Pain's the name of 3G game

PUBLISHED : Tuesday, 06 September, 2005, 12:00am
UPDATED : Tuesday, 06 September, 2005, 12:00am

SmarTone latest to suffer with earnings drop of 27pc, but still remains optimistic

SmarTone Telecommunications Holdings expects 'severe pressure on profits' in the coming year as the cocktail of high mobile penetration, over-competition and the steep cost of rolling out 3G networks continues to ravage mobile operators' profit margins.

The firm said increasing handset subsidies and costs related to 3G including network expenses, licence fees, depreciation and the cost of content would weigh heavily on earnings in the coming months, although it also predicted 3G users to contribute to a 'moderate' increase in average revenue per user (arpu).

SmarTone yesterday announced a 27 per cent drop in net profit to $338.8 million for the year to June 'amid severe price erosion prevailing in the market', and a 12 per cent decline in earnings before tax, depreciation and amortisation to $832 million.

Operating revenue increased by $252 million to $3.61 billion on the back of growth in mobile services revenue and handset sales. Arpu grew by $11 to $199, while the firm booked $30 million in 3G licence fees in the 12 months to April, which will rise to $50 million in the current financial year.

Chairman Raymond Kwok Ping-luen said: 'The launch of 3G has established the platform for future growth, despite the resultant increase in costs and pressure on profits in the short term.'

This 3G-based optimism has been mirrored by SmarTone chief executive Douglas Li in recent weeks. He said the upcoming generation of high-definition handsets and new services would 'allay fears among consumers that there's no point in watching 3G content'.

Rival operators have also been bullish on 3G's prospects. Hutchison Whampoa chairman Li Ka-shing joked at his group's recent interim results: 'If our 3G losses continue to grow, the guys sitting beside me will have to cut their bonus,' while managing director Canning Fok Kin-ning claimed 'the critical mass [of 3G] has arrived'.

But the recent round of financial results reiterates the high price Hong Kong's four licence-holders continue to pay in their 3G gamble.

Hong Kong CSL last month reported a 21.4 per cent drop in earnings before interest and tax to $375 million for the year to June, compared with $477 million a year ago.

Lower subscriber revenues and heavy 3G roll-out expenses pushed Sunday Communications into an interim net loss of $61.81 million, with analysts predicting a full-year net loss of up to $183 million.

And despite all the talk, Hutchison's global operating losses for 3G totalled US$10.62 billion, down from the US$14.29 billion loss a year earlier.

The message appears to be short-term pain for long-term gain.

But Macquarie telecommunications analyst Jimmy Cheong questioned how much long-term gain really lies ahead, and said that in the absence of consolidation there was little to be optimistic about in the mobile sector. 'If the market stays at six players it is difficult to be bullish. If it stays this way, it won't be good for anyone,' he said.

Yesterday, SmarTone's Mr Li said the firm was open to consolidation, 'but only if it brings long-term shareholder value'.

But with the company's share price closing at $9.10 compared with $22.90 in March 2000, those shareholders may be disappointed with what came next: 'There have been discussions in the past, but there are none currently ongoing.'