The Road To China

Cheng Yu-tung plays by a different set of rules in China. The Hong Kong property magnate didn't bother to wait for approval from Beijing, for example, before starting construction on a $420 million addition to a power plant in Guangdong province two years ago. Since an offshoot of the provincial government was a partner in the deal, Cheng was confident Beijing would come around. Sure enough, in September, he finally got the O.K.

Now, with the Zhujiang plant nearly ready to begin operating, the chairman of New World Development Co. still doesn't have an agreement on pricing--or any assurance anyone will buy his electricity. No matter. Last month, Cheng bundled the power plant together with a clutch of roads and bridges in China and Hong Kong, and he sold a minority stake to the public, raising $300 million.

This gutsy approach has made New World the developer to watch in China. No one can match Cheng Yu-tung, not even better-known developer Gordon Wu. Most Hong Kong tycoons won't invest more than 10% of their equity in the mainland, but New World is willing to risk a full 25%. And while rivals stick to property development, an isolated toll road, or a power plant, New World is taking on a range of projects (table, page 43). "Other companies are mostly in the real estate business," says Cheng, one of the richest and best-connected Chinese tycoons in Asia, in a rare interview. "We have toll roads, power plants, housing schemes--and we're even looking at airports."

OTHERS FEAR TO TREAD. New World also has an advantage over big Western operators such as AIG, GE Capital, and Morgan Stanley. That's because Cheng, 69, cares more about getting the deal done than about satisfying nervous lawyers. By forming partnerships with local officials, for example, Cheng gives them a vested interest in the success of his projects. That has helped him win generous returns as well as guarantees to repatriate profits and get loans and investment paid back in hard currency, two chronic sticking points for foreign investors in China. "The government has guaranteed that New World will make money," says Cheng.

Cheng's aggressive approach has also given New World confidence to step in where others fear to tread. When authorities in the central city of Wuhan ran short of funds for a new bridge across the Yangtze River, New World came to the rescue. In 1989, shortly after the Tiananmen massacre, a cash-strapped Wu, chief of Hopewell Holdings Ltd., backed out of a toll road around Guangzhou. New World picked up the project. Unlike Hopewell, whose construction subsidiary takes on the risk of building projects, New World lets mainland contractors do the actual work. That means the company isn't exposed to China's endemic cost overruns.

Altogether, New World has plunked down investments of $1.2 billion on more than 60 projects. What makes New World an intriguing vehicle for international investors is that the Chengs are actually executing their China projects rather than just talking about them. "They've shown they can succeed," says a Hong Kong-based fund manager.

FLURRY OF DEALS. In addition, the group will put in a further $1 billion of its own money during the next four years, making New World one of the largest--and most aggressive--investors in China. "We're always looking for more investments," says Managing Director Henry K.S. Cheng, 49, Cheng Yu-tung's eldest son and heir apparent.

To bankroll its strategy, New World is looking to international investors. It is in the midst of a flurry of debt and equity deals expected to raise more than $1 billion by early 1996. It has just spun off a one-third interest in its New World Infrastructure, raising $300 million on the Hong Kong exchange. Three days after trading began on Oct. 27, the price had risen 6.7%. The unit plans to raise an additional $300 million in debt. In September, the Chengs listed their Renaissance Hotel Group on the New York Stock Exchange, raising $163 million--mainly in order to fund increased investment in China. Over the next few months, they plan to pull in $500 million more through private placements.

The China business is one part of a sprawling empire with some $7 billion in assets that includes a budding Hong Kong telephone company, the territory's largest chain of jewelry shops, and one of the world's largest hotel chains. The Cheng family easily makes it into the ranks of the super-rich: Through their privately held jewelry company, the Chengs own stock in the New World group worth $2.4 billion.

The kudos that New World wins for its success in China are all the more striking because of the troubles that have afflicted Wu--a former darling of investors who were looking for a China infrastructure play. Hopewell has been dogged by chronic cost overruns, poor disclosure to investors, and a growing belief that the company is too thinly managed. Analysts say that New World has both management depth and an ability to limit risk--something that has eluded competitors.

Whereas Wu is known for table-thumping, the elder Cheng has quietly cultivated intimate ties with officials who can smooth the way. He grew up with the mayor of Guangzhou, Li Ziliu, a connection that can't hurt New World's business in the city. Guangdong Electric Power Development Co. is one of the owners of its new Zhujiang power plant, which should make it easier to get a satisfactory pricing deal. Cheng also has direct access to Chinese President Jiang Zemin.

But relationships can cut many ways in China. A ripple of unease ran through New World earlier this year after Beijing Vice-Mayor Wang Baosen committed suicide in the midst of an anticorruption drive. Wang, whose lavish lifestyle prompted the Communist authorities to make him a posthumous example of the evils of corruption, was a government-appointed director of New World China Investment Ltd., the predecessor to New World Infrastructure. New World's business doesn't seem to have suffered, and there was never an indication that New World engaged in any illicit deals. Cheng Yu-tung subsequently had a high-profile meeting with President Jiang, demonstrating that the group remains in good standing.

New World wins high marks for steps it has taken in recent years to bring in more professional managers and to make the company more transparent to investors by spinning off the infrastructure and hotel subsidiaries. That has given investors confidence it can continue the success it has had so far in China. "It's probably one of the best exposures [to China] available," says Simon Male, a fund manager at G.T. Management (Asia) Ltd. who holds stock in both New World Development and New World Infrastructure.

CONFIDENCE IN CHINA. The strategy is not without risks. China still lacks a well-developed legal and regulatory structure, and there are delicate moments looming--such as the transition to a post-Deng leadership and China's takeover of Hong Kong. The Chengs believe that fears have been overblown. After China gains sovereignty over Hong Kong in 1997, says the elder Cheng, "there won't be much difference between China and Hong Kong." New World also insists that it isn't placing too much emphasis on ties with individual leaders. "We build relationships with the entire government," says one New World Infrastructure executive.

New World's confidence in China's stability was clear after the Tiananmen Square massacre. While other investors stayed away, the Chengs were making two of their biggest deals--the Guangzhou ring road and the first phase of the Zhujiang power plant. The result was high returns--about 25% annual return on equity for the toll road and an 18% guarantee for the power project. "They structured their deals quite well because they were going in when no one else was," says an analyst in Hong Kong who follows New World closely. "Going forward, it's not quite clear if they can do as well."

To win over more Chinese officials, New World is investing where the state needs help: power plants, bridges, and roads. These provide steady, secure returns for New World--and receive applause from local authorities. Another political winner: New World is pioneering a government-subsidized plan that will provide hundreds of thousands of apartments at modest prices.

To understand how New World blankets a region, look at Wuhan, where key roads and the country's main north-south rail line cross the Yangtze River. New World has a stake in three bridges and may take a fourth. It also has a stake in the city's new airport and the toll road connecting it to the city. Nearby, it plans to build an industrial park. A recently completed retail-and-office tower houses Wuhan's top department store and a roster of tenants such as AT&T, Hongkong & Shanghai Bank, and McDonald's. Next on the drawing board: tens of thousands of midpriced apartments.

New World is trying to make sure it isn't seen as the ugly foreigner in China. Most of its infrastructure investments are minority stakes. The company comes up with cash and project knowhow, then sits back and waits for the returns to roll in. With projects such as toll roads, says Henry Cheng, "you just send people there and they sit in a toll booth and collect money."

GOLD-PLATED FIXTURES. More spectacular profits may come from the tiny upper end of China's housing market. New World has already built one of China's toniest projects, a cluster of detached houses on an island in Guangzhou. The airy, wood-paneled dwellings feature cathedral ceilings, imported marble, and gold-plated bathroom fixtures. Selling price: $350 a square foot, similar to rates in Manhattan. Of the 28 units put up for sale last March, 80% have been sold. Similar high-end projects are under way in Shanghai and Beijing. In all, New World has four dozen commercial and residential projects planned or in the works.

Cheng's bets in China are in character for a man known for putting many of his investments in the same basket. After growing up in a village on the Pearl River Delta, Cheng dropped out of primary school and made his way to Macao and then Hong Kong. He worked as an apprentice goldsmith in a friend's jewelry shop before marrying into a family that ran a jewelry business. In 1968, a year after China's Cultural Revolution spilled into the streets of Hong Kong, he bought the house he still occupies from a British officer for $130,000. Today, the mansion on the south side of Hong Kong island would fetch at least $13 million.

In the following two decades, New World went on to develop some of Hong Kong's most prestigious properties, including the Regent Hotel and the Hong Kong Convention & Exhibition Center. But in the late 1980s, New World lost focus. Unlike its rivals, it missed the chance to acquire large amounts of land in Hong Kong during periodic downturns in the property market. Worse, it started to diversify with a series of ill-considered acquisitions. Two were particularly damaging: the 1989 purchase of the Ramada hotel chain and the acquisition of nearly half the shares in a money-losing television channel in Hong Kong.

With family members scattered throughout New World and Cheng's privately held jewelry company, New World seemed like the classic Chinese family business: stiff, hierarchical, unwilling to give true power to professional managers yet unable to manage increasingly far-flung acquisitions. Analysts blamed Henry Cheng for the troubled acquisitions, although company insiders insist that the rap is unfair. Fair or not, Henry is only recently starting to live down the notion that he lacks his father's golden touch.

The plunge into China is what helped turn the group around. At first, that too looked like an ill-conceived move. The mainland projects were consuming cash with no sign of producing profits. And China's attempt to cool its economy, started in 1993, put many real estate development projects on hold.

SPINNING MONEY. But now, with many of its China projects completed, the money is starting to pour in and New World seems to have won over the skeptics. Unlike some of the companies touted during China's 1992-93 boom, 12 of New World Infrastructure's 15 China ventures are generating cash. New World's China business "is changing from a high-risk gamble to its greatest hidden asset," argues Charles Cheung, an analyst at Jardine Fleming Securities Ltd. in Hong Kong.

Uncertainty over projects such as the Zhujiang power plant, where construction was nearly complete before the company won government approval, is still troubling to some of the group's critics. New World Infrastructure's rates of return "aren't that great," says William Kaye, managing partner of the Asian Hedge Fund. Although Kaye's firm has a number of direct investments in China, he thinks New World's China infrastructure projects stack up badly next to similar offerings coming out of Australia where, he notes, the returns are similar and the political, legal, and currency uncertainties are lower. "We need to get compensated" for the higher risks in China, he says.

But Kaye's is a rare voice of dissent. Investors are sniffing around China, despite earnings disappointments at a number of companies, and New World Infrastructure looks like one of the better plays. The company's offerings have raised 50% more than the company thought was possible when road shows began. Another sign of confidence that the Chengs have started to put the pieces of the corporate jigsaw puzzle together comes from the strong showing of their New World Development unit, whose shares have more than doubled since the beginning of the year. New World obviously must keep working on creating a more focused, more transparent, better-managed group. But it is clearly building a road to China.

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