3G to drag down profits for Hutchison

March 17, 2004

Hutchison Whampoa is expected to post lower profits as the heavy burden of its 3G venture overshadow the gains in its other businesses. The company, which is spending Euro 18 billion on 3G networks, will report 2003 results on Thursday. Analysts predict around a 12% drop in profits from a year earlier.

Hutchison began commercial 3G networks across Europe and Australia in 2003 but handset problems and poor network coverage plagued its sales. In November, the firm pushed back its 3G break-even target by one year to 2006 because of handset shortages. Late delivery of handsets during the Christmas period also ended hopes of finishing the year on a high.

The firm has been aggressive with its price cuts to lure users and aimed to have 1 million subscribers in each the UK and Italian market. They fell short and ended up with less than 1 million 3G subscribers globally.

Hutchison deepened its commitment to its 3G business in the UK after KPN pulled out of the venture in November. NTT DoCoMo, which is holding a 20% stake in the UK operation, is also eager to withdraw. Hutchison is planning to pay back £1.5 billion of bank loans for the UK operator one year earlier than required to lower interest costs.

Hutchison's container ports operation, retail divisions and energy business are forecasted to report a raise in profits. The company is expected to sell some of its assets to offset losses in 3G for 2003 and also the next two years.

Hutchison could gain around HK$3.5 billion for the recent sale of its Hong Kong fixed line phone business to affiliate Vanda Systems. (£1 = HK$13.4350) It may also generate HK$2 billion from the sale of its stake in Vodafone and Deutsche Telekom.

Hutchison might release reserves from the sale of stakes in its UK venture in 2000 to cover losses of its phone business.

Future gains could come from asset sales such as the expected initial public offering this year of its Indian mobile phone unit and selling its 36% stake in Canada's Husky Energy.

The real test will be later in the year when rival operators begin selling 3G services. Hutchison has enjoyed unrivalled possession of the 3G markets in most countries and the arrival of other 3G operators could be a difficult time for the company. The danger could be if Hutchison decided to be more aggressive with its pricing and handset subsidies, it could virtually wipe-out its profits.