Daily Quommentary: PCCW (8), Hutch (13) and China Plays
Jul 23, 2001 - 11:52:07 HKT
QuamResearch
PCCW (8), the ex-darling of retail and institutional investors, last Friday night said it failed in raising US$2.5 billion ($19.5 billion) via the issuance of 10-year and 30-year bonds. The incident, though unable to affect the ability to raise funds by other major telecom mammoths, might have a negative psychological impact on the sector.
This bearish mood could be further exaggerated by news that Vodafone, the world's biggest telecom operator in which Hutchison (13) holds more than 3% stake, is delaying the launch of its 3G mobile services ahead of a cloudy global market environment. The response of Canning Fok, Hutchison's managing director, to this piece of news, however, was quite entertaining. He told the HKET that "he was as happy as being a "ghost" (a Cantonese slang which could be quite equivalent to "as happy as being in heaven") as Hutchison will possibly be the second (number one being Japan's NTT DoCoMo) telecom operator to launch 3G services. Fok said that the company would launch its 3G services as planned. "We will be using a shotgun while our rivals will still be using swords," Fok said.
We agree with Fok's argument, and the currently depressed share price, at $76 a share against its book value of approximately $60, could be a good chance to accumulate this excellent long-term investment. However, we don't share the same confidence recommending a "buy" on the close relative to Hutchison.
In early July, PCCW announced that Moody's and Standard & Poor's assigned respective "senior unsecured issuer" ratings of Baa1 and BBB, which are one level above junk-bond status, to PCCW-HKT Telephone, the most profitable part of the PCCW stable. PCCW then told the world that this subsidiary would like to issue 10-year and 30-year bonds at reduced rates.
PCCW has very large debt -- $37.7 billion in long-term debt and another $14.4 billion in convertible bonds. Of the $37.7 billion long-term debt, $36.7 billion is the remaining portion of the bridge loan used to buy HKT. As Jay Templeton, Quam's telecom analyst, in a June 6 analyst report said, PCCW's debt for the bridge loans should be around $1.8 billion, and with its other short- and long-term debt and CBs, the annual interest burden should be $2.9 billion or more. Now that the hope for a reduction in interest expense has subsided, we fear that the counter will not be able to stay at the $2-plus level for long. At 12:30pm, PCCW closed the morning session at $2.025, down 10 cents from Friday's $2.125. At this price, PCCW is capitalised at slightly under $45 billion, which remains unattractive for a company with virtually no asset backing.
The Hang Seng Index ended last week down 311 points, or 2.46%, at 12,302 after falling to a three-month low of 12,192 on Thursday. The average daily turnover remained low at $6.28 billion, reflecting a lack of investing interest.
The selling pressure, however, was mainly among the China-concept plays. The H Share Index, falling 12.31% week to an intra-week low of 432 on Tuesday before close at 458, which is still 7.72% below the previous week's close. The Red Chip Index also lost 6.1% to 1,070. Major casualties were shares with little fundamental backing. While some China plays may continue their adjustments, many of these have fallen back to reasonable levels based on their respective P/Es and dividend yields.
Anhui Conch (914), the mainland's largest cement producer, and Shandong Xinhua Pharmaceutical (719) will announce their respective interim results on July 24 and 25, kicking off the announcement season for H shares. Their results could give us some hints on the H shares' earnings prospect. Should their results be good enough (say earnings grew by more than 10% for the first half), buying interest could be back to these roller coasters. (end)
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