Veto China Resources loans
16 December 2010

Six HK-listed subsidiaries of China Resources (Holdings) Co Ltd (CRH) are seeking approval from their independent shareholders to lend money to each other, to CRH, and to unlisted companies controlled by CRH. Webb-site urges shareholders to vote down the proposals, which require a simple 50% majority of those independent shares which vote at the meetings. CRH is prohibited from voting. The listed companies are:

CRH is a HK-incorporated wholly-owned subsidiary of China Resources Co., Ltd (CRC), incorporated in the PRC. All the intercompany loans would be guaranteed by CRH (in the case of HK$ and US$) or CRC (in the case of RMB). If the borrower is a subsidiary of a listed company, then it will be guaranteed by that listed company. All that may seem reassuring, but it still exposes the lender to loss if CRH or CRC goes bust. CRC currently has a AAA rating issued by a mainland rating agency, China Lianhe Rating Co., Ltd. No rating is given for CRH. But ratings, like reputations, can easily be lost - just ask shareholders of Enron or AIG.

Lending money to related companies or a parent company is an incredibly bad idea and independent shareholders should not accept it. For many years, mainland companies, mostly government-controlled, have been asking independent shareholders of their HK-listed subsidiaries to approve loans (euphemistically called "deposits") with "group finance companies" controlled by the unlisted parent. These proposals always encounter strong opposition, and independent shareholders have occasionally succeeded in voting them down, despite any state-controlled votes in the free float. One example was China Oilfield Services Ltd in 2004. The China Resources proposal takes a further step along this road: rather than distributing cash via a group finance company, China Resources wants to build a matrix of bilateral loans between the companies.

Listed companies should be financially independent of their parent and of their fellow subsidiaries. Shareholders of each company do not benefit from the profits of the other companies, and nor should they bear the risk. The China Resources group claims that there are seasonal cash flows at some companies which match funding needs at other companies. If that is the case, then it argues in favour of merging the companies together so that liquidity can be pooled between them, and then independent shareholders would benefit from the synergies of the combined companies. There may be other good reasons for maintaining separate listings which outweigh the synergies of merging them. But they cannot have it both ways. So long as they are separate, they should be financially independent.

Under the proposals, the listed lender would get a higher interest rate than they might get on deposits with independent banks, but that does not adequately compensate for the fact that they would be at the mercy of the controlling shareholder who in practice can decide whether to call for repayment or roll over the loans, depending on where it wants the money to be. Furthermore, if listed companies have surplus cash sloshing around, then they should pay it out to shareholders as dividends, and finance their short-term funding needs from trade finance facilities from the banking system. This would reduce the equity tied up in the company and improve return on equity.

No HK-controlled group of listed companies behaves in this way - you do not see Cheung Kong and its various listed companies asking for approval to lend money to each other or to Li Ka-shing; nor do you see it with any of the other tycoon-controlled conglomerates, such as Henderson group, New World group or firms controlled by Sun Hung Kai Properties. It is a uniquely mainland thing, and if the trend persists, then it could threaten the mainland economy with a repeat of the Japanese Keiretsu system, where clusters of listed companies surrounded a group-controlled "main bank". That system had some pretty awful consequences when the Japanese bubble burst in the early 1990s and the bad loans piled up. China should learn from its neighbour and put its listed companies on a more independent footing.

So, if you hold shares in any of these companies, vote AGAINST the proposals and VOTE NOW - time is very short as the first of these meetings is on 22-Dec, only 6 days away. If you are an asset manager, don't you dare get on a plane for the holidays until you have directed your custodians to vote against this! If you are a retail investor, make the effort - call your bank or broker, and get them to vote for you. Every share counts, and this could be close. For more information on the voting process, see our voting guide.

© Webb-site.com, 2010

Organisations in this story

• CHINA RESOURCES (HOLDINGS) COMPANY LIMITED
• China Resources Beer (Holdings) Company Limited
• China Resources Building Materials Technology Holdings Limited
• China Resources Gas Group Limited
• CHINA RESOURCES LAND LIMITED
• China Resources Microelectronics Limited
• CHINA RESOURCES POWER HOLDINGS COMPANY LIMITED

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