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Empire of the state

16 April 2014 By Una Galani

CITIC’s $37 billion merger has shed some light on the gargantuan task of reforming China’s state-owned enterprises. The giant conglomerate is merging its assets, which range from finance to football, into its smaller Hong Kong-listed subsidiary. The result combines listed stakes and a mish-mash of smaller businesses. But if all goes well, CITIC Pacific shareholders will get a profitable ringside seat in the cleanup.

It’s the first time China has cracked open such a large conglomerate, and it won’t be easy to replicate. CITIC Pacific investors will acquire assets from the parent company’s main operating arm for shares worth $28.4 billion and cash of $8 billion. Since the new shares are being issued at HK$13.48 each, 26 percent above the smaller group’s undisturbed 60-day average price, it’s equivalent to CITIC Pacific investors having bought the assets at a small discount.

Much of it investors can access already. Over 80 percent of CITIC’s valuation is accounted for by listed stakes in eight companies, chiefly CITIC Bank and CITIC Securities. The other 20 percent lies in 40-odd subsidiaries, which range from helicopter services to real estate. It’s a real valuation headache. And while there’s more transparency over CITIC’s assets, it may be harder for shareholders to keep track of, say, CITIC Pacific’s long-suffering iron ore business in Australia.

CITIC’s sprawl speaks volumes about the way China’s 100-plus centrally managed state-owned enterprises have grown. But investors could benefit. Assets that are coming virtually for free, like Beijing’s Guo’An football club, or the group’s publishing arm, may have value for a trophy investor. Unwinding the conglomerate discount could be a source of value if CITIC decides to be more disciplined.

Such a sea change won’t come quickly. For now CITIC aspires to remain a conglomerate, comparing itself to the likes of Siemens of Germany and Li Ka-shing’s Hutchison Whampoa. That raises the worry that the empire will keep getting bigger, without necessarily creating value for shareholders. While CITIC’s bold deal shows it to be probably the most experimental of China’s government-owned enterprises, decades of state capitalism don’t wash away overnight.


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