The newest group of companies to hurry onto the Hong Kong Stock Exchange is the port operators, but some analysts suggest caution in investing in this new spate of Chinese government spin-offs

----By Lee Perkins

Following calls by the Ministry of Communications last year to seek diversified investment for port and harbour development, three of China's major port operators have scrambled to prepare listings for the Hong Kong Stock Exchange (HKSE). But while China's continuing growth and export-based economy provide a promising macroeconomic backdrop for investors, many experts believe this may be an area to step lightly in for the time being.

Although China's superlative statistics leave many potential investors salivating, even Chinese investors face serious transparency problems in their capital and equity markets. Many of these difficulties stem from inefficiency, bad management and corruption endemic within China's state-owned sector, a serious impediment to China's WTO promises to open up to private investment and promote fiscal accountability and corporate responsibility.

Highlighting the difficulties investors face when seeking a share of government-owned industry is Tianjin Port Development Holdings' continuing attempts to list on the HKSE. Despite having won preliminary regulatory approval for its proposed Hong Kong IPO in November of last year, Tianjin Port Development Holdings, the largest port operator in Tianjin and a spin-off unit of red-chip conglomerate Tianjin Development Holdings, only started pre-marketing on April 24, and shares are likely to begin trading on May 24, after previously being turned away twice by Hong Kong's listing committee. Some analysts had suspected the port would be delayed a third time in February after suspicions were raised by the HKSE over irregular trading on parent company shares in February.

In a statement issued at the request of the HKSE, the Board of Directors of Tianjin Development Holdings, Tianjin Port Development Holdings' parent company, admitted having noticed the increase in trading volume of company shares. But, with the exception of off-market disposal of 15 million shares - representing 1.65 percent of the total issued share capital of the company - by Tsienlien Group, controlling shareholder of the company, on February 23, the board was unaware of any reason for the increase.

Coming to fruition

There is history here. In September 2001, Tsienlien Group and Tianjin Investment, two substantial corporate shareholders of Tianjin Development Holdings, were successfully prosecuted under Securities Ordinances for failure to report disposals and acquisitions of 662,000 and 1,824,000 shares of Tianjin Development, respectively, the previous year, according to the Hong Kong Securities and Futures Commission. Both Tianjin Investment and Tsinlien pleaded guilty to a total of eight summonses.

"The problem is [accountability] is not as clear cut as the mentality you have in the West," said Patrick Wong, Underwriter for TT Club, one of the international transport and logistics industry's leading providers of insurance and related risk management services, at the 3rd Trans Asia Shipping Conference in Dalian in April. "Okay, this is what you've done, this is the law, and this is the regulation. But this is not the case. Even though on paper there may be no connection [between entities], in fact there may be a strong influence indirectly or through other channels. Its not as strict as you might think it is." Since its initial proposal, Tianjin Development Holdings Ltd has increased the size of its IPO by 20 percent to HK$1.26 billion. The company now plans to sell 578 million shares on an indicative price range of about HK$1.80 to HK$2.19 a share, market sources reported; the new price range is 20 percent higher than the one previously proposed - HK$1.50 to HK$1.83 a share, as the company announced last week. Tianjin Development Holdings, the investment arm of the Tianjin Municipal Government, intends to use the funds for proposed expansion. The company hasn't always delivered on promised spin-offs, however, and a planned sale of shares in its road unit, first unveiled in late 2002, has yet to take place.

Tianjin Port had planned to follow hot on the heels of rival Xiamen International Port Co in 2005, hoping to become the second purely Chinese port to go public. Xiamen International Port successfully listed last year raising HK$1.36 billion (US$175million).

At present, principal operation of the Tianjin port is divided between Tianjin Port Company Ltd, whose principal business interests include loading and unloading, freight, transfer and car transport, and Tianjin Port Development Holdings Company, a subsidiary of Tianjin Development Holdings Ltd, a government-owned conglomerate whose activities include winery products, stevedoring and storage services, investment holdings, container transport and storage services.

While unclear exactly why the HKSE's listing committee rejected both previous attempts requesting more data, sources suggested the board wanted clarification of the relationship between the two port operating companies to allay fears that the flotation would hurt Tianjin Development minority shareholders. Since both entities are ostensibly controlled by the municipal government, the listing committee was concerned about competition between the two. Furthermore, the fact that Tianjin is only spinning off certain assets raises the question in many investors' minds - is it really the crown jewels, or are they being held in reserve? "Operation of Tianjin Port itself has already been effectively divided into separate entities," said Huang Lijun, vice president of Tianjin Port Company. "Of these, Tianjin Port has already been floated successfully on the Shanghai stock exchange A market." Tianjin Development's port unit, Tianjin Port Container Terminal, accounts for about 47 percent of the port's container volume. However, the municipal port authority has promised to allocate at least half of the port's container volume to the unit in the future. It is rumoured that Tianjin Development shareholders will be offered preferential rights to subscribe to Tianjin Port shares, although Tianjin Development declined to confirm this.

In recent years, ports across China have enjoyed an unprecedented boom in shipping as the country's ravenous appetite for raw materials, from crude oil to iron ore and concrete, has grown and exports in every category have mushroomed.

Amid this scramble for capacity, more and more port operators are looking for new channels of investment, and an ever-increasing number of state-owned H-shares and red-chip companies have benefited from Hong Kong listings as China's own exchanges have developed little from their original role as a vehicle for forcing SOEs to embrace free market capitalism.

Despite the initial excitement of mainland investors, China boards have done little to impress upon SOEs the notion of enhancing shareholder value, and the stock market has virtually halved in value since its brief peak in 2001, while the economy has grown by over 50 percent. China's inability to create a functioning stock market threatens to handicap the country from reaching its full growth potential.

Over the past few years, container throughput at Chinese ports has grown by 30 percent a year, and Beijing has said it expects that China could move 120-140 million TEUs by 2010. Any potential Hong Kong port listing is likely to benefit greatly from projected growth in the China port sector.

Modern Tianjin is already an international seaport metropolis and was one of China's first cities to open to the outside world with joint ventures established as early as 1980. In terms of foreign investment, Tianjin is first in north China, having already attracted the attention of multinational businesses like Motorola, NEC, Siemens, Volkswagen, Samsung and Zanussi through creation of the Tianjin Free Trade Zone in 1991.

Amid this scramble for expansion some have pointed to a potential glut in capacity. When asked about overcapacity in Chinese ports, Mohammad Sharaf, CEO of Dubai Ports World said, "Some people say there is overcapacity now. But how about the future? China is the world's fastest-growing economy. We don't want to be out of it. We want to be part of the economy that is growing the fastest. We want to be a part of the supply chain on both sides. In the East and the West. China is a focus point, and Europe is another. This is where the global trade is happening"

In the right direction

It has also recently been reported that the investment arm of Singapore's PSA Corp Ltd has signed a 50-year agreement with Tianjin Port Group to build and operate six berths at the port at a cost of about RMB6 billion. The agreement will give the mainland port operator a controlling 51 percent interest and calls for the first three berths to be operational by 2008, in time for the Beijing Olympics.

Tianjin is now likely to become China's third port operator to list after Dalian Port Co, operator of China's largest crude oil terminal, started share trading in Hong Kong on April 28. The port operator hopes to raise US$240 million to help fund US$512 million worth of expansion aimed at alleviating import commodity logjams and increasing containerised export capacity for manufactured toys, textiles and appliances. BNP Paribas and UBS AG are arranging the sale, and underwriters have highlighted Dalian's oil handling business as a key selling point for the IPO.

"Dalian Port has already invested US$3.36 billion in construction of the Northeast Asia Shipping Centre that in essence means building another port the same size as Dalian Port. In five years Dalian will be one of the largest and most advanced oil, ore and container ports in the world," said one official at the port's Foreign Investment Promotion Office, who declined to be named.

The state-run company has earmarked 33.6 percent of the IPO shares for four strategic investors, meaning a mere 16.4 percent of the shares on offer will be allocated to institutional investors, assuming the retail tranche expands to 50 percent of the offering from 10 percent, owing to massive oversubscription.

Dalian's price share range is expected to level out below that of Xiamen, China's seventh-busiest container harbour. Xiamen Port, which operates a dedicated container port just north of the Pearl River Delta, trades just around 20 times after gaining 40 percent since its listing.

When asked about the overall transparency of the industry, Patrick Wong said, "The south is generally more liberal, more open ... Dalian is planning to list on the Hong Kong Stock Exchange, and gradually the regulatory bodies and other organizations will enforce totalling of assets and liabilities."