PCCW Turns The Corner

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

21 March 2002

Pacific Century Cyberworks (PCCW) has reported a profit for 2001 of US$243m, representing a sharp turnaround from the previous year's US$885m loss. PCCW has focused on the operations of Hong Kong Telephone, which it bought from Cable and Wireless in 2000 in a controversial US$28.5bn deal, and which provides 91% of its revenues.

In the last year PCCW has cut operating costs 9%, reduced capital expenditure 41%, improved ebitda by 4%, and reduced net debt to US$4.9bn from US$7.7bn a year before. The profile of the remaining debt has been restructured, raising the average maturity to six and a half years.

The company said it was aggressively expanding its residential broadband Internet service, which grew 43% to 400,000 subscribers last year and is now profitable. Overall revenue was up 6% last year, at $2.82 billion.

Before the earnings figures were released, PCCW shed 2.4% Wednesday on the Hong Kong stock exchange to finish at 2.03 Hong Kong dollars (26 US cents), after rising 6.4% in the previous two sessions. The share price has lost 94% of its value since the heady days of the Hong Kong Telephone takeover, making it look like one of the most successful LBOs ever staged, especially since it now looks as if the gamble has paid off and PCCW will survive.

"We come into 2002 with stronger, more efficient operations and a renewed commitment to enhancing shareholder value," said Richard Li, the 35-year-old chairman and chief executive of PCCW , and its largest shareholder with 37%.

At a press conference, 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 told reporters.

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.

There has been plenty of market scepticism about Richard Li, but the man appears undeterred. Appearing more relaxed in front of reporters than he has been for months, Mr. Li sought to put to rest speculation he may step aside as CEO. "There is currently no plans to have the CEO position offered-not in the short term," he said, later adding: "I feel very much in place in PCCW today."

PCCW's return to earth after its dot-com adventures certainly does highlight the anomalous sight of a quintessential new economy deal-maker in charge of a fusty old telco. Although Mr Li now wears a suit and tie, at least when presenting his company's results, his twin loves of deal-making and high-technology won't go away. Company insiders say he spends his time on his new technology initiative on the mainland rather than on the affairs of the core fixed-line division.

Still, analysts say that Mr. Li deserves credit for the company's shift back to basics, even if he spends little of his own time on it. Last April, Mr. Li hired Frederick Ma, a family friend, to serve as board member and personal adviser to help streamline the business. Mr. Ma has been responsible for most of the cost-cutting that has taken place, and says that there is more to come.

So PCCW's shares are still a bet on Richard Li, although a much less risky one than a year ago. Analysts say the company, with $1 billion in cash, is on a strong enough financial footing that even if Mr. Li's latest China venture were to flop, PCCW wouldn't be seriously dented.

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