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MARKET COMMENTS
The HSI fell for a fourth consecutive day on Monday as investors dumped telecom/tech related stocks. Even ¡¥old economy' stocks, which investors have recently been turning back to, got dragged lower. Among the fallers were C&W HKT and HSBC. Tech stocks were battered as the GEM index closed down 13.1%. Given the sharp falls on NASDAQ the last two evenings, we expect to see further downside for HK stocks.
PCCW (1186) BUY $16.80 Target Price: $29.00
PCCW's share price has fallen 24% since Cable & Wireless agreed to the terms of the HKT takeover deal. The major uncertainties of the group now lie in its post merger debt position and the launch schedule of the NOW network. However, we believe the merger between PCCW and HKT will still proceed. Singapore Telecom, which had also bid for HKT, has seen its share price fall by about 19% during the same period. A termination fee of US$100mn will be payable by C&W to PCCW in the event that C&W does not recommend or its shareholders do not vote in favor of the merger. Although there may be further share price weakness in the short term, we believe that this provides a strong buying opportunity for investors.
On April 3, management discussed the operations and strategies of Cyberworks Ventures (CWV) at an analyst meeting.
Meeting highlights:
CWV, which is the venture capital arm of PCCW, has currently invested US$400mn in a total of 42 companies, excluding the share swap deals. Of these 42 companies, up to twelve are preparing for IPO with over 60 new venture investments being considered. We believe that the IPO candidates include Rediff, SilkRoute and Sina.com. Based on April 3's closing prices, we estimate that CWV has unrealised profits of $1bn from the two recently listed companies, Tom.com and iMerchants.
CWV aims to build the largest and most diverse network of Internet companies in Asia. The company is in a strong position to attract high quality investors, given its first mover advantage, brand name, large scale of operation and potential distribution power.
CMGI Asia, the 50:50 JV between PCCW and CMGI, intends to introduce 23 US-based CMGI companies into the region. Excluding the 18 companies disclosed at end-January, the additional five companies are ThingWorld.com, Raging Bull, WebCT, (content and communities companies), yesmail.com (an e-commerce company) and Speechmachines (an e-commerce enabler).
Pacific Convergence is scheduled to launch its Network of the World (NOW) services in June. The first phase launch includes a portal and free to air TV channel. The group has signed 11 MOUs with cable operators, enabling it to reach 10mn households.
Management declined to discuss the post-merger strategy with C&W HKT, since the group is preparing the scheme of arrangement documents that will be forwarded to the shareholders of C&W HKT by May 18. The merger is expected to be completed by end-June. Although the group has arranged a syndicated loan of US$12bn for the merger, it is aiming to reduce its debt balance to US$3.5bn. It may repay US$3bn by its cash balance and the balance by introducing several strategic partners.
MARKET COMMENTS
The HSI fell for a fourth consecutive day on Monday as investors dumped telecom/tech related stocks. Even ¡¥old economy' stocks, which investors have recently been turning back to, got dragged lower. Among the fallers were C&W HKT and HSBC. Tech stocks were battered as the GEM index closed down 13.1%. Given the sharp falls on NASDAQ the last two evenings, we expect to see further downside for HK stocks.
PCCW (1186) BUY $16.80 Target Price: $29.00
PCCW's share price has fallen 24% since Cable & Wireless agreed to the terms of the HKT takeover deal. The major uncertainties of the group now lie in its post merger debt position and the launch schedule of the NOW network. However, we believe the merger between PCCW and HKT will still proceed. Singapore Telecom, which had also bid for HKT, has seen its share price fall by about 19% during the same period. A termination fee of US$100mn will be payable by C&W to PCCW in the event that C&W does not recommend or its shareholders do not vote in favor of the merger. Although there may be further share price weakness in the short term, we believe that this provides a strong buying opportunity for investors.
On April 3, management discussed the operations and strategies of Cyberworks Ventures (CWV) at an analyst meeting.
Meeting highlights:
CWV, which is the venture capital arm of PCCW, has currently invested US$400mn in a total of 42 companies, excluding the share swap deals. Of these 42 companies, up to twelve are preparing for IPO with over 60 new venture investments being considered. We believe that the IPO candidates include Rediff, SilkRoute and Sina.com. Based on April 3's closing prices, we estimate that CWV has unrealised profits of $1bn from the two recently listed companies, Tom.com and iMerchants.
CWV aims to build the largest and most diverse network of Internet companies in Asia. The company is in a strong position to attract high quality investors, given its first mover advantage, brand name, large scale of operation and potential distribution power.
CMGI Asia, the 50:50 JV between PCCW and CMGI, intends to introduce 23 US-based CMGI companies into the region. Excluding the 18 companies disclosed at end-January, the additional five companies are ThingWorld.com, Raging Bull, WebCT, (content and communities companies), yesmail.com (an e-commerce company) and Speechmachines (an e-commerce enabler).
Pacific Convergence is scheduled to launch its Network of the World (NOW) services in June. The first phase launch includes a portal and free to air TV channel. The group has signed 11 MOUs with cable operators, enabling it to reach 10mn households.
Management declined to discuss the post-merger strategy with C&W HKT, since the group is preparing the scheme of arrangement documents that will be forwarded to the shareholders of C&W HKT by May 18. The merger is expected to be completed by end-June. Although the group has arranged a syndicated loan of US$12bn for the merger, it is aiming to reduce its debt balance to US$3.5bn. It may repay US$3bn by its cash balance and the balance by introducing several strategic partners.
