Quamnet: PCCW (008): A Hold Or A Sell?
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PCCW (008): A Hold Or A Sell?
Mar 29, 2001 - 17:26:51 HKT
QuamResearch
"On August 17, 2000, PCCW completed the HKT acquisition, representing one of the largest corporate mergers in Asia's history." In its interim results announcement, the company, which is seeking to become one of Asia's leading integrated technology, communications and media companies, posted an interim loss of HK$34.9 million. Of course, that was not the end, and we continued to warn investors to avoid this company in our previous reports. The losses for the 2000 financial year, sad to say, beat even the most bearish analyst estimates.
The key elements to watch will be the Internet write-offs, its negative shareholder equity, and its lingering debt burden as well as the questionable state of HKT.
PCCW Full Year Results
For the year ended December 31, 2000, net loss was an extraordinary high US$886 million (HK$6,930 million) on revenues of US$935 million (HK$7,291 million). Revenues accounted for four and a half months of the HKT group's results but does not include the revenues of the HKT group's IP Backbone business and its wireless communications business. Loss per share was HK 47.54 cents, compared to an earnings per share of HK 9.99 cents a year ago.
Year ended 31 December,
HK$ million
2000
1999
Turnover
7,291
152
Operating profit/loss before provision for impairment losses and net losses/gains on investments
520
(293)
Losses/Gains on investments, net
(4,887)
574
Provisions for impairment losses
(312)
--
Loss/Profit from operations
(4,679)
281
Finance (costs)/income, net
(2,356)
56
Gains on disposal of discontinued operations
--
21
Share of results of jointly controlled companies
(100)
--
Share of results of associated companies
(63)
(5)
Share of profits of unconsolidated subsidiaries
790
--
Loss/ Profit before taxation
(6,408)
353
Taxation
(522)
(7)
Loss/ Profit for the year
(6,907)
347
Loss/ Earnings per share (cents)
(47.54)
9.99
HK$4,887 million losses on investments
The HK$6,930 million losses for the year mainly consisted of the significant HK$4,887 million provisions made against the company's strategic investments and the change in the market value of other investments. It includes 1) net unrealized losses on holdings of other investments of HK$1,076 million, 2) net realized gains from disposals of certain other investments of HK$50 million, 3) net gains from disposals of certain investments in subsidiaries of HK$181 million, and 4) the provision for other than temporary decline in value of investment securities of HK$3,911 million.
The company didn't mention what were those investments, but it should include CMGI and SoftNet. The share price of these companies dropped a lot in the period.
Surprisingly, PCCW has taken a prudent approach in this item, and further write-downs are not likely. This may help to boost this year's results.
Negative Shareholders' Funds
The balance of goodwill, arising from the HK$HKT acquisition, of US$22 billion (HK$172 billion) was written off against reserves. As a result, at 31 December, 2000, PCCW had negative net assets of HK$14.1 billion, the first HSI constituent chips to have negative net assets.
Finance Costs
Net finance charges for the year were US$302 million (HK$2,356 million). A loan arrangement fee of HK$1,159 million was incurred in respect of the bridge loan facility and the amortized portion of HK$896 million was taken into account in finance costs for the year ended 31 December, 2000. The balance of HK$263 million of this fee will be charged to the profit and loss account in 2001. Interest expenses and other bank charges of HK$2,458 million included interest expenses relating to the bridge loan facility of HK$2,215 million.
Major Business Areas
1)Telecommunications services comprise the fixed line telecommunications network services and equipment businesses in Hong Kong. Overall telecommunications services revenue fell 7% year on year, largely due to a 34% decline in international voice (IDD) revenues. The company said that the increase in residential and business line tariffs in January 2001 would be reflected in the results for the 2001 financial year.
2)Business eSolutions comprises the systems integration, applications development and business broadband access businesses. Revenue from this division increased 25% y-o-y to nearly US$154 million (HK$1.2 billion), driven by major system integration projects for the finance and public sectors.
3)Internet data centers revenues increased 120% y-o-y to more than US$15 million (HK$121 million) following launch of premium services under the Powerb@se brand in June 2000.
4)B2C services revenues increased 34% y-o-y to US$143 million (HK$1,115 million), driven by accelerating local take-up in broadbrand Internet access services.
A Telstra Deal
In order to reduce debt, PCCW issued to Telstra a 6-year US$750 million (HK$5,850 million) convertible note. In this deal, PCCW was forced to give up majority control of the mobile business to Telstra. The deal also involved a new 50:50 IP backbone JV. Although the new JV's debt will not appear on PCCW's balance sheet, and which will not increase PCCW's burden, PCCW is no longer free to direct any cash flow from these two "associates".
Debt Refinancing
In December 2000, the deeply indebted company completed a HK$4,143 million rights issue and an issue of US1,100 million (HK$8,580 million) in convertible bonds. By December 2000, the outstanding bridge loan facility was reduced to but still at a very high US$7,655 million (HK$59,700 million). One can imagine that finance costs will still be a great burden to the company.
In December 2000, five banks led the syndication of US4,700 million (HK$36,660 million) in long term loans, which was drawn down in February 2001 to refinance the US$4,100 million (HK$32,000 million) which remained outstanding under the bridge loan facility.
Lock-up Ends: Will C&W dispose of PCCW shares?
The answer is definitely yes. But it seems that no buyer has been found, and C&W may not be willing to sell at this very low price.
It appears that C&W anxiously wants to exit PCCW as quickly as possibly, preferably once and for all for its 14.8% stake. It has seen the damage a major sell-out can do via its first chunk liquidated back in September. And wouldn't it be better for C&W to get rid of the whole thing in one go right now at a higher price while giving the appearance of support to PCCW?
Whether or not a strategic investor can be found for C&W's stake, C&W's current willingness to hold out does not represent faith in HKT and its current owner. Instead, the reason is the low share price. In August 2000, C&W received 0.689 PCCW shares and HK$7.65 in cash for every HKT share. This means at the current price of HK$3.25, each HKT share was only worth HK$9.89 per share. The valuation dropped nearly 50% compared to the HKT pre-acquisition price. (In August 2000, the share price of PCCW was around HK$15.)
One can expect that if the share price of PCCW goes up, C&W may have the temptation to sell. Therefore, the upside potential is limited. HSBC Securities already downgraded PCCW from Buy to Hold, but we can't further downgrade PCCW's ratings. Fundamentally, we don't suggest investors to buy unprofitable companies. As such, we suggest that investors avoid this company, especially since Richard Li, the man with a little educational scandal, declined to say when PCCW would break even.
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