Battered PCCW faces rough road ahead
Pacific Century CyberWorks (PCCW) employees head to work at the Internet company's Hong Kong headquarters as the firm reported worse than expected results on March 28. Investors punished the stock on March 29, sending shares as much as 14 percent lower at one point. REUTERS/Bobby Yip
Bloodied but still standing, former high-flyer Pacific Century CyberWorks must now prove it is more than just a heavily indebted, former monopoly telecommunications company in an increasingly competitive market.
Investors, who have been abandoning PCCW for months, accelerated their flight for the exits on Thursday after the company posted worse than expected 2000 results.
PCCW's stock ended down 6.47 percent at a new 52-week low of HK$3.25. At one point, shares in the firm headed by 34-year-old tycoon Richard Li were off over 14 percent, wiping over US$1 billion in market value from the company.
"The main question is how they are going to grow the business and leverage the Hong Kong telecom assets for new business opportunities," said one analyst, who declined to be identified.
While PCCW generates plenty of cash from its core telecoms holdings, many analysts say its debt obligations are a drag on its bottom line and leave it with little room for investment.
Prudential-Bache on Thursday cut PCCW to "hold" from "strong buy", saying that while PCCW should have no problem funding interest payments on its US$4.7 billion bank loan, it may have trouble when the principle begins to come due in 2004.
PCCW's estimated net debt to EBITDA ratio is six times, versus an average of 2.5 times for PCCW's fixed-line incumbent peers in Asia, according to Goldman Sachs. EBITDA is earnings before interest, taxes, depreciation and amortisation.
PCCW is also now in the dubious position of negative shareholder equity totalling US$1.8 billion, thanks to its decision to write down against reserves the entire goodwill amount of US$22 billion incurred when it bought Hong Kong's dominant telephone company Cable & Wireless HKT in August.
BRAVE FACE, BATTERED BOTTOM LINE
PCCW has sought to put a brave face on its troubles, with executives touting the strength of its core telecoms business and opportunities for value-added services in Hong Kong and abroad.
Li, once a near-folk hero in Hong Kong, appeared at two analysts' briefings to discuss the results but did not meet the media, which has been hounding the firm since last week's revelation that he did not earn a degree from Stanford University, as had been claimed in PCCW press releases.
Despite the recent plunge in its share price, PCCW is still more expensive than many of its peers.
According to Goldman Sachs, by one measure PCCW trades at a 66 percent premium to its telecom peers, based on a share price of HK$3.48 and forecast 2001 EBITDA of HK$6.66 billion.
"The priority is to go about reducing their debt, because obviously the interest payments are weighing heavily on their bottom line," said JS Cresvale International analyst David Blennerhassett.
PCCW's consolidated net loss of US$886 million included US$627 million in provisions to account for the decline in its investment portfolio, and finance charges of US$302 million. PCCW said 2001 finance charges would total US$490 million.
Revenue in the core Hong Kong telecoms business dipped seven percent year-on-year, although international direct dial revenue fell more deeply than many watchers had expected.
Goldman, initiating coverage at "market performer", forecast PCCW's 2001 revenue would grow by 6.2 percent on a pro forma basis to HK$21.9 billion (US$2.8 billion).
WHERE "NOW"?
Li said he expects overall revenue to grow in the "high single-digits" in 2001, with EBITDA growing faster.
He told analysts on Thursday that if PCCW can't develop its business-to-consumer Internet services to a level where they are worth US$2-$3 billion, then there is no point in having them.
Many watchers have been concerned about the cash-draining B2C services, especially the Network of the World (NOW) Internet and TV service that once formed the core of PCCW's vision. PCCW said it will outline its consumer Internet strategy in 90 days, and has capped its EBITDA loss on B2C this year at US$200 million.
"E-commerce, B2B, B2C still make up such a minority of their revenue, but ironically a majority of their losses still come from ex-telecom revenue," Blennerhassett said.
"The next 90 days are going to be telling. This operation could go either way, depending on what strategy they put forward," said one analyst.
Some suggest PCCW could spin-off more assets or take public the units it has already hived-off into joint ventures with Australian telco Telstra Corp . But market conditions make it difficult to take PCCW's mobile phone and Internet protocol backbone joint ventures with Telstra public.
PCCW's slumping shares also invite the question of whether the company would be subject to takeover -- hostile or otherwise -- though one analyst said a hostile takeover was unlikely.
More likely would be a friendly rescue by Li's father Li Ka-shing, Hong Kong's richest tycoon.
The elder Li early this year ruled out any intervention by his companies in PCCW, but a few weeks later his Hutchison Whampoa conglomerate took a 0.83 percent stake in PCCW when it sold the firm a rooftop satellite business for US$103 million.
A tidy disposal of Cable & Wireless Plc's nearly 15 percent holding in PCCW would help a lot.
C&W wants to unload its shares, but PCCW has been thwarted in its efforts to find a strategic buyer. Global investor disfavour towards tech and telecoms shares isn't helping.
ING Barings maintained a "hold" rating and said it expected to see support for the shares at HK$2.89 -- which it said is the value of HKT's traditional telecoms business plus the "Cyberport" property development project. It said PCCW's "concept" projects are worth HK$1.57 on a sum-of-the-parts valuation.
ING Barings said it did not anticipate positive company news until the third quarter "at the earliest."
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