22 March 2019
Citic has failed to get a timely foothold in lucrative sectors in Hong Kong, forcing it to seek overseas deals. Photo: Bloomberg
Citic has failed to get a timely foothold in lucrative sectors in Hong Kong, forcing it to seek overseas deals. Photo: Bloomberg

Itochu investment in Citic doesn’t make much sense

Japanese trading house Itochu Corp. and Thailand’s Charoen Pokphand Group have agreed to jointly invest US$10 billion in Citic Ltd. (00267.HK) for 20 percent stake, in a deal that will make them the second-largest shareholder in the Hong Kong-listed firm.

Now, it remains unclear why Itochu wanted to invest in Citic Ltd., which was formerly known as Citic Pacific Ltd.

Citic Pacific had failed to build an entry barrier to its business since setting foot in Hong Kong in 1990. It acquired or bought into several companies, including Cathy Pacific (00293.HK), Dah Chong Hong Holdings (01828.HK), Western Harbour Tunnel and Citic Telecom. All these sectors either have intense competition or cyclical feature. And, in some cases Citic does not have the controlling stake and only acts as a strategic investor.

Therefore, the profit has fluctuated substantially. The earnings reached the first peak of HK$7.2 billion in 1997, and sixteen years later — in 2013 — the profit was still around HK$7.6 billion.

It’s only rare that a lucrative industry or business comes with a high entry barrier. Property, finance and utilities in the 90s fulfilled that criteria, and those who were already in the industries were unwilling to offload the businesses. Thus, Citic has struggled to get into the game and scale up.

Smart investors grab good quality assets tightly and sell them after the growth peak is over. Li Ka-shing’s Cheung Kong has kept Hongkong Electric Co. (02638.HK) for nearly three decades before a separate listing. That tells a lot.

Citic has turned to overseas market after failing to get a foothold in the lucrative sectors in Hong Kong. It acquired special steels business from mainland and an iron ore project in Australia. However, low-cost iron ore mines had already been snapped up by local investors. So, Citic had to resort to lower-grade magnetite ore. And it has been deeply trapped into the project for lack of sufficient knowledge of local market operation.

Citic Pacific completed a massive US$37 billion purchase of assets from its state-owned parent Citic Group in August 2014. The parent has injected several assets, including finance and infrastructure businesses, into the listed unit. Market believes that Itochu and Charoen Pokphand are keen on the finance business, as China has considerable restrictions on foreign players in the financial sector.

However, it is debatable if Citic has any special edge in its financial unit compared with the big four state-owned banks or other rivals. Will the Chinese government offer any hugely attractive asset to foreign investors? The answer would be ‘no’.

So, this now raises the question: Is Itochu now getting trapped like Citic Pacific was before?

Citic shares may continue to hover at low levels in the future due to old problem of absence of entry barriers to the firm’s businesses, despite the group’s expansion and introduction of new strategic investors.

This article appeared in the Hong Kong Economic Journal on Jan. 23.

Translation by Julie Zhu

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Columnist at the Hong Kong Economic Journal

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