Midas touch vanishes in the East

A collapse in Hong Kong's once-reliable profits has sent panic through investors. Stephen Vines reports

Hong Kong investors call Li Ka-shing "Superman" because he has something like a Midas touch when it comes to making money. In the past 10 years he has increased the profits of Cheung Kong, his parent company, 19 times over. Last week, however, he had to announce that profits for 1994 had only risen by 3.4 per cent.

Cheung Kong is only the most conspicuous victim of the profits squeeze that is sweeping through Hong Kong's listed companies, most of which are in the process of reporting their results for last year.

Analysts have been caught short by lower-than-expected profits, and many international fund managers have quickly responded by lowering the Hong Kong weighting in their international portfolios.

The main problem for Hong Kong companies is the downturn in the property market, which underpins the valuation of the entire stock market. Companies like Cheung Kong have the bulk of their assets invested in property, but even non-property companies rely on property earnings for a substantial part of their profit.

Hysan Development, a medium-sized property developer, showed the extent of damage inflicted by the fall in property prices when it dismayed the market by announcing a 29.2 per cent profits fall last week.

The Wharf (Holdings) conglomerate, which was founded by the late Sir YK Pao, also surprised the market by turning in only a 13.8 per cent rise in profits.

One of the few non-property-related stocks, Cathay Pacific, Hong Kong's de facto flag-carrying airline, controlled by Swire Pacific, also managed only a modest 4.1 per cent profits rise in the face of mounting operating costs.

It is hard to understand why the analysts were caught quite so short in predicting results from companies such as these. The most likely explanation is that they simply failed to appreciate the degree to which earnings per share growth has slowed.

In the bullish days of 1992, average eps growth was 22 per cent. The following year earnings growth halved, leading to expectations of a recovery from this more modest base, but profitability has been slow to rise.

By the end of the 1994 reporting season it should become clear that eps growth has risen not much more than 12 per cent.

However, even this estimate could prove to be misleading, as some of the recently released results have shown. Sun Hung Kai Properties, for example, appeared to be bucking the market trend by reporting a 16 per cent profits increase for the six months to 31 December. But much of the profit improvement was derived from late booking of development property sales made in the previous year when prices were higher. SHK's report showed that total property sales were in fact down by 58 per cent.