COMPANIES & FINANCE ASIA-PACIFIC: PCCW magic needed to confound sceptics: Effective fund-raising has failed to dispel fears about chances of growth in Hong Kong, say Rahul Jacob and Joe Leahy:
Financial Times; Feb 1, 2002
By RAHUL JACOB and JOE LEAHY
Pacific Century Cyberworks has often been credited with financial wizardry.
Two years ago, when news leaked of Singapore Telecommunication's discussions with Cable and Wireless to acquire Hong Kong Telecom, the internet upstart with a poor customer base put a USDollars 28bn cash-and-shares offer together in a breathtaking two weeks, eventually pipping Singapore's main carrier to the post.
In the past few weeks PCCW's gift for financial engineering has been on display again: in mid-January Morgan Stanley sold a USDollars 450m five-year convertible bond on the company's behalf that was more than six times subscribed.
This followed on the heels of about USDollars 1.25bn in new fund-raising in the last quarter of 2001. Taken together, these bond issues have lengthened the maturity of PCCW's USDollars 5bn in net debt from 3.3 years to 5.2 years.
"PCCW is managing a very slick refinancing," says Nigel Coe, an analyst with Deutsche Bank.
Despite the progress the company has made with its debt restructuring, doubt remains. Many question the former monopoly incumbent's ability to increase earnings when it is primarily confined to Hong Kong - arguably the most saturated, rapidly liberalising and highly competitive telecoms market in Asia.
PCCW's management says the company has not been given full credit for the progress it has achieved in boosting margins, such as cutting back its money-losing Net work of the World news and entertainment internet venture.
Last year PCCW said it would reduce losses from its internet division to USDollars 100m in 2002 and 2003.
PCCW, which laid off 500 staff in December, says the job cuts are part of a change of culture at Hong Kong Telecom to make the former monopoly more customer-focused rather than engineering-driven.
Richard Li, PCCW chairman, vows to raise productivity levels to the highest regional standards in the next three years through further cuts.
Cutting costs on that scale may yet prove a less daunting task than boosting revenues in the competitive Hong Kong market. Many of its rivals in the international calling and mobile telephony market are losing money, but remain in business.
"Our Hong Kong business is under intense competition," Mr Li says.
PCCW is aiming for flat revenue growth in the fixed-line telephony business but improved pre-tax profits, he says.
Analysts and investors will be poring over its results, to be announced next month, for evidence of sustainable long-term improvement in its earnings outlook. Given that the fixed-line business and wholesale account for 88 per cent of total revenues, the real improvements must come from there over the next few years.
Mr Coe estimates there is scope for the company to raise its productivity levels to 400 lines per employee - this compares with PCCW's current level of 300 lines per employee and Korea Telecom's 450 lines.
Asia, meanwhile, is awash with internet protocol capacity. Prices have fallen sharply in the past 12 months.
Mr Li points out, however, that PCCW's undersea cable business, Reach, a joint venture with Australia's Telstra, is underpinned by two of the region's largest telecoms carriers. Reach was confident enough to buy struggling US wholesale carrier Level 3's Asian assets in December.
Mr Li says PCCW is not looking to buy into regional carriers in the way that SingTel has done, despite the risk that PCCW may be dismissed as an also-ran in the race to build a regional telecoms group.
"We're very cautious when it comes to infrastructural-type investment," he says.
Instead, Mr Li is pinning much of PCCW's hopes for future growth on its corporate IT services division. The share of the group's total revenues from this division is expected to rise to 10 per cent this year from zero three years ago, of which 65 per cent will come from Greater China.
Corporate clients include Sony and China's Ping An Insurance. Mr Li says it is this area that will help to deliver double-digit profit growth for PCCW. "Where we find that kind of growth is through these new high-value-added services," he says.
This still seems like a sideshow compared with the challenge of fighting off the effects of liberalisation in a near-saturated local telecoms market.
Wireless and fixed-line penetration levels in Hong Kong are in excess of 80 per cent and 55 per cent respectively, with fixed-line numbers declining for the first time in 2001.
Investors remain unenthusiastic about PCCW's shares, even though the stock price has tumbled along with other telcos to HKDollars 2.05, a drop of 55 per cent from a year ago.
"I don't see a catalyst to push it up," says Ayaz Ebrahim of Credit Agricole Asset Management. Given this investor apathy, it will take real wizardry in the form of improved earnings to lift PCCW's shares.
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