Hutchison's 3G loss offset by asset sales

Tony Munroe

HONG KONG: Ports-to-telecom conglomerate Hutchison Whampoa Ltd. said its first-half net profit doubled as exceptional gains from asset sales offset deep losses at its third-generation (3G) mobile phone unit.

Hutchison, which Asia's richest businessman Li Ka-shing built into a global empire through avid buying and selling of businesses, said its six-month profits were bolstered by net exceptional gains of HK$15.06 billion (US$1.93 billion).

Profit was also buoyed by strength in its retail and property arms and its container ports operations, the world's largest.

Group Managing Director Canning Fok said the company is confident about its 3G development and targets.

"We feel very confident that our breakeven will happen in 2005," he told reporters at a results-briefing.

Hutchison reported net profit of HK$12.5 billion for the six months through June, compared with HK$6.07 billion in the same period a year earlier. Six analysts polled by Reuters had forecast on average that Hutchison would post net profits of about HK$13.03 billion.

"I think the results are good news. They had a relatively weaker bottom line because of high 3G user acquisition costs because there were more subscribers," said Rob Hart, analyst at Morgan Stanley.

Hutchison sold its 20 percent stake in a China joint venture with consumer goods giant Procter & Gamble Co. in May at a profit of HK$13.7 billion. It also earned about HK$1.3 billion from selling shares in its Hutchison Global Communications Holdings Ltd. unit, then known as Vanda Systems.

Those gains were offset by a first-half loss on its 3G business of HK$12.24 billion on an EBIT basis. Citigroup had forecast 3G EBIT losses of about HK$12.65 billion, while Merrill Lynch expected a HK$14.05 billion EBIT loss on 3G.

Investors, long skeptical of Hutchison's US$22 billion commitment to commercially unproven 3G, expect further one-time gains to smooth startup losses for the service when the company spins off its emerging markets telecom units in what sources have said could be an October IPO worth up to US$2 billion.

The company said it intends to complete the listing in the second half of the year if market conditions are favourable.

"It's really a bloodbath in terms of 3G losses. 3G has been a disaster for Hutchison, they won't turn a positive cash flow for some time which means it will need to find asset sales next year to cover 3G," said Francis Lun, general manager at Fulbright Securities.

Sister property firm Cheung Kong (Holdings), which owns nearly half of Hutchison and generates the bulk of its earnings from its stake in the conglomerate, said its net profit almost doubled as its development business enjoyed a boost from a reviving Hong Kong real estate market.

Cheung Kong's earnings of HK$7.75 billion were slightly ahead of the average profit forecast of HK$7.56 billion of three analysts polled by Reuters.

Hutchison, which has slashed fees to spur user growth at its 3G operations in Britain, Italy, Hong Kong and elsewhere, said subscribers to the multimedia-enabled service totaled 3.2 million as of this week, compared with 1.73 million in May.

Nomura had forecast Hutchison would report roughly 3 million 3G users, while Macquarie Securities' target was 3.3 million.

A widening range of 3G handsets, led by a popular model from South Korea's LG Electronics Ltd., is helping spur user growth, although analysts believe Hutchison's subscriber acquisition costs are far higher than the industry average.

Shares in Hutchison, battered by the firm's 3G bullishness for four years, fell 7 percent in the first six months of the year, under-performing the Hang Seng Index, which fell 2.3 percent in the period.

The stock has enjoyed a recent rally on hopes of improving 3G user numbers, as well as a network-sharing agreement it recently struck in Australia with rival Telstra Corp.