(Refiles to fix typo in 11th paragraph)
* CITIC Pacific shares fall amid CITIC asset deal scepticism
* Deal will boost state-run parent's control in near term
* More 'essential' state-owned enterprise reforms urged
By Denny Thomas and Matthew Miller
HONG KONG/BEIJING, March 28 China's move to list
one of its biggest state-run conglomerates in Hong Kong has left
some investors questioning whether Beijing's choice is about
improving corporate management and welcoming foreign investors
or cementing its own control.
CITIC Group Corp, China's state-run flagship
investment company, is to transfer its main operating assets to
its majority-owned, Hong Kong-listed industrial conglomerate
CITIC Pacific Ltd. The deal, valued at $42 billion,
comes just a few months after China's Communist Party promised
to promote use of free markets to bolster growth in the world's
The day after welcoming a deal that folds huge assets from
steel to property companies into their firm, CITIC Pacific's
minority investors were more sceptical, sending the stock lower.
CITIC Pacific plans to pay for the biggest injection of assets
into a listed company in Hong Kong's history with an unspecified
combination of new shares for existing holders and cash.
Rather than relinquishing control, in the short term CITIC
Group could raise its stake in CITIC Pacific from 57.51 percent
to close to 90 percent, according to Breakingviews calculations.
While it's unclear whether or when CITIC Group
might ultimately reduce its holding, the transaction highlights
the complexities that China may face in convincing markets that
it can successfully open up more state-owned assets to foreign
"If you go to market with confusing messages, lack of
clarity about structures, you can often put a big chunk of
investors off side," said Sydney-based Shane Oliver, head of
investment strategy at AMP Capital, which manages $120 billion.
"Then it's much harder to retain them," said Oliver, whose fund
has exposure to Hong Kong and China shares.
After rising more than 13 percent on Thursday on the back of
the deal announcement, partly on short-covering, CITIC Pacific
shares slid to the bottom of the pack on Friday. The stock was
down 5 percent at 0801 GMT, making it the worst performer in the
benchmark Hang Seng Index, up 1.1 percent.
As CITIC Pacific slipped, some investors also questioned
whether the new assets it is receiving will revive confidence in
a company hammered in recent years after miscalculating the huge
cost of developing a mine in Western Australia. In October 2008,
the stock lost half its value in one day after sour bets on the
direction of the Australian dollar resulted in nearly $2 billion
"Early gains were driven by the excitement of the deal,
people have become more down to the earth again as they need to
see how well the assets will be in future," said Ben Kwong,
chief operating officer of regional brokerage KGI Asia.
In the deal, CITIC Group said it would transfer the assets
of its main operating arm, CITIC Ltd, to the Hong Kong-listed
CITIC Ltd made a net profit of 34 billion yuan ($5.5
billion) net profit in 2013. It had a total equity of about 225
billion yuan ($36.2 billion) at the end of 2013, while its debt
level wasn't disclosed in the Wednesday filing announcing the
Its array of assets stretches from gold mining in Central
Asia, to oil in Kazakhstan and the Beijing Guoan Football Club.
The company also makes hydropower equipment, owns China's only
platinum import and export company and biggest manganese ore
miner, and oversees a small empire of office and residential
property spanning Shenzhen to Dalian.
About 79 percent of its 2013 profit came from the financial
sector, through stakes in companies like China CITIC Bank Corp
, according to estimates from Jefferies analysts.
While the deal means investors in CITIC Pacific will get their
first exposure to financial services assets, China's banks have
struggled of late, under the weight of mounting bad debt.
"CITIC Pacific will be a stronger company through a much
enlarged shareholders' equity, broader range of businesses and
deeper managerial skills," CITIC Pacific said. "These will
enhance its competitiveness and ability to capture the economic
growth opportunities in China."
The company hasn't indicated exactly how it will finance the
deal. In a statement on Thursday, credit rating agency Moody's
said it "expects that CITIC Pacific will fund the acquisition
mainly by equity through issuing new shares to CITIC Group."
Moody's placed its ratings on CITIC Pacific under review for
an upgrade, reflecting its expectation that "the proposed
acquisition will greatly increase CITIC Pacific's scale and
enhance its credit profile." Last November, Moody's had cut
CITIC Pacific's rating to Ba2, two notches below investment
grade, citing lingering risks associated with its Sino Iron
How the CITIC deal fares will be closely watched by those
looking for evidence that China can implement the reforms it
says it wants to make.
Last November China's Communist Party said the government
was prepared to advance state-owned company restructuring and
promote further use of markets to bolster its economy as its
slows after the blistering growth of the last decade. Beijing
also said it would transform qualified government-owned
conglomerates into state investment companies.
In one of the first developments, Sinopec, Asia's biggest
oil refiner, said last month that it would sell up to 30 percent
of its marketing arm, which owns more than 30,000 petrol
stations, in a 300 billion yuan ($48.31 billion) asset
restructuring. The sale may take place in the third quarter of
this year, company chairman Fu Chengyu said earlier week.
"It is absolutely essential that these SOEs get
restructured. They represent an incredibly inefficient part of
the Chinese economy," said Singapore-based Peter Elston, head of
Asia Pacific Strategy and Asset Allocation at Aberdeen Asset
"What we seen so far really just the tip of what needs to
happen. It's encouraging to see some restructuring taking place,
but an awful lot more needs to happen, before we can have the
confidence to increase investment into China," he added.
Hong Kong remains the leading market for China-related
companies, which have raised more than US$375 billion from
equity share sales in the enclave since 1993.
"Hong Kong is always a 'testing ground' for China's reforms
and has the ability to help Chinese companies to extend their
overseas business," K.C. Chan, Hong Kong's acting financial
secretary, told Reuters.
(Reporting By Denny Thomas and Matthew Miller; Additional
reporting by Umesh Desai and Michelle Chen in HONG KONG; Editing
by Kenneth Maxwell)