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Hong Kong corruption probe takes heavy toll on Sun Hung Kai investors

HONG KONG -- More than US$7 billion has been wiped off the market value of Sun Hung Kai Properties since the billionaire Kwok brothers who run the Asia's biggest developer were arrested in a corruption investigation in late-March, sapping shareholder confidence in the Hong Kong conglomerate.

Five Sun Hung Kai-connected men arrested in the investigation are expected to appear at Hong Kong's anti-corruption agency later on Monday, according to sources involved in the case.

Shareholders say the company has lacked transparency and clarity over the probe.

“The longer it goes on, the longer it drags on the stock, and potentially wears on the business itself,” said Tim Gibson, head of property equities in Asia for Henderson Global Investors, a mutual fund that manages US$800 million in Asia real estate stocks, including Sun Hung Kai. “It's a distraction we could do without.”

Hong Kong's highest-profile graft scandal has seen the arrests of Thomas and Raymond Kwok, the joint chairmen of Sun Hung Kai Properties, which owns the International Commerce Center (ICC), the city's tallest building and home to Morgan Stanley, Deutsche Bank and the Ritz Carlton. Their estranged brother Walter was arrested earlier this month, widening a probe that has also netted Thomas Chan, the board member in charge of land purchases, and Rafael Hui, Hong Kong's chief secretary from 2005 to 2007 and a friend of the Kwoks since childhood.

The Independent Commission Against Corruption (ICAC), which is leading the investigation, has not laid any charges. It may extend bail on Monday, charge those arrested or let them go with an option to re-arrest them at a later date.

'Grossly inadequate' Disclosure

As the largest component of the FTSE EPRA/NAREIT Developed Asia index, Sun Hung Kai is a must-have for mutual funds tracked against that much-followed benchmark.

The investigation overhang presents a tricky situation.

Investors are unsure whether now is a good time to buy a stock that has shed a fifth of its value, or whether they should sell a company whose top executives are ensnared in a messy scandal that may play out over several years. The Kwoks are preparing for a seven-year legal fight, according to one source familiar with their planning, who did not want to be identified.

One mutual fund investor said disclosure from Sun Hung Kai and investigators had been “grossly inadequate,” adding the company had done little other than set up an internal committee to handle the investigation.

“Their actions to date haven't given minority shareholders a lot of comfort that they are dealing with it as seriously and aggressively as they could if it wasn't the family,” said the investor, who did not want to be named.

Analysts' ratings on Sun Hung Kai stock have all been negative since the arrests of the firm's co-chiefs. “Strong Buy” and “Buy” recommendations have dropped to 8 from 18 two months ago, and the number of “Strong Sell” and “Sell” notices has more than doubled to 5. “Hold” ratings have jumped to 10 from four.

Sun Hung Kai's net income is forecast to more than halve in the year to end-June, to HKUS$21.13 billion, according to a mean estimate on Thomson Reuters StarMine. Full-year results are due in September.

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