Bleeding the Millions of Li Ka-shing

Jan 06, 2009
*Special to asia!

With his investment in 3G technology bleeding red ink, Li Ka-shing makes sure he pays his lieutenants well to keep it afloat.

But Li decided to carry on, claiming he firmly believed in the future of 3G. This was despite contrary evidence showing that 3G phone services were rapidly being replaced by something faster and newer. Perhaps what really firmed up Li's resolve was the knowledge that his infallible reputation — he was, and still is, called "Superman" by Hong Kong's adoring public, who think they would not lose money buying shares in his companies — would take a huge beating if he gave up on 3G. In his 70s and already a rich man beyond belief, reputation would matter as much, if not more, to Li than mere money.



o 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.

lee han shihLee Han Shih is the founder, publisher and editor of asia! Magazine.


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