Peoples hit in escalating price war
Earnings at China Resources Peoples Telephone dropped 22 per cent last year as an intense price war hurt profits, raising questions about the firm's ability to prosper as it prepares an initial public offering.
Research reports from the company's listing sponsors, UBS and CLSA, revealed Peoples earned $270 million last year, down from a maiden profit of $345 million in 2002. The figure was also lower than a sum Peoples reported in October last year, when it said it had earned $285 million in the first nine months.
The profit drop raises worries about the industry's future as operators attempt to outgun each other with cheap tariff plans.
A source close to Peoples said the company still made money in the fourth quarter. A lower audited figure reflects tax and interest arrangements but overall the company met internal targets.
The price war has hurt other industry players and the hostilities show few signs of abating. Last month, Hong Kong's most profitable mobile operator, CSL, described the market as one of the worst in a decade and reported lower profits for the second half of last year.
Two weeks ago, Hutchison Telecom opened a new front in the price war by introducing a handset for its third-generation (3G) services priced at just $998. Analysts expect the aggressive move to force rivals into providing hefty subsidies, potentially bringing an end to a two-year epoch of profits.
UBS said Hutchison's move would have little impact on Peoples, arguing Hutchison targeted high-end users, who were not the focus of Peoples.
'We believe neither the handset nor the voice offerings represent a challenge to Peoples' 2G services,' it said, adding that 3 was not a threat - for now.
UBS and CLSA, however, did not provide earnings projections for their client. Instead, considerable portions of their reports were used to advance the idea that Peoples could withstand a price war and increased competition.
The brokerages also applauded the strategy of not having a costly 3G licence.
Peoples, the strategy of which is to always match the best offer in town, was compared to low-cost airlines and inexpensive xiaolingtong mobile services available on the mainland.
Keeping costs low and passing on the savings to customers has helped Peoples capture about 15 per cent of the market.
UBS estimated the company spent US$231 per subscriber, 23 per cent lower than rivals such as Sunday Communications.
It assigned an equity value of '$3.5 billion to $4.1 billion' to the company, higher than that of Sunday ($1.97 billion) but lower than SmarTone Telecommunications ($5.32 billion).
CLSA said Peoples had $918 million in loans to shareholders, as of the end of December, and was paying 7 per cent interest annually. A source close to Peoples said the company was expected to be debt free after listing.