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02 Feb 2005
MOODY'S AFFIRMS HUTCHISON WHAMPOA LTD'S A3 RATING; OUTLOOK CHANGES TO STABLE FROM NEGATIVE
Hong Kong, February 02, 2005 -- Moody's Investors Service has affirmed the A3 debt ratings
of Hutchison Whampoa Limited (HWL) and its guaranteed subsidiaries and
affiliates. Moody's has also changed the outlook on their
ratings to stable from negative.
Moody's says that the outlook change reflects an increasing likelihood
that HWL will achieve -- within the next two years -- financial
metrics more appropriate for its credit rating. This outlook is
driven by: 1) a strongly improving operating profile for its 3G
business with good prospects that it will achieve EBITDA breakeven this
year and become free cash flow positive within the rating horizon;
2) continued strong cash on balance sheet retention; and 3) ongoing
stability and growth in its established businesses. As a result,
the likelihood of a downgrade in the next 12-18 months has declined
significantly, such that a stable outlook for the rating is now
The HWL group companies that the outlook change applies to are:
Hutchison Telecommunications Australia Ltd
Hutchison Whampoa Finance (CI) Limited
Hutchison Whampoa International (01/11) Ltd
Hutchison Whampoa International (13/13) Ltd
Hutchison Whampoa International (03/33) Ltd
Moody's notes that HWL's 3G business is now approaching a
point where key execution risks and the risk of significant failure are
diminishing. Brand value for the business has been created and
subscriber growth at H3G -- particularly in the key markets of Italy
and UK -- has been encouraging. Subscribers currently totaled
6.8 million, a significant rise from a very low base of less
than 700,000 subscribers as of the beginning of 2004.
The momentum in subscriber growth has been strong, indicating better
acceptance of the new 3G technology. As a result, it now
has a reasonably meaningful customer base, which it can leverage
to expand market share and generate cost synergies. Consequently,
there appears to be a very good likelihood of EBITDA breakeven being achieved
for the 3G business this year.
Moody's notes, however, that increasing competition
in H3G's core markets -- as incumbents roll out both their
own 3G services and step up customer retention initiatives -- has
resulted in lower-than-expected monthly ARPUs and net margins,
as well as higher-than-anticipated customer acquisition
costs (CAC). Nevertheless, the higher number of subscribers
should compensate for the lower ARPUs, such that total 3G revenue
and EBITDA (before CAC) are anticipated to be largely in line with expectation.
This trend supports Moody's belief that H3G is in a reasonably good
position to attain EBITDA breakeven - as targeted in 2005 -
given increasing awareness and acceptance of and migration to 3G.
The further expansion of its subscriber base will provide economies of
scale, enabling cost savings.
A continuing concern is the fact that CAC remains higher than expected,
resulting in larger-than-expected FCF deficit. Additionally,
Moody's expects CAC will stay high as H3G seeks further expansion
of its market share, in face of rising competition. As a
result, its peak funding requirement is likely to increase,
but not materially beyond our expectation. And even if this were
to occur, Moody's anticipates that H3G would still attain
free cash flow breakeven no later than 2007.
Moody's says that HWL's A3 ratings continue to reflect ongoing
stability of cashflow generation from its established businesses,
supported by its well-diversified business portfolio and the strong
competitive position these businesses enjoy in their respective markets.
In addition, HWL's A3 ratings remain supported by management's
commitment to retaining substantial balance sheet liquidity and the ongoing
solid operating fundamentals of its established businesses, including
sound growth in operating cash flow as well as prudent financial and funding
Its sizable liquidity reserve of over US$17 billion serves as a
strong cushion against unexpected results for its 3G business.
HWL intends to retain such a reserve until the execution risk of 3G has
passed and has established a track record of doing so. As a result,
Moody's looks at net leverage when it is assessing financial risk
for HWL. The reserve's stability has also risen as most of
it is now in the form of cash and high-grade bonds. Moreover,
HWL's refinancing risk -- due to refinancing already completed
-- has fallen. Consequently, its debt maturity profile
has undergone a significant extension with only 21% now due between
2005 and 2007. Furthermore, almost 50% is due after
HWL's FY2004 financial profile is expected to remain significantly
and materially impacted by its substantial 3G capex requirements as well
as investment and start-up losses. In FY2004, net
leverage is expected to increase to approximately 32% and GCF/Net
Debt and RCF/Net Debt decrease to around 11% and 4% respectively.
Meanwhile, GCF/Gross Interest is also expected to fall to 2.3x
from 2.7x. Moody's looks at gross cash flow measures
for HWL because gross cash flow is a better indicator of the company's
underlying cash flow as it captures the recurring dividend cash flow,
instead of equity income of HWL's affiliates. The company
continues to report substantial negative FCF due to its investment in
However, as H3G increases operating cash flow through further subscriber
expansion, and barring any irrational competitive behavior,
which would prompt a significant surge in CAC, Moody's expects
HWL's credit matrices to begin improving in 2005. Upon successful
execution of its business plan, Moody's expects HWL to be
able to improve GCF/net debt to over 35%, RCF/net debt at
around 30%, and GCF / Gross interest to rise to about 4x
The key risk to the rating in the next two years is the evolving competitive
landscape for telecoms in Italy and the UK. Moody's anticipates
competition to intensify in 2005, but also expects H3G to act as
the primary driver of pricing initiatives. It would not be in the
interests of incumbents to offer aggressive tariff reductions as such
actions would likely reduce overall margins for these markets and cannibalize
existing 2G subscriber bases, a strong source of recurring revenue.
The key challenges for HWL are to ensure that it (1) acquires the high-valued
customers targeted by hefty CAC investment, and (2) minimizes customer
churn as competition intensifies. Network stability, fast
moving and innovative content, and strong customer-service
support are important factors for minimizing churn. HWL has built
up considerable strength in these areas, given its status as first
mover and industry innovator.
The rating agency says that it is unlikely that the ratings will be upgraded
in the next two years since HWL's financial metrics are unlikely
to become more appropriate for its rating before 2007. However,
this might change if HWL successfully monetizes its 3G investments and
substantially de-leverages its balance sheet.
On the other hand, downward rating pressure would emerge if (1)
free cash flow breakeven in 3G beyond FY2007 appears increasingly unlikely
- this could be a result of intensifying competition, causing
in turn a further surge in CAC, high churn rates and/or under-achievement
of budgeted ARPU and operating margins; (2) the stability of income
from established businesses is disrupted with recurring annual EBITDA
falling below HK$25 to HK$30 billion, and/or (3) large
acquisitions occur in established businesses or 3G.
Hutchison Whampoa Ltd. (HWL) is a Hong Kong-based conglomerate
with strong presences in Asia, Europe and the Americas. Its
6 core businesses are:  ports and related services;
 telecommunications;  property and hotels; 
retail and manufacturing;  energy and infrastructure,
and  finance and investments. HWL is 49.9%-owned
by Cheung Kong (Holdings) Ltd. (Cheung Kong) which is, in
turn, about 37%-owned by Li Ka-Shing and his
Corporate Finance Group
Moody's Investors Service Pty Ltd
612 9270 8100
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
No Related Data.
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