Monday, July 18, 2005

WSJ : Bridge Project May Channel Big Gains to Property Firms

"Heard in Asia" Column
By MEI FONG Staff Reporter of THE WALL STREET JOURNAL July 18, 2005

HONG KONG -- A long-discussed, ambitious plan for a bridge linking mainland China with Hong Kong and Macau is likely to get off the ground soon, and that could generate significant gains for infrastructure and property plays.
Talk of a bridge to serve as a visible symbol of Hong Kong's and Macau's reunification with China began more than a decade ago. The project would link the two cities with China's Pearl River Delta region, an economic powerhouse that has less than 5% of China's population but accounts for about 20% of its gross domestic product and 40% of its exports. But the plan didn't get far beyond the drawing board, as the region was hit by the Asian financial crisis in the late 1990s, then by the SARS epidemic in 2003.
Now, such a bridge could serve as more than just a symbol. With Disneyland opening in Hong Kong in September and Macau's gambling revenue swelling, it could boost tourism and logistical links in one of the world's busiest manufacturing districts at a time when the area faces growing competition from the Yangtze industrial region around Shanghai.
Chinese authorities gave the green light to the bridge in March, though many details, such as the extent of private involvement and the timetable, haven't been set. But belief the bridge will be built is spurring partnership discussions among operators of everything from hotels to highways, industry executives say.
Some analysts expect an announcement on the funding structure by year's end. They predict the cost of the 29-kilometer bridge could range between HK$15 billion and HK$30 billion, or US$1.9 billion and US$3.9 billion, with the private sector owning between 10% and 50% and provincial governments in southern China owning the rest.
Victor Fung, chairman of the Greater Pearl River Delta Business Council, a government advisory group that includes key Hong Kong business figures, says the groundbreaking could happen before year's end.
Earlier, "a lot of people didn't agree" with the idea of a bridge, said Mr. Fung, chairman of Hong Kong-based sourcing giant Li & Fung. "Now it's: 'How come you guys aren't fast enough?' "
Even former critics now seem eager to play a role, including Macau casino magnate Stanley Ho. His family runs Hong Kong-listed Shun Tak Holdings, which controls ferries plying the Macau-Hong Kong route. Analysts speculate that Shun Tak might team up with other Hong Kong-listed companies, such as infrastructure and property company Hopewell Holdings, or Mr. Ho's leisure operator Melco International Development, to vie for the project.
"I think they realize the bigger the Macau story, the bigger the benefit to them," says Danie Schutte, an analyst at CLSA Asia-Pacific Markets.
Others that might pitch to participate are Cheung Kong Infrastructure, part of Li Ka-shing's Hutchison Whampoa conglomerate; toll operator Shenzhen Expressway; real-estate giant Sun Hung Kai Properties and real-estate and infrastructure firm Citic Pacific.
Analysts say Hopewell Holdings could emerge as one of the biggest players. The company's chief, Gordon Wu, a Princeton engineering graduate, proposed the bridge in the late 1980s and has been its most vocal advocate. In addition, its network of highways and property investments gives it one of the biggest footprints in the Pearl River area, analysts say.
The company has a strong cash flow, thanks to its 75% stake in Hopewell Highway Infrastructure, which builds and operates toll roads in China. As of December, Hopewell had HK$2.411 billion in cash, a sizable war chest for the project, says Andes Cheng, an analyst at South China Research, a Hong Kong brokerage firm.
In February, Merrill Lynch began covering both Hopewell Highway and Hopewell Holdings -- two years after Hopewell Highway and 33 years after Hopewell Holdings were listed in Hong Kong. Merrill Lynch analyst Cusson Leung says shares of the two companies generated little excitement before because of their relatively small market capitalizations and low trading volumes.
Now, Hopewell Holdings' market capitalization is US$2 billion, up from between about US$500 million and US$600 million in the 2001-2002 period, while its share price has climbed sharply from about HK$4 at the end of 2001. On Friday, its shares rose 1% to close at HK$19.90 apiece.
"It's the company that stands to benefit most from [Pearl River delta] regionalization," says Mr. Leung, who estimates that the asset value of Hopewell Holdings' infrastructure arm, Hopewell Highway, could increase between 50 Hong Kong cents and HK$1 per share if Hopewell wins a 50% stake in the bridge and it is completed swiftly.
Some analysts say shares of Hopewell Holdings remain relatively undervalued. Mr. Leung contends they are about 34% below asset value. Analysts attribute the undervaluation to uncertainties related to a potential stake in the bridge and the company's failure thus far to secure government approval for a proposed 60-story twin-tower hotel in Hong Kong.
If Hopewell Holdings gets a stake in the planned bridge, it might need to raise substantial debt, depending on the stake size, says CLSA's Mr. Schutte. Massive debt has become a big issue for some investors in major infrastructure projects; troubled Anglo-French company Eurotunnel is still struggling to pay debts from building the link between Britain and France.
Investors in infrastructure companies can face heavy risks, Mr. Schutte says, noting "timing is crucial in deciding when to buy infrastructure plays."


Post a Comment

<< Home