Daily Quommentary: KS Li Broke His Promise
Feb 23, 2001 - 09:54:51 HKT
QuamResearch
A couple of weeks ago, Li Ka-shing promised the world that neither his Cheung Kong (1) nor his Hutchison Whampoa (13) would buy a stake in his son Richard's PCCW (8) because there would be a conflict of interest. Mr. KS Li, a 72-year-old man and one of the world's busiest businessmen, who makes ten thousand promises everyday, must be a bit forgetful. Yesterday, the Father's conglomerate flagship Hutchison acquired a minority stake in the boy's PCCW in a connected transaction.
Richard's debt-ridden telecom mammoth will sell 183.5 million new shares, about 0.83% of the enlarged share capital of PCCW, at $4.375 per share to his father's Hutch in exchange for Hutchison Telecommunications Technology Investment Group, a profit-making satellite communications operator which earned $14 million in after-tax profit last year. The expectation of a series of rescue plans from Father might have a short-term impact on the share performance of PCCW, although this transaction alone is only a small drop of water, unable to put out PCCW's fire of mounting debts. Details of the transaction will be analyzed later today.
For Hutchison, which has a market cap of $390 billion, the transaction, which is valued at a tiny $803 million, is dust in Hutch's universe. There won't be any significant impact on Hutch's financials, but the conglomerate giant might have some marks deducted from its credibility rating.
Overnight the Nasdaq Composite was down another 24 points to 2,245 after testing a 52-week low of 2,186 while the Dow was flat at 10,527. The IT-rich Nasdaq managed to rebound back to the positive territory of 2,292, but sellers took control in the afternoon trading session. One wonders if there will be more selling pressure tonight. This should continue to give pressure to locally listed telecos China Mobile (941), Hutch and China Unicom (762). Mobile lost $1.50 at $42.20; Hutch was down $2.25 at $92.25; and Unicom dropped 45 cents to $11.35.
Hutchison is selling its 20% stake in VoiceStream Wireless, a U.S.-based GSM mobile operator, to German telecom giant Deutsche Telekom. The deal is expected to make $50 billion in exceptional gain, equivalent to about 9 times its initial investment. However, there are increasing worries that the deal will finally fall through. Even if it is completed, the gain will be much less than originally expected as the transaction will be paid mainly by new DT shares, the price of which has dropped some 50% since DT made the offer. Hutch recently told analysts that the company is holding $78 billion cash in hand. Together with its reserve loan facilities, the company should be able to launch a $200-billion acquisition when prices are cheap. The recent sharp decline in global telecommunications market should be favourable to the cash-rich Hutch.
At $91.75, Hutchison is capitalised at $390 billion, about 60% above its book value. Hutchison managed to maintain an average ROE (return on equity) of around 15% over the ten years between 1989 and 1998. Its book value has been greatly enhanced by 200% to $57.69 as at the end of 1999 after the sale of Orange plc. If Hutchison continues to make an ROE of 15%, earnings in three years could be around $38 billion (EPS: $9) when its capital raised from the sale of Orange starts to generate income. The company at around $90 a share should be an excellent long-term investment, although it seems a bit pricey based on its FY00 or even FY01 recurrent earnings.
Yesterday the benchmark HSI lost 253 points, 1.65%, to 15,099 on turnover of $10.6 billion. Investors sold their telecos and financials in exchange for properties and H shares.
Banks are flushed with excessive low-cost deposits and they have found a limited supply of quality borrowers in the market except for potential homebuyers. A Chinese bank said yesterday it is willing to provide mortgage services at prices as low as prime minus 3% - probably the cheapest terms never before seen in Hong Kong's mortgage lending history!
Expecting a recovery in the property market, investors bought Henderson Land (12), one of the most property-market-sensitive developers, and Wharf (4), a conglomerate with a number of large-scale developments due for presales this year, pushing their respective shares up 50 cents to $45.80 and 15 cents to $22.70. Other developers also outperformed the index at the end of the day. Amoy and Sino (83) were respectively up 25 cents and 2.5 cents to $9 and $4.375. NWD (17) and Hysan (14) were both unchanged.
The short-term adjustment of H shares might have been completed. The H Share Index was up 1.86 points to 1410.25 despite a big decline in the HSI. Most of these national enterprises are still extremely cheap. Investor who followed our advice should hold their shares tight, as we see plenty of upside in many of them. (end)
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