Investor, Phone Hong Kong

What telephone company operates with an efficient modern communications network, low cost structure, and a balance sheet that's almost debt-free and generates a return on equity of 44%? AT&T, you say? Not even close. Try Hong Kong Telecommunications, whose ADRs (American Depositary Receipts) have risen on the Big Board from 23 in June to 30.

Investors haven't gone ape over HKT because the company's exclusive franchise to provide local telephone services in Hong Kong expires on June 30, 1995. And in July, 1997, Hong Kong will become a region of the People's Republic of China. But some of the smart-money crowd is convinced that investors are overly pessimistic about the outlook for HKT. For one thing, the Chinese government owns 20% of HKT stock, which should assure the company's continued dominance in Hong Kong, they say. Cable & Wireless (Hong Kong), the British communications giant, still owns 58% of HKT's stock, with the remaining 22% of the shares in public hands.

Second, HKT's exclusive franchise to provide international services in Hong Kong doesn't expire until September 30, 2006. China accounts for about 40% of such traffic and 20% of revenues, estimates analyst Stuart Crane of A. R. Schmeidler, a New York investment firm that has been accumulating HKT shares. Crane says those figures should increase to 65% and 45%, respectively, by 2000. He notes that there is only one telephone per 100 people in China today, vs. Hong Kong's 57 phones per 100 people. Crane says the stock is "clearly undervalued" and worth perhaps twice its current price.

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