But analysts warn that move may increase financial risks to its units

A narrow 50.8 percent majority of shareholders of mainland consumer conglomerate China Resources Enterprise (CRE) approved the group's proposal to allow it to borrow from its listed units at an extraordinary general meeting held Wednesday in the city.

CRE management reiterated their view that the proposal will improve the group's cash flow and create value for shareholders. Meanwhile, financial analysts slammed the proposal, saying that it will increase financial risks to the listed companies.

Six China Resources Group units listed in Hong Kong - China Resources Land, China Resources Enterprise, China Resources Power Holdings Company, China Resources Cement Holdings, China Resources Gas Group and China Resources Microelectronics - jointly proposed the intra-group lending proposal on November 22. According to the proposal, the listed units will lend to each other, to the parent China Resources (Holdings) Company, and to other unlisted companies controlled by CRH.

"The proposal can enhance higher returns on temporarily surplus cash while the involved risks will be low," CRE Chief Financial Officer Frank Lai said after the meeting. "As we do not think better returns - on a risk-adjusted basis - can be earned from purchasing financial products in the open market or depositing the cash in the banking system, we believe that the proposal is in the interests of the companies and shareholders."

However, it did not meet with unanimous approval as the number of shares voted were approximately 371,920,167 or 50.8 percent for versus 360,143,298 or 49.20 percent against. Nor did it win a majority from every listed company as approximately 57.7 percent of China Resources Gas Group's shareholders voted against the intra-group lending proposal at a special general meeting held Wednesday.

"The intra-group lending proposal will leave restrictions on the amount, duration and purpose of lending so that the loan amounts will be capped at a prudent level to limit loan exposure levels for the China Resources Group companies," a CRE statement said.

The statement added that the dividend policy and credit rating of its units and the China Resources Group will not be affected.

The share price of CRE rose 3.54 percent to close at HK$32.20 in Hong Kong trading Wednesday.

However, financial analysts were not as impressed, saying that it is neither a good move for the companies nor the market.

"The point is that the companies should enhance and execute transparency during the loan-making process in which all information is disclosed," said Michael Wong, Convoy Asset Management director.

Independent stock commenter David Webb said on his website that the intra-group lending proposal may increase financial risks for the China Resources Group companies as the parent company wants to build a matrix of bilateral loans between the companies, weakening their financial independence.

Webb argued that the listed companies should distribute the surplus capital as dividends and finance their short-term funding needs through the banking system instead as this would reduce the equity tied up in the company and improve returns on equity.

"Shareholders of each company do not benefit from the profits of other companies, nor should they bear the risk," Webb said earlier this week.

He also disputed the argument made by China Resources that seasonal cash flows at some companies which match the funding flows of others.

"If that is the case, then it argues in favor of merging the companies so that liquidity can be pooled between them, and then independent shareholders would benefit from the synergies of the combined companies.

Meanwhile, Ricky Tam Siu-hung at Champions Asset Management also said Monday that internal lending will put the group's corporate governance at risk.

"It should be easy to borrow money in a market awash with cash," he said. "The move raises questions about the financing capability of the group."

China Daily

(HK Edition 12/23/2010 page3)