ASIA!

So Li ploughed on, putting more and more of Hutchinson's money into the venture. As of end-2007, Hutchinson had invested around US$25 billion in it, and not got a single cent in return.

Most companies would have gone down given such a massive bleeding. Hutchinson managed to stay above water through a series of timely and adroit asset sales, which raised billions that quickly went into the 3G ventures. This included a 20% sale of Hutchinson's container ports worldwide to rival PSA in Singapore for US$4.4 billion, and its 10% stake in Procter & Gamble's China operations back to the consumer goods giant.

In late March, Li met reporters to brief them on Hutchinson's 2007 results. For the full year, Hutchinson had a net profit of HK$30.6 billion, up from HK$20 billion a year ago. While this looked impressive, nearly all of the profit came from the sale of a highly profitable 2G mobile phone business in India, and very little from continuing operations. Take away asset sales and Hutchinson's profits were whittled down to a few billion dollars, Hong Kong, the result of improved performance from its oil division due to rising oil prices.

Li, who always appears optimistic about his 3G ventures, was not out of form during the briefing.

"The 3G business is no longer a burden to us. It may become our most profitable and fastest-growing business,'' he said. Li's optimism is based on the fact that last year Hutchinson's 3G business lost only HK$17.9 billion before tax and interest — lower than the HK$20 billion lost in 2006, and the much higher levels in previous years.

Li said that some time in the second half of this year, the 3G business should "achieve positive monthly earnings before interest and tax on a sustainable basis''. As of March, the business had 15.8 million subscribers in Italy, the UK, Australia, Sweden, Denmark, Ireland and Austria. This was up from 14.5 million a year ago, the result of Hutchinson opening more stores and giving more sweeteners to would-be customers.

Many analysts do not share Li's sanguine view. "The numbers show the 3G operations have stabilized, and are becoming self-sustaining,'' said Alexander Chia at the Kuala Lumpur office of rating agency Standard and Poor's Equity Research. "The question is whether the rate of improvement can continue." In a nutshell, Chia is saying he doesn't know whether Hutchinson has turned the corner despite the improvement. His recommendation of Hutchinson as a "hold" — polite finance parlance for "don't buy" — reflects the uncertainty.

But even if Li is right and the 3G arm manages to "achieve positive monthly earnings before interest and tax on a sustainable basis'', it may mean very little. Many companies like to measure their performance at the level before interest and tax on grounds that changing interest and tax rates make year-to-year comparison inaccurate. The actual reason may be that it makes the numbers look much better than they actually are. Whatever the rationale, interest and taxes are real. Sustainable profits before tax and interest could turn into huge losses — especially for a capital-intensive business like 3G — when the items are accounted for.

Li may argue that EBITDA — earnings before interest, tax and amortisation — is the best way to look at his 3G business. Warren Buffett, two years younger and twice as wealthy (Buffett is worth US$52 billion, Li about US$26 billion), has a different perspective.

"We'll never buy a company when the managers talk about EBITDA. There are more frauds talking about EBITDA. That term has never appeared in the annual reports of companies like Wal-Mart, General Electric, Microsoft. The fraudsters are trying to con you or they're trying to con themselves. Interest and taxes are real expenses. Depreciation is the worst kind of expense: You buy an asset first and then pay a deduction, and you don't get the tax benefit until you start making money. We have found that many of the crooks look like crooks. They are usually people that tell you things that are too good to be true. They have a smell about them," he said.

Perhaps it is lucky for Li that most analysts are enamoured with EBITDA and tend to accept Hutchinson's numbers at face value. But even then, they have other concerns, primarily about whether the 3G business is still viable.

The telecommunication business is arguably the most competitive and volatile on earth. Companies that are in the forefront of the business can, in a year or two, find themselves overtaken by smaller rivals armed with newer and better technology or better products. Motorola, once the No. 2 phone maker in the world, is a good example. The American company fell on hard times when it failed to come up with equally popular products after the best-selling Razr ran its course. Things are so bad that when Motorola tried to sell its phone division earlier this year, it found no takers.

Where Motorola goes, Hutchinson seems likely to follow, but with a different twist. Li is not a technology man and relies on input from his many highly paid tech gurus for decisions in high-tech business. In 1999/2000, Hutchinson was caught in a hostile bid against Vodafone of Britain for Germany's Mannesmann. The bid was launched soon after Hutchinson had agreed to sell its UK phone business to Mannesmann for shares, making it the biggest shareholder of the company. Vodafone's bid raised Mannesmann's share prices and, after it went through, Hutchinson pocketed billions of dollars in profit from the sale of its Mannesmann shares. That was the first time Li had done such a high-profile deal, and a  spectacularly successful one, too, which led the British and American media to praise him as an international businessman with great foresight. Thus encouraged, Li decided to take the profits from the deal to build a much bigger telecom business on the 3G model.

3G gives faster connectivity and multiple services. The problem is that most consumers do not seem to want them, or not at the price charged by the providers. In Europe, mass-market commercial 3G services officially began in March 2003 when 3 (a Hutchinson unit) launched the services in the UK and Italy. Studies by the European Union Council predicted that within two years, 80% of the population of Europe would be using 3G. As Hutchinson was the biggest 3G provider in the EU, its future looked very bright indeed.

Unfortunately the rollout of 3G was delayed by a number of factors, primarily the huge cost of additional spectrum licensing fees since 3G in most countries does not share the same radio frequencies as the much cheaper 2G. Today, there are nearly 4 billion mobile-phone users, and barely 300 million of them are 3G subscribers. This is hardly surprising. In the five years that 3G has been in the market, technology has moved beyond it to 3.5G and 4G, as well as other wider and cheaper modes of communication such as wireless broadband. When these services are commercialised, 3G could be as good as dead.

But try telling that to Li Ka-shing who still insists that 3G may "become our most profitable and fastest-growing business". This sounds like the 80-year-old multi-billionaire is digging in for a last ditch fight in the biggest gamble of his life. Of course, the people doing the actual fighting would be Canning Fok, Dennis Lui and Susan Chow. Every year, or even every month they can hold the 3G business above water means that it gives Hutchinson more time to stave off the evil day when it will have to write off the billions it has put into the business. Compared to the stakes involved, what Li has paid them is pittance indeed.

 

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