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China Developer Triples Share Price as It Sheds State Control

Posted on February 20, 2007 by Water Wisdom
2007-02-21 17:04 (New York)
By Dune Lawrence
Feb. 22 (Bloomberg) — Joe Zhang spent his first days at Shenzhen Investment Ltd. rewriting the Chinese state company’s Website to replace slogans such as“Human Capital Mobilization”with financial targets. He had to threaten to fire someone to get the changes posted a month later.“They kept saying, `Yes, you’re absolutely right, we fully agree,’ but nothing happened,” says Zhang, who became chief operating officer last March, after co-heading UBS AG’s China research team. “In a government company, if you don’t have a blunt guy to execute what you’ve agreed on, you come to work at 9, you leave at 5 and nothing will happen.”
Zhang is transforming the firm, which owns $1.4Bln of land and apartments in southern China, from a jumble of assets into an investor-focused property developer. The challenges he faces underscore the obstacles confronting professional managers at Chinese companies burdened by decades of government control. State firms are under pressure to boost efficiency and answer to shrholders as they compete for investor financing. Shenzhen Investment’s stock tripled in 2006 after eight years of stagnation, placing it among the top 10 performers in the 1,068- member Morgan Stanley Capital International Asia Pacific Index.
“Joe’s providing a shrholder’s perspective of how a company should be structured,” says Ian Beattie, who oversees $1.4Bln in Asian stocks at London-based New Star Asset Management Ltd., including Shenzhen Investment shrs. “You get the China economics, but you also get the correct capital structure.”
June Deadline
The company, which posted net income of HK$534.3Mln ($68.4Mln) on sales of HK$3Bln in 2005, will report 2006 earnings in April.
Its 200% shr-price gain last year was the second-biggest in the Hang Seng Composite Property & Construction Index, which tracks 31 builders. China Overseas Land & Investment Ltd., controlled by China’s Construction Ministry, rose 214%  Zhang, 43, set a June deadline for Shenzhen Investment to sell units unrelated to property development. The company has already shed its major non-property holdings, including a power producer, TV-screen maker and cable-TV provider — raising HK$1.4 billion.
The firm is focusing on building apartments in Shenzhen, an industrial hub across the border from Hong Kong. It plans to boost return on equity, or net income divided by net assets, to more than 20% by 2008 from 12.6% in 2005.
Zhang stresses accountability to investors at a firm that for years answered to municipal bureaucrats. Shenzhen Development, which first sold shrs to the public in 1997, is now 51 percent-owned by outside shrholders.
`Proactive’ Management
The company held its first-ever conference call for shareholders two days after Zhang joined, and has had eight more since. Zhang estimates that he’s talked with 300 investors after holding meetings in Japan, Singapore and Hong Kong.
“With Joe Zhang, the management has become proactive,” says Winson Fong, chief investment officer at SG Asset Management in Singapore, who bought 8Mln Shenzhen Investment shrs from October to December. The company’s cheap land holdings and the stock’s estimated 30% discount to the value of its assets also attracted him, he says.
Zhang says the toughest part of his job is instilling a sense of urgency at a company unaccustomed to deadlines or performance targets.
“They’re used to very slow implementation and very vague statements,” he says. “We really want to demonstrate to the capital market and investors that when we say something, we mean it.”
Peaking Property
Not everyone expects Zhang’s success to last. Gunnar Pahlson, who manages a $36Mln China fund at Hagstromer & Qviberg in Stockholm, attributes much of the stock’s rise to a surge in Chinese property values that may be nearing its peak as the government cracks down on developers.
The stock has risen 5.86% to HK$3.43 this year. Pahlson sold his Shenzhen Investment shrs in January. Authorities in December required developers to base their
capital-gains tax payments on actual sales. They had previously calculated payments on their own revenue estimates, and the authorities often didn’t require a reconciliation.
A January report from Fitch Ratings estimated that the measures may cut the typical Chinese developer’s gross margin, the percentage of sales left after production costs, by as much as 10 percentage points to 20% 
“I’m not sure I believe his story,” Pahlson says of Zhang.“It’s always difficult with these turnaround stories to know if they can deliver on time.”
State Bureaucracy
Zhang says the need to seek multiple government approvals for every decision slows him down. Selling Shenzhen Investment’s 19% stake in Shenzhen Mawan Power Co., which runs electricity plants in the city, required approval from the boards of two state-owned companies as well as the State Administration of Foreign Exchange, Ministry of Commerce and State-Owned Assets Supervision and Administration Commission. The process took three months.
Zhang, who has spent more than 15 years outside mainland China, grew up helping his parents’ farm crops such as cotton and sesame in Hubei province. After earning an undergraduate economics degree from the Hubei Institute of Finance and Economics in 1983, he spent six years at the People’s Bank of China, where he worked on loans to state companies.
Zhang moved to Australia in 1989 and received a master’s degree in development economics from the Australian University in Canberra two years later. He was a lecturer on banking and finance at the University of Canberra from 1991 to 1994. He says he abandoned his doctoral studies because he was only an “average” student.
Riling Clients
Zhang turned instead to investment banking, moving to Hong Kong to work in equity research at banks such as UBS, HSBC Holdings Plc and W.I. Carr Securities. HSBC hired Zhang to head China research in 1998. He says he was fired six months later after telling Hong Kong’s South China Morning Post that a Chinese government bond sale HSBC had helped arrange was a “lose-lose” proposition. HSBC spokeswoman Annie Cheng declined to comment on the reasons for Zhang’s departure.
“I did not believe that China needed the foreign exchange,” says Zhang, a father of two who says he spends his free time reading books on current affairs and investing. He moved to UBS in 1999 and stayed for seven years. His team won the top ranking among China country analysts in Institutional Investor magazine’s annual survey from 2001 to 2005.
Lawsuit Target
“His passion for stocks made him talk not only to everyone in the UBS broking platform and our clients, but also to our back- office girls, tea ladies and whoever he ran into,” says Jenny Wong, who worked for Zhang at UBS before moving to a U.S. hedge fund company in Hong Kong.
Zhang’s opinions sparked at least one lawsuit. Greencool Technology Holdings Ltd. sued Zhang in 2001 for publishing a report that questioned the company’s statements that it used environmentally friendly technology to make refrigerants. UBS paid HK$300,000 to settle the case in 2002. When asked about the lawsuit, Zhang points to Beijing-based Greencool’s subsequent decline.
“It is interesting to note that the company’s sales and profit collapsed,” he says. Greencool’s Hong Kong-traded stock has tumbled to HK$0.38 from HK$2.05 at the end of 2001. Trading in the shrs has been suspended since Aug. 1, 2005, after the company failed to release earnings reports, according to a Greencool statement.
CEO Salary
Zhang — hired by Shenzhen Investment at a salary of HK$3 million a year, three times the chief executive officer’s pay — emphasizes individual responsibility and reward.
During the Mawan Power sale, he says he required daily progress reports from department heads involved in the transaction, showing up at their offices in person if their answers didn’t satisfy him.
“We needed an outside force to push our management and corporate development forward,” says Chairman Hu Aimin. “When he first came, he was an outsider. Now he’s part of the organization.”
Hu says he responded to complaints about Zhang’s style by reminding employees that Zhang was working in the company’s best interests. He also hinted Zhang should soften his approach with the gift of a book titled “Appreciate Your Children,” Zhang says.
Zhang has also used incentives to spur on his colleagues. When the company completed the Mawan Power sale, reaping a HK$371 million profit, he recommended bonuses and promotions for the executives who had pushed it through.
He recognizes there’s still plenty working against him. “We have to battle bureaucracy, and the property market is always a risk, and finally, we have to battle complacency,” he says. “We did extremely well in 2006, but that’s only the low-hanging fruit.”
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