Hong Kong Airport to Repay HK$6 Billion Before Going Public

February 18, 2004

Airport to Repay HK$6 Billion Before Going Public 
The Standard, Hong Kong


The Airport Authority will have to repay the
government HK$6 billion in equity as the first stage
of its privatisation before private investors are
allowed to buy a stake in the airport operator in an
initial public offering.

Details of the plans will be given to legislators on
the economic services panel next Monday.

According to a briefing paper lodged with the
Legislative Council yesterday, the government hopes to
introduce an amendment in Legco in March to change the
Airport Authority ordinance so the equity transfer can
be made. 

The government expects the authority to raise the cash
from syndicated loans and hopes the money can be
repaid in the 2004-05 financial year.

Given the current low interest rates, it believes it
is in the authority's best interests to raise the cash
sooner rather than later.

Under the Sino-British agreement signed in 1996, the
Hong Kong government agreed to inject HK$36.4 billion
into the Airport Authority to help finance the
construction of Chek Lap Kok.

In the paper, the government points out this has left
the authority with a low debt-to-equity ratio which
``has resulted in a relatively high weighted average
cost of capital''.

Returning HK$6 billion to the government would
increase the debt-to-equity ratio from 1:4 to about
1:2, bringing it into line with similar organisations.

According to the government's financial advisers,
returning the HK$6 billion ``should not unduly affect
its financial strength and credit rating'' provided
there is continued government support for the
organisation.

The paper, jointly prepared by the Economic
Development and Labour and the Financial Services and
Treasury bureaus, admitted the authority's borrowing
costs will increase, lowering net profits in the next
few years.

``But the capital structure optimisation would in the
long term help improve Airport Authority's return on
equity and make it more attractive to potential
investors,'' the paper said. It added that a
privatisation bill will be prepared in parallel with
plans to amend the ordinance and will be subject to
far more public scrutiny and consultation.

The bill will allow the creation of an airport company
with shares listed on the stock exchange.

But the document gives no details of the planned
timetable for the initial public offering or how large
a stake will be sold by the government. Instead, the
paper said the sale will depend on market conditions
including the financial strength of the Airport
Authority.

The authority, which made a net profit of HK$503
million in the 2002-03 financial year, was badly
mauled by the Sars crisis as the total number of
flights and passengers dropped by about 20 per cent
last year. It also heavily discounted landing fees and
rents for airport users, leading insiders to believe
it is likely to post a loss this year.

Edmond Lee, strategist at Sun Hung Kai Investor
Services, said the authority should be valued at more
than HK$20 billion given it has plenty of room for
expansion.

``The new exhibition centre and Disneyland will help
drive the airport's growth in the future,'' he said. 

``Also, it's new and efficient and will gain from the
consolidation of surrounding airports. It's the
government's best asset and need not be sold cheaply
because the shares will probably be briskly snapped up
by investors.''

Lee said that, given the current low interest rate
environment and the airport's high credit rating, it
could be priced at 13 to 14 times its earnings,
compared to Beijing Capital International Airport's
price-to-earnings ratio of around 10 to 11 times.


The paper said the government's financial advisers
analysed several options before settling on an IPO.
These include a sale to strategic investors,
securitisation, issue of exchangeable bonds and a sale
to the Exchange Fund.


It admitted that airlines and other commentators had
raised issues which needed to be discussed further
before privatisation could take place.





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