Path unclear for toll-road firm
Monday, April 28, 2003
markets.scmp.com
NICHOLE CHAN
Shanghai Industrial's surprisingly bad results, blamed on an unexpectedly large loss from its start-up semiconductor unit, captured the headlines last week.
The stock lost 17.11 per cent in the four days after the results came out. But longer term, investors are far more worried by the uncertainty surrounding its core operations.
Shanghai Industrial has been enjoying fat, guaranteed returns from two toll-road projects, Yanan Road and the Inner Ring Road, in Shanghai. The returns from these two units accounted for about 60 per cent of its total profits for last year.
In 1996, the Shanghai city government guaranteed an annual return of 14 per cent of invested capital for the Yanan Road project.
The guaranteed return on Inner Ring Road was not formally written in a contract, though it is estimated to be 13 to 15 per cent, according to analysts.
But last year might be the final one for Shanghai Industrial's juicy toll-road profits.
In November last year, China issued a directive ordering regional governments to settle with foreign investors on the cancellation of previously guaranteed returns on infrastructure projects.
As a red chip incorporated in Hong Kong, Shanghai Industrial was covered by the directive, and its earnings prospects were plunged into turmoil.
Shanghai Industrial has disclosed it is in talks with its parent, the Shanghai municipal government. It plans to sell the projects back, receive cash reimbursements, and then buy other new projects from the government.
At first, investors seemed to believe that Shanghai Industrial would not be badly treated by its parent in the crucial transactions. The company's share price fluctuated between HK$11.50 and $12 from mid-December until the middle of this month when it began its sharp slide to Friday's close of $9.20.
Shanghai Industrial said the cash compensation for the two projects should at least equal to their net book value, which was estimated to be $4.9 billion.
But the recent share price weakness shows growing frustration among investors over the scant progress in the negotiations for replacement projects. Nor has any schedule been made for the disposals or acquisitions.
There is clearly no good time for any company to undergo such an upheaval regarding its assets. But this is a particularly bad time for this to happen with Shanghai Industrial, with investors in defensive mode and preferring to hold cash, said Renee Hung, a fund manager at Value Partners.
Getting a grasp on the future outlook for Shanghai Industrial's earnings is difficult until the shape of the asset restructuring becomes clear.
Most analysts have yet to factor in the disposals of the toll-road projects, but have downgraded their investment ratings.
They have warned that the central and municipal governments were preoccupied with handling the Sars crisis.
Solving Shanghai Industrial's problems would not be a priority as the authorities were concentrating their energy and attention on the national crisis, they said.
If the restructuring is further delayed, Shanghai Industrial risks losing this year's guaranteed returns from the two-toll roads while also not being in a position to receive contributions from replacement projects this year.
"We are concerned that Shanghai Industrial's earnings this year will fall sharply and the company may be forced to buy other assets from the government which yield low returns," wrote ING Financial Markets' analysts Peter So and Vivian Xia. These analysts have a "hold" rating on the counter.
"Earnings sustainability risks are high in our view."
There are suggestions the red chip will be compensated via the injection of new, non-guaranteed utility projects such as water, sewage and airport assets.
Analysts believed that regardless of the ultimate replacement projects, it would be impossible for them to be better than toll roads, in terms of high returns and low risk.
For now, the analyst pack is still in favour of Shanghai Industrial despite its problems.
A poll of 18 brokers by Thomson First Call found a consensus "buy" recommendation with a 12-month median price target of $14.43 for the counter.
JP Morgan analyst Benjamin Lo said most of the negatives had already been priced into the company's stock. He maintained an "overweight" rating on Shanghai Industrial.
"Once the road earnings uncertainties are cleared, our expectation of strong core earnings-per-share growth should help drive the stock to our fair value estimate of $14.75, based on three-year average par-to-net asset value," he said. |
