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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

HANGING ON AT HOPEWELL

Asia Watches as Wu Acts to Shore Up His Infrastructure Empire

By Matthew Fletcher in Hong Kong


IT SEEMS ALMOST A point of honor for Hong Kong's Gordon Wu Ying Sheung. The annual general meeting of his $2.25-billion Hopewell Holdings is conducted in Cantonese and English. Proof, if any were needed, that the Princeton-educated engineer still sees himself as a local boy made good internationally. In November, Wu met his stockholders as usual in Hopewell Center, the 66-story tower in Wanchai district that until the late 1980s was Hong Kong's tallest building. This time, he had to work harder on his patter. Wu, 59, had to convince investors that a 14% drop in profits to $272.7 million - and a 45% cut in dividend payments - were in their long-term interest.

Foreigners were also listening. In the past decade, Wu had turned Hopewell, once just another local property company, into an infrastructure and power developer in China, the Philippines, Thailand and soon, says the magnate, in Pakistan and India. Only days after briefing the shareholders, Wu was off to New Jersey to donate up to $100 million over five years to his alma mater. Then it was on to Washington to meet top-ranking World Bank officials. The financial institution is being asked to help fund a Hopewell power project in Pakistan.

The Hong Kong stock market was not impressed. Hopewell shares continued their slide after the annual meeting. As of Nov. 21, the counter was down 43% from its year's high in July, shaving $1.7 billion from the company's market capitalization. Also last week, shares of Hopewell's 54.6%-owned power arm, Consolidated Electric Power Asia (CEPA), fell nearly 12% over concerns about delays in its Pagbilao power plant in the Philippines. "Hopewell's cash flow situation is not sustainable," says Charles Whitworth, an analyst at brokerage James Capel in Hong Kong. "They're going to have to take action in the next six to nine months if they're going to move forward."

Wu denies the company has problems. "We have a good cash flow," he says. "I never bite off more than I can chew. If people want to look out for bankruptcy proceedings for Hopewell, they will be disappointed." Last week, he revealed his intention to sell to "friendly investors" up to 30% each in the $1.9-billion Guangzhou-Shenzhen-Zhuhai (GSZ) Superhighway and the $3.2-billion Bangkok Elevated Road and Train System. The Chinese toll road has been open to traffic on a trial basis since July 1994. Approved in 1990, the Thai project is finally moving after King Bhumibol Adulyadej recently urged the government to solve the capital's transport problems. Hopewell has yet to put together project financing for it. "There have been [equity] investors knocking on my door," says Wu. "We will sell at a premium."

But industry watchers say Hopewell simply has too much debt - and that's just for starters. Aside from the surprise profit and dividend cuts, the company also reported a net debt-to-equity ratio of 61%, double that of last year because of new loans, though Wu says much of that is for project financing. Another stunner: Hopewell recently provided details about a $746-million cost overrun on the GSZ Superhighway. Traffic is said to be below expectations, but nearly everyone believes that the 122.8-km toll road will eventually make money. Hopewell and its Chinese partner will be collecting tolls until 2026 and developing commercial sites along the route. But Hopewell's bottom line will not immediately benefit when the highway formally opens in early 1996. Says a Hong Kong analyst: "The income on its equity stake goes straight back into the project to pay down debt."

That is true of Wu's other mega-deals. To meet the huge costs of infrastructure projects, private developers typically put in about 25% of the capital - on their own or with other equity partners - and raise the remainder through bank loans. The debt is secured against the project itself. The price: the developer doesn't get back the bulk of his money until all the loans are paid. How about early completion bonuses? Hopewell received a $53-million windfall for finishing the Shajiao B power plant in Guangdong province one year ahead of schedule. But that is not likely to happen with Shajiao C, which has encountered turbine vibration problems.

Wu says the $746-million cost overrun could be recouped. Well into the construction of the GSZ Superhighway in 1992, Hopewell engineers discovered soft land along parts of the road. Large sections had to be elevated. Wu decided to expand nine interchanges as well to allow Hopewell to build bigger retail and commercial developments along the route. "As a developer, that was a wise decision," says Stewart Elliott, a Hopewell veteran and head of CEPA. "We saw these opportunities, and we went for the additional assets."

The decision added about 50% to the project's original budget. Alarm bells started ringing only about two months ago when a letter allegedly from Hopewell to the governor of Guangdong was leaked to a Hong Kong newspaper. The document proposed that Chinese partner Guangdong Provincial Highway Construction Co. agree to the transfer of the extra cost from Hopewell's balance sheet to that of the project in the form of shareholder loans. Fears over the size of the overrun were confirmed when Hopewell released its 1995 annual report in September. Describing the extra cost as "additional investment," Hopewell said the Chinese had agreed in principle that part of the $746 million be considered as loans from Hopewell.

"This is effectively asking the Chinese to bail out the project," says Wendy Ko, an analyst at brokerage G.K. Goh. A Hopewell insider says an agreement will be signed later this month increasing Hopewell's 42% share of toll receipts. Half the additional cost will also be transferred to the project. The enlargement of the nine interchanges created new spaces beneath them for bus terminals, gas stations, car parks and commercial centers. The shopping areas will each have a total gross floor area of 680,000 square meters. Combined with a higher share of toll receipts, says Hopewell, these developments will enable it to recover all it spent and "realize a favorable return on investment."

Still, some investors are fuming. They say the tycoon failed to do his homework before charging ahead with the superhighway. "Hopewell misjudged the speed of major civil engineering construction in China, the complexities of land acquisition and budgeting," says Michael Green of Nomura Research Institute. Hopewell has also gotten flak for breaking the cardinal rule of mega-projects: Keep the costs off your own books. Says a project banker: "The good thing about Hopewell from a banker's viewpoint is that it is quite happy to use its balance sheet to get projects done quickly. But in terms of shareholders, the company ends up with a much larger liability."

Wu may succeed in transferring part of the overrun to the superhighway's books. But some of his shareholders want better disclosure in the future. Last year, Hopewell sprang another surprise by revealing in its annual report that it had sold 2.5% of the superhighway to an undisclosed buyer. The Hong Kong stock exchange had to prompt the company to identify the deep-pocketed purchaser as Japanese trading firm Kanematsu. The stake went for $125.2 million, putting a face value of $5 billion on the whole road - nearly three times higher than most estimates. "On the basis of that deal, the highway looks like a very valuable asset," says Declan Magee, manager for regional research at HG Asia.

There are also complaints that Hopewell is liquidating assets that generate high-quality recurrent income. It sold its 51% interest in a Hong Kong residential development this year for $198.6 million, at a time when the property market remained sluggish. Hopewell may have little choice, given its heavy debt. "If you're a banker and you're looking at the ability to repay debt at the corporate level, there is virtually no operating cash flow," says a Hong Kong securities analyst. David Barden of Baring Securities estimates that only $492 million of Hopewell's $1.25-billion borrowing facility is left to help meet the $1.56 billion that Wu says he needs over the next two years to go forward with his projects.

Hopewell also needs $258.7 million by December to pay CEPA for shares that will raise its stake in the power developer to 61.6%. Wu says the money will bring CEPA's cash pile to $961 million, which will help fund future deals, including an $8-billion power project in India's Orissa state. CEPA is seen as a prize possession. "Power is the only thing that Hopewell has got right," says an analyst. "If Hopewell is having trouble at the parent level and it has to do some sort of fund-raising exercise, that could involve CEPA because it's the only company generating real income."

Wu says Hopewell is on track. Bankruptcy looks unlikely, even to his critics. Hopewell's bankers, among them Hongkong Bank and Hang Seng Bank, have sunk too much cash into the company and will help Wu prevent it from going under. "They're informed of my plans," says the tycoon. "That's why they're comfortable."

No one is ruling out a spectacular Wu maneuver - and selling big stakes in the GSZ superhighway and the Bangkok road system could be it. He has piled up a personal fortune estimated at $1.7 billion through risk-taking. Wu was the first to build privately financed hotels in China in 1978. He sealed his reputation as a can-do builder with fast work on Shajiao B. "He's a visionary but his approach is very practical," says long-time friend Simon Murray, head of Asian operations of Deutsche Bank.

Wu's track record still counts for something. "If you look at other project developers in Asia, Hopewell is among the few that have delivered," says Bob Dewing, head of project finance at Citicorp. The superhighway may turn out to be a key link in one of China's fastest-growing economic corridors. HG Asia's Magee says Hopewell can earn $129 million from it starting in 1999, because "once projects are built and the debt is repaid, they kick off cash." Wu needs to convince investors and creditors that he can keep things going until then. And spring no more surprises.


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