Bending corners not the same as turning them at Hutchison
Li Ka-shing and his lieutenants at Hutchison Whampoa have been nothing if not patient with their third-generation mobile phone business. It has proven a costly virtue.
Hutchison has lost HK$120 billion on its investment in 3G since 2002, not including interest charges and tax payments.
Over the past 31/2 years, gains from disposals have averaged 135 per cent of the company's net profit. Put another way, Hutchison has managed to stay in the black only by selling off money-making assets.
The business now appears to have turned a corner.
The management yesterday said total registered 3G customers grew 7 per cent to 15.9 million users in the first six months, even as the costs associated with winning and retaining those customers fell 15 per cent. Revenues from the segment rose 20 per cent to HK$28.19 billion.
Still, there are many other corners yet to be turned.
Executives yesterday reaffirmed the key target for 3G: achieving monthly profitability (before interest and tax) some time next year.
That will be an ambitious undertaking. Hutchison's 3G losses peaked in 2004 at HK$38.45 billion. They narrowed 6 per cent in 2005 and an impressive 45 per cent last year. However, losses for the first half of this year narrowed a disappointing 6 per cent to a not insubstantial HK$11.32 billion.
Currency movements shoulder much of the blame, adding an estimated HK$1.02 billion to reported losses which the company said would have otherwise narrowed by 14 per cent.
Hutchison was also hit by a regulatory shift in Italy, its largest global market by number of users. Dubbed the Bersani decree, the action banned operators from charging pre-paid card users a fee for topping-up their phone cards.
While the company's average revenue per user increased in Britain, Sweden and Denmark, it fell 7 per cent in Italy to HK$321, well below the company-wide average of HK$456 per user.
Executives now are pinning their hopes on the British and Irish markets. Revenues there slipped 1 per cent in the period but it is where the company's highest-paying customers are to be found.
Spearheading a major restructuring of operations in that market, group managing director Canning Fok Kin-ning based himself in Britain for seven months from last September to March, reshuffling executives and weeding out third-party mobile phone dealers who were not up to scratch.
At the same time, Hutchison plans to focus less on boosting sales volume in favour of targeting high-quality customers. That will be a relief: while first-half losses narrowed, as a percentage of sales they still stood at 40 per cent compared with 51 per cent a year ago.
Until 3G does hit full profitability and can stand on its own feet, investors are likely to remain wary of Hutchison's need to offset 3G losses by selling off money-making assets.
The company's shares are down 2.3 per cent in the year to date compared with a 15 per cent rise in the Hang Seng Index. The market is signalling, apparently, that bending corners is not the same as turning them.
