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SCMP Reporter

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.



PCCW has makings of a recovery stock