Expectations Low as Hutchison 3G Launch Nears

Hutchison Whampoa is approaching the moment of truth for its multi-billion dollar gamble on third-generation mobile telecoms, with many investors betting on a rare failure for Asia's richest tycoon Li Ka-shing.

The conglomerate, which also has vast retail and property holdings and is the world's biggest container ports operator, is expected to launch its 3G service commercially in the United Kingdom and Italy some time in January, following a low-scale rollout to "friendly" users that began in October.

Some watchers said Hutchison, whose shares have been devastated by its contrarian enthusiasm for 3G, will have three to six months from its commercial launch dates before investors decide whether its unproven multimedia wireless business is a bust or not, while others give the company a year to make its case.

Expectations for Hutchison's 3G prospects are low.

"We still believe that the 3G investment is likely to be significantly shareholder value-destroying," Credit Suisse First Boston wrote in a research note, putting a fair value on the firm of HK$44.50 (3.6 pounds) per share.

Hutchison shares, which had rallied in recent weeks, fell 1.45 percent on Monday to close at HK$51. The stock is down 32.6 percent in the past year, and is 63 percent below a peak of HK$139.50 reached in early 2000.

"The good news is that most of the bad news is in the price already," said Nomura International analyst K.Y. Ng.

Still, there's room for downside disappointment because some believers hold out hope that Li will manage once again to vindicate his reputation as a masterful investor.

Even under the worst-case scenario, many watchers expect Hutchison will be able to extract at least some value from the US$16.7 billion it has committed to spending on its 3G networks in the UK, Italy, Sweden, Denmark and Austria through 2005.

No one expects the 74-year-old Li, who earned the nickname "Superman" for his prescient market-timing, to throw good money after bad if 3G proves to be a lemon.

"It's not completely priced in because some people will give the benefit of the doubt because it's Hutchison," said Ng.

Bear Stearns, for one, has a 12-month price target of HK$40 and an "underperform" rating on the stock, while DBS Vickers rates the stock as "fully valued" and recommends investors re-enter at HK$39, a valuation that excludes its telecoms assets.

THINKING BIG

Hutchison has said it aims to enlist one million users each in the UK and Italy for its "3"-branded service by the end of 2003, targets regarded as aggressive given the premium pricing for 3G phones and services and the fact that Hutchison must lure subscribers from their existing mobile carriers.

Under the assumptions of bank covenants, Hutchison's 3G networks in the UK and Italy would break even by 2005 on both an EBIT and EBITDA basis (earnings before interest, taxes, depreciation and amortisation).

The precedent set by Japan's NTT DoCoMo, the only commercial 3G operator using the WCDMA standard that Hutchison will use, is not encouraging.

More than a year after launch, just 140,000 users have signed up for DoCoMo's FOMA service, even though gadget-friendly Japan is a bigger country than either of Hutchison's two launch markets. Short handset battery life and initially insufficient network coverage served to crimp early 3G demand in Japan.

Goldman Sachs said in a research note that if Hutchison manages to attract 100,000 users each in Italy and the UK by mid-year, generating monthly per-user revenues of about 60 euros and 50 pounds, respectively, investors would consider it a "satisfactory consumer response."

RISK IN COST, TIMING

Those monthly average revenue per user (ARPU) levels are the same as those generated by incumbent cellular carriers in the two markets from their contract customers, Goldman Sachs said.

Edmund Harriss, fund manager at Investec Asset Management, which overseas about US$25 billion globally, said the biggest risk for Hutchison's 3G launch is that it takes longer and costs more money than expected.

"I don't think it will be a failed investment," he said.

"The more realistic problems are that there's a slippage in terms of their launch, by which time Vodafone and all the rest will all be approaching their launch dates as well, so that instead of them being an outright leader they are going to have to compete with incumbents," he said.

According to Italian press reports, Hutchison has thus far attracted 30,000 pre-orders for 3G service in that country.

Hutchison's Italian operation recently unveiled two introductory pricing plans.

Under one, customers will pay 85 euros per month -- far more than most contract customers there now pay for mobile service -- for 40 hours of voice calls and 40 hours of video calls, plus about 400 content downloads, such as soccer goal video clips.

The other Italian plan costs 140 euros a month and comes with a free handset. According to Merrill Lynch, this implies that a handset costs roughly 660 euros each.

Pricing for the UK service is expected to be revealed soon.