PCCW Expected To Report Interim Loss After CSL Disposal

by Mary Swire, Tax-News.com, Hong Kong

03 September 2002

After disposing of its 40% stake in mobile business CSL in June, Hong Kong's telecommunications operator Pacific Century CyberWorks (PCCW) said it would book an accounting loss of US$232m, and indeed the company is expected to report an interim loss of up to HK$792m (US$100m) on Thursday as a result.

The consensus forecast reported by Business Post is in the region of HK$400m. However there will be an underlying profit from PCCW's core fixed-line business (the old Hong Kong Telecom) of about HK$1bn.

After the disposal of CSL, PCCW chairman Richard Li Tzar-kai told analysts that he plans to sell more non-core assets this year in order to reduce debt further, saying that CyberWorks would probably sell its property division and other assets outside the core telecoms business. The CSL disposal reduced debt to about US$4.2bn.

The sale of CSL was consistent with the vision expressed by Mr Li when presenting PCCW's 2001 results in March. At a press conference then, Mr. Li defended his controversial plan to pin future growth on providing New Economy-style services in mainland China. PCCW's vision is to "take our core fixed-line business in a mature and competitive market and leverage it with value-added technology that will drive growth - and it is working," Mr. Li said.

Mr Li says that the strategy will pay off down the road by recruiting major Chinese and multinational clients who will eventually turn to PCCW for higher-end consulting and telecom services.

Key brokerage J P Morgan however thinks that the key to the short-term future for the group is cost-cutting, writing in a research note: "We will be looking for signs of PCCW's ability to further cut costs which we believe is necessary given the lack of organic growth in its core business." The note estimates that PCCW has about 13,500 employees, a 7.5 per cent reduction from 14,258 at the end of last year. But last week, chief operating officer Mike Butcher told union leaders there would be no pay cuts or layoffs in the near future.

PCCW's core Hong Kong business is a wasting asset, with competitors and the Internet making inroads into both the volume and the profitability of fixed-line calls. Revenues from fixed-line are expected to fall 3% this year - but it could be more.

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