Mansion House, 2001-03-29 - HKT-PCCW (008) HOLD
The Group reported a net loss of $6.91bn in 2000 compared with the net profit of $0.35bn in 1999. The result included the 4.5 months result of the former C&W HKT since mid-August last year and it was complied based on the assumption that the current organizational structure (the 50% owned Reach and the 40% owned Regional Wireless Company formed with Telstra) was established when the merger was completed. The result was substantially below our earnings forecast of $2.7bn as PCCW booked almost $5.2bn provision for impairment loss as well as investment loss in its venture capital fund. In addition, the Group recorded a net finance cost of $2.36bn in 2000, which was mainly incurred for the US$12bn ($93.6bn) bridging loan raised to finance the merger with C&W HKT. Turnover jumped 482% to $7.29bn. EBITDA was $1.49bn in 2000 compared with a negative EBITDA of $0.24bn in 1999. The share of JVs and associates profit was $0.63bn in 2000, which was mainly composed of Reach and the Regional Wireless Company, compared with a loss of $0.078bn in 1999.
However, on a pro forma basis (assuming that the current organizational structure was established since the beginning of 1999), the turnover would have increased by 1% to $20.69bn in 2000. This modest growth in turnover was mainly attributed to the 7% decline in turnover of the Telecom Services businesses, which composed of the IDD and fixed line telecom services in HK, to $20.23bn in 2000 as these businesses continued facing intensive competition. The Business eSolutions, Internet Data Centers, B2C, Infrastructure & Real Estate businesses all reported positive revenue growth. The pro forma EBITDA was $6.16bn in 2000. Due to the growth of high value-added telecom services and effective cost control, the Telecom Services and the Infrastructure & Real Estate reported a positive EBITDA of $9.36bn and $0.17bn respectively. However the other remaining business units recorded a combined negative EBITDA of $3.38bn as they were in their initial start-up phases.
Meanwhile, the Group also made $171.6bn provision on the goodwill incurred on its merger with C&W HKT against its reserve account. As a result, the Group recorded a shareholders' deficit of $14.13bn at the end of 2000. However, this has been reduced to a shareholders' deficit of $7.22bn after the US$4.7bn ($36.7bn) bank refinancing loan and the Telstra JVs transaction were completed in 1Q01. On the other hand, the Group had $60.8bn net debt at the end of 2000 compared with the $3.2bn net debt at the end of 1999. This has been reduced to $39.6mn in 1Q01.
Looking ahead, we believe that the Group lacks any major drivers to drive earnings growth in the coming years. We expect that the Telecom Services will report a modest growth in earnings as there is limited scope for expansion in the local market and the Group will continue to face intensive competition in all fronts. Other businesses are still in their initial start-up phases and are not anticipated to generate a positive EBITDA in the short term. In addition, the profit contributed from Reach and the Regional Wireless Company will be reduced as the Group has substantially reduced its interest in these two companies and their results will not be booked on a consolidated basis. Furthermore, as the high tech stocks have showed no sign of recovery, it is uncertain whether or not the Group will need more provision for its venture capital investment. Hence, we have revised downwards our earnings forecast by 2% to almost $4.4bn in 2001 but has not provided any provision for its venture capital investment as the Nasdaq index has fallen by more than 23% since the beginning of the year. These, combined with the uncertainty of the disposal of some 3bn PCCW shares currently retained by C&W, will continue to induce selling pressure on the counter. However, we believe that the downside is limited and maintain HOLD on the counter. (Eric Wong)
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