HONG KONG: CITIC Pacific Ltd, the State-owned investment company that's reorganizing following derivatives losses, reported a 43 percent drop in first-half profit as the global recession hammered demand for steel.

Net income dropped to HK$2.47 billion ($319 million), or 68 cents a share, from a restated HK$4.36 billion, or HK$1.98, a year earlier, the company said in a Hong Kong stock exchange statement yesterday. The decline was greater than the HK$2 billion median estimate of three analysts surveyed by Bloomberg. Sales declined 32 percent to HK$18.1 billion.

At the company's special-steel business, its biggest earnings contributor, the plunge was even steeper: profits fell 72 percent as manufacturers pared investments in machinery. Special-steel profits fell to HK$524 million from a restated HK$1.84 billion, CITIC Pacific said. The mainland steel industry posted seven straight months of losses starting in October as prices dropped to 1994 levels, according to the China Iron & Steel Association. The previous year was even worse: the company incurred a HK$12.7 billion annual loss in 2008, its first in almost two decades, because of Australian dollar forex losses. The losses, which CITIC Pacific at one point estimated at HK$14.6 billion on a realized and marked-to-market basis, led to the departure in April of then Chairman Larry Yung.

To turn things around, new chairman Chang Zhenming is buying steel assets and selling other holdings, including most of a stake in Cathay Pacific Airways Ltd, as the company refocuses following currency losses that forced a $1.5 billion bailout from its State-owned parent.

Earlier this week, CITIC Pacific said it agreed to acquire stakes in mainland steel companies for 1.5 billion yuan. In May, Chang said CITIC Pacific plans to invest 15 billion yuan in its iron ore and steel businesses over the next two years.

"CITIC Pacific needs to dispose of more of its non-core assets including power plants," Billy Ng, a JPMorgan Chase & Co analyst in Hong Kong, said before the announcement. "Then, it can free up resources for its key businesses such as special steel and iron ore."

On the positive side, CITIC Pacific boosted earnings at its property units 6.6 percent to HK$483 million, based on figures in the statement. The company has signed an agreement to work with an affiliate on developments on the mainland, it said. The move is part of a wider plan to increase cooperation with parent CITIC Group, the company added.

The steelmaker plans to pay an interim dividend of 15 cents a share, compared with 30 cents a year earlier. It didn't announce a final dividend for 2008, the first time the company has failed to make such a payout.

Despite the negative profits picture, the company's stock is recovering strongly. CITIC Pacific rose 1.1 percent to HK$23.70 at the close of trading in Hong Kong. The shares have more than doubled this year, making it the best performing company in the Hang Seng Index, which has gained 42 percent. CITIC Pacific lost 81 percent of its value last year.

In line with asset reconfiguration, Chang said in May, the company would conduct a review of its operations and sell off assets that weren't efficiently managed or had low returns. This year, it has already agreed to sell its 20 percent stake in North United Power, a power supplier in Inner Mongolia, and 14.5 percent of Cathay Pacific.

China Investment Corp, the nation's sovereign wealth fund, has also agreed to take a 40 percent stake in CITIC Capital Holdings Ltd by buying new shares, CITIC Pacific said. The deal will cut CITIC Pacific's holdings in the investment-fund manager to 27.5 percent, it added.

As part of its asset realignment, the company will use the HK$7.3 billion it will get from selling the Cathay stake to Air China Ltd and Swire Pacific Ltd to repay loans and for future developments, Chang said today at a Hong Kong press conference.

The company has no plans to sell its remaining 3 percent stake in the airline or its holdings in Hong Kong tunnels, he added.

China Daily - Bloomberg News

(HK Edition 08/27/2009 page4)