10/19/00Asia Stock Focus:CyberWorks To See More Volatility
By KENNETH WONG
Of DOW JONES NEWSWIRES
HONG KONG -- Volatility will plague shares of Pacific Century CyberWorks Ltd. (H.PCW) in the weeks ahead, despite a landmark US$3.56 billion tie-up with Australia's Telstra Corp. (TLS).
Analysts credit the Hong Kong Internet and telecommunications group for forging the long-term partnership. But they are concerned the move has impaired CyberWorks' future revenue and cash flow, after selling to Telstra a controlling stake in former Cable & Wireless HKT's mobile phone assets, and transferring its submarine cable assets to a joint venture with the Australian firm.
"PCCW is now a smaller company, with a big chunk of its EBITDA (earnings before interest, tax, depreciation and amortization) going into the wireless and IP (Internet Protocol) backbone ventures. It is hard to think the company is worth more," said Eric Tomter, who covers the stock for Dresdner Kleinwort Benson Securities (Asia) Ltd.
"Retail investors are losing confidence in the stock and now focus on PCCW's cash flow, half of which will be taken up by the Network of the World," said James Loh, an analyst with Typhoon 8 Research Ltd., referring to CyberWorks' Web and TV-based broadband entertainment network.
In just three days, CyberWorks shares plunged 17% to close Wednesday at HK$6.35, only one third of what they were worth in February when the firm said it would take over HKT. The Hang Seng Index has fallen 16% since the end of February.
Tomter now reckons HKT's telecoms business will contribute HK$8.3 billion in EBITDA to CyberWorks for the year ended March 2002, down 30% from the previous year. This is the result of the 60% sale to Telstra of HKT's mobile phone arm - which is being put under a regional mobile venture - and a transfer of its IP backbone business into another 50-50 venture with the Australian firm.
Under accounting rules, although CyberWorks' share of future earnings from these two ventures will appear on its income statement as contribution from associated companies, they won't translate into cash flow the company needs to make interest payments and develop its Network of the World.
Dressing Up The Balance Sheet
Bertrand Chui, an analyst with Worldsec International, expects CyberWorks' annual cash flow, now driven by HKT's fixed-line and international direct dial businesses, to be cut to US$10 billion from US$12 billion, although that should cover about three times its interest payments of around US$3 billion a year.
The logic of severing CyberWorks mobile and IP backbone arms is that it clears from its balance sheet US$3.56 billion in outstanding debt, of which HK$9 billion is due in February. Doing so makes CyberWorks look healthier financially, analysts say.
"Both the wireless and IP backbone are very cash hungry businesses, especially with the high cost of third generation wireless technology development, which will add substantial debts to the ventures," Chui said.
CyberWorks has already said the IP backbone venture with Telstra will raise US$2 billion, partly to pay off US$1.125 billion of CyberWorks' existing debts.
It is also considering a global fiber cable project, which press reports have said will cost around US$4 billion, while an investment in a 3G wireless network in Hong Kong could cost HK$2 billion.
Though these investments will now be financed off the balance sheet - meaning any loans incurred won't accumulate on CyberWorks' own accounts - it doesn't mean the debts will disappear altogether.
"What they do is that they make their own balance sheet look healthier. The debts will still be there, and meanwhile investors don't get a clear picture," said Loh.
Besides the Telstra alliance, traders said the sell-off in CyberWorks shares was also a result of souring sentiment toward embattled technology stocks worldwide.
After being admitted at the Hang Seng Index in August, CyberWorks has seen its weighting by market capitalization trimmed to under 4% from 7%.
Transforming Into Holding Company
Tomter of Dresdner added that CyberWorks is "turning more and more into a holding company" through selling and deconsolidating Cable & Wireless HKT's core telecoms assets.
"And holding companies normally trade at a discount" said Tomter, who has a sell recommendation on the stock, and expects it to fall another 30% from the HK$7 level.
Loh of Typhoon 8 is less bearish, and has a trading buy recommendation at HK$7. "Given the bearish market conditions now, we should see some upside when the market rebounds," he said.
Another analyst with a European brokerage who declined to be named, said: "They've sold their best assets. What else do they have left now?"
"I don't see CyberWorks shares rebounding sharply unless it announces that some strategic shareholder will take up that stake C&W is set to sell."
Cable & Wireless PLC (CWP), which still holds 15.3% in CyberWorks, will be allowed to dispose of half of that stake in February, and the remaining half in August.
One more factor adds to the likely volatility in CyberWorks shares: the conversion price of a US$750 million convertible note to Telstra will be set based on the 45-trading day weighted-average close of CyberWorks shares after the agreement last Friday.
Traders say even though CyberWorks can buy back its shares at any time, a further fall, likely driven by more short-selling activities, will favor Telstra by allowing it to convert the note into a bigger CyberWorks stake.
-By Kenneth Wong, Dow Jones Newswires; 852-2802-7002; kenneth.wong@dowjones.com
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