PCCW - After Settlement of HKT Deal ,ellenlang !

After Settlement of HKT Deal,
Li Faces Questions on Plans


August 21, 2000


Heard in Asia
By JASON BOOTH
Staff Reporter of THE WALL STREET JOURNAL


Richard Li has a lot of explaining to do.

With the closing of Pacific Century CyberWorks' takeover of Cable & Wireless HKT last week, the research blackout imposed on brokerage firms involved in the deal was lifted. In all, nine houses, including most of the largest firms, had been involved in the investment-banking feeding frenzy.

Now these analysts are free to resume coverage. For the most influential houses, CyberWorks will be pulling out the stops, with senior management spending a week or more with individual analysts, fully explaining their story.

And there will be plenty to explain. Especially after Mr. Li, CyberWorks' 33-year-old founder and chairman, last week ambitiously proclaimed his intention to double the company's market capitalization, which already stands at a hefty US$35 billion.

Seeking Clarification

First off, these analysts will want clarification on the joint venture with Telstra. The Australian telecommunications firm in April agreed in principle to invest around US$1.5 billion in a joint venture aimed at building a region-wide mobile business. The deal would also involve Telstra buying US$1.5 billion of convertible notes issued by CyberWorks. Yet the deal hasn't closed.

An analyst at a top U.S. brokerage firm who met with Telstra management but who requested anonymity because he is still formulating CyberWorks coverage says he believes the Australian company is committed to the deal but is likely renegotiating for better terms given that telecom stocks around the world have fallen sharply since the deal was unveiled. The uncertainty over this much-needed cash infusion will hang over CyberWorks shares for the time being, given the company needs every penny it can get to manage its gearing of over 100%.

They will also be looking for clarification of Mr. Li's promises to spin off investments made by his firm's venture capital arm, CyberWorks Ventures. Once touted as CyberWorks' most promising division, Ventures has seen the value of its 50-odd investments plunge along with the collapse of Internet stock valuations in April. And many analysts doubt that these promised IPOs will happen until tech stocks come back into favor.

Again, any money generated from this arena will be vital in allowing CyberWorks to pay down its debt while expanding its operations.

But what analysts will really want to hear about when they are ushered into CyberWorks' new offices in the former Hongkong Telecom tower is broadband Internet. Despite the muted rollout of CyberWorks' broadband service, Network of the World, the possibility of creating Asia's dominant broadband Internet service is the overriding reason why analysts have a favorable view of this company.

Without that opportunity, CyberWorks is just another telephone company. In the words of Pratik Gupta, head of Asian-Pacific Internet research at Salomon Smith Barney, who is formulating coverage: "The biggest hurdle will be to make sure that NOW becomes very popular. If that does not work out, they will be in trouble."

Visible Hope

You can see that hope built into the forecasts of analysts that already report on the company. HSBC Securities maintains a buy recommendation and a 12-month target price of 22 Hong Kong dollars (US$2.82), a 43% rise from Friday's close. But HSBC's bullish outlook is based on some pretty formidable assumptions, in particular that the company's NOW service will be received in 21% of global homes with televisions by 2010.

Despite the bad press that the Internet sector has received, being a dot-com can in fact be a very profitable business, but only if you dominate the market. Consider Yahoo! Here is a company that in the three months ended June 30 made a pretax profit of US$109 million on revenue of US$279 million, a margin of almost 40%. But Yahoo gets around 680 million page views a day and as a result takes an estimated 33% of online advertising revenue spent in the U.S.

The only way CyberWorks can ever expect to see those kinds of returns is to gain the kind of market share outlined by HSBC. To that end, analysts will be asking plenty of questions about CyberWorks' ability to secure favorable business relationships with the big cable operators around the region, who in many cases will act as the firm's distributors. Countries where they particularly want to see progress, but have so far seen little, are South Korea, China and India.

Just how Mr. Li and the rest of the CyberWorks management answer such questions will influence the tone of the new wave of coverage due to emerge on the company in the coming weeks. That in turn will affect the company's share price and the Hang Seng Index, in which CyberWorks is the fourth-largest constituent.

So far, most analysts appear willing to give Mr. Li the benefit of the doubt. Only one brokerage firm, Dresdner Kleinwort Benson, has a sell on the stock. After all, Internet analysts are by nature believers in the Internet revolution, the success of which is so important to Mr. Li's fortunes. And given CyberWorks' size and influence in Hong Kong, and the likelihood of more lucrative investment-banking opportunities down the road, few want to lose favor with Mr. Li by openly criticizing the company.

Yet the bar for this company has been set very high. And after Mr. Li's boast of being able to double the company's market capitalization, expectations will be even higher. In the words of Greg Feldberg, Internet analyst at Indosuez W.I. Carr: "Doubling their valuation is feasible in the long term if they succeed at everything."

Write to Jason Booth at jason.booth@wsj.com