NEW SHAREHOLDERS NOT WELCOME AT PCCW
Merry's sentiments EXACTLY!
I used to think that Pacific Century Cyberworks (PCCW) (8) would be a buy once the price slipped below $2, now I am not so sure. My uncertainty has been compounded many times over by reading an extraordinary interview in the 'South China Morning Post' newspaper with Richard Li, the company's chairman.
The words that leapt out of the page were 'in the current environment we can only protect our original shareholders' interests'. This is truly staggering and quite definitely suggests that no one should consider becoming a shareholder if the chairman of PCCW is not prepared to protect their interests.
Why on earth did Mr Li make this extraordinary statement? The answer is as bizarre as the statement. Mr Li was trying to explain away the appalling performance of his company's shares which have lost more than 90 per cent of their value since peaking last year.
According to Li Junior this is not at all the way the situation should be viewed because, 'for original PCCW shareholders, we have already increased value many times over'. He pointed out that Tricom, the vehicle through which PCCW came to the market, was priced at $31 cents at the time of the takeover, thus people should view the current PCCW price as one which has increased five times within the space of two years.
Incidentally the gullible people who conducted this interview appear to be believe that Mr Li 'created' Tricom', a small telephone equipment manufacturing company. He did nothing of the kind but since assuming control of company has succeeded in diminishing its core business.
This is small quibble, proving only the extraordinary amount of myth making which surrounds Mr Li and his business. The bigger questions arise over his attitudes towards shareholders. Let us look first at the statutory position and remind Mr Li that there is no distinction between shareholders on the basis of when they acquired their holdings. Directors of a company have an equal responsibility towards all shareholders regardless of whether they have been members of the company for a day or a decade.
In the case of PCCW its shareholder list was greatly expanded by the takeover of Hongkong Telecom because HKT shareholders were forced to acquire PCCW shares as part of the deal. Apparently the hapless victims of this takeover are to be treated as second class shareholders.
They are also likely to be treated to endless amounts of gobbledegook designed to obscure rather than explain what is happening in the company. Take this example from the interview, 'my definition of shareholder value is ebitda', said Mr Li. In plain English he is simply saying that shareholder value is to be judged by profitability, well, what a revelation.
In the old days when people invested in companies with real earnings we used to have a simple term to describe these earnings, it was post-tax profits, which was widely understood to be net profits. This new term: ebitda or earnings before interest, tax, depreciation and amortisation, means nothing more than gross earnings and is a dangerous way of looking at profitability because it amounts to little more than viewing trading profits without considering the liabilities.
You can well see why Mr Li finds it attractive for shareholders to focus on ebitda because the company is heavily indebted and carries a big loan service burden, which does much to diminish the bottom line.
Mr Li tells us that PCCW will double its earnings (on an ebitda basis) within seven years. His maths are rather questionable on this point because he says he is assuming an average 11 per cent revenue growth per year. Even allowing for the effect of compounding, this will not produce a 100 per cent increase in seven years.
This also begs the question as to why anyone should believe Mr Li's projections. You do not even need a short memory to recall that this is the same Mr Li who promised to build the world's biggest internet service. It was Mr Li who compared the HKT merger with the AOL-Time Warner alliance and, as he did in this interview, spoke of leveraging the strengths of the two companies. The only problem is that PCCW has been shown to have no strengths worthy of leveraging. The company's recently published results show that HKT is the only part of the corporation making money and that the activities contributed by the old PCCW are nothing more than a drain on resources.
All in all it seems I will have to revise my buy target for this counter, maybe any price below $1 would be good because once it has become a penny stock it will almost certainly attract takeover interest.
I note with amusement that Merrill Lynch has now given PCCW shares a 'fair value estimate' of 70 cents. Presumably this is the same Merrill Lynch which was once extolling the virtues of PCCW when priced way above $20; my, how times change.
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