07/14/97 AFTER THE HANDOVER, A 'GOLDEN OPPORTUNITY'?

View items related to this story

AFTER THE HANDOVER, A 'GOLDEN OPPORTUNITY'?

Now that China has come marching into Hong Kong, is it time for investors to go marching out? It's certainly a temptation to take profits. After all, the blue-chip Hang Seng Index is up 13% this year. Many ''red chip'' stocks--newer companies based in Hong Kong but controlled by Chinese state entities--have more than doubled. But most pros think the Hong Kong takeover will continue to pay big returns. ''We view this as a golden opportunity,'' says Thomas R. Tuttle, co-manager of the big-cap Colonial Newport Tiger Fund.
At the same time, the face of the Hong Kong market is in for a change now that China has taken charge of the former British colony. As Chinese investors acquire stakes in some blue chips--and as rumors swirl that more moves are in the offing--these pillars of the Hong Kong Establishment are undergoing a sea change. ''The Chinese want to have major interests in strategic sectors of Hong Kong,'' says J. Mark Mobius, president of Templeton Emerging Markets Fund. ''These companies will look increasingly like Chinese companies.''
And that, many pros say, is affecting the nature of Hong Kong investing. Analysts and fund managers now expect Hong Kong to take on the characteristics of Asia's more volatile emerging markets, complete with less predictability in corporate earnings. ''Following blue chips will become much more difficult,'' concedes Gary Greenberg, manager of Peregrine Asia Pacific Growth Fund.
While that's a reason to tread with caution, Greenberg and other pros remain bullish. After all, the main reason to plunge into developing economies is high growth. Bank of America expects China to grow 9.5% this year and 9% in 1998, against 6% for Hong Kong.
Despite these expectations, Tuttle notes the Hong Kong market is trading at 13.5 times forecast 1997 earnings, vs. the price-earnings ratios of 15 to 20 for many other emerging markets in Asia. In fact, Tuttle thinks there's value in such blue chips as real estate developer Cheung Kong Holdings or HSBC Holdings, the global financial group that owns Hongkong & Shanghai Bank. Like most Hong Kong blue chips, these companies offer American depositary receipts trading in U.S. dollars (table). These have climbed recently, but many other blue chips have barely risen in 1997, despite the frenzy that accompanied the runup to Hong Kong's handover to Beijing July 1.
BEIJING'S SIGHTS. While it has been building for years, China's move into the blue chips intensified in 1996 when China's state airline and Citic Pacific, a conglomerate whose ADR trades in the U.S., took control of Cathay Pacific Airways, Hong Kong's flag carrier. Citic also purchased 20% of China Light & Power, Hong Kong's premier electric utility.
Then, in May, Britain's Cable & Wireless sold a 5.5% stake in Hong Kong Telecom to state-owned China Telecom. Now, the street is alive with rumors that Hang Seng Bank, controlled by HSBC, is also in Beijing's sights.
Not every tale of a Chinese buy-in has paid off. In the weeks before Beijing took its stake in Hong Kong Telecom, the phone company's price climbed 61%. The real beneficiaries, however, turned out to be C&W, which gained access to China, and China Telecom, which will gain technical and market knowhow--and perhaps a bigger piece of Hong Kong Telecom down the road.
Since the deal, hkt has fallen 5%. But many Hong Kong investors think that's the exception. With Beijing at the helm, Hong Kong's blue chips are in for some heady times.
Dave Lindorff and Pete Engardio

RELATED ITEMS

TABLE: Finding Value in Hong Kong