AWSJ: Analysts Missed The Mark On PCCW; Show Pack Behavior
By GREN MANUEL
Staff Reporter
Some people are optimists. Some people are superoptimists. And some work as stock-market analysts.
Just look at the Internet boom in Hong Kong.
The city went on one of its periodic journeys into market madness over Pacific Century CyberWorks Ltd., driving up the company's share price to HK$28.50 (US$3.65) as local investors took on faith Chairman Richard Li's ability to transform PCCW into a conglomerate with Old Economy profit and New Economy growth prospects.
Following a year of sustained crumbling in the company's share price, PCCW's stock has for the first time reached stability, at around HK$2.70.
"It's not just a case of a few analysts making inaccurate forecasts, but almost all of them," says Dennis Fan, an associate professor in the Department of Finance of the Chinese University of Hong Kong, who studied the accuracy of brokers' forecasts in the city.
But the factors he identifies in PCCW's coverage aren't unique. Indeed, the case of PCCW is such a textbook example that Dr. Fan often uses it to explain to his students how analysts as a group can get things so wrong.
When the price of PCCW's stock was hovering at around HK$17 in August, the company had just completed the largest takeover in Asia outside Japan, the US$29 billion deal for Cable & Wireless HKT Ltd., the city's former phone monopoly. At that time, analysts were sitting on a mountain of data disclosed during the deal, and the bursting of the Nasdaq Stock Market bubble was already old news. Yet even the most bearish of them came nowhere near to predicting PCCW's stock would find equilibrium at the current trading range.
So, culled from a year's worth of research reports from 30 brokerage firms large and small, here is a breakdown of how the analysts did:
The egg-on-face crowd: It's not news that many analysts were infected by PCCW fever last summer - but it might be surprising to know that many of them remained ill after swallowing an 80% price fall. Picking one of many at random, on July 18, 2000, Jonathan Iu of SG Securities announced "PCCW: all systems go! - STRONG BUY." Apart from a couple of weeks last month when he was worried about technical aspects related to the issue of a convertible bond, he, like a host of others, has kept a "buy" on PCCW during its long and torturous slide.
"Given the evidence last year, and the potential of the Internet, I wouldn't have changed my strong buy call," he said. "You could say it was a wrong call, but hindsight is always 20/20."
The advisers: The takeover of HKT and a subsequent US$12 billion debt deal brought in almost every major corporate finance house in the city, with total fees for the takeover alone amounting to US$130 million. Many simply stopped covering the stock. For instance, Goldman Sachs advised Singapore Telecommunications Ltd., a rival suitor for HKT, and then didn't cover the stock for a full year. Merrill Lynch is just issuing its first report in more than a year (it advised Cable & Wireless PLC on the HKT sale), while UBS Warburg, one of PCCW's main advisers, waited five months after the takeover was completed before returning to the fray (with a "buy").
BNP Paribas Peregrine, however, covered the stock even though it was doing corporate finance work for PCCW until October, maintaining an "outperform" rating throughout.
Adrian Ngan, head of Hong Kong research at BNP, says there was no pressure to issue upbeat research. He explains: "It's a concerted effort. Only if an analyst is positive toward the stock do we go ahead with the deal." Spokeswoman Connie Chung adds: "Corporate finance people have no influence over the research people".
The no-shows: But many brokerage firms with no significant conflict of interest simply decided against committing staff to researching such a complex business enterprise. One example is Salomon Smith Barney, which only started coverage this week.
Stephen Brown, head of research at Kim Eng Securities, a brokerage firm that started coverage of PCCW in November with a "hold" rating, says many brokers realized last year that the stock was overvalued. "Those people who realized that and weren't prepared to compromise themselves just didn't write about it."
The neoskeptics: In retrospect, January was a key month for PCCW's coverage with a slew of "sell" or "hold" calls, including those from Daiwa Securities and Nomura. In some cases, the firms were telling clients to sell shares at HK$5 when they had told them to buy them at HK$20 - but at least those who followed that advice avoided an additional 50% drop that was just around the corner.
In April, after the company released its first annual results, a whole new crop of firms that had been optimistic threw in the towel, including Dao Heng, DBS Securities, HSBC Securities and Prudential-Bache Securities.
The flip-floppers: Once set in their verdict many were unprepared to revisit it as the situation changed. Only a few followed the strategy of Credit Lyonnais Securities (Asia), who went from "buy," to "long-term buy," to "trading buy" as the stock rose then fell, posting a "sell" in January, then in recent weeks going back to a "buy" as the price stabilized.
The skeptics: Dresdner Kleinwort Wasserstein became the first firm to stick a "sell" on the company on June 16, when the shares traded at HK$15.60. Their report pointed out that the merged company had a "strong management team" and that shares could be valued at HK$54 in four years. But they said the share price was "materially overvalued in the short term."
"It was a great call," says Niall Shiner, director. The only other prominent skeptic wasn't even a broker, but David Webb, a former merchant banker now running webb-site.com, an online shareholder activist bulletin.
So what are the common factors in the stock's coverage that led to so many brokers missing the looming collapse?
In some cases it may have been fees. Two brokers at different research houses said their managers put pressure on them to issue upbeat research reports in the hope of getting corporate finance deals with the company.
But on the whole, advisers and would-be advisers haven't been noticeably more enthusiastic than many other houses who had no chance of bagging such fees.
Mr. Iu of SG Securities says one of the factors that led to his optimism was figures produced by research companies specializing in technology, whose predictions of growth were the starting point for his analysis. "Obviously, now that the market has crashed everybody has changed their perceptions."
Dr. Fan of Chinese University says one problem is that analysts rely on the assumption that companies have an intrinsic value that can be objectively calculated, and that over time the share price will move to this intrinsic value due to market forces.
But analysts have found real problems analyzing PCCW, with its assortment of Internet venture-capital deals, a high-tech property project named Cyber-Port, a city's fixed-line network and a completed property development in Beijing.
Dr. Fan adds that a general problem with analysts is their tendency to run in packs.
"They think `If everybody is correct except myself then I'm in great trouble.' Therefore I'll follow the crowd."
--------------------------------------------------------------------------------
URL for this Article:
interactive.wsj.com
--------------------------------------------------------------------------------
Copyright © 2001 Dow Jones & Company, Inc. All Rights Reserved.
Printing, distribution, and use of this material is governed by your Subscription Agreement and copyright laws.
For information about subscribing, go to wsj.com
Used with permission of wsj.com |
