 1993 it locked up a staggering HK$240 billion ($31 billion) of investors' money - more than all the notes and coins in circulation in the former colony, now a special administrative region of China.
In fact ever since it was listed the company has traded below its issue price. Principally a manufacturer of cars, it is currently producing just enough to keep its factory in Guangzhou open. Last year's losses soared 144%. Its joint venture partner, Peugeot of France, has pulled out. Are there furious investors barracking directors? How many hours will the AGM last? These are the questions Euromoney puts to a spokesman for Denway Investments as we wait outside.
He barely has time to answer. The AGM is over in 11 minutes. The whole thing is conducted in Cantonese. About 20 investors are there. When the company's vice-chairman, Guo Peinan, is later asked by journalists about the break-up of the joint venture, he replies that several foreign car firms are looking to replace Peugeot. "But we will need to get the approval of Beijing," he adds, "And this is another uncontrollable factor for us." A loss for the year, says Guo, is "inevitable".
Welcome to the world of Chinese corporate governance.
Elsewhere in Hong Kong's corporate firmament, these China-backed companies are booming. The boom's initiator is Shanghai Industrial, which listed in May last year, and is 65% owned by the Shanghai Municipal government. It is trading at well over six times its initial launch price of HK$7.28 - a price chosen for its auspicious feng shui (traditional Chinese symbolism). But even here the proverb "China is like a deep weir pool" is pertinent.
Incentives you can't keep
Shanghai Industrial's share option scheme is best described as a share option scheme with Chinese characteristics. The company's chairman, Cai Lai Xing, has 4 million options exercisable at HK$8.08, and given the current price of HK$42.20 that means he is sitting on a paper profit of US$17 million. However, Shanghai Industrial's spokesman says the money is not really his and he can't "retire tomorrow on his windfall". He adds: "Chairman Cai was appointed by the government, and according to our practice quite a large percentage of the money will be channelled back to the government or into the company." This will be done according to a secret formula - and by definition, being secret, it's not in the annual report.
Cai's remuneration is a mystery. As is the reason for granting a manager share options as incentives and then taking back a good chunk of the proceeds if they go into the money. "[On] that point I can't argue with you," says the spokesperson, "but it is the practice of all China-backed companies."
Shanghai Industrial is the best starting point for looking at the recent red-chip phenomenon that has swept Hong Kong in 1997, if only because it started it off. Owned substantially by the Shanghai municipal government, it is like all red chips a Chinese government-owned entity, but it operates under Hong Kong laws and is Hong Kong-listed. Such companies have been able to grow at a phenomenal pace through the so-called "injection" of assets onto the balance sheet, mostly from the mainland by their parent companies - usually a government ministry or muncipality.
For many of these companies it is a rags-to-riches story. When it listed last year Shanghai Industrial had a market capitalization of only HK$1 billion. One year later, in May 1997, that figure jumped to HK$38.7 billion. That makes it one of Hong Kong's biggest companies, almost equal in size to airline Cathay Pacific (HK$40 billion) and old trading conglomerate Wheelock (HK$40.2 billion). But in six months' time, the bets are it will be substantially bigger than both.
The company has achieved such remarkable growth by raising equity capital in Hong Kong, and buying assets in Shanghai such as roads, shopping centres, a cosmetics company and a food company. Something approaching alchemy is at work. A quick glance at the price earnings ratios readily explains all. The Shanghai-based assets are being bought at a P/E ratio of about 10. Shanghai Industrial carries a historical P/E ratio that is about five times this figure. So the company is following a classic route: buy cheap, sell high.
This arbitrage between how Hong Kong values China assets, and how Chinese officials do, has driven investors wild, and opened the way for other China-backed conglomerates. Suddenly Hong Kong's stock market is going red. There are 54 red chips and the statistics about them beggar belief. One of the largest, China Merchant International began the year with a share price of HK$3.17. By mid-June it was HK$19.35. Jardine Fleming calculates that these companies are trading at a 134% premium to blue chips - on the basis of their respective P/E ratios. And most important of all seven red chips now number among Hong Kong's top 40 companies by market capitalization, against three in 1993.
Corporate Hong Kong is in the midst of a shake-up. Red chips now make up almost 10% of Hong Kong's total market capitalization, against less than 1% at the beginning of the 1990s. A new red-chip index was launched in June to run parallel with the more sober Hang Seng. The red chip index has a base value of 1000 for January 1993. It was trading at around the 3000 mark towards the end of June.
One of the most thrusting red chips, China Everbright IHK, owned by the all-powerful State Council, is currently trading on a historical P/E ratio in excess of 1100. This must be close to a world record. Theoretically it means it will take well over a thousand years at 1996 earnings to accumulate enough turnover to equal the company's present market capitalization. The Hang Seng Index typically trades on a P/E ratio of 15.