Pacific Century CyberWok
5 May 1999
Yesterday's euphoric reaction to little Tricom's reincarnation as Pacific Century CyberWorks will leave a lot of new investors fried. The shares traded in a range of $0.132 cents to $3.225, finally closing at $1.83. 1.13 billion shares changed hands, equivalent to about twice the free float. What investors seem to have ignored is that every 20 existing shares will be consolidated into only 1 new share in the company, and the existing issued shares will only be worth 7.16% of the enlarged company.
Based on the current share price, the consolidated shares would be trading at $36.60 and the enlarged company (with 1.613 billion consolidated shares in issue) would be worth HK$59 billion with net assets of around HK$2.19 billion.
It gets worse - of the HK$2,460 million paid by by Tricom for its purchase of properties from Pacific Century Group, HK$1,500 million will be paid by issuing new shares, but the rest (HK$956 million) is in the form of Convertible Bonds, convertible into new shares $1.24 per consolidated share. It was probably done this way so that the free float of the company (which includes new shares being placed with third parties) would amount to 25% of the company as required by the listing rules. When the Convertible Bonds convert, a further 774m shares will be issued, raising the implied market cap, based on the current share price, to HK$87.4 billion.
Webb-site.com has previously estimated PCG's share of the "Cyberport" property development to be worth at least HK$9 billion (see Cybervillas by the Sea, 22-Mar-99) with very low risk, so this would take the company's value up to HK$11.2 billion.
However, remember that Tricom must fund its $7bn capital commitment to the Cyberport. After this deal its net assets will be only HK$2.19 billion. Even given the near-certain profit in the project, it will probably not be able to borrow more than 3 times its net worth to fund its investment. So we can expect a further equity fund raising, which will spread the HK$9bn+ Cyberport project among new investors. Of course, if the shares remain in hyperland for long enough, then Tricom won't need to issue too many of them to raise the extra money.
We put fair value, including the Cyberport, at around $4.70 per Consolidated Share ($0.235 per current share). That's about 87% less than the current share price. Ouch!
Pacific Century CyberWok: you buy, you fry.
It has been announced that the consolidation will now only be 5 to 1, not 20 to 1. This means that there will be 4 times as many shares in issue and our estimate of fair value, at $0.235 per current share, translates to about $1.18 per consolidated share. Since we wrote this article, the shares have already fallen from $1.83 to $1.17 (per current share), a fall of 36%.
© Webb-site.com, 1999