Market primed to see 3 Group in profit at last

PUBLISHED : Monday, 21 March, 2011, 12:00am
UPDATED : Monday, 21 March, 2011, 12:00am

After nine years of red ink, investors are eagerly waiting for Hutchison Whampoa's controversial foray into third-generation (3G) mobile phones to finally turn a profit.

The 3 Group lost HK$998 million before interest and tax in the first half of last year, significantly less than the HK$5.45 billion deficit in the same period the previous year.

At the time of the last interim results, Hutchison Whampoa chairman Li Ka-shing repeated assurances that he expected its 3 business to make a positive contribution to the group. The end of year figures are due to be announced on March 29.

The numbers at the time were encouraging and this time Hutchison investors seemed to be taking notice.

Since the interim results announcement last August, Hutchison shares have surged nearly 60 per cent, trading in the HK$88 to HK$90 range over recent weeks.

But after totting up the 3 Group's losses of HK$156.5 billion between 2002 and August last year, Hutchison's ability to raise capital to expand its business has been limited.

In January, Hutchison said it would spin off its port division into a business trust, Hutchison Port Holdings Trust, that is listed in Singapore. By floating its port operation in Singapore, the conglomerate was able to reduce debt, enhancing its overall valuation.

Revenues from the trust assets were about US$1.3 billion for 2009, constituting 5 per cent of Hutchison's total revenue and gross earnings came to about US$800 million, making up 17 per cent of Hutchison's total earnings. According to a statement filed with the Hong Kong stock exchange, Hutchison expects to book a gain of about HK$44 billion this financial year thanks to the proceeds of the initial public offering of its port business.

Hutchison said the cash proceeds of Hutchison Port Holdings Trust in Singapore would 'significantly' reduce the group's net debt.

It expects its net debt to net total capital ratio could be cut to around 20 per cent in 2011, down from an estimated 30 per cent in mid 2010.

Hutchison also said that the mobile phones division was 'becoming cash-flow positive'.

Now analysts are widely expecting Hutchison to put its 3G losses behind it when it releases its full-year 2010 results.

'If the 3G division isn't able to generate a return for Hutchison last year, it should do in the first half of 2011,' said one analyst.

However, the 3 division faces another problem.

In a recent interview with the Financial Times, Kevin Russell, chief executive of Hutchison-owned 3 Group in Britain, warned that the company could lose out to its bigger rivals Everything Everywhere, Vodafone and O2, if it was unable to secure airwaves in an auction next year.

Russell suggested that regulators in the UK should introduce rules to give 3 Group a greater chance to buy radio spectrum against its bigger rivals, giving consumers more choice.

Network operators in Britain have been reduced from five to four.

Analysts said 3 in Britain would struggle as an operator if it was not able to secure enough spectrum, and Hutchison might have to sell the business or form a joint venture.

The 3 Group operations in Britain and Italy are the two main income drivers for Hutchison's 3 group.

The analysts warned, however, that Hutchison would have to make a decision on the British operations before the auction, which is scheduled for the first quarter 2012. If not, and if it failed to secure enough spectrum, then the UK division's value would tumble.