HONG KONG Chinese conglomerate CITIC Pacific became the latest victim of global financial market turmoil on Monday after warning of potential foreign exchange losses of nearly $2 billion and accusing its senior finance director of trading without approval.
Mark-to-market losses from leveraged foreign exchange contracts amounted to a whopping HK$14.7 billion ($1.9 billion) -- or nearly a third more than its net profit in 2007, the Beijing-backed company said on Monday.
CITIC Pacific, once a favorite among investors because of its state backing and government-invested pedigree, plans to make a major provision that will drag the company into the red for 2008, Chairman Larry Yung told reporters.
Company executives stressed that the company was experiencing no cash-flow problems, but admitted to the need to tighten internal supervision and controls.
Underscoring Beijing's support, parent CITIC Group -- one of China's largest state-owned financial groups and holder of a 29 percent stake in the listed company -- agreed to arrange a standby loan facility of $1.5 billion for the company, CITIC Pacific said.
"It's very unexpected," an analyst with a major brokerage said, declining to be identified because of the sensitivity of the issue. "I'm really disappointed as the company had never disclosed leveraged forex transactions before."
Chinese corporations have, for the most part, not been as hard hit by turmoil in the global financial markets, partly as a result of the strength of the Chinese economy, which is still growing at a near double-digit percent, and their relative lack of exposure to investments abroad.
CITIC's case marks one of the heaviest hits to a Chinese firm from market volatility, coming on the heels of No. 2 insurer Ping An's warning of a January-September loss after booking a $2.3 billion loss on its investment in troubled Fortis.
CITIC Pacific's stock has fallen in value by about two-thirds this year to HK$14.52 on Friday, before a suspension on Monday, underperforming a 45 percent loss on the blue-chip Hang Seng Index. It will resume trading on Tuesday.
START FROM HEDGING
Analysts had expected the steel-to-property conglomerate to earn HK$5.8 billion this year, according to a poll of six analysts by Reuters Estimates. That fell far short of 2007's HK$10.8 billion, which was swelled by gains from spinning off trading arm Dah Chong Hong Holdings and telecoms services unit CITIC 1616 Holdings.
Yung, once China's richest businessman, apologized to investors for a problem he said was only uncovered last month.
"There was no reason to believe fraud or other illegal activities were involved," Yung said in a statement.
CITIC Pacific has a market value of around $4.1 billion, and its shares have fallen about 35 percent this month. Trading in the stock was suspended before the market opened on Monday.
Group Finance Director Leslie Chang had resigned as of Monday, after failing to abide by the company's hedging policy and did not obtain approval before conducting the ill-fated foreign exchange transactions, the firm said.
Financial controller Chi Yin Chau, who also resigned, had failed to exercise oversight or notify the chairman of unusual hedging transactions, it added.
Efforts to contact both executives through the company were not successful.
Chang began conducting leveraged foreign exchange transactions in July 2007 to lock in the company's cost in its investment in an Australian iron ore mine, following a surge in the Australian dollar, Managing Director Henry Fan explained to reporters on Monday.
The contracts bet on the rise of the Australian dollar and Euro, but turned loss-making when both currencies strengthened against the U.S. dollar, he added.
"The company has no cashflow problem and we will not expedite the sale of non-core business," Fan reaffirmed.
CITIC Pacific, which is also invested in Cathay Pacific, has shifted its focus to special steel and property projects in China in recent years.
In March, the company raised the capital expenditure requirement for its iron ore mine in the Pilbara region of Western Australia by 40 percent to $3.5 billion, due to the appreciation of the Australian dollar.
It has an 80 percent stake in the Australian mine with the remaining 20 percent sold to the China Metallurgical Group.
CITIC Pacific said the initial estimate of losses was based on prices on the latest practicable date, but final losses would be determined by a number of factors including exchange rates and the volatility of the currency market, the firm said.