Evening Wrap: Cathay Shoots Down Pilots, PCCW Tries to Fly a Bond
Jul 09, 2001 - 19:38:01 HKT
QuamResearch
With a forced holiday in HK on Friday and bad days on Wall Street at the end of last week, HK started this week off with a whimper, the HSI opening for the morning 231 points down and dropping to as low as 12,583, a 416 point or 3.2% drop from the previous close. However, the sellers and the buyers seemed fairly evenly matched and the index generally held its own for the rest of the day, finally closing at 12,690.68, a 308.80 point, 2.4% decline from Thursday. Market turnover was HK$9.48 billion.
The main stories for the day involved PCCW's (8) bond issue and Singapore "Reach" license, Hutch's announcement of the level of investment for its Hong Kong 3G network and a likely increase in provisions for the interim due to Vodafone stake, and Cathay's ongoing dogfight with its pilots' union.
Properties
Properties declined as a group 1.5%.
Cheung Kong (1) dropped back 50 cents to $82.50, Henderson (12) fell $0.30 to $35.30, SHK (16) lost $2 to $69, and NW Development (17) (in the Comm. & Industrial sub-index, but we still like to lump it in here) fell 40 cents, 4.3%, to $8.95.
SHK's price is again in an attractive zone. New World's below $9 price might suggest to some a buy. However, the company is probably one of the weakest HK conglomerates, and we would not feel comfortable recommending a purchase -- not for serious, long-term investment anyway.
Banks / Financials
The financials as a group declined both in the sub-index and out. HSBC (5) lost $1.50 to $89.50 -- a quite attractive level for non-punters -- and was followed by Hang Seng Bank (11) which lost $1.75 to $82.25. BEA (23) declined 35 cents to $17.75 and at this level is an absolute steal considering its expanded size -- and profits -- due to FPB Bank, which is not yet reflected in the figures. Add to that BEA's apparent intent on getting into the PRC, and this is a medium-sized bank with some potential zip.
Utilities
The three power utilities were mixed with HK Electric (6) and CLP (2) gaining 50 cents and 20 cents respectively to $29.85 and $32.80. HK Gas (3) fell 5 cents to $9.40.
Comm. & Industrial
China Mobile (941) dropped $1.80 and Unicom (762) 55 cents to $39 and $13.35 respectively.
PCCW (8) fell 2.5 cents or 1.05% to $2.35, up considerably off its day low of $2.25.
Reach, PCCW's 50/50 Internet service joint venture with Telstra, received a license from Singapore allowing it to set up its own cable capacity in the city-state. This will enable it to "deliver an enhanced product portfolio to our customers," the Reach MD was quoted by Reuters as saying. Reach's goal is to make Singapore its regional gateway for services to neighboring countries including Malaysia, Indonesia, and Thailand.
Meanwhile, as expected, PCCW announced the launch of a US$2.5 billion bond offer. PCCW's HKT unit received investment grade ratings (barely) from S&P and Moody's last week, and PCCW is now trying to convince investors to take up the new bond as the company hopes to refinance most of its existing debt. According to Reuters, the company officially used the US$2.5 billion figure in its press conference, but a figure of up to US$3.8 billion came out during a Q&A session in reference to its existing debt load relating to the HKT acquisition of US$4.7 billion. The US$3.8 billion, if raised, would be used to pay off the first two installments in its existing debt structure.
In the existing scheme of debt, the first US$1.5 billion tranche is due in three years and carries a rate of 85 basis points above LIBOR. The second tranche, US$2.3 billion due in five years, is at 115 basis points above LIBOR, and the third, US$900 million due in seven years, is at 145 basis points above LIBOR. The one-year LIBOR was about 6% at the time of the launch. No prices were mentioned today, but Reuters said analysts were figuring on 260-300 basis points over comparable maturity US treasuries. Five year notes are carrying 4.625% coupons but have yields of 4.85% at yesterday's prices. It thus looks like PCCW will pay around 7% for the refinanced debt. That works out to interest payments of US$266 million (HK$2 billion) a year.
Hutchison (13) fell $2 to $75.75. The SCMP carried an article with analysts saying they expected larger provisions from its 3.14% Vodafone stake, split into 971 million shares held straight out and 1.16 billion shares tied to two convertible bonds. Vodafone's share price has continued to slide, and at 151p is quite a bit off the 240p (or so) that the company was trading at the end of 2000. The numbers SCMP quoted didn't quite make sense to us, though perhaps there's an easy reason, but one analyst estimated an additional HK$4.6 billion was to be written-down in the interim. Another figure of $8.8 billion was also mentioned in connection to the bonds.
However, the difference between the bonds' strike prices and the current share price comes out closer to HK$23 billion, and the difference compared to the end-of-year Vodafone share price is around HK$21 billion. That's probably the truer impact, but Hutch has accountants.
Finally, Cathay Pacific (293). This is a battle which is really heating up, and as of today, a total of 52 pilots have been shot down, though bloodshed in the CX generals' quarters may also be in the cards if the conflict turns out to drain half a billion dollars out of its arsenal like the last time around.
As the market opened, Cathay said it had cancelled a total of 39 flights due to the pilot union's industrial action, and seven flights this morning experienced delays of 15 minutes or more. Perhaps related to this, after market close today Cathay said it fired 49 pilots -- 23 captains and 26 first officers with an average 8 years of service ranging from 18 months to 22 years. This is in addition to the 3 pilots fired last Friday. However, to sweeten the effect, Cathay also said it will implement a new pay and rostering scheme unilaterally. The new pay scheme becomes effective today and includes pay rises of up to 9% as well as increased education, housing and maternity benefits. Cathay's director of corporate development, Tony Tyler, admitted the new package is not as generous as the proposal it made to the union leadership at the end of June. The reason given is that there was less money available as a result of the damage done to the company by the union's industrial action. We figure that it's perhaps more a matter of hardball, and to serve as an example for next time.
Cathay shares fell $3.3%, 35 cents, to $10.15. This is starting to look rather ugly. Perhaps potential investors will want to exercise caution, but existing shareholders should certainly not be frightened into selling their stakes. This airline stock will fly again, and getting out for trading reasons is about as sure a way as any to ground your investment returns.
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