PCCW's 2000 Loss May Top HK$5 Billion, Analysts Say

Pacific Century CyberWorks, the embattled telecoms and Internet firm headed by tycoon Richard Li, will post this week its first combined results since acquiring Hong Kong's dominant telco, with many analysts forecasting a hefty loss.

Because PCCW's US$28.5 billion purchase of Cable & Wireless HKT was completed in mid-August, just four-and-a-half months of combined operations are expected to be included in the results on Wednesday, making forecasts difficult, company-watchers said.

Other questions include how the firm will account for losses in its investment arm, and how it handles the massive goodwill incurred when it swallowed the larger HKT business in Asia's largest corporate takeover.

"They're going to come out with all kinds of weird, bizarre numbers," said Nomura International telecoms analyst Richard Ferguson, who expects a year 2000 loss of HK$2.58 billion (US$331 million) and has an "underperform" rating on the stock.

"It'll be a fairly confusing picture."

Deutsche Bank analyst Nigel Coe, who also rates the counter "underperform", forecast a loss of HK$5.4 billion, assuming PCCW takes a charge of HK$3.5 billion to account for the loss in value of its investment portfolio.

"However, we should not lose sight of the fact that this number is extremely polluted by a number of one-off acquisition type expenses that makes this an extremely volatile forecast," Coe warned in a research note.

One analyst who declined to be identified said that on a pro forma basis the combined company would have earned HK$1.08 billion, but that the headline number will likely be a loss of HK$2 billion.

LAUNDRY LIST OF ONE-OFFS

PCCW's bottom-line is expected to be weighed down by items such as merger advisory fees and interest expenses.

The company must also decide whether to account for the plunge in value of some of its publicly listed investments, which include estimated paper losses of US$305 million on PCCW's stake in CMGI Inc and US$121 million for its holding in Softnet Systems, Deutsche Bank said.

PCCW must also account for the goodwill incurred from the HKT deal. Goodwill is used to account for the difference between the purchase price of a company and what the firm was actually worth, and has been estimated in PCCW's case to total HK$190 billion.

Many watchers expect PCCW to write down the entire amount at once against shareholder equity, which could put the company in the dubious position of having negative equity, but would not hurt the company's bottom-line.

On the plus side, Deutsche Bank's Coe said he expected the core HKT business to post revenue growth of some two percent, marking the first top-line increase since 1997, thanks to higher monthly access charges and healthy consumer broadband uptake.

LOOKING FOR A LOOK AHEAD

The numbers PCCW does report will matter less than the outlook provided by company executives for operations going forward, several analysts said.

UBS Warburg analyst Bethany Chan, who forecasts a loss of HK$374 million and has a "buy" rating on PCCW, said she hopes for guidance from the company on several questions including:

-- What will become of the 15 percent stake in PCCW that Cable & Wireless Plc wants to sell? That share overhang has been a millstone dragging PCCW's share price for months.

-- What are the company's plans for its combined TV and Internet service called Network of the World? Once at the heart of PCCW's vision, PCCW has said it would cut funding of its consumer-focused Internet projects, including NOW, to US$200 million a year. Some analysts would like to see a further cut.

-- What sort of pricing pressure does PCCW face in its core telecoms units?

Many analysts see little on the horizon to boost shareholder sentiment, and some said the results might not help matters.

Nomura's Ferguson said the one-time, New Economy high-flyer has essentially been stripped to the core Hong Kong telecom business -- but saddled with US$4.7 billion in bank loans and in the difficult position of being a former monopoly.

Just over a year ago PCCW, bolstered by the Li family imprimatur -- Richard Li's father is Hong Kong's richest tycoon Li Ka-shing -- rode atop the wave of Internet mania and was able to use a share price reaching as high as HK$28.50 to buy HKT.

But investor sentiment towards Internet and telecoms stocks in general and PCCW in particular, which has been the worst performer on the Hang Seng Index in 2001, has punished the counter, which closed at a 52-week low on Friday of HK$3.575.

The revelation last week that Richard Li, 34, did not in fact earn a computer science degree from California's prestigious Stanford University, as PCCW had often claimed, was a further embarrassment that some watchers said undermines PCCW's broader credibility.



Source: chinadaily.com.cn


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