Li Family Ripe For Next Generation
John Durie Jdurie@mail.fairfax.com.au
07/31/2001
Australian Financial Review
Page 693
Copyright of John Fairfax Group Pty Ltd
Canning Fok, the Hutchison Whampoa managing director, puts the issue clearly when asked about Richard Li's rival phone company: ``We are competitors and we're not going to help Telstra.''
When Li's company, Pacific Century CyberWorks , acquired Hong Kong Telephone from Cable & Wireless last year, Fok explained that his chairman (Li's father, Li Ka-shing, or, as he is better known, LKS) called a board meeting to put the issue beyond any doubt.
``He told us to treat them as competitors.'' As such, they are treated in business terms like an enemy and like all competitors are watched like a hawk by the 49-year-old, straight-talking, University of New England-educated Fok, who manages LKS's $US45 billion ($88 billion) conglomerate .
LKS and Hutchison are not the only game in town in terms of Chinese investments or telecommunications, but the statements put the family dealings in context.
In an interview with The Australian Financial Review, Fok explained just how he manages to keep the reins on an empire which covers assets from bottled water to retailing, to being Australia's biggest electricity distributor, to being the world's biggest port operator. And in July next year it will launch the first extensive third-generation mobile-phone network in Europe.
Despite a spectacular exit from the mobile phone business in Europe, the $11.5 billion potential cost of the 3G launch has resulted in a 46 per cent slump in the company's stock price from a peak of around $34 last year to $18.38 at its close on Friday.
While analysts say 36 per cent of the company's net asset value comes from its wireless business with ports at 17 per cent, property 13 per cent, cash reserves and managed funds 20 per cent and infrastructure 9 per cent right now the star asset is not an earner.
Last year's profit results showed ports contributing 29 per cent of earnings before interest and tax, infrastructure 29 per cent and property 14 per cent.
Fok describes the ports and his infrastructure businesses as his ``workhorses'' but rejects any suggestion that they are needed to fund the 3G play, saying: ``The telecommunications business is self funding. They are workhorses, too, you know, they are really also a utility business.''
Hutchison is 49.9 per cent controlled by Cheung Kong Holdings, which in turn is 36 per cent controlled by the Li family.
Much of the company's interests are held through partly owned companies and Fok, a 20-year veteran at the company, who has served as MD for the last eight years, is chairman of the 57.8 per cent-controlled Australian arm, Hutchison Telecommunications.
He is also deputy chairman of Cheung Kong Holdings, which, among other energy investments in Australia, is part of the AMP-Deutsche-Hastings syndicate bidding for Sydney airport.
Asked about his Australian investments, which total over $5 billion, Fok simply says ``they are solid investments''. As to future plans, ``we will take one step at a time''.
Some 70 per cent of Hutchison's earnings are generated outside Hong Kong across 28 countries, so Fok travels constantly, returning to Hong Kong two weeks every month for a review of the operations .
As to the chairman's involvement, Fok says: ``We talk very frequently.''
Unlike retiring GE boss Jack Welch, who extols the benefits of idea-swapping at every level of management, Fok says: ``We have a great deal of expertise and synergies ... our bankers use telephones and drink water.''
Fok naturally devotes his most time to the next big project so, whereas three years ago he travelled the world to talk to ``friends'' like Goldman Sachs in the hope they would move into Cheung Kong's then-new office tower, right now everything is focused on the 3G launch.
After a soft launch at the start of the European summer, the real start will be in September. Once the Australian system is tested in October next year, when the frequency first becomes available, it will be launched soon after.
Hutchison has 2,500 people around the world working on the respective launch after spending some $US6.5 billion buying spectrum across Europe and in Australia.
Thanks to perfectly timed sales of assets, like its Orange UK mobile operations, the company effectively abandoned traditional mobile telephony, and after a strategic withdrawal from the German spectrum auction last year the company's balance sheet can easily finance the total $US11.5 billion 3G investment.
Fok notes that the overall company has no debt and $US6 billion in cash, saying: ``That is a real competitive advantage. My competitors can only dream.''
The decision to exit second-generation mobile phones, Fok says, ``allowed us to look at the business with clearer thoughts''.
Roaming agreements are in place with existing operators to allow customers to use traditional services and the company has recently signed a worldwide supply deal with Japan's NEC. This landmark agreement, which will be announced shortly, completes partnerships within NTT DoCoMo and so-called killer applications like an exclusive deal with the UK and Italian soccer federations.
These will allow fans to program in the game they want and, whenever a goal is scored or there is some other highlight, the user will be beeped and can press a button and watch the action on his or her mobile screen.
Price and the all-important brand launch are still being discussed, but Fok figures some two years after its launch 3G devices will swamp traditional handsets in much the same way colour television did to black and white and DVDs are doing to videos.
After the worldwide launch starts late next year, the 2003 year will show the biggest hit on profits, with Goldman Sachs predicting a 12 per cent fall in earnings per share after gains of 5 per cent and 9 per cent this year and next respectively.
These predictions, of course, do not account for any later float of any of the assets or any further non-recourse borrowings.
Fok thinks the 3G business will be cash-flow positive in 2005 and show net profits the year after.
It is a long-term investment and Fok has the balance-sheet strength to back it.
Richard Li's empire has also suffered at the hands of the stockmarket, having fallen some 87.1 per cent since it acquired Hong Kong Telephone last August and 61 per cent this year.
Despite being the talk of Hong Kong in the last few weeks because of its ``failed'' bond offering, the ever-optimistic folk at PCCW like to look at it differently, saying all they really did recently was test the US market for Hong Kong Telephone debt after the company received its first rating in early July.
The previous owners didn't put any significant debt on the company but PCCW has loaded it with $US4.7 billion the first interest payment, totalling $US1.5 billion, being due in 2004.
The way PCCW sees it, the phone company is past its major capex and earns $US400 million a year in free cash flow so it won't have any problem meeting that payment.
Optimistic, maybe, but there is some time for the company to allay investor fears that money made by the phone company won't be blown at PCCW.
There are some loss-making areas at the parent-company level, with its internet services division using up $US280 million in cash last year, an estimated $US190 million this year, and it is now on a budget to use up $US100 million over the next two calendar years.
Time will tell whether Richard Li and his team will prove the doubters wrong.
--------------------------------------------------------------------------------
Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved. |
