HEARD IN ASIA: Pacific Century CyberWorks's Story Is Probably Too Good to Be True
FROM THE ARCHIVES: March 22, 2002
By SARAH MCBRIDE
Staff Reporter of THE WALL STREET JOURNAL
HONG KONG -- To hear some analysts tell it, Pacific Century CyberWorks Ltd., the Hong Kong communications company, is turning from an ugly duckling into a swan. Upon closer study, it looks more like the ugly duckling is painting a few feathers white.
True, the company turned in better-than-expected 2001 results Wednesday. Debt is narrower. Net profit, at 1.89 billion Hong Kong dollars ($242.3 million), was almost 10% better than most analysts expected, according to a survey by Thomson Financial/First Call. And compared with the 2000 net loss of HK$129.3 billion -- which was restated from an earlier-reported loss of HK$6.91 billion -- the results almost were enough to bring tears of joy to the eyes of investors.
Shares in the company rose 1% to HK$2.05 each on Thursday, but investors who bought the shares might have been listening too hard to some analysts who think PCCW is a fairy tale come true.
Earlier this week, Goldman Sachs spilled 39 pages of ink on PCCW, calling it "underowned and misunderstood" and giving the stock a target price of HK$2.70 a share. CLSA has it as a buy, with a target price of HK$2.69 a share. And hold on to your hats for SG Securities, which calls it a "turnaround play" and has a target price of HK$3.26 on the stock.
Here are some of the reasons analysts are giving for their bullishness, and why they don't ring true:
Profit is up. Take a hard look at those numbers. Almost half that profit came from one-time investment gains, not the core business. Strip out those gains, and profit was just HK$1.2 billion.
Moreover, revenue was actually down slightly at the company's key fixed-line-telecommunications division. PCCW's fixed-line market share in Hong Kong fell to about 89% from 94% a year earlier.
Costs are down. Yes, PCCW has done a good job cutting costs, through staggered job cuts of about 1,000 last year, debt restructuring and the like. The company can probably even do a little more in this area.
"They employ 14,000 people, which is a lot, considering this is a mature, fixed-line business," says Jonathan Iu, an analyst at SG. "If they cut 30%, they could save up to HK$1 billion, after the initial provisioning."
This is where the fairy tale starts to come in. Who genuinely believes PCCW will lay off 4,200 people? Even Mr. Iu has doubts, as it turns out. "It's politically incorrect to start laying off 1,000 people" at once, he says. He envisions cuts of a few hundred at a time, stretching out over years, he says.
It is the same story for the debt restructuring. PCCW owes $5.9 billion (HK$46.02 billion), half what it owed a year ago. Interest expense on that debt in the second half of 2001 fell 27% from the first half, to HK$1.3 billion. But the average Hong Kong interbank offered rate fell more than 35% in the same period. The company says it has reduced the rate on its interest payments by half.
And take a look at capital expenditure, which was cut to US$310 million from US$528 million in 2000. That hardly seems sustainable; PCCW itself said it will need to spend more on requirements such as upgrading its local network. At 11% of revenue, PCCW's capital expenditure is lower than most of its global peers'.
PCCW is cheap. Sure, but if you look at most any stock the right way, it can look cheap.
Many analysts are using a variation of the price/cash-flow measure to value PCCW. That measure concentrates more on how much cash companies generate than where they spend it; it becomes popular at times when investors are worried about cash.
Goldman trumpets that on the basis of price to 2002 free cash flow, PCCW is trading at a 63% discount to its peers.
Not surprisingly, fund managers prefer to value PCCW another way, which takes into account its debt. Ng Ean Kiam, a portfolio manager with Credit Agricole Asset Management in Singapore, likes looking at the enterprise value -- or market value plus debt -- compared with Ebitda, or earnings before interest, tax, depreciation and amortization.
With an enterprise value of about nine times Ebitda, PCCW is "the most expensive telecom in Asia," he says.
But get back to PCCW's biggest business-fixed-line telecommunications. There is more competition, international direct-dial prices are falling, and the company's biggest market already has about all the fixed lines it can handle. "You're not talking a lot of growth," says Matthew Choi, who runs Dresdner RCM's Tiger Fund.
He sees only one reason to buy PCCW, a onetime highflier that had a share price approaching HK$30. "If we expect profit-taking in the [broader] market, [PCCW] could turn out to be a more defensive stock," he says.
Write to Sarah McBride at sarah.mcbride@wsj.com5
URL for this article:
online.wsj.com
Hyperlinks in this Article:
(1) online.wsj.com
(2) online.wsj.com
(3) online.wsj.com
(4) online.wsj.com
(5) mailto:sarah.mcbride@wsj.com
Updated March 22, 2002
Copyright 2002 Dow Jones & Company, Inc. All Rights Reserved
Printing, distribution, and use of this material is governed by your Subscription agreement and Copyright laws.
For information about subscribing go to wsj.com
Used with permission of wsj.com |
