Hutchison-Whampoa Investors: What's Up With the European 3G Strategy?

TOKYO -- European wireless strategy, not numbers, will be high on investors' radar Thursday when Hutchison Whampoa (HUWHY:OTC BB) reports first-half fiscal earnings.

Investors are hoping that Hong Kong's top industrial conglomerate and Li Ka-shing, its powerful chairman, will explain their abrupt about-face last week in regard to a German third-generation mobile-phone license. Within hours of winning a license last Thursday, Hutchison pulled out of a consortium with Holland's KPN Telecom, BellSouth (BLS) and indirectly NTT DoCoMo, which has a 15% holding in KPN. Hutchison said the $7.5 billion price tag was "too high and not cost-effective."

But investors want a better explanation than that, and also want to know how the conglomerate will secure its place in the European third-generation, or 3G, wireless market.

"No doubt I have questions about Hutchison's long-term strategy after the German pullout," says Edmund Harris, fund manager for the (GFCHX)Guinness Flight China & Hong Kong fund, which is up 5.5% year to date. Hutchison accounts for nearly 15% of the fund's holdings. "Everyone wants to know what they plan to do about their telecom operations after this stunt."

The uncertainty surrounding the pullback has caused Hutchison's shares to ease about 4.2% in the past week. The shares closed today in Hong Kong at HK$112.5, a decline of 1.32% for the day.

The slide is bad news for foreign fund managers who invest in mainland China and Hong Kong shares because Hutchison accounts for 12% of the Hang Seng index and is present in most portfolios. For example, it currently makes up about 6.7% of the (NGCAX)Liberty Newport Greater China fund and around 8.6% of the (WEHKX)Wright EquiFund Hong Kong fund, according to fund tracker Morningstar. For Asia-Pacific funds, which are down an average of 6.8% year to date, these two funds are sporting returns of 18.6% and 8.1%, respectively.

While such funds will be closely watching how Hutchison explains its moves, analysts are split on whether the company has acted rashly.

"In the end, Hutchison made a wise decision," says James Loh, an analyst at Typhoon Eight Research. "With seven competitors [including Hutchison], that means the market penetration for each firm is at around 40%", which is lower than what any telco expected before the auction started.

Harris agreed that the number of new entrants in the auction was more than expected, which could result in higher competition and lower revenue.

Loh reckons Hutchison's shares could rise to around HK$120 in coming months and is forecasting a price target of HK$145 within a year.

Others are more critical. "It may be difficult for Hutchison to convince investors that it can create value by building a pan-European, 3G operation without an equity interest in one of Europe's largest 3G markets," says Salomon Smith Barney analyst Anil Daswani -- especially after the conglomerate just weeks earlier had told investors it was committed to a pan-European, third-generation mobile network. Daswani says the stock is fairly valued at its current level.

But those who have not lost faith point out that Hutchison still has several options to get back into the German mobile market. Its alliance with KPN, while perhaps strained, still exists, so Hutchison may be able to rent network space through this. It also may be able to secure a stake in KPN Mobile, a subsidiary the Dutch company is planning to float this fall.

Or billionaire Li may be able to cut another deal with another operator. He has a knack for striking lucrative alliances, as will be seen in the first-half results scheduled for release Thursday.

Daswani expects the conglomerate to post group net profit of HK$44.9 billion. This will include a net exceptional gain of HK$37.7 billion from the company's sale of its 10.2% stake in Mannesmann to Vodafone AirTouch (VOD) earlier this year. And beyond such deal-driven, one-off profit stimulators, investors point out that Hutchison's diversification may be its true strength. Port container operations account for about 30% of profits, 25% from investment income and 15% from utilities. The remainder is spread over a variety of other areas.

So even if a crystal-clear explanation for the German about-face isn't forthcoming on Thursday, fund managers such as Harris are unlikely to dump their shares. "I still like the stock over the long term, since they have other operations they can fall back on, unlike other telecom firms," he said.

Still, investors will sleep a bit easier if Hutchison gives them some clue of its plans in the wireless arena.

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