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1. Rail merger reward set to arrive late

2. Citic Pacific eager to shed projects

1. Rail merger reward set to arrive late
Eli Lau , The Standard 14 December 2002.

The mooted merger of Hong Kong's two railway corporations is unlikely to produce an expected windfall of up to HK$15 billion for the government in the next fiscal year as the final decision on the issue will not be made until March.

It is understood that the two railway operators - Kowloon-Canton Railway Corporation and Mass Transit Railway Corporation - are still unable to agree on a merger.

The delay points to a March agreement, just before the announcement of the budget.

The government had earlier expressed confidence that the merger would translate into enough cash to put a dent in the estimated HK$75 billion deficit the SAR is expected to incur by the end of the financial year in March.

The Environment, Transport and Works Bureau and Financial Services and the Treasury Bureau are conducting separate feasibility studies on the merger.

The studies were expected to be completed by the end of this month, a government spokesman said yesterday.

An Environment, Transport and Works spokeswoman said yesterday there was no timetable for the bureau's release of its study.

``Just like our Secretary [Sarah Liao] said, we will release the study result after completion,'' she said.

Democratic legislator Andrew Cheng yesterday said the two railway operators and government officials were still talking.

``As far as we understand, the two operators still need time to reach consensus on such matters as profit division and fare arrangements,'' he said.

Market watchers have estimated that the MTRC must allocate around HK$60 billion for the merger - by both issuing new shares to the government and through cash payment.

It has been widely expected that the government will receive about HK$10 billion to HK$15 billion from the MTRC.

Investment bank Merrill Lynch earlier predicted the merger exercise would lift the MTRC's gearing from 58 per cent to 176 per cent.

The market expects the merger to save up to HK$140 million a year in operating costs.

The second tranche of a HK$15 billion MTRC share sale has been held up by the proposed merger.

In August, KCRC chairman Michael Tien said he would back the proposal.

MTRC chairman and chief executive Jack So echoed Tien's sentiments, saying a merger would reduce operating costs, increase efficiency and cut duplicated resources.

But Tien made a U-turn after a KCRC board meeting in October.

Secretary for the Environment, Transport and Works Sarah Liao has said a merger may pave the way for fare cuts. She said the government was open minded and ``waiting for the consultancy report to do further analysis before [formulating an opinion]''.

2. Citic Pacific eager to shed projects
Staff reporter The Standard 14 December 2002

Citic Pacific wants to sell its US$751 million (HK$5.86 billion) worth of infrastructure projects in Shanghai back to the local government after the guaranteed fixed returns on the investments are terminated this year, it was reported yesterday.

According to market rumours, the Shanghai government will offer public utility projects, including water and sewage treatment plants, to the conglomerate to compensate it for the loss of its fixed return.

However, these projects are unlikely to lure Citic Pacific due to their relatively low return of 5 per cent. In comparison, Citic Pacific reaps an annual guaranteed fixed return of 15 per cent on its six bridges and toll roads, Hong Kong Economic Times reported.

As a result, Citic Pacific management would like to recoup its investment by selling the projects and plans to use the money to develop its fibreoptic business in the mainland, the report said.

Citic Pacific management was not available for comment yesterday.

``We expect the company to sell the projects back to the government at book value, which is about HK$5.9 billion,'' Sun Hung Kai Securities' Florence Cheung said in a recent research report.

Cheung said the projects generated about HK$1 billion in annual cash flow and she expected the possible sale would trigger a 20 per cent fall in the conglomerate's 2003 net profit, although there would not any impact on its net asset value per share.

The six infrastructure projects are an important lifeline for mainland-backed Citic Pacific, and analysts expect they would contribute 25 per cent of its earnings this year.

About HK$820 million of its 2003 profit may be on the line after guaranteed fixed returns on its mainland projects are terminated this year, the conglomerate said earlier.

Citic Pacific had held a ``meaningful'' first round of talks with the Shanghai government late last month and negotiations were on-going.

Earlier this year, the State Council ordered mainland entities to revoke existing guarantees of fixed returns to foreign investors by year-end. In future, no mainland project sponsors will be allowed to offer such guarantees. Foreign firms have been offered four options - to split the return equally with a Chinese partner; sell the project back to the state; convert the project to a national debt; or simply terminate the project.

Citic Pacific had said the last option had already been ruled out by the Shanghai government. Other locally-listed firms affected by Beijing's policy change include Cheung Kong Infrastructure, New World Infrastructure and Shanghai Industrial.

Shares of Citic Pacific fell 0.32 per cent to close at HK$15.60 yesterday.