PCCW (8): Show of Faith or More Manipulation?
Jan 23, 2001 - 13:20:17 HKT
QuamResearch
The press reported today that Richard Li bought PCCW convertible bonds with a face value of US$20 million (HK$156 million) for US$17.1 million (HK$133 million). The price represents a 14.5% discount. Also, PCCW deputy chairman Alex Arena bought 50,000 shares at HK$4.075. The information is available at the HK Exchanges Web site (hkex.com.hk).
Some investors may be tempted to take heart in the news. Don't! Mr. Arena's purchase is so minimal as to have no significance. Mr. Li's bond purchase should give him a 4% yield along with the potential for capital gain, so it's a pretty safe move for him. This is assuming the CBs he bought are some of the batch issued in October 2000. Those notes had coupons of 3.5% and were convertible at US$1.0083 or about HK$7.865.
The SCMP reported that the convertible bonds increased from US$83.88 to US$88.58 on January 16, the day Mr. Li played the market. Mr. Li's US$17.1 million paid out represents an average price of US$85.50.
The important feature of the news, however, is not Mr. Li or Mr. Arena. It's Mr. Yang. Andrew Yang Fan Shing sold off his holdings in both PCCW and the parent company, Singapore-listed PC Regional Development. Again, the holding in PCCW was rather minimal -- just 109,912 shares sold at HK$3.913 -- but the stake in PCRD was slightly more significant. The stake sold there was 4.798 million shares at S$0.812 per share or about HK$3.64 each. That would mean a HK$17.46 million cash-out.
Though the numbers are not terribly large, they do spell trouble, potentially, for HK-listed PC Insurance (HKSE: 0065) and Mr. Li. Originally, there were rumors that PCRD was going to sell off its insurance arm. Mr. Yang is the deputy chairman and CEO of PC Insurance. It is important to note that Mr. Yang has not yet sold his PC Insurance stake and still holds about 66.5 million shares. The sale of PC Insurance would supply cash for paying off PCCW's other liabilities. However, if Mr. Yang has sold down his PCCW and PCRD stakes, it suggests that he could be on the way out. Since he was the one who built up the business in the first place, it could mean that a sale of the business will turn out to be harder than otherwise thought.
At HK$4.85 per share, the convertible bonds are still underwater, but the company has a market capitalization of HK$106 billion. Until the C&W stock overhang issue is resolved, any play on PCCW is pure speculation, especially since the fundamentals of the company still appear to be deteriorating. Under HK$4, the stock appeared to be a potential speculative buy, and that proved to be the case, especially with the young Mr. Li doing some bond buying and having a high profile lunch with his dad soon after. However, this smacks of manipulation, and small investors are too much at the whim of this company's management playing with the stock price rather than focusing on business building.
At just under HK$5 per share, it looks like the speculative buy potential has evaporated, and putners who try to jump in now will likely get their fingers burned. On a final note, for those who figure that it represents a "long-term buy" as evidenced by Li's bond purchase, remember that the convertible bond is good for 5 years and the conversion price works out to HK$7.865 per share. Though that works out to a 62% premium over the current price, the stock price would need to appreciate just 12% per year until maturity to hit that range -- hardly a return commensurate with the risk.
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