CITIC Pacific: Defensive Play

StockHouse LogoAmidst uncertainties in the local stock market caused by a weakening Dow Jones and a crumbling NASDAQ, CITIC Pacific [267] is one of a few Hang Seng Index constituents that has seen company buy-backs over the past month. This action, coupled with the continuing spectacular performance of its aviation division, is likely to provide downside protection to the stock in the short term.

Over the longer term, the Company’s early entry into China’s untapped, high-growth telecoms infrastructure industry and the successful establishment of a strategic beachhead ahead of China’s entry into the WTO, is a good enough reason for investors to stick around to see its long-term strategy of diversifying into the telecoms sector bear fruit.

Short term outlook

stockhouse citic picThe Company has been an aggressive buyer of its own shares over the past month. Between September 7 and October 5, the Group bought back a total of 14,937,000 shares at prices ranging from HK$30.70 ($3.94) to HK$37.20.

Based on its closing price of HK$31.30 on October 10, the stock of CITIC Pacific had fallen 27.2% from a high of HK$43.00 as at the end of August.

Morgan Stanley Dean Witter believes that the Company, with HK$9.5 billion in cash on hand, is likely to continue buying back its own shares in the coming year.

The Company announced interim net profit of HK$1.6 billion for the six months to 30 June 2000. The aviation division was the star contributor, registering 1,318% YoY growth in operating profit.

Its 25.4%-owned Cathay Pacific [293] recorded twenty-fold YoY net profit growth to HK$2.183 billion in the 1H of FY2000, while its 28.5%-owned Dragonair saw its profit more than double over the same period.

The strength of this division is expected to carry through into the 2H. Cathay Pacific has just announced a new monthly passenger number record of 1,087,480 for August, culminating a 15.1% YoY increase to 7.9 million passengers for the first eight months of 2000.

“Although the summer peak is now over, the outlook for traffic remains positive,” said the airline’s general manager Ian Shiu. The aviation sector looks set to remain a key earner for CITIC Pacific, ensuring healthy profit growth for the full year.

Based on consensus FY2000 and FY2001 EPS of HK$1.48 and HK$1.75, respectively, the stock is trading at prospective PERs of 21.1 times and 17.9 times, respectively.

Long term outlook

Director Andre Desmarais has been a constant net buyer of CITIC Pacific shares since November last year, just two months before the Group’s official announcement regarding the nation-wide fibre optic network and the possible purchase of an interest in CITIC Guoan. Between November 1999 and September 2000, the director amassed a total of over 40 million shares at prices ranging from HK$20.80 to HK$40.50. The fact that he has not sold any of his holdings seems to imply that he is in for the long term.

The Group’s telecoms-related acquisitions (either completed or about to be completed) include:-

  1. A 60% interest in Lucky Zone Enterprises Inc. Lucky Zone has invested in a 32,000 km fixed optical fiber network with a center ring connecting Beijing, Wuhan, Guangzhou, Shenzhen and Shanghai. 
  2. A 50% interest in CITIC Guoan. CITIC Guoan owns stakes in four cable TV networks and the CITIC Building in Beijing. Other assets owned by CITIC Guoan, such as four GSM networks, a minor holding in CITIC Securities and China Unicom [762], will not be included as part of the proposed asset injection by CITIC Beijing. 
  3. A 100% stake in Telecom 1616 Group, which is an external telecommunications service operator in Hong Kong.

As at the date of the Company’s interim results announcement (28 August 2000), over 20,000 km of the fibre optic backbone network had been laid. The center ring will be operational once the relevant permit is issued. The Company believes that by holding stakes in the mainland’s major cable TV networks through CITIC Guoan, its objective of reaching end-users can be achieved.

Telecom 1616 Group has alliances with 18 international telecoms carriers and will serve as an international exchange platform in Hong Kong, connecting China and the rest of the world. The Hong Kong-based group and its partners will also be natural users/customers of CITIC Pacific’s backbone network services.

Thus, the three investments are all inter-related and form an integrated global telecoms network through which digital data, voice and video can be transmitted into and out of China. The nationwide backbone network with its international connection point in Hong Kong will be complete with its own distribution channels - the cable TV networks owned by CITIC Guoan – once the relevant PRC authorities approve the acquisition. Approval is expected by the end of this year.

Managing director Henry Fan has indicated that the Company is planning to bring in a mainland telecoms partner with regards to the optical fiber backbone network investment. The proposed alliance is expected to be finalized by the end of the year.

It is believed that this move is intended to trim down the Company’s stake from 60% to 49% in order to comply with mainland rules restricting foreign telecoms stakes to a maximum of 49% upon China’s WTO membership.

Even though the Company’s interest in the backbone network will be lowered, it together with its Beijing parent and Chairman Larry Yung will still hold a total of 89%, meaning there is absolutely no change in control. Moreover, it is only logical for the Group to ask for a premium from its new partner when it disposes of the 11% interest. The 60% interest was acquired by CITIC Pacific for a consideration of HK$1.132 billion.

Therefore, it seems that the recent sell down of the stock on news of the likely reduction in interest in the network may have been an over-reaction on the part of the market.

Copyright StockHouse Media Corporation

Share our publication on social media
Share our publication on social media