Will Hutchison’s 3G gamble pay off?

22 Aug 2003

Hong-Kong based industrial conglomerate and telecoms operator Hutchison Whampoa [0013.HK] has said it plans to order three million new third-generation (3G) mobile handsets from NEC and Motorola over the next few months to help fuel an ‘autumn attack’ on the UK and Italian mobile phone markets. The diversified company, which also has interests in property, energy, ports and containers, made the bold announcement as it released its financial results for the first six months of 2003 showing an operating loss of HKD3.9 billion (EUR450 million) from its operation of 3G networks in the UK, Italy, Austria, Australia and Sweden, roughly in line with analysts’ expectations.

Hutchison said it had 520,000 subscribers across its European 3G networks at the end of June, with Italy (300,000) and the UK (155,000) accounting for most of the total. Despite this leaving it well behind its target of one million subscribers in each country by the end of the year, the operator remains bullish about reaching its goals, claiming that its current summer promotional offerings in the UK, Italy, and Australia are being well received. Hutchison’s managing director Canning Fok went so far as to tell reporters yesterday ‘Of course we’re confident of reaching our targets, otherwise why would I order three million new handsets?’. He said that Hutchison was planning to slash tariffs in the UK to as low as GBP15 a month, down from the current entry level contract of GBP25 a month, as well as launching pre-paid services in the fourth quarter.

The Hutchison Group’s total turnover for the fist half of 2003 rose by 41% to HKD65.8 billion, helped by a strong contribution from Dutch retailer Kruidvat, which it acquired last October. The Group said the expected losses in the 3G division were largely covered by a HKD1.9 billion provision, part of a total HKD8 billion set aside for this year’s losses from the unit. From the start of 2004 changes in Hong Kong accounting rules will prevent Hutchison from using such cross-subsidisation measures. Mr Fok said yesterday that the company is planning to bolster its 3G war chest by spinning-off its Indian mobile and Hong Kong fixed line operations, as well as putting some of its property assets into a real estate investment trust.

By the end of June 2003 Hutchison’s UK network comprised 4,300 cell sites covering 70% of the UK population, whilst its Italian network had coverage of 70 of the biggest 100 cities and 50% of the population. Its remaining 3G networks are still largely in their infancy; in Australia its infrastructure covers the biggest five cities via 500 base stations, whilst the Group’s operations in Sweden and Austria have only just undertaken soft launches with network rollout accelerating in readiness for a Christmas promotional campaign. The Swedish network covers most major cities whilst that in Austria covers approximately 30% of the population including major cities like Vienna, Graz and Linz. Hutchison is also planning to launch services in Hong Kong in the autumn, and Denmark just prior to Christmas.

Although it is most unlikely that Hutchison will reach its subscriber targets for the UK and Italy, the analyst community on the whole were impressed with the midterm figures, with many saying that whilst Hutchison undoubtedly will be forced to revise downwards its previous estimates, the subscriber figures are fairly promising given the relative maturity of the Italian and UK mobile markets where growth of 2G services has slowed considerably over the past year to 18 months.

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