Citic Pacific storms Hong Kong: A pounds 610m placing has catapulted a Chinese investment vehicle into the colony's top 20 companies. Teresa Poole reports

YOU can spot it easily from the air; on one side of the border are rich green marshes and the headstones of a Chinese cemetery peeking through an overgrown hillside. On the other is a grey-white urban sprawl dotted with construction sites and skyscrapers.

Once just a village, Shenzhen is the face of new modern China, pressing hard against the last remnants of old rural Hong Kong.

More than a decade has passed since China's paramount leader, Deng Xiaoping, launched the 'open door' policy. Last year the country's annual growth rate averaged 12 per cent.

It was nearer double that in some coastal regions, particularly in the special economic zones such as Shenzhen, which have been spurred on by investment from Hong Kong.

The figures attest to the pace of growth. Telecommunications traffic between Hong Kong and China is growing by about 30 per cent a year. Freight traffic across the land border is up by about 25 per cent annually. With growth of this pace expected to continue, institutional investors are looking for ways to cash in on the boom and, if possible, the perfect 'China play'.

The are many choices. The illiquid, volatile 'B' share markets of Shanghai and Shenzhen; the large quoted Hong Kong companies with huge infrastructure and trade links with the mainland; and the nascent investment funds set up to take stakes directly in Chinese industries are some of the main routes.

Most recently there has been a rising tide of mainland Chinese money buying into and taking control of Hong Kong- quoted companies.

These companies have become vehicles for raising money which is then used to finance investments back inside China.

The giant of this last type of 'red chip', both in size and pedigree, is Citic Pacific, the quoted subsidiary of China's biggest investment vehicle in Hong Kong.

Earlier this month, Citic Pacific took another huge step towards centre stage when it raised HKdollars 7.2bn ( pounds 610m), the largest placement in Hong Kong by a single company.

The money was used to finance the purchase of a 12 per cent stake in Hongkong Telecom from its parent, Citic Hong Kong. Citic Hong Kong, whose stake in Citic Pacific will increase from 43 to 46 per cent, will also provide a HKdollars 3.3bn loan. Included in the deal were controlling stakes in two mainland power plants and a stake in a Hong Kong waste treatment plant.

In all, HKdollars 11.4bn in assets moved into Citic Pacific from its parent, catapulting its market capitalisation to more than HKdollars 24bn and making it one of the colony's 20 largest companies. (Two years ago, it was worth just HKdollars 1.6bn).

The placement was made even as the stock market remains vulnerable to the shouting match between Peking and the colony's governor, Chris Patten, over plans for political reform in the territory.

It has also pinpointed concerns over whether Citic Pacific should be viewed as more than a well-connected investment company.

The Citic group's history goes back to 1979 when the State Council of the People's Republic of China authorised the formation of China International Trust & Investment Corporation (Citic) as a flagship vehicle for the economic reforms.

Formed in 1987, Citic Hong Kong brought together Citic's interests in the colony. Apart from its 46 per cent of Citic Pacific, Citic Hong Kong's main interests are a stake in the Eastern Harbour Crossing tunnel company, and extensive property, shipping and trading activities. It also has a controlling interest in a bank, and a remaining 7 per cent stake in HK Telecom. As a private company, detailed financial information on Citic Hong Kong is scarce and analysts are wary of even guessing its total worth.

Citic Pacific was set up just three years ago. Since then, injections of assets from the parent and its own acquisitions has seen it develop into a formidable concern. Analysts expect 1993 net profits to reach about HKdollars 2bn after the latest deal with earnings per share growth of 25 per cent.

As well as the new HK Telecom stake, the company's main assets are its holdings in Cathay Pacific (12.5 per cent), Hong Kong's main carrier, Dragon Air (46.2 per cent), the Hang Chong conglomerate (100 per cent), a big property portfolio, and the new power stations.

According to an interview given last week by Larry Yung, head of Citic Hong Kong, to the Chinese language press here, Citic Hong Kong will gradually inject profitable businesses into Citic Pacific, but only if earnings per share will not be diluted.

The HK Telecom injection, for instance, has been priced at a substantial 20 per cent discount to the market price. Big, capital-intensive projects in Hong Kong and the mainland will be undertaken by the parent company, and injected only when they are up and running smoothly, he said.

As the mainland's key stock market vehicle, Citic Pacific has to be seen to be behaving fairly if it is to show off China's investment integrity. So far, outside shareholders have been expected to be willing to dig into their pockets regularly to finance the rapid growth.

According to Adrian Faure, at Baring Securities: 'To date, including the recent deal, prices paid have actually been very fair and minority shareholders, for once in Hong Kong, have not been badly treated.'

Two main questions still dog the quoted company: to what extent it has become a true 'China play', and whether it is shifting fast enough from passive investment to active management.

'At first it was a reverse China play,' said one analyst. 'Here you had a Chinese company owning Hong Kong assets, rather than the usual China play of a Hong Kong company owning China assets. And it was effectively just a holding company.' The purchase of Hang Chong, which spans car dealerships, trading, retail and property, helped to address both these issues; it is wholly owned and managed by Citic Pacific and should contribute more than a third of profits this year, according to analysts.

At the same time, its mainland business is expanding sharply; in recent months the vehicle dealership's sales on the mainland have exceeded those in Hong Kong.

The latest deal also boosts mainland involvement, through the acquisition of the power stations in Henan and Jiangsu provinces. Considering the mainland's increasing power demands, it should prove the base for further investment in the sector. But the huge investment in HK Telecom will mean that about a third of profits will come from this passive stake.

Mr Yung said it would use the relationship with HK Telecom to break into the mainland's telecommunications market, but this is likely to be some years off.

Overall, Citic Pacific indicated it would be comfortable if 30 to 40 per cent of its assets are on the mainland within five years, although this may be difficult to achieve. Citic Hong Kong has, however, recently signed letters of intent in Shanghai for a road tunnel, power station, and road and rail facilities, so there are several mainland projects in the Citic pipeline.

Citic Pacific's progress over the past three years is prompting followers. According to Ravi Narain, at Peregrine Brokerage: 'Citic Hong Kong's success in floating off its own unit and developing it into one of the largest listed companies in Hong Kong, reaching Hang Seng index status in such a short time, has obviously encouraged several provincial mainland governments to replicate their example.'

Citic Pacific has also set a trend. Although it is the only quoted company backed by the central government in China, there are a host of smaller, provincial and locally backed companies on the Hong Kong market, such as the established Guangdong Investments and the newer Guangzhou Investments.

'Institutional investors are seeing China-backed companies going public that are positioned to acquire assets in China at low prices with very high growth potential,' Mr Narain said. This combination of Western accounting practices and mainland Chinese businessmen with connections has so far proved enticing to investors.

(Photograph omitted)