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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Stitch who wrote (2198)	2/16/1998 12:31:00 PM
From: Worswick	Respond to of 9980

More grist. For private use only from the SCMP JF picks defensive hongs JAKE LLOYD-SMITH Investors should focus on strong balance sheets and high recurrent cash flows when picking Hong Kong conglomerates, Jardine Fleming (JF) says. With trading conditions remaining difficult due to the economic downturn in Hong Kong and the region, the house said it was backing Hutchison Whampoa, Swire Pacific and Citic Pacific. "We continue to recommend Hutchison and Swire Pacific as our top picks . . . [these] offer upside in the medium term and more importantly have sufficient financial resources to ride out the current environment," JF said, summarising recent discussions with managements in the sector. Citic was favoured because of its defensive earnings mix. "Approximately 55 per cent of earnings and almost 70 per cent of net asset value are derived from infrastructure projects in Hong Kong and China," JF said. "However, we must stress that Citic is the weakest counter on our buy list because its net debt to equity is expected to be over 50 per cent in the next year or two. "This may limit its ability to close deals in the current tight credit environment." JF was neutral on Wheelock and Co and First Pacific Co. It said firms would respond to the downward pressure on property prices with different strategies, although none envisaged delays in property development schedules. "Swire is likely to become an active buyer of land in the current downturn," JF said. "Citic will focus on its current land bank, while Hutchison is unlikely to make land bank replenishment a priority in 1998." While most conglomerates believed that rental and take-up of office properties would be hit in the months ahead, Wharf (Holdings) officials said they expected to be largely immune from the pressure. "The management's optimism, we believe, is due to its dominant position in Tsim Sha Tsui, which allows it to control supply," JF said, describing the firm's position as "surprising". It said that impact of falling rents would be felt least by conglomerates with portfolios concentrated in areas supported by local consumers, rather than tourists, numbers of which had fallen sharply. "Hutchison, Swire and Citic should see less pressure on their rental portfolios," it said. "Wharf/Wheelock will feel the biggest pain." In consumer-related businesses, JF said its views of the impact of the slowing economy were more bearish than those offered by many managements. While Citic was optimistic about the contribution from trading and distribution, including that from its main vehicle, Dah Chong Hong, JF saw Dah Chong's earnings slipping 14 per cent this financial year. Similarly, Hutchison was still budgeting for an increased contribution from its mobile telephone operation, while JF was looking for a 15 per cent decline. Wheelock failed to make the buy list because of JF's "cautious outlook for both property and development" and its relatively narrow 20 per cent discount to estimated net asset value. First Pacific "is still facing great uncertainty due to its exposure to various Asian markets . . . Earnings are likely to be on a declining trend in the short to medium term". It said several of First Pacific's businesses would need to be restructured or receive cash injections in the coming months, which would drain its cash position. Back To Top