Citic Pacific Limited
Larry Yung, Chairman of Citic Pacific Limited (“CPL”), was having a board meeting with his property development team The owner of the piece of reclaimed land wanted to dispose of it and it was available to CPL on a first-choice basis. CPL could acquire the site and develop it into another Grade A office building and planned to call it ‘Citic Tower II’. Investing in Citic Tower II did not seem to bring clear positive returns. The asking price of the land was HK$1 billion. The rigid assumptions set by the property development team and the Net Present Value Rule, the project reflected a PV around HK $ 1.54 billion and costs around HK $ 1.6 billion. Maybe this decision was too deterministic, did not allow for any flexibility, managerial discretion or strategic actions.
Citic Pacific Limited listed in Hong Kong on the Hang Seng Index stock exchange since 1991. Diversified company with a clear focus in three main businesses: special steel, iron ore mining and property development in mainland China. Citic Pacific focuses on developing medium and large scale projects in mainland China. Properties are located in prime areas of Shanghai and major cities in the Yantze River area.
Activities include: Bridge, road and tunnel facilities, power generation, environmental projects, aviation and telecommunication.
Extensive trading and distribution interests in: Motor industry. Owns stakes in: Dah Chong limited, Cathay Pacific, Dragonair and string of trading and property companies.
Property Investments: Revenues significantly less predictable, based on 12% required return (WACC) with no attempt to differentiate for individual project risk.
Development of Citic Tower: Began in 1995.
Despite the post Asian financial crisis in 1999, weak demand and falling prices still maintained high occupancy rate
Larry knew that the commercial real estate market was extremely cyclical. Given the volatile nature of the...
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