Tough grilling ahead for Li, sinking CyberWorks
Monday, March 26, 2001
JON OGDEN and BEN KWOK
Pacific Century CyberWorks and embattled chairman Richard Li Tzar-kai face another stern examination by the markets this week, with some analysts expecting the financially stretched Internet and telecommunications firm to post a big loss and go into negative equity.
CyberWorks shares fell 9.49 per cent to HK$3.57 last week with some of the selling blamed on the uproar over Mr Li's confession he had not graduated from Stanford University as claimed in CyberWorks' press releases and the prospectuses of two other firms where he was a director.
Mr Li and CyberWorks, which is down 87.16 per cent from its peak last year, will be in the hot seat again on Wednesday when the company releases results for last year.
A loss as big as HK$5.4 billion could be unveiled, according to Deutsche Bank analyst Nigel Coe.
CyberWorks could incur a HK$2 billion charge for advisory fee amortisation and another HK$2 billion for interest on a US$9 billion loan which financed last year's takeover of incumbent telecoms firm Cable & Wireless HKT, said Mr Coe.
He also assumed CyberWorks would take a HK$3.5 billion provision to cover the market value of its portfolio of Internet company investments being crushed.
It will also have to account for the estimated HK$187 billion in goodwill, or amount over the book price, it had to pay for HKT. That could be deducted from shareholder equity leaving CyberWorks with a negative book value.
The alternative to book the goodwill as an asset and write it down over 20 years would "probably wipe out net income for the foreseeable future, meaning that management could well baulk at that option", said Mr Coe.
With so many one-off items, predicting the bottom line was a "crap shoot", said David Webb, editor of Webb-site.com, which champions shareholders' rights.
But negative equity and the results for last year mattered less than the company's future business prospects which look increasingly bleak, according to some analysts.
After being a high-flying concept company last year, CyberWorks had to take on a huge debt load to acquire HKT.
But the cash flows from HKT are not enough to meet the debt repayments from the takeover, let alone make progress on the highly ambitious plan of being a global provider of broadband Internet access.
"Put simply PCCW looks to be in a bind," said Nomura International analyst Richard Ferguson in a new report titled "First-degree burns".
"To develop its growth businesses - high risk ones at that - the company requires additional funding. Whether that . . . takes the form of debt or equity, it is likely to prove difficult to raise under current market conditions."
Markets are likely to be less receptive to fund-raising attempts by CyberWorks in the wake of the degree controversy, which calls integrity into question.
"I think the episode does further tarnish the credibility of the company in its public statements," said Mr Webb.
"The less credible the company's releases, there's a corresponding increase in investment risk."
Even Mr Li's "big idea" for positioning CyberWorks as an intermediary between the Internet and cable TV operators looked fatally flawed, said Mr Ferguson.
The cash-poor company would find it tough to break into key markets such as China, India and Japan which were already sown up by better established businesses.
"We contend that PCCW's plans are over-ambitious relative to its financial position and, given the company's current financial difficulties, highly unrealistic," said Mr Ferguson.
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