Can Hong Kong Telecom Get Its Wires Uncrossed?

As revenues fall, the pressure on CEO Cheung is rising

Hong Kong Telecom CEO Linus Cheung loves to use public forums to expound on his vision for the future of telecommunications and the multimedia age. So when analysts gathered in November for a semiannual briefing on the company's financial results, they settled in for another long speech.

Instead, a taciturn Cheung spoke for less than a minute. He then handed the show over to Financial Director David N. Prince, who announced Hong Kong Telecom's first-half earnings had been far below expectations--up 1.4% to $789 million on a 3% fall in revenue, to $2.2 billion. Earnings in the second half are expected to fare much worse after the government opens Hong Kong's long-distance phone market to more competition on Jan. 1. Other woes include a slow start for the company's costly expansion into interactive television and troubled relations with labor unions. Cheung barely spoke during the question-and-answer session and didn't even acknowledge Richard H. Brown, chairman of parent company Cable & Wireless PLC, who was in the audience.

The desultory performance led many analysts to conclude that Cheung, 50, is on his way out. That judgment may seem harsh: Hong Kong, after all, is caught in a nasty recession, and the company still has $2 billion in cash. And at $1.90, Hong Kong Telecom's stock is about where it was a year ago, despite a crash in the rest of the market.

But the pressure on Cheung to show he can generate growth is tremendous. Global giants ranging from MCI WorldCom Inc. to such Internet telephony players as Burlington (Mass.)-based VIP Calling aim to capitalize on the deregulation of Hong Kong's $3 billion market for international direct-dial phone service. Hong Kong Telecom now controls 75% of that business. Deep losses may be in store if it can't successfully diversify. Figures telecom analyst Daniel Widdicombe of Bear, Stearns & Co. in Asia: "They are in big trouble." Cable & Wireless also has a lot on the line. Last year, it derived 63% of its profit from its 54% stake in Hong Kong Telecom.

Leung's game plan is to cut costs and develop new businesses, using the $865 million Hong Kong Telecom received from the government for ceding its long-distance monopoly eight years ahead of schedule. But neither strategy is going well. Cheung's move to slash wages in September by 10% outraged workers and sparked a backlash in the legislature and the government of Hong Kong Chief Executive Tung Chee-hwa. In November, he softened the cuts by offering profit-sharing bonuses and stock options. The Hong Kong Confederation of Trade Unions is still opposed and points to the big government payout. "How can you then try to squeeze the workers?" asks union General Secretary Lee Cheuk-yan.

"CASH COW." Nor has Cheung had much luck cutting new deals. When he joined Hong Kong Telecom in 1994 from Cathay Pacific Airways Ltd., Cheung became the first ethnic Chinese to run the British-dominated company. The hope was that he would develop close relations with Beijing and give Hong Kong Telecom--in which Beijing-owned China Telecom also has a 13% stake--an inside track in China's market. But those connections have yet to pay off.

Cable & Wireless doesn't seem to be helping in Asia. Despite Hong Kong Telecom's hunger for expansion, its British parent recently excluded it from a $200 million joint venture in Vietnam. Contends telecom analyst Richard Ferguson at Nomura International in Hong Kong: "The reality is that Cable & Wireless is just using it as a cash cow."

Cheung, who declined to be interviewed, also is at a crossroads with his foray into video-on-demand in Hong Kong. The service offers movies, karaoke, cartoons, and home banking and involves a $1 billion investment over 10 years. It has overcome technological glitches and signed up 70,000 subscribers. But that's not enough to cover the $170 million invested so far. Allen Ma, who heads the service, says the company is "still studying" whether it should slow the investment.

Still, Cheung has plenty of cash to shop with. On Nov. 24, it announced a $30 million takeover of Star Internet, the city's No. 2 Internet service provider after Hong Kong Telecom. But Cheung will have to do more to prove he can prepare Hong Kong Telecom for the brutal new world of competition.