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SCMP Reporter

Fears of the deadly Sars virus have severely curbed the wanderlust of Hong Kong's mobile-phone loving masses. Flights have been slashed by a third as employers shun non-essential travel and holiday-makers heed government advice to stay at home.

The vast majority of Hong Kong's seven million residents - 91 per cent of whom own a cellular phone - have decided the best thing to do is batten down the hatches and wait out the storm.

However, this virtual grounding presents the mobile-phone companies - SmarTone Telecommunications Holdings, Hutchison Telecom, Sunday Communications, Peoples Phone, New World Mobility and CSL - with a problem. 'People are not leaving their homes so much and are using fixed lines to communicate rather than going out and using their mobiles,' Kim Eng Securities analyst Edward Fung said.

Analysts agreed mobile operators would suffer a drop in earnings from a prolonged bout of home-staying and fixed-line operators would benefit.

SmarTone's share price closed at HK$8.70 yesterday, down 9 per cent from a peak of $9.55 last month. Sunday's stock price has declined from 17 cents at the end of February to 13 cents at yesterday's close. In comparison, fixed-line company City Telecom has held steady in the past two months, hovering at $1.45. It closed yesterday at $1.42.

The intense competition generated by six companies operating in the saturated mobile-phone sector often boils over into price wars. With operators keen to undercut each other on rates, the real money-spinner has come from outside Hong Kong - the premium charges brought in by roaming services.

Roaming allows a mobile user to take and make calls outside their normal service area, which usually means outside their country's borders. Mobile operators strike deals to use each others servers and these costs are passed, minute by minute, to the consumer. Rates vary by country but can reach $50 per minute.

'The local service is not very profitable, competition is very high,' said Kenny Tang Sing-hing, an associate director at Tung Tai Securities. 'But for roaming, profitability is very high compared with IDD charges. Roaming demand between Hong Kong and China is the most profitable service for the mobile-phone operators.'

Traffic across the border has slumped since the start of the outbreak, leading to a considerable decline in the number of people using roaming services.

China Motion sells SIM cards that can tap into overseas networks at local rates.

Tony Hau Tung-ying, chairman of China Motion, said the number of people travelling to the mainland had 'fallen significantly' leading to a 50 per cent drop in the company's roaming business.

Mr Hau said some local mobile operators' roaming revenue had fallen more than 70 per cent in the past month. He estimated most mobile operators had suffered at least a 10 per cent drop in earnings because a 50 to 70 per cent drop in roaming business, would account for an almost 20 per cent of the carriers' revenue.

The sudden decline in roaming represents a 'big hit' to mobile-phone operators, according to one analyst.

'Roaming makes up 15 to 25 per cent of service revenues excluding equipment sales. It's very significant,' he said.

He said that on average, mobile operators' pocketed a healthy 50 per cent margin on roaming calls. He estimated that SmarTone's average $100 million per quarter profit from roaming would turn into a $25 million per quarter loss while the Sars crisis continued to affect Hong Kong.

Andrew Jobson, an analyst at Daiwa Institute of Research, said a lot of the Sars-related bad news had been factored into the share price of SmarTone, but for many investors the fear remained that the crisis might drag on and possibly get worse.

'The only positive side is some companies have seen some pick-ups in their [short messaging] and other kinds of wireless data usage,' Mr Jobson said, although he doubted this would be enough to offset the fall in roaming.

As for the positive side of Sars for fixed-line operators, the outbreak was expected to give a more sustained boost to video-conferencing than the increase the service saw after the September 11 attacks, Mr Fung said.

Evidence is already emerging that Hong Kong's fixed-line operators - PCCW, City Telecom and New World Telecom - are benefiting from the crisis. A spokeswoman for City Telecom said IDD calls had increased by 20 to 30 per cent since the start of last month and Internet usage had doubled.

Phillip Securities research director Louis Wong Wai-kit said the Sars-related benefits had worked in City Telecom's favour.

'They've seen IDD calls increase 20 to 30 per cent in the past week,' he said, adding that 'every 5 per cent rise in IDD volume would see earnings increase by 15 per cent'. Despite that, Mr Wong said City Telecom was still trading on a bargain basement valuation of less than six times this year's projected earnings.

New World Telecom spokesman Thomas Leung said the company had recorded a 20 per cent year-on-year increase in IDD traffic last month.

However, he warned that optimism was premature because 'the prolongation of Sars will ultimately affect our telecoms business in the long run because many corporations will slow down their business activities'.



Mobile operators hit as Hong Kong stays home