Daily Quommentary: The Fair Value of PCCW (8)
Apr 03, 2001 - 09:48:13 HKT
QuamResearch
Cable and Wireless are pleased to offload its entire 14.7% stake in PCCW (8), the IT venture of billionaire-son Richard Li, through an issue of convertible notes (the "CNs"). C&W will issue US$1.5 billion (HK$11.7 billion) zero-coupon convertible notes expiry on 9 June, 2003. The CNs are exchangeable for PCCW shares at between $3.60 and $3.80 anytime on or before expiry. If PCCW's prices go above $3.60, CN holders will be tempted to take profit by converting their notes into shares at the stated price, effectively placing a ceiling on PCCW share price at $3.60.
With limited upside potential, disappointed shareholders dumped shares of PCCW to as low as US$3.35 (equivalent to HK$2.61, 1 ADR=10 PCCW) in New York before closing at US$3.40 (HK$2.73), a new low after the merger with C&W HKT. The CNs, which are in essence a combination of a debt equity and a call option granted to the notes holders, were issued at zero coupon rates, implying that no interest will be paid to the notes holders and the only attraction is the attached call option. The CNs appeal to nobody except the punters who have short-sold PCCW's shares but want a safety net for them to limit the upside risk. With the CNs on hand, they can on the one hand limit their potential loss at $3.60 when shares of PCCW rebound beyond this level, and ne the other they will be able to maximize their potential gains by keeping the short position as long as the shares keep falling.
As at the end of 2000, PCCW had negative net assets amounting to $14 billion. At Friday's closing price of $3.075, the company was capitalised at $67 billion, representing a premium of $81 billion to the company's net tangible assets. It might still be too generous to credit the existing management (whose ability and credibility are now in doubt) and the clientele and the fixed-line network of HKT (which are both deteriorating) $30 billion of goodwill. But even then, the "fair" price of PCCW will be $16 billion ($30 billion goodwill minus $14 billion negative equity), or 73 cents per share -- a disaster to shareholders! Some might even argue if we should grant a premium to the management of PCCW, and if not, then the goodwill of HKT alone might not be able to compensate for the $14-billion negative asset value. In other words, one may doubt if the fair price is, or close to, ZERO!
Lingering weakness in the U.S. markets continues to deter the world equity markets from staging a strong rebound. In the U.S. the Nasdaq Composite dropped to its lowest close since October 1998, as profit warnings continued to dog market sentiments, although some punters blamed it on mounting U.S.-Chinese tensions over the South China Sea. The Nasdaq Composite sank 57 points, or more than 3%, to 1,783. The Dow lost 101 points to 9,778 on Amex profit warning. The S&P 500 fell 14.46 points, or 1.25%, to 1,145.87.
Yesterday the Hang Seng Index closed at 12,727, down 33 points from the previous day. Turnover remained weak at $6.95 billion. Advancers, however, managed to outpace decliners 314 to 301, with the remaining 450 being unchanged.
The Hang Seng China Enterprise Index, or the H Shares Index, rose another 11.05 points to 429.07. In the mainland, Shanghai and Shenzhen A shares gained 12.21 points and 3.01 points respectively to 2,226.90 and 678.56. While there are still a number of undervalued H shares, investors should be careful in their selection after the recent price hypes. Northeast Electrical (42), yesterday's best performing H share which went up 21% to 76 cents despite its profit warning. Another example was Jilin Chemical (368), which had also posted profit warning before announcing a net loss of RMB836 million for 2000. Jilin Chemical promptly lost 8.5% the next day after the result announcement.
Holiday mood will continue until the end of Easter Holiday in the middle of April. The best strategy now is don't take any action unless the market suddenly go into a crazy sale. (end)
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