Quamnet - To Three or Not to Three? That Is Li Question (8)
Jan 18, 2001 - 12:57:01 HKT
QuamResearch
PCCW's share plummet has gone farther than most, even Quamnet, expected. Shares yesterday hit a 52-week low of HK$3.775 but managed to end the day slightly off the ground at HK$3.875. Of course, this is a far cry from the HK$27.65 closing high last year, a distant memory for many a mourning speculator. The question now is how much lower can it go. Or will it go. It can go to zero, but even the most pessimistic observer figures that scenario is unlikely.
Will it go to HK$3? Will it rebound and start to move up? PCCW's capitalization is now under HK$90 billion, and this represents a mighty fall for this amalgamation of what was once Hong Kong's dominant telecom and what was once touted as the leader of Asia's Internet revolution. In the past, PCCW could do no wrong in the mind of techno-punters, and every slip in the stock price became another excuse to "buy on the dips." Unfortunately, many who adhered to this practice ended up averaging down and down and further down and now have hopes only of breaking even.
Telstra has now come out and said that the downward track of PCCW's stock price below the four dollar death mark -- to use Chinese number puns -- doesn't concern them. Or perhaps they did not quite say that. The HK iMail wrote that it "was not an issue that would turn it (Telstra) away from its alliance with the company (PCCW)." Between the lines, could one presume that there are other issues that would turn Telstra away from the alliance? Investors should not be too excited by Telstra's apparent expression of faith: Telstra does not have an equity stake, just convertible notes, and if the notes don't get converted, Telstra gets its money back at the end of the day. In the meantime, the Aussies draw interest and continue with their business. Of course, if PCCW should go bankrupt, that might cause Telstra some concern, and the continued price fall of the shares does suggest that PCCW's means of raising funds are becoming more limited.
The iMail mentions a number of analysts, and not surprisingly they have divergent views. Some figure the stock has bottomed. Others suggest HK$3.00 to HK$3.50 is not unrealistic. That price range is the rumored placement level at which Cable & Wireless would be willing to part with their next chunk of shares when the second lockup period ends one month from now. C&W has not yet indicated whether it will place the shares -- the British firm currently owns 15.3% of PCCW and can sell half of that on or after February 17, according to the papers -- and this uncertainty is one of the weights on the stock price.
C&W originally sold its 54% stake in HK Telecom for US$6.5 billion cash and 4.5 billion PCCW-HKT shares, 20.2% of the entity, for a total consideration supposedly worth US$15.7 billion at HK$15.80 per PCCW share. In September, after the end of the first lock-up period, C&W dumped what it could -- 4.9% -- at prices said to be between HK$9.675 and HK$9.976 per share. C&W raised around HK$10 billion at the time. If it sells half of its remaining stake in February, some 1.7 billion shares, C&W will get just HK$5 billion to HK$6 billion.
Many feel C&W won't do it at such a low price, saying that they will just wait until PCCW's share price rises and that they have no urgency to sell. This may be true, but neither would C&W wish to wait for the share price to drop even further. The British teleco is not a HK stock speculator, and it wants out. And if it wants out, investors had better listen, because the firm has seen enough of the inside workings of HKT to know whether it is viable in the long-term or not.
The stock price will remain under pressure even if C&W does not sell in February since the overhang will remain.
Investors should be cautious. One should not bet on a quick rebound, even if one happens. A quick buck may be had, and it may be quickly lost. Just because it appears that the company's leaders seem driven by the quick-buck mentality does not mean investors have to be too. One should invest because one believes the business model is good, the management is excellent, and the long-term prosperity of the company is reasonably assured. We do not feel these conditions are completely, or partially, matched in PCCW. Instead, we see a core business that seems to be crumbling -- temporarily propped up by its still monopoly-like power in fixed-line -- and the firm as a whole threatened by the huge debt burden.
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