Real opportunities linger as credibility hangs in the balance sheet
Chairman Richard Li Tzar-kai may have been absent when PCCW delivered its 2003 results yesterday, but his fingerprints were clearly visible on the announcement. In the red column we have a list of one-time charges, ranging from game business assets in Japan to a complete write-down of Reach, the undersea cable joint venture with Telstra, adding up to US$892 million.
The resulting HK$5.2 billion loss halts progress towards returning the firm's balance sheet to positive territory. Notwithstanding legal finesses aimed at ending the firm's negative balance sheet equity, such non-cash adjustments hinder a return to promised dividend payouts. PCCW remains a telecommunications company in an investor no man's land, neither offering the earnings of a growth stock nor dividend yield of a secure utility.
A possible way out may lie in the injection of property assets into a shell vehicle. Such a back-door listing smacks of yet another burst of tricky financial engineering, but the one-off gain will shore up the balance sheet and simplify the main businesses into something almost a pure telecoms play.
Past goodwill write-offs have left the firm with net liabilities of HK$7.35 billion, causing many investors to think further write-downs were unlikely. Yet any misgivings PCCW had about joining partner Telstra in putting a zero next to Reach in its balance sheet, must surely have vanished after the $738 million profit in 2002 turned into an $821 million loss last year.
That has left the firm essentially as a Hong Kong-based fixed-line operator with an arguably under-utilised state-of-the-art network. Reversing the slide in long-distance revenues, which fell 17 per cent to HK$2.97 billion, looks a lost cause. Local telephone service revenue fell 12 per cent to $6.02 billion and declined further in the second half.
More encouraging was its performance in data services where revenue held up at HK$4.39 billion. A strong response to the launch of SMS fixed-line services and NOW broadband television helped to slow the decline in market share. The likelihood of a relaxation in the regulatory regime to give PCCW greater pricing flexibility next year, increases the odds of a return to positive growth this year.
Overseas, PCCW has acquired a licence to develop wireless broadband services in the underdeveloped British market, a venture with hard to predict upside, but at least limited downside.
Such businesses offer real opportunity but attention will focus on what management describes as 'technical reorganisation of the balance sheet'. That is likely to see the launch of a new property firm with Cyberport at its core. With investor memories scared by past misadventures, the execution of this transaction puts management credibility on the line. Giving investors solid reasons to buy PCCW will demand more than an opportunistic shuffle of property assets.