Hutchison Whampoa Fails to Reassure, but Pleases Vodafone Investors

TOKYO -- Hutchison Whampoa (HUWHY:OTC BB) did not necessarily reassure its own shareholders regarding its European third-generation, or 3G, mobile-phone strategy when it released earnings earlier today, but it did boost the spirits of Vodafone Group (VOD Quote) investors.

This took short-term pressure off the U.K.-based mobile-phone operator, the largest in the world and a part owner of Verizon Wireless, which today announced it would look to raise $5 billion in an initial public offering. Vodafone was up nearly 3% to 2.62 in late afternoon London trading Thursday, while its ADRs were up a nearly similar amount by midday in New York.

Yet, market observers caution that Hutchison's lockup on its Vodafone shares expires in September, adding the opportunistic conglomerate is not likely to be a long-term shareholder. The company, chaired by billionaire Li Ka-shing, is known for cashing in on savvy telecom plays.

An example of this prowess was seen in the company's first-half results released today, which were bolstered by the HK$50 billion in profit Hutchison booked as a result of the sale of its stake in Mannesmann to Vodafone earlier this year. As a result, profit including the exceptional gain increased four-fold to HK$31.13 billion ($3.99 billion), vs. profit of HK$7.31 billion in the same period last year. The Mannesman gain was offset by a HK$30 billion charge for investment and exchange rate fluctuations, the company said.

The profit jump didn't have investors cheering however, as they were below expectations of about HK$45 billion. And investors were also grumbling because neither Li nor managing director Canning Fok outlined the conglomerate's European telecom strategy as they had hoped. They also gave scant explanation for Hutchison's decision to pull out of a consortium that won a German 3G mobile-phone license last week. The consortium consisted of KPN Telecom, Bell South (BLS Quote) and indirectly NTT DoCoMo, which holds a 15% stake in KPN. Hutchison's withdrawal has reportedly strained Hutchison's alliance with KPN and NTT.

Rather than go into a detailed discussion of European wireless strategy, Li reiterated the company's earlier statement that it withdrew from the license because of the hefty price tag that came with it.

"In Europe, we are still very aggressive but [most] importantly, we must have a budget," Li says. "We do not have the ability to cover everywhere in the world, or each country in Europe, but if it fits into our budget we will bid for 3G licenses."

Analysts said the uncertainty is likely to dog Hutchison's share price for some time. This is bad news for shareholders, who have seen the stock lose 35% of its value since June, and for the Hong Kong market, because the conglomerate accounts for 12% of the Hang Seng index. Hutchison's closed down a point Thursday to HK$111.50, which was below the stock's 50-day moving average.

The one pressing item Hutchison did clear up was the issue raised in local press reports that the company is now locked out of Germany's 3G market for two years due to a contractual prohibition on competing with KPN. "We can get back into Germany at any time," Fok says.

But Simon Rogers, an analyst at UBS Warburg, says Hutchison needs to clear the air on other matters: It must formally announce its bidding partners for upcoming 3G licenses in France and Italy, while clearly stating who exactly is in charge of its European telecom operations, he adds.

A potential bright spot for the company, Rogers says, is that "the future sale, or sales, of Hutchison's stakes in European 3G licenses to strategic partners," will always help the share price. Rogers has a buy rating on the stock and a 12-month price target of HK$135.

But it's exactly that last point that will keep Vodafone shareholders guessing in the months to come.

Reporters at TSC's sister site, TheStreet.co.uk , contributed to this article.