New Information Shows PCCW in Even Worse Shape, Worse Than We Thought
Stephen Vines
Date : JUL 11, 2001
While Pacific Century Cyber Works (0008) is busy trying to flog a new bond issue to refinance it's impressive debt, shareholders have been given some interesting insight into the state of the business which has not received the attention it deserves.
The bond issue is being raised not on behalf of the listed parent company but its wholly owned subsidiary PCCW-HKT Telephone, the fixed line telecommunications business, which is the only really profitable entity within the group.
Because the old telephone company is looking for cash PCCW has been forced to provide further details about the business of this company which go well beyond the annual results announcement for 2000 released at the end of March.
Following this announcement Linus Cheung, who used to be the Chief Executive of Hongkong Telecom and is now a deputy chairman of PCCW, seemingly in charge of paper clip allocation, said, 'if Cable & Wireless had not sold HKT, the company could still have paid a dividend. It would have remained profitable, debt-free.but it's a commercial decision, there was nothing I could do'.
Mr. Cheung's frank (possibly foolishly brave) speaking is much appreciated but is slightly misleading because the new figures about the telephone business, released on 4 July, show that the telephone company remains profitable (this, we knew) but its core businesses are lacklustre at best (this, we only guessed).
At a time when data services are producing healthy revenue increases for other telecoms network providers, PCCW-HKT could not even manage a 10 per cent increase in this business, instead turnover rose from $3,402 million in the year to March 31, 2000, to $3,688 million twelve months later.
The local telephony service performed far better, its turnover rose from $6,777 million to $7,320 million. This is largely because PCCW retains its monopoly on the fixed line network. However that monopoly is being actively challenged by i-Cable and, so we are told, by Hutchison's telephone operation, although how viciously Li Ka-shing, the majority shareholder in Hutch, wants to compete with his son Richard, the majority shareholder in PCCW, remains an open question. As matters stand however this is the only part of the business showing real growth.
Compare this with the massive loss of business in international calls, where PCCW faces real and effective competition. Turnover fell from $5,063 million to $3,770 million, a loss of over 25 per cent. Moreover PCCW's international business is definitely on a downward curve, meaning that these losses are highly unlikely to have been curbed.
Nevertheless PCCW-HKT managed to record a net profit for the year to 31 March, 2001 of $5,879 million, compared with $2,337 million in the previous year. This is far less impressive than it sounds because in the previous year PCCW decided to make a $3,823 million write-down of fixed assets, there was no similar provision the following year. In other words there has been no underlying profits increase, on the contrary, there has been a substantial fall.
These interesting figures landed just two days after PCCW was obliged to publish its figures for the year ending 31 December 2000 according to US generally agreed accounting principles or GAAP accounting rules. Here is a case for crying, 'God Bless America' because GAAP rules provide a much better picture of a company's financial situation than Hong Kong accounting standards. PCCW has a US listing so it needs to issue a statement showing its financial results according to the GAAP method.
The well reported headline news following the publication of using the GAAP method for producing PCCW's results was to push losses up from $6,907 million, as recorded under the Hong Kong system, to $14,571 million, using the American system.
Why is GAAP better? PCCW's results provide a ready answer. For example, under Hong Kong rules all the business, loans etc. poured into the alliance with Australia's Telstra can be excluded from the company's results because its ownership is regarded as temporary. Whereas the US system sensibly looks at whether or not a company has control of an asset and if it does, compels that company to include the figures for these assets in its general accounts.
Secondly, the US system requires a statement of market value for equities held by a company. In Hong Kong companies simply state the acquisition value, which, particularly in current circumstances, greatly inflates their value.
The biggest impact on PCCW's figures however arises from the Hong Kong system of allowing goodwill to be charged against shareholder's equity, without having any impact on earnings. The American system treats goodwill as an asset that can be amortised. Thus under the Hong Kong system the write-off of the goodwill resulting from the HKT takeover has left the company with negative assets, whereas under the American system shareholder's equity stands at $145,893 million. Bringing goodwill back onto the revenue side of the balance sheet gives shareholders an opportunity to see how these assets are performing.
Of course PCCW's results, issued under the Hong Kong system of accounting, are no more misleading than all the other results issued in this way but this particular exercise has provided a welcome opportunity to highlight the differences. In the case of PCCW it supplies yet another nail in the coffin for those foolish enough to think that the company is poised for a dramatic recovery.
Just to confirm how misguided such thoughts are, PCCW obligingly issued what it described as it 'Internet Service Strategy' on the same day that it revealed the poor state of its telephone business. This strategy can be summed up in two words: massive retrenchment. All previous talk about PCCW becoming the world's biggest internet company and creating an international market leading service to link the internet with
television services has been replaced by a more prosaic and realistic focus on the Hong Kong market.
The reality check is most welcome but it also means that PCCW must be viewed as no more than a large company focusing on a small marketplace. This has considerable implications for its growth prospects; all of which seem to be adequately (although perhaps not adequately enough) reflected in PCCW's languishing share price. While it hovers just above $2, there is little incentive to buy. [Ends] |
