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Ben Kwok

Goldman Sachs believes the counter is  at fair value and suggests waiting to see how subscriber take-up performs

Here is a  16-billion-dollar question for investors: is it time to buy Hutchison Whampoa stock, battered as it is by fears about the roll-out of its third-generation (3G) mobile-phone service?

Not according to Goldman Sachs, which forecasts a HK$40 to $50 trading range for the Li Ka-shing conglomerate over the next 12 months. At yesterday's closing price of $47.70, Goldman  believes it is close to fully valued.

Hutchison's 3G operation is budgeted to spend US$16.7 building a business that Goldman says relies on a magic combination of three 'G's' if it is to be successful - goals, girls and gambling.

With content deals lined-up with the English Premier League and Playboy, hopes were high of capturing consumer attention.

Yet with launches in its key European markets - Britain and Italy - complete, results have been mixed. Hutchison forecasts that it will attract one million subscribers in both Italy and Britain by the year-end, but after two months has secured just 100,000 customers in Italy, its best performing market.

In Britain, where Hutchison made a huge fortune building and later selling Orange four years ago, it has attracted just 25,000 users.

According to Goldman, a pair of the most popular NEC e606 handsets are selling  for #300 (HK$3,828) at distributors such as Phones4U and Carphone Warehouse.

'Despite these seemingly attractive discounted prices which are competitive with the #100 to #200 range for existing 2G handsets, we note the consumer response to 3 UK's launch has been slower than we initially envisaged,' Goldman said.

Operational challenges facing Hutchison's British business are not unexpected. Problems with handset availability, size, function and pricing were all perceived as likely inhibitors to growth.

Goldman noted that only 6 per cent of the firm's subscribers spend more than #50 per month, but Hutchison's lowest post-paid plan is pitched at #59.99.

Most users seem likely to pick the pay-as-you-go option but face a per-minute price of 50 pence for video calls.

A Hutchison spokeswoman said: 'What we can say is that with any new technology, our customers will experience some rough edges initially. We are working hard to resolve the remaining kinks in our systems. Our customers are using our products and services and we're getting a lot of useful feedback.'

In the worst-case scenario, Goldman predicted that Hutchison would wind down its European 3G operation, incurring a write-down of HK$110 billion in assets, or $26 per share.

Still, the company would be left with profitable ports, oil and retail businesses that could generate a US$3.5 billion free cash flow, the brokerage said. It would not break the bank of Hutchison, which has $16.5 billion in liquid reserves.

'We are cautious but not overly negative on Hutchison shares,' Goldman  said.

Goldman is not the only securities house maintaining a wait-and-see attitude on Hutchison.

ING Securities said many investors were sniffing around the stock but the main reason for buying it now was because of its heavy index weighting.

'If you buy Hutchison for 3G, it seems too early,' ING Securities' Cusson Leung said.

'If you buy for NAV (net asset value) discount, Cheung Kong is probably more attractive.'

Mr Leung said Cheung Kong was trading at an 80 per cent discount to its net asset value excluding its vast Hutchison stake.

Merrill Lynch also said  the sharp weakening of the US dollar against the euro was hurting Hutchison's earnings due to its debt load.

'A 10 per cent weaker US dollar could mean around HK$1.6 billion in additional ebit (earnings before interest and tax) losses per annum over the next two years when the foreign currency losses are translated into Hong Kong dollars,' Merrill Lynch said in a recent report.

The brokerage added that a strong euro would mean higher earnings should the venture eventually swing into profitability.

But the trouble with that is few investors are factoring that prospect into Hutchsion's share price yet.



Broker adopts cautious tone over Hutchison 3G