End of the rainbow remains out of reach
For Li Ka-shing and his lieutenants at Hutchison Whampoa, getting their enormous investment in 3G mobile-telephone services to pay off is a bit like chasing the pot of gold at the end of the rainbow: the closer they think they are to their target, the further it seems to recede into the distance.
Back in 2005, Hutchison managing director Canning Fok Kin-ning forecast that the business would cover its operating costs the following year and turn a profit in 2007.
That prediction proved too optimistic, but Mr Fok remained upbeat. In early 2007, he said the 3G division should turn the corner and generate a profit before interest and tax during 2008.
That target proved elusive, too, but by March this year, he was confidently predicting break-even sometime before the end of this year.
Yesterday, both Mr Li and Mr Fok were being more guarded with their forecasts, complaining that the recession had forced customers to trim their discretionary spending on mobile services. Now they say the 3G unit may not break even before interest and tax until the first half of next year.
Meanwhile, the division continues to bleed red ink. In the first half of the year, the loss from 3G (excluding one-off gains) came to HK$5.45 billion.
To shore up group earnings in the face of such enormous losses, Hutchison has repeatedly been forced to sell assets.
In 2006, the company sold a 20 per cent stake in its flagship ports division for HK$24 billion. The following year, it disposed of subsidiary Hutchison Telecommunications International Ltd's (HTIL) 2G mobile business in India for HK$31 billion.
And so it goes on. In the first half of this year, Hutchison realised a profit of HK$3.64 billion by merging its Australian 3G unit with Vodafone Australia, and on Wednesday HTIL announced the sale of its Israeli business, which could net Hutchison a dividend of up to HK$4.46 billion.
These and other disposals have supported profits in recent years (see the first chart below), but with Hutchison's ports and retail businesses hammered by the recession, and income at its Husky Energy subsidiary hit by lower oil prices, first-half earnings were still ugly, down 33 per cent from 2008.
Even worse, with HTIL's Indian and Israeli phone businesses sold and its Hong Kong and Macau division spun off, that particular cookie jar is now empty.
There is still plenty Hutchison could sell, however. Speculation has long surrounded Husky's future, although Mr Fok brushed aside talk of any divestment yesterday.
The big prize, though, would be the sale, or more likely the merger, of one of its European 3G businesses. As Hutchison's Australian deal showed, merging with a competitor can yield major gains through cost savings.
To date, the company has managed only baby steps, signing network-sharing agreements in Britain and Sweden and a site-sharing pact in Italy.
Yesterday, Mr Fok was remaining tight-lipped about the prospect of a larger deal, except to dismiss talk of a tie-up with Italy's Wind Telecomunicazioni, saying the business was so highly geared 'I wouldn't touch it with a barge pole'.
But without at least one big European deal, ideally accompanied by early break-even dates in the continent's other markets, investors are likely to remain wary.
With cumulative losses on 3G now totalling well over HK$110 billion, Hutchison shares have underperformed the Hang Seng Index woefully ever since the venture's launch (see the second chart).
'That really hurts,' Mr Fok admitted yesterday. 'I've got to make 3G profitable. Then I can pay a big dividend and signal to the market that the whole saga is over. I've got to do it.'
For the time being, however, it looks as if Hutchison's pot of gold remains frustratingly out of reach.
