China’s sprawling state-owned conglomerate Citic Group is accomplishing a massive public listing with limited investor scrutiny

April 11, 2014 Leave a comment

China’s Citic Misses the Transfer

ABHEEK BHATTACHARYA

March 27, 2014 10:44 a.m. ET

China’s largest state-owned conglomerate is going public in Hong Kong, but in an opaque way. Heard on the Street columnists Alex Frangos, Abheek Bhattacharya and Aaron Back discuss whether this is genuine reform.

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Making a sprawling Chinese government conglomerate go public should instill market discipline. Doing it through a process that limits public due diligence undermines the exercise.

That’s the case with the massive asset transfer between Beijing-based Citic Group and one of its listed subsidiaries in Hong Kong, Citic Pacific. 0267.HK -4.76% The listed company will pay cash and shares for the assets of its unlisted state parent. A price hasn’t been settled, but government rules require that it be at least the assets’ book value, an impressive $36 billion of banking, brokerage, property and energy operations. That would make this the biggest-ever public market asset transfer in Chinese history, according to Dealogic.

The move is likely an early example of the Communist Party’s push for state-owned enterprises to become more market-oriented. In theory, instead of hiding assets out of view, a move like Citic’s forces sheltered business units to be subject to investor scrutiny. It also removes the risk that the nonlisted parent can siphon profits by forcing the listed company to acquire the parent’s assets at artificially high prices. Citic has its fingers in finance, publishing, tourism and engineering, emblematic of how unfocused China’s state-owned firms can get.

In practice, the move is but a small opening of the scrutiny window. By backing into its subsidiary, Citic Group avoids the sunshine of a full initial public offering. The subsidiary, Citic Pacific, listed in the early 1990s through a similar maneuver. Even after a possible share offering, private shareholders are almost certain to remain a minority to Beijing.

Citic Pacific’s shares climbed 13% Thursday, adding to a 14% increase in the two weeks before the deal was announced. Some of Thursday’s rally is justified because the listed firm is paying for the parent’s assets with shares valued at a 6.5% premium, besides the cash.

Beyond that, investors face a bevy of question marks—especially the final sales price. Many of Citic Group’s assets are in stressed sectors and may not be worth the book value Citic Pacific will pay. Separately listed China Citic Bank 601998.SH -1.50% and Citic Resources Holdings 1205.HK +0.99% fetch 0.7 times book, and China’s property sector on average is about 0.9 times, says UBS. UBSN.VX +0.39% It could be a repeat of state-owned China Mobile’s injection of $32.8 billion worth of assets into its listed Hong Kong company in 2000, at a massive premium to those assets’ future earnings, according to Carl Walter and Fraser Howie, co-authors of the book “Red Capitalism.”

Getting Citic’s full set of attributes into public view is a step forward. But that doesn’t mean investors should like what they see.

 

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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