Survivor checks bruises
Saturday, September 29, 2001
COMPANY VISIT by BEN KWOK
Here's a million-dollar question for investors: Can a good stock perform well in a bad sector?
If Asia Global Crossing (AGC) is a guide, the answer is a firm "No".
Just under a year ago AGC, the first pan-Asian undersea cable network provider, made its debut on the United States market.
It was launched in an initial public offering at US$7 a share but since then the counter lost 58.71 per cent, closing at US$2.89 on Wednesday. Yet, despite the tumble in its stock, down from a high of more than US$11 at the end of January, the company is well positioned to survive a fierce industry shake-out.
According to Merrill Lynch, 10 out of 15 emerging cable carriers have filed for bankruptcy since the beginning of the year. Merrill blames a "large supply of inefficient assets flooding the market" - a legacy of the headlong expansion and over-investment of the Internet bubble.
The supply mismatch has not gone unnoticed by AGC's management, which believes it can capitalise on industry consolidation.
Chief executive John Legere said the industry's development would favour his company.
"Many new carriers have either merged or closed down their operations due to their own financial problems," he said.
"More traditional carriers also came to realise that it is now more economical to buy [telecommunications capacity], rather than build a network in Asia."
An example was seen in German giant Deutsche Telekom's moves.
It formerly owned a significant stake in the GlobalOne Alliance, a joint-venture carrier which invested heavily in transpacific cable capacity. However, this year, Deutsche Telekom signed a 10-year contract with Asia Global Crossing.
Meanwhile, Cable & Wireless has bought capacity from AGC and Reach, a joint venture between Pacific Century CyberWorks and Australia's Telstra. The British telecoms company, which last year sold Hong Kong Telecom to CyberWorks, has been cashing out of its Asian telecoms investments.
AGC is still in the early investment phase of its life-cycle, and is not expected to turn a profit for probably another three years. With the collapse of the Internet bubble, capital markets have lost their appetite for red ink-bleeding start ups, and so it is hardly surprising the stock is depressed.
And yet, there are reasons to be positive about AGC. Despite posting losses, it has beaten analysts' forecasts for the past three quarters.
According to consensus estimates reported by data provider Thomson Financial First Call, AGC's projected loss per share for 2001 is US$0.62, or a loss of US$360 million. That is 2.4 times last year's US$147 million loss.
Despite this prospect, seven out of eight brokers had a buy recommendation on the company, whose shareholders include Global Crossing and Microsoft in the US, Japan's technology investor Softbank, and Hong Kong's Hutchison Whampoa.
Mr Legere is proud of his company, which launched its first transpacific link between the US and Japan in 1999.
"We are the first mover, which made us the natural winner here," Mr Legere said in July when officiating at a ceremony to mark the launch of an undersea cable service in Taiwan. AGC was the first foreign company to land fibre-optic cables on the island.
He said AGC was worth twice the combined capitalisation of rivals 360 (Network), Flag and Level 3.
While that boast still holds true, Asia Global Crossing stock has fallen almost 50 per cent since then, in line with a global meltdown in the telecoms and Internet sectors.
In a 20-page report Credit Suisse First Boston (CSFB) said the main concern lay with majority shareholder Global Crossing.
The two counters were highly correlated, CSFB pointed out and so a fall in Global Crossing stock also pulled down AGC.
In addition, there were concerns that parent company might not be able to stump up the US$400 million in funding it has promised AGC.
Pricing of the company's product - telecoms capacity - is another significant, and unknown, factor.
The collapse in the Internet sector has driven down wholesale bandwidth prices, and they could fall further as the remaining carriers undercut each other in a scramble for survival.
Several industry experts have forecast price falls of between 50 per cent and 80 per cent during the course of this year.
However, CSFB, a firm supporter of AGC, has raised its estimates for the company and argues that it deserves to trade at a premium to its parent.
"Investors appear to be valuing AGC in line with, or at a slight discount to Global Crossing," CSFB analyst Chris Fang said.
"In our view, AGC should at least trade at a 25 per cent to 50 per cent premium to Global Crossing's near-term multiple as it is expected to grow twice as fast from 2002 to 2007."
Industry conditions may be challenging, but AGC has one of the best management teams in the telecoms sector. Mr Legere was one of the first group of executives to work in Asia for AT&T, and now leads a team of at least 20 executives who formerly worked for the US telephone company. As well, Hutchison Whampoa, which knows a thing or two about building up a successful telecoms business, has sung the praises of its partner.
Hutchison group managing director Canning Fok Kin-ning said its partnership with Global Crossing was the most satisfying it had forged since last year.
The Hong Kong conglomerate and AGC are co-owners of local fixed-line network operator Hutchison Global Crossing.
Once dubbed a jewel in the crown of the Hutchison empire, Hutchison Global Crossing is due to secure HK$4.4 billion in standalone financing, and is planning a spin-off listing.
AGC, which aims to become solely a bandwidth provider, has set up eight partnerships with non-dominant operators in Asia.
It is on schedule to launch services in the Philippines and South Korea during the coming six months, after its landing in Taiwan.
The company is actively addressing investors' concerns that its shares lack liquidity, with a free float of only about 10 per cent.
It has also been off the shopping list for many Asian fund managers due to the fact that it is listed in the US.
To increase awareness of the company in Asia, Mr Legere said AGC was seeking approval to list on an Asian stock market. Singapore and Hong Kong seem the two prime candidates.
In a move to distinguish itself from other telecoms plays, the company earlier moved its listing to the American Stock Exchange from the technology-heavy Nasdaq.
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