Since Richard Li Tzar-kai acquired a controlling stake in PCCW in 2000, all that investors wanted to know was how he divested valuable assets to pay down the company's debts. Eight years after the takeover, PCCW is finally making it as a recovery stock in the eyes of investors as robust growth in the local economy boosts demand for telecommunications and media services. But is the recovery sustainable? PCCW's net profit for the year to December rose 20 per cent to HK$1.5 billion, though revenue fell 7.4 per cent to HK$23.7 billion on a smaller contribution from property sales. Core revenue rose 12 per cent to HK$20.5 billion from HK$18.37 billion a year earlier. Market watchers take PCCW's reduced reliance on property sales as a cue to assess its ability to turn around as a telecommunications play. 'The strong growth in core profit has got to be a recovery story,' said Kelvin Ho, an analyst at Nomura International who rated PCCW a 'buy' with a price target of HK$5.06. PCCW's valuation has room to improve as its quadruple-play strategy helps it compete and defend its market share, Mr Ho said. 'The fixed-line market is getting polarised in Hong Kong,' said an industry veteran. 'PCCW and Hutchison Telecom should benefit the most as they have territory-wide broadband networks. This eliminates competitive pressure.' PCCW competes with Hutchison Telecom, Hong Kong Broadband Network, Wharf T&T and New World Telecom in the fixed-line segment and with SmarTone Telecommunications Holdings, China Mobile Peoples Telephone and CSL New World Mobility and Hutchison Telecom for mobile phone users. With more than 2.3 million lines, PCCW's fixed-line market share of about 68 per cent remained the same last year. But increasing demand for broadband internet service boosted revenue from this core stream by 8 per cent, while revenue from traditional local voice services was stable. In the higher-margin corporate fixed-line segment, PCCW lost some market share to rivals, notably Hutchison Telecom, a source said. While market size limited fixed-line expansion, two PCCW initiatives, Now TV and PCCW Mobile, posted double-digit revenue growth although they remained in the red last year. In June 2005, PCCW acquired a controlling stake in Sunday Communications for HK$2 billion. It has since invested several hundred million dollars to enhance network coverage. The investment made PCCW one of the four 3G mobile operators with more than 206,000 3G customers and brought in HK$1.4 billion in revenue last year, allowing its earnings before interest, tax, depreciation and amortisation to break even. 'The integration of the mobile business helped PCCW reduce costs 6 per cent,' Morgan Stanley said on the turnaround in the mobile business. Despite fierce competition in the segment, group managing director Alex Arena said PCCW was one of only two mobile operators to attain a net increase in subscribers last year, thanks to the rise in 3G subscribers. 'Management reiterated targeting 25 per cent of the 3G market in the next few years,' Morgan Stanley noted, adding the margin for the mobile business should widen this year. Last year, Now TV most likely became the city's largest pay-television operator after it paid about HK$1 billion for three years of exclusive rights to air English Premier League football matches and drew more than 882,000 subscribers by the end of last year. Still, it had a segmental loss of HK$397 million, less than the HK$439 million a year earlier. 'I think it's okay for Now TV to make losses still, as it is their strength to differentiate from competitors,' Mr Ho said. 'It is nonsense for PCCW to just focus on profitability and give up capturing market share.' Morgan Stanley believes Now TV will continue to improve this year as management invests more in content and marketing. Ultimately, how soon and how much of a turnaround the company makes depends on the intensity of competition. 'Once competition steps up, PCCW's performance could be affected,' Mr Ho said. Last year's earnings per share rose 19.67 per cent year on year to 22.18 HK cents. The company declared a final dividend of 13.50 HK cents per share, up from 12 HK cents a year earlier. However, the company refuses to set a clear dividend policy. 'We want to consider the dividend payout once every six months on a case by case basis,' Mr Arena has said. PCCW has outperformed the market this year so far. It was down just 2.38 per cent on Friday whereas the Hang Seng Index has lost 19.09 per cent by comparison.