Large tariff cuts prompt share decline
Hongkong Telecom shares fell yesterday following the announcement that the company is to cut tariffs by an average of 25 per cent.
Most analysts had factored the widely expected decision into earnings forecasts and the share-price decline was smaller than the market's overall fall.
The shares fell almost 1.5 per cent to $13.35 on the first trading day since the international phone market was partially deregulated on Friday. This compares with a 2.38 per cent slide in the Hang Seng Index.
Rather than cut on an across-the-board basis, Telecom is offering customers tailored reductions through a variety of call plans for which subscribers must first sign up.
Telecom, since agreeing early last year to give up its overseas monopoly, had been expected to cut tariffs to remain competitive.
The company does not release details on the size of its market share.
ABN Amro telecoms analyst Joan Kiernan said the reductions amounted to a 'little more' than she expected but were clearly focused on 'high-spending customers from which it derives most benefit'.
Ms Kiernan's comment reflected the general view that many of the benefits had been tailored to higher-revenue earning business, rather than residential, customers.
Looked at on a route-by-route basis, Telecom's tariffs on its 001 and 0060 international services are still higher than many of its competitors'.
One of Telecom's main tactics is to emphasise that service is as important as price.
To that end, all international calls of less than six seconds will be free and extra service commitments are to be introduced allowing rebates of time if calls are deemed poor quality.
However, new price reductions are expected from rivals in the coming days as they seek to prize market share away from Telecom.
Telecom's executive director for sales, marketing and customer service Roy Wilson denied it was entering a price fight with competitors.
'I don't see this as a war but a highly competitive drawn-out game of strategy and staying power.' Warburg Dillon Read telecoms analyst Jason Billings trimmed his financial-year earnings forecast for Telecom about 1.5 per cent as a result of the move.
He would cut a further 6 per cent for the 2000 financial year, which begins in April.
Jardine Fleming analyst Dylan Tinker said he would adjust his forecast only slightly.
He expected earnings per share in the 2000 financial year to decline more than 5 per cent year on year.
The tariff cut that took most by surprise was on the mainland route.
This route was not originally covered by Friday's limited liberalisation but a cut in the internal accounting rate between Telecom and China Telecom has allowed new tariffs to be introduced.
Mainland calls (apart from to Guangdong Province) have been cut from $9.50 a minute to $7.20 and possibly as low as $6.70 for bulk use.
Mr Wilson said the company was still required to get permission from the Office of the Telecommunications Authority to make any further price cuts.
However, he said there was evidence that the organisation was operating a little faster than it used to in approving tariff reductions.