(FORTUNE Magazine) – FOR THRILLS and spills, Merrill Lynch's recent adventures in Hong Kong rival Indiana Jones and the Temple of Doom. At the center of the drama is Fung King Hey, 63, a shrewd and private man who, with nothing more than a primary school education, went on to build Hong Kong's largest stock brokerage firm. In the summer of 1982 Merrill Lynch spent $82 million -- then and now its largest investment overseas -- to buy into Fung's firm, Sun Hung Kai. Consummated when Hong Kong's economy was booming, that deal made Fung potentially the biggest individual shareholder in Merrill Lynch. The American financial services company hoped to exploit Fung's contacts among wealthy overseas Chinese; in the bargain it got a piece of the action in Hong Kong real estate and retail banking, where Sun Hung Kai had a lot of its assets. Within a few months the Hong Kong real estate bubble burst, punctured by fears of what China might do when the British leases on the colony expire in 1997. The panic dragged down the local stock market. The value of Sun Hung Kai's assets -- and Merrill Lynch's investment -- plunged. A year later depositors staged a run on Sun Hung Kai's bank, and Merrill Lynch had to put in more money to shore up the parent's finances. In 1982 Sun Hung Kai lost a total of $28 million; its profits in the two following years were meager. A rival Hong Kong broker puts forward a widely accepted view of what happened: ''The deal went bad for everybody except Fung.'' Just another story of a gullible American company taken in by a wily foreigner? No, say the principals. Charles Ross, chairman of Merrill Lynch International, says that Fung's business connections, especially in China, are ''more important than we ever imagined in making the investment.'' In praising their partner, Merrill Lynch executives note that Fung pitched in with $130 million of his own money -- from a personal fortune estimated at over $300 million -- to help see Sun Hung Kai through its troubles. Recently he invested several million more to buy back control of his company, which he had lost in the course of the difficulties. Says Fung, ''I regard each setback as a valuable experience.'' The cliffhanger looks as if it's moving toward a happy ending featuring a more buoyant Hong Kong. Last fall the dispute over the colony's future was resolved -- London and Peking agreed that the city will revert to China but remain a capitalist enclave for at least 50 years. Hong Kong's stock market index has rebounded from a low of around 675 in December 1982 to over 1600 recently -- the highest since Merrill Lynch joined Fung. William Arthur, 51, the vice chairman of Merrill Lynch Capital Markets who is helping guide Sun Hung Kai's turnaround as its full-time president and chief executive, says, ''We've had two years of crisis management. That's behind us, thanks to the recovery of Hong Kong. Now we can get back to what we do best -- financial services that make money.'' Originally Fung teamed up with both Merrill Lynch and the French bank Paribas to create what he termed ''a multinational financial supermarket.'' He wanted an alliance with large international partners as insurance against crises in Hong Kong. Tony Fung, his son and the vice chairman of Sun Hung Kai, says: ''We had to find someone who could provide an umbrella on rainy days and stand beside us on sunny days.'' The triumvirate never quite worked. There was, first, the problem that Sun Hung Kai wasn't just in the brokerage business -- it also had substantial holdings in Hong Kong real estate and operated a retail bank. Fung, who made his first fortune trading Hong Kong properties, brought his brokerage house into that risky business in the heady late 1970s. It seemed a natural move since real estate companies were and still are a major component of the Hong Kong stock market. But in September 1982 the extended wrangle over Hong Kong's future seemed to reach an impasse, and property values collapsed. Fung's brokerage firm found itself holding 46.6% of a battered real estate developer, Sun King Fung. Tony Fung now describes that company as ''really disastrous.'' Sun Hung Kai Bank, a retail institution then fully owned by the brokerage house, suffered too. In 1981 Fung's property developer got stuck with an office building; his bank ended up buying it for $56 million. The bank's expensive headquarters came to represent 70% of its stockholders' equity, and the property crash promptly slashed its value. Merrill Lynch's William Arthur recalls arguing at a Sun Hung Kai board meeting during the real estate fiasco: ''Being in the property development business is incompatible with banking, which relies on trust.'' Chairman Fung quickly agreed. In 1983 he took the property developer out of Sun Hung Kai and replaced it with his shares in a company that runs Hong Kong's leading television station, HK-TVB. In effect Fung swapped TV stock worth $21.6 million for a real estate company then worth only $8.3 million. Nonetheless, six months later Sun Hung Kai Bank faced a run by depositors. In those panicky days Hong Kong Chinese were withdrawing their funds from many small local banks and finance firms, converting the money to U.S. dollars and sticking it into international institutions. As one of Fung's aides says, ''Money wasn't his problem. The only thing that would stop the run was having two of the world's big financial institutions putting in more capital.'' FUNG'S FOREIGN PARTNERS came through with $10 million -- Merrill Lynch contributed $5 million -- but took majority control of his company in the process. Evidently the Hong Kong government wanted the muscle of Merrill Lynch and Paribas out front. As one of Fung's senior executives explains, ''The run was on local banks, so giving up control was a way to make Sun Hung Kai a foreign-owned bank.'' Fung was compelled to cede all but 25.5% of Sun Hung Kai to his foreign partners. Says one of his former managers, ''It was traumatic for Fung and the local Chinese who had always run things.'' For a time Fung vanished from view amid wild rumors of suicide. Fung, in fact, was quietly salvaging his reputation. Digging into his own deep pockets, he began putting millions into Sun Hung Kai. He converted about a third of the bonds he had received from Merrill Lynch into the American company's stock and sold the shares at a tidy profit, raising $51 million to throw into the rescue operation. To friends astonished by a bailout he was not legally obligated to contribute to, Fung explained: ''One can have money many times, but honor only once.'' With lots of help from Merrill Lynch, Sun Hung Kai began to get its house back in order. Chairman Fung gradually distanced himself from daily management, leaving Merrill Lynch's Arthur to shape up operations. They needed it. Fung's company was adept at fast trading but lacked discipline. One Hong Kong businessman intimately involved with Sun Hung Kai recalls, ''They conducted business in a very Chinese seat-of-the-pants style. It was like making the big league but still playing bush-league ball.'' As Chief Executive Arthur describes his role: ''I'm trying to be the mortar between the bricks as we rebuild.'' For starters, he devised a strategy that cleaned up the balance sheet. This spring a pair of deft transactions put $58 million of cash into the company's coffers. Sun Hung Kai sold off its retail bank at a loss, but more than offset it by selling its TV shares for a profit. Fung proved to be a major asset of his troublesome bank. Arab Banking Corp. -- owned by the governments of Libya, Kuwait, and Abu Dhabi -- acquired the bank on the condition that Fung remain chairman and hold 25% of the equity. Ahmet Arsan, the chief executive installed in Hong Kong by the Arab bank, says: ''His stake isn't peanuts, so we hope Chairman Fung will introduce us to clients and business.'' Similarly, Arthur says that Fung's ''unique and irreplaceable'' relationships around Asia can feed customers into new activities of the brokerage firm. Sun Hung Kai is stressing investment banking these days, including fund management, corporate takeovers, and floating commercial paper. Most of that business in Hong Kong is handled by British-run firms. But the clients are predominantly local Chinese, whom Tony Fung describes as ''our captive market.''

Fung's brokerage house, long a retail specialist, is carving out other niches because the Hong Kong stock market has become dominated by institutional investors. When local people sold shares during the recent scare, foreign investment houses were the big buyers. In the process Sun Hung Kai's total market share of local securities trading shrank from around 25% to 20%. Tony Fung says, ''We have to be expert in Asian securities, not just Hong Kong.'' ANOTHER OPEN DOOR for Sun Hung Kai is China, which Arthur predicts ''will become a major borrowing market.'' He figures that Peking's government will need international financing for its modernization drive. Fung's contacts have already helped Merrill Lynch snare underwriting assignments for recent issues of People's Republic of China bonds in Japan and West Germany. Sun Hung Kai has teamed up with the Bank of China and two other state corporations to form Tien An Development Co., which builds hotels and operates a trading company. Andrew Chow, 35, managing director of Tien An, says that the alliance will make possible ''a lot of things we couldn't do by ourselves.'' For example, he's preparing to sell stock to cash-rich farmers in the People's Republic to help finance hotels. For all those high hopes, Sun Hung Kai still faces some formidable hurdles. The company has been a middleman in China trade for six years without making much money from it. By operating through a new company controlled by the People's Republic, Arthur says, ''we should get some kind of comparative advantage.'' The betting in Hong Kong is that Fung's company can come back strong. First- quarter earnings of $2.7 million were more than double the earnings for all of last year. A British investment banker says, ''Fung always does well in a bull market, so the current environment is tailor-made for him.'' Fung apparently thinks so too. He just paid $29 million for Paribas's share of Sun Hung Kai, thereby regaining majority control. Merrill Lynch declined Fung's offer of $29 million for its share. Even after watching its $87- million investment lose approximately two-thirds of its value, the American company remains bullish about the future of Hong Kong. Or at least about the future of Fung King Hey. BOX: INVESTOR'S SNAPSHOT MERRILL LYNCH ASSETS (AS OF 3/29/85) $31.3 BILLION CHANGE FROM YEAR EARLIER UP 26% NET PROFIT (LATEST FOUR QUARTERS) $132.4 MILLION CHANGE UP 9% RETURN ON COMMON STOCKHOLDERS' EQUITY 6% FIVE-YEAR AVERAGE 15% RECENT SHARE PRICE $32 PRICE/EARNINGS MULTIPLE 22 TOTAL RETURN TO INVESTORS (12 MONTHS TO 6/7) 33% PRINCIPAL MARKET NYSE Explanatory notes: page 154