BUSINESS

So is everyone tuning in? Well, no. When it launched the service in late 1993, Wharf Cable confidently predicted it would have 250,000 subscribers by the end of 1994 and break even two years later when half-a-million households signed up. It is now 1996, but the company is still 30% down from the initial target. Last week, property, infrastructure and communications flagship company Wharf Holdings put back the break-even point by a year, to the end of 1997. Says Mike Warren, an analyst at Hong Kong brokerage W.I. Carr: "1996 is a critical year for Wharf Cable." Some investors, he adds, have already decided that Wharf management lacks the necessary depth and expertise to see its new ventures through to a profitable conclusion.

Investors have punished Wharf for failing to deliver on its promises. Since March, it has been consistently underperforming the territory's Hang Seng index. Last August, Standard & Poor's retained Wharf's "A" credit rating, but downgraded its financial outlook from "stable" to "negative." It was worried about the cable business and the New T&T telephone company, the Wharf unit that became one of the territory's three new fixed-line telecommunications providers in July. As overseas investors divert funds from overbought Wall Street to Hong Kong, Wharf's stock price has been inching up. But, says a property analyst, "there's no reason to get excited about the stock right now, except that it's been a laggard." He is one of many who are reluctant to be named when making negative comments about the powerful conglomerate.

Despite losses from cable and Hong Kong's property slump, Wharf remains profitable. Earnings for 1995 have yet to be announced, but analysts forecast a 42% increase from 1994, to $567.8 million. The catch: more than half will come from the transfer of Wharf's entire stake in Singapore-listed Marco Polo Developments to another unit of parent company Wheelock. Wharf got $194 million in cash and five Hong Kong properties from the asset swap, from which it booked $257 million in profits for the first half of 1995. Without the exceptional item, forecast earnings will be 22% smaller than 1994 -- the worst performance in nearly three decades.

Last month, subsidiary Omni Hotels sold nine U.S. inns to Texas tycoon Robert Rowling for more than $500 million. Wharf is said to have made $100 million in profits, though some analysts say it is much less. Those bullish on Wharf say both the asset swap and the Omni sale are good for the firm. "The company is clearing its books to make itself a pure Hong Kong-China play," says Nichols Pang of Baring Securities.

One of the territory's biggest landlords, Wharf had a reputation for stodginess before Peter Woo Kwong Ching took over as chairman in 1991 from his father-in-law, the late shipping tycoon Sir Yue Kong Pao. A former banker, Woo was determined to put his mark on the company. He set out to unlock hidden value in the group's existing assets. A tram depot was transformed into upmarket Times Square. Costing $310 million, the shopping and office complex has been earning $129 million a year in rent since it opened in 1993. Another big project is Gateway II in Kowloon. It will add 2.7 million square feet of retail and office space to Wharf's 5.5-million sq ft Harbor City.

Today, around three-quarters of Wharf's nearly $12-billion assets is tied up in property. "Its portfolio is one of the best in Hong Kong," says Michael Green of Nomura Research Institute. Wharf has big stakes in the Cross Harbor Tunnel Co., which earns toll fees from an underwater tunnel linking Hong Kong island and Kowloon; Modern Terminals, owner of the Kwai Chung seaport container terminal; and Hong Kong Air Cargo Terminals. David Mackie of Salomon Brothers says property rentals will account for 55% of 1996 profits, sales of office buildings up to 35% and the tunnel and terminals companies 10% to 15%.

Woo had more in mind. "Wharf threw open the doors to investors," says W.I. Carr's Warren. "But when you open up to people, they get close to the numbers. If you come up with ambitious goals, investors will be disappointed when you don't meet them." In 1992, the new chairman announced a property and infrastructure push in China, starting with the development of the central city of Wuhan into a commercial and industrial hub linked to Hong Kong by high-speed rail lines and a mega-container port. Then came the cable franchise, which gave Wharf the right to become the territory's sole cable provider for three years. Its stock price soared.

When Wharf got a license to provide telecom services in Hong Kong last July, however, punters were already shying away. Beijing officials took their time in granting approvals for the Wuhan projects. The container port recently received the green light. But Wharf now has to deal with local authorities, which want to become the majority partner. The problems contrast sharply with the success in China of more low-key conglomerates such as New World Development and Cheung Kong. Though still interested in Wuhan, Wharf is now focusing on property development in Shanghai, Beijing and other major cities.

It had also talked up the cable-TV project. "The company became a victim of its own hype," says James Miles of Asia Equity. "They built up very big expectations of what the company was about. But they just did not deliver." Wharf says the disappointing number of subscribers is the price it had to pay to have the network up and running to meet government targets. It launched the service in public housing estates, using a microwave system that could be installed quickly but carries only a limited number of channels. The choice of programs -- shows produced in-house and educational and other specialized fare less likely to appeal to lower class viewers -- contributed to the high rate of people signing up and then dropping the service.

Wharf Cable is switching to a state-of-the art fiber-optic network and revamping its programming mix. So far, new lines have been laid to serve 100,000 households, about a tenth of the number the microwave system can currently reach. When fiber optic replaces the microwave network in two to three years, Wharf will have the capacity to bring 45 channels to more than 1.1 million homes. It has increased the number of channels from the original eight to 20. Among the new fare: four pay-per-view Cineplex movie channels, including America's Home Box Office, six round-the-clock news services and coverage of major sport events.

"It's dangerous to write off cable at this point," says Warren. "If you get a rebound in consumer confidence, the flat monthly fee [of $27] doesn't hurt so much. Once you reach a critical mass of subscribers, it generates a lot of cash for the company." But cost is not the only consideration. Wharf Cable's franchise as Hong Kong's exclusive cable provider ends in June. Another worry: the government's decision in November to allow Cantonese-language broadcasts by STAR TV. Rupert Murdoch's satellite network had been asked to beam Mandarin-only shows, giving Wharf Cable an edge in Cantonese-speaking Hong Kong.

A new technology may turn out to be the most formidable challenge. Hong Kong Telecom plans to bring the world's first commercial video-on-demand service to the territory this year, the first step toward full-scale interactive television. VOD subscribers can call up any show they want any time, while cable subscribers can watch only programs scheduled on a given day. To stop VOD, Wharf is seeking a judicial review, arguing that Hong Kong Telecom is infringing on its cable franchise.

Wharf is betting on its fiber-optic network for more than simply cable. New T&T will be using the same lines, keeping its investment costs down. (Wharf intends to spend a total of $1.4 billion on the two ventures.) New T&T will sell customized telecom services to business users, and home shopping and banking for residential customers. But New T&T will be facing off with former monopoly Hong Kong Telecom -- and fellow upstarts New World Telephone, a subsidiary of New World Development, and Hutchison Telecommunications, a unit of the Cheung Kong group.

The bottom line? "If the cable venture falls on its face, then people will start to question whether the current management can actually grow the company," says Miles. Woo, 48, stepped down in 1994 as Wharf chairman, reportedly because he was in the running to become the first chief executive of post-1997 Hong Kong. Wharf veteran Gonzaga Li, 66, moved up from CEO to chairman.

In the short-term, a lot depends on the direction of Hong Kong property values. "Most people think we're at the bottom of the residential market," says Warren. "But the outlook for the office sector is quite cloudy. You may see it track sideways. What we really need to give the property market a kick-start is to get mainland demand coming." That's exactly what's going to happen in 1997, says Green. "It should be almost perfect timing for Wharf." A true believer, the Nomura analyst says he will not be surprised if "people will be buying Wharf for its cable operations" in two years. Maybe. But Penthouse and Playboy shows notwithstanding, investors are still waiting for a genuine show of fireworks. Your move, Wharf.