Hutchison Delays Break-Even Target for 3G Operations from 2006 to H1 2007

The 3 Group posted LBIT (loss before interest and tax) of HK$12 billion (US$1.5 billion) for the first half of this year, compared with losses of HK$20 billion a year earlier and HK$16 billion in the second half of 2005. Revenue grew by 36% compared to the first half of 2005 and by 17% compared to the second, to almost HK$23.51 trillion. Management expects that the 3 Group will continue to report narrowing losses in the second half. However, it does not foresee that the 3 Group as a whole will achieve an EBITDA break-even after user acquisition costs for 2006. It is now expected that the 3 Group will achieve positive monthly EBITDA after deducting all user acquisition costs on a sustainable basis during the first half of 2007 and positive monthly EBIT (earnings before interest and tax) on a sustainable basis during the first half of 2008.

Outlook and Implications

• 3G Subscriber Growth: Despite the delay of the EBITDA break-even target, growth in the group's 3G subscriber base has been solid. The 3 Group’s 3G customer base grew 15% between 31 December 2005 and 30 June 2006, to 12.7 million. With the exception of 3 Italia, expansion in the 3 Group's customer base was principally in the higher-value post-paid segment. Although the cost of acquiring post-paid customers is typically higher than for pre-paid, the 3 Group's average cost of acquiring a customer continued to decline—from ¬293 (US$375) at 31 December 2005 to ¬262 at 30 June 2006. Overall 3 ARPU increased from ¬42.20 at the end of last year to ¬44.66 at end-June 2006, led by the improving quality of 3 U.K.'s post-paid customer base. The group’s overall non-voice ARPU grew both in value terms (from ¬10.47 reported at the end of last year to ¬12.54 at end-June 2006) and as a percentage of total ARPU (from 25% to 28%).
  
  However, competition for customers was very strong in all markets, particularly in the United Kingdom. As a result, first-half customer churn for 3 as a whole was higher than management had expected, averaging 3.2% per month.
  

• Challenges Ahead: Hutchison Whampoa has been the most aggressive investor in multimedia-enabled 3G services in Europe, but intense competition from operators such as U.K.-based Vodafone Group and the absence of a killer application have lengthened the road to profitability. The company's efforts to generate returns on its approximately US$25-billion 3G investment suffered a blow earlier this year, when it shelved the initial public offering (IPO) for its largest unit, in Italy, unable to fetch the desired price (see Italy: 13 February 2006: Hutchison Whampoa Scraps H3G IPO, Sells 10% Stake to Major Investment Bank and Italy: 20 February 2006: H3G Italy Plans IPO by Year-End). Although its European, Australian, and Hong Kong 3G businesses have all posted improved financial results, Hutchison Whampoa is yet to convince the market that its revolutionary 3G offering would deliver a crucial application for mobile communications (see Australia: 23 August 2006: Hutchison Australia's H1 Loss Widens on CDMA Network Closure Costs and World: 17 August 2006: Hutchison Telecom Turns Profit in H1 on Strong Results in India, Israel).