In a good show of business prowess, Pacific Century CyborgWorks reported growth in sales and a decline in losses. "We are seeking to become one of Asia's leading integrated technology, communications and media companies," the announcement said. "Our aim is to build on our expertise and knowledge of digital technology, communications and new media to become a leader in Internet infrastructure, content and services."
PCCW Interim Numbers
For the six months ending June 30, 2000, turnover jumped 40% year-on-year from HK$74.2 million to HK$104 million while net loss narrowed 12.5% from HK$40.7 million (8.81 cents per share) to HK$34.9 million (0.34 cents per share). No dividend was declared.
"The consolidated turnover ... (increased) 40.2% ... due to the substantial change in the nature of the Group's business since it was acquired by the Pacific Century Group on 3 August 1999 and in particular the contribution of approximately HK$32 million from the property operations of the Company".
Interim Results, HK$'000
2000
1999
Turnover
$104,027
$74,185
COGS
($42,762)
($36,752)
Gross Profit
$61,265
$37,433
Investment Inc.
$209,896
$668
Other Inc.
$352,430
$3,952
Admin Expense
($326,268)
($77,788)
Finc Costs
($263,451)
($3,966)
Operating Profit
$33,872
($39,701)
Jointly Controlled Entitities
($19,299)
Associates
($49,631)
($711)
Pre-Tax Profit
($35,058)
($40,412)
Tax
($3,446)
($1,112)
After-Tax Profit
($38,504)
($41,524)
Minorities
$3,569
$813
Net Income
($34,935)
($40,711)
And as for the loss, Mr. Li via the announcement proudly stated that "the loss for the period is mainly due to the amortization of the arrangement fee for the loan facility for the acquisition of HKT." Shareholders in PCCW must now be very pleased to find that the loss was purely the result of the arrangement fee and thus surely is profitable, no doubt beating the negative comments of certain pundits.
One might like a little more disclosure, however, of exactly what made up those categories of "investment income" and "other income."
The Phone Connection
In an interesting twist that some dissenters -- those who obviously do not have the vision to see Mr. Li's vision nor the wisdom to understand the tremendous paradigm shift the PCCW represents -- will find perhaps troubling is how Hong Kong Telecom was somehow left out of the income statement. Of course, the merger / takeover did not take place until August 17, after the end of the reporting period, so HKT was not a part of PCCW at that time. Presumably, HKT's results will be announced separately later? There was a P&L statement provided which showed PCCW's new crown jewel posting a 1.3% Y.O.Y increase in revenue while operating profit declined 3.2% and EBIT declined 5.2%. Strangely, there was no net income figure. Of course one does not expect more write-offs from HKT like they had last year, but still ...
Interim Results, HK$ Million
2000
1999
%Change
Revenues:
Local Telecom
$5,357
$4,754
12.7%
Internet & IMS
$631
$435
45.1%
Int'l Telecoms
$5,012
$5,863
-14.5%
Mobile
$2,692
$2,421
11.2%
Other
$446
$486
-8.2%
Total Revenues
$14,138
$13,959
1.3%
Operating Costs
Cost of Sales
($4,287)
($3,934)
9.0%
Overhead
($5,655)
($5,689)
-0.6%
Total Operating Costs
($9,942)
($9,623)
3.3%
Op. Profit
$4,196
$4,336
-3.2%
EBIT
$5,658
$5,969
-5.2%
"HKT continues to drive growth from new services," sang the report, "and this has resulted in a 1.3 per cent increase in turnover for the (period) compared to a 19% decline for the corresponding period in 1999." Though the base may look small to visionless detractors at just 4.6% of revenues, this 45% growth area was powered forward by 75% growth in the number of subscribers. Pricing pressures are no concern to an Internet leading building market share. Even more outstanding was the mobile services division with average revenues per contract customer powering forward at 4% per year.
Though revenue from retail IDD was just 11% of turnover, about HK$1.55 billion, the company said its share of the retail market had stabilized and gross margins for IDD had been sustained through achieving substantial reductions in its wholesale international connectivity costs.
Beyond the Announcement
Not mentioned in the printed results announcement but discussed during the results PR event, however, were a few observations that perhaps even sophisticated, forward-thinking supporters should be concerned about. Two accounting changes apparently allowed the next Microsoft to reduce the losses they otherwise would have reported. This seems so out of character with Mr. Li that one can hardly believe it.
One change involved reclassifying certain long-term holdings as short-term investments. This was mainly a 3.8% interest in Tom.com (HKGEM: 8001) and some CMGI (NSDQ: CMGI). By doing so, investment gains of HK$562 million were posted with HK$510 million of that being the unrealized Tom and CMGI gains. We are not exactly sure where that gain was recorded on the P&L since the company recorded investment income of HK$209.9 million. Could there perhaps have been a decline in the share prices of previous investments which allowed the company to post a small net profit in 1999 from unrealized gains when it otherwise would have posted a loss of several hundred million dollars? Though we are not sure, it would seem the other investments lost perhaps around HK$350 million.
Mr. Li reminds us of another great character, Mr. George "Read My Lips" Bush. On March 20, the company stated that Tom.com and other such investments were for "long-term strategic policies" and that it was definitely not the company's policy to "book unrealised gains on investment securities."
Another change was the treatment of the grand NOW. The US$130 million (HK$1 billion) used on developing Network of the World was capitalized instead of expensed., Capitalizing a large expenditure is usually more common for capital investments -- factories and the such -- rather than launching a fancified Web site. The result is that earnings were rather less punished.
Without the two changes, losses just might have been larger with HK$1.5 billion a figure
bandied about.
In addition, some investors might wish for more clarification of where the "other income" of HK$352 million came from, but Dow Jones reported that HK$345 million was interest income from two share placements earlier this year. Dow Jones also reported operating costs of HK$590 million affected PCCW, but this amount was not exactly spelt out anywhere clearly in the results announcement.
Other Stuff: Unicom and Telstra
The company in its press conference decided to focus on exciting new developments instead of boring losses. Telstra is still on, according to the company, though word on the street is Telstra may back out unless the conversion price for their convertible bond is far closer to HK$9 than the current strike price based on valuations when the market was, well, happier with PCCW. Telstra also has to deal with its ratings being cut by Standard & Poor's because of its high-risk investments. This could not mean PCCW, but some other Australian venture.
PCCW also announced it is teaming up with China Unicom (HKSE: 0762) in a PRC yellow-pages venture. PCCW will spend HK$200 million for a 38% stake in ChinaBig.com, a PRC business directory outfit. Unicom will take a 31% stake. Cyberworks claims the venture will generate HK$800 million in revenue next year, and sure this should provide even more reason to smile for CyberWorks fans since Cyberworks' share alone is already more than its own entire revenue stream!
What About Richard's Sale of Shares?
Investors should not worry if they have faith that Mr. Li will do the right thing for the company and for the millions of faithful followers.
When he dumped HK$3.8 billion worth of his shares on August 9 he was not to know that the Gigamedia and CMGI plans sere to be scrapped, but they had not appeared to be working out. Both deals fell through about a month later. Mr. Li said he didn't feel the price decline was affected by the deals.
At HK$9 per share with 21.2 billion shares outstanding, the capitalization is over HK$190 billion. Perhaps a certain amount of bullishness toward this stock and its owner is warranted -- after all, there is a certain amount of bullish substances emanating from that direction.
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