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Edited Transcript of 315.HK earnings conference call or presentation 18-Feb-20 9:00am GMT

Half Year 2020 Smartone Telecommunications Holdings Ltd Earnings Presentation

Kowloon Mar 5, 2020 (Thomson StreetEvents) -- Edited Transcript of SmarTone Telecommunications Holdings Ltd earnings conference call or presentation Tuesday, February 18, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anna Yip

SmarTone Telecommunications Holdings Limited - CEO & Executive Director

* Kai-Lung Chan

SmarTone Telecommunications Holdings Limited - CFO & Executive Director

* Stephen Chau

SmarTone Mobile Communications Limited - CTO & Executive Director

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Presentation

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Unidentified Participant, [1]

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Good afternoon, ladies and gentlemen. Welcome to SmarTone Telecommunications Holdings Limited's Interim Results Announcement and Management Presentation for Financial Year 2020. First, may I introduce you to the executives here with us today: Ms. Anna Yip, Executive Director and Chief Executive Officer; Mr. Patrick Chan, Executive Director and Chief Financial Officer; Mr. Stephen Chau, Executive Director and Chief Technology Officer. The briefing will begin with a slide presentation by Ms. Anna Yip and Mr. Patrick Chan, followed by a Q&A session. (Operator Instructions)

Now may I invite Ms. Yip and Mr. Chan to begin with the presentation? Ms. Yip and Mr. Chan, please.

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Anna Yip, SmarTone Telecommunications Holdings Limited - CEO & Executive Director [2]

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Thank you. Good afternoon, everyone. Welcome to SmarTone's FY '20 Interim Results Presentation. First of all, I will provide you with an overview of our performance for the period under review, then Patrick Chan, our CFO, will then walk you through the financial performance in further detail. After that, I will take you through the business review section to discuss our strategies and outlook for the industry and SmarTone, and then we'll open up for questions.

First half of FY '20 was the first period when the new HKFRS 16 accounting standard is adopted. So if we just go to the illustrations for a moment: This shows you the changes that are made from the previous accounting standard HKAS 17 to the current FRS 16. Essentially, these -- the changes involve that lease expenses are no longer booked at OpEx above the EBITDA, except for short-term and low-value lease contract. Instead, they are recognized at right-of-use assets and lease liabilities on the balance sheet side, and then they are depreciated below the EBITDA line in the profit and loss account. So I hope that this simple illustration shows you that changes are being made. Later on in our financial section, Patrick will take you through further detail to illustrate how the numbers have changed.

In terms of the overview of our performance. During the first half of FY '20, group net profit is down 20% at $265 million due mainly to 3 reasons. Firstly, there's a drop in handset profit due to the reduced levels of wholesale trading, consumer demand as well as the particular short-term campaigns during the period. There's also a decline in inbound roaming as visitors dropped sharply due to the social events during the period. And last but not least, high depreciation from CapEx investments in the prior period. All these 3 factors contributed to the drop in the net profit.

While undoubtedly we faced a very challenging operating environment, we'd also like to highlight that during the period our service revenue has kept relatively steady and grew 3%. Our customer number grew 7% to 2.64 million. Our major customer segments include professionals, families, millennials as well as others. I'll take you through in more detail in the next section, in the business review section. There's also a continuous growth of the enterprise solution business. And our growth of alternative channels, including online and direct sales force, all to -- helped to -- with customer acquisition during the period. Our mobile postpaid ARPU has kept steady at about $225. Interim dividend is at $0.145 per share, in line with the profit decline and the 75% payout policy.

I will now pass the time to Patrick to walk you through the financial details.

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Kai-Lung Chan, SmarTone Telecommunications Holdings Limited - CFO & Executive Director [3]

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Thank you, Anna. I will now cover the key financial information for the first half of FY '20. During the period under review, despite competition and the recent social event, our group service revenue was 3% higher. The steady performance was the result of growth in the enterprise solution business, which helped offset the modest decline in roaming revenue. Attracted by SmarTone's superior customer experience, company customer number continued to grow, reaching 2.64 million, an increase of 7%. Our average mobile postpaid churn rate improved to an industry low of 0.8% compared to 1% a year ago. Amid the challenging conditions, SmarTone mobile postpaid ARPU was down marginally by 1% to $225. Total roaming revenue was down 4% year-on-year mainly due to the drop in inbound roaming as a result of the decline in visitors. For example, for the October to December 2019 quarter alone, visitors dropped by 50% year-on-year, according to official statistic.

Now we come to the handset business. The first half FY '20, handset and accessory business profitability was impacted by the following items: first, the reduced level of wholesale trading. As we all know, the wholesale business was significantly affected in the past half year. There's also a weaker demand from the consumer reflecting a lack of popular flagship model and longer handset replacement cycle by the consumer. Last but not least, there was also -- as Anna mentioned, there was also a higher handset subsidy for selected short-term promotion program. And because of under the HKFRS 15, handset cost is recognized fully upfront instead of amortized over the contractual period of the customers.

As Anna mentioned earlier, for key items affected by HKFRS 16, we will show them under the new accounting standard as well as a like-for-like comparison versus last year under HKAS 17. OpEx is one of the key area impacted by the new accounting standard HKFRS 16. Under the new standard, rental costs are now shown in depreciation below EBITDA instead of OpEx above EBITDA. So reported OpEx under HKFRS 16 registered a 21% year-on-year decline. For an apple-to-apple comparison under the previous accounting standard, OpEx increased 4% due to an increase in the cost of services provided to support new business growth, particularly the enterprise solution business; staff costs growth mainly from salary review last year; and also additional resources for new projects. We do not expect any further growth for the second half of the financial year. Network costs and other OpEx were stable despite growth in data usage of around 30% [in the year] and customer number growth.

Under the new HKFRS 16 accounting standard, rental costs are shown in depreciation below EBITDA instead of OpEx, while there is a corresponding reduction in the OpEx, as shown in the previous slide. For a like-for-like comparison based on the original accounting standard before HKFRS 16, a 4% year-on-year increase in depreciation and amortization was recorded for the current period. This was mainly due to a 6% increase in fixed asset depreciation as a result of CapEx from previous year. Nevertheless, we do expect full year fixed asset depreciation to be similar as previous year. Other items were largely stable under this D&A category.

So during the period under review, challenging condition continued to weigh on profitability. Group EBITDA was mainly affected by decline in the handset business and the impact of inbound roaming from recent social events, as I just quoted earlier. In addition, there was an increase in the fixed asset depreciation, so contributed to a decline in net profit, would -- dropped 20% to $265 million.

I will now hand back to Anna for the business review section. Thank you.

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Anna Yip, SmarTone Telecommunications Holdings Limited - CEO & Executive Director [4]

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Thank you, Patrick. Undoubtedly, the first half of this financial year has been a very challenging operating environment for SmarTone. Despite the challenges, we were very focused on growing our service revenue, which is the key stable force for the business. And our operational focus is on 4 things. First of all, it's about growing our target segments, particularly the high-end SuperCare, the millennials and the professionals. Number two is accelerating growth in the Enterprise Solutions. Number three is enhancing customer experience as well as our staff productivity through digitization and process improvement. And last but not least is to prepare our entry into the 5G.

During the period, our high-end customer segments continued to grow. We have traditionally held a very good share in high-value customer segments. These customers most appreciate the strong network performance and the high standard of customer care that SmarTone offers. Our customer strategy is three-pronged: first of all, a careful segmentation through the life stage or customer need for different customer base, including families, the silver haired, the millennials as well as the professionals; second, engaging our customers through various exclusive events and workshops; and last but not least, rewarding the loyalty through a variety of great initiatives that are much appreciated by our customers, including the linkage with the point system offered by the Sun Hung Kai group of malls. Due to the success of our strategy, SmarTone has been able to grow our customer base in the high-end SuperCare segment and is up 6% on a year-on-year basis. These customers are most likely to appreciate the performance uplift for 5G, and we believe that the acquisition and retention of these customers will help us position well for the launch of the 5G.

In addition to those segments, SmarTone is also expanding the presence in the millennials segment through both the SmarTone brand as well as our digital brand Birdie. During the period, for example, Birdie achieved a 125% growth in the millennial customer base by offering plans that meet the needs of the young crowd, offering them to exclusive events for social engagement and also including many fun elements like gamification in a mobile experience. We will continue to grow this segment and expect our share to continue to increase over time.

SmarTone recently took up 22 accolades at the 2019 Service & Courtesy Award presented by the Hong Kong Retail Management Association. In addition, SmarTone also won the best mobile network operator gold award at the CAHK STAR Awards 2019. Both are recognitions of the achievements of the team and our commitment to a high-quality network and great customer service.

Now I want to turn our attentions to the Enterprise Solutions. During the period, the enterprise solution business continues to register strong growth. Known for our portfolio of solutions for selected industries, as you can see on Page 20, including construction, property management, hospitality, health care and transportation, our enterprise solution team is skilled in incorporating the latest technologies to provide end-to-end solutions to address industry-specific pain points. With the approach of 5G, the Smart City development will gather pace; and our enterprise solution business is well positioned to capture a lot more opportunities.

Talking about awards. Our Smart Construction solution also received the first price for construction safety in the Construction Innovation Award 2019 presented by the Construction Industry Council. This is a solution that integrates technology and also human experience to enhance construction worker safety, health as well as operational efficiency at construction sites.

Now as part of our digitization drive, SmarTone is in the process of implementing robotic process automation or RPA, in short. By streamlining workflows and automating a lot of rule-based, repetitive tasks, we have achieved a number of key benefits, including operational efficiency and cost savings. Very importantly, as our employees are also freed up for higher-value book, we are able to increase our employee satisfaction, which is one of the key metrics for us. Another example of digitization is the introduction of the bilingual AI chatbot in June 2018. Our chatbot, which is called S-Bot, is now available on the SmarTone website, SmarTone CARE as well as WeChat. It is also available to Birdie users. During the time, 50% of the chats now -- are now handled by S-Bot. And this also means that this free up about 30% of the workforce in our service center as a result of this initiative. We will continue to explore chatbot as well as other digital initiatives to improve our productivity and enhancing better cost control.

Now let me turn to a very hot topic, which is 5G. We are currently in the process of rolling out our 5G network. As you can see on Page 24, this is a map of our 5G network in a high-level sense. Our initial priority is to provide coverage in high-traffic areas, for example, the CBD areas and other [golden bow] areas. By deploying a mixture of different spectrum bands, we will then gradually expand to wider area coverage by the end of the year. As you can see on this map, different dots signifies the coverage covered by high-band, mid-band as well as low-band spectrums across Hong Kong.

Our 5G network will be based on a 4G, 5G integrated network architecture, where the 5G network will be overlaid on our LTE network. The seamless interworking between the 4G and 5G provides superb user experience and enabling of a much richer customer experience in innovative 5G use cases, for example, AR, VR, cloud gaming and applications for different industries. And very important to note is also that 5G will be more cost effective than 4G in meeting the growing data usage. Our multilayer and multiband architecture also enables optimizing and efficient use of network resources to deliver the best 5G user experience. For the high-band spectrum, it will be used for small cells at travel hotspots to enhance network performance and capacity in certain outdoor areas. For the mid-band spectrum, it will be used for broad outband -- outdoor coverage as well as quality indoor coverage using the 3.3 gigahertz. For the low-band spectrum, they will be used for territory-wide 5G coverage, with good in-building penetration. We are all working very, very hard, with a plan to introduce our industry-leading 5G network by midyear this year.

Now as mentioned previously, we already have a very solid presence in the Enterprise Solutions segment. Our solutions serves clients in the selective sector, for example, construction, property management, facility management, transportation and health care. With the coming of 5G, as you can see on Page 26, there are just some examples of how some of these applications in the selective sectors will become even more diversed, more in depth and more specific in solving the particular pain points for the industries. We will work with selective sectors in bringing these solutions to life for them. Now on the consumer front, 5G will also provide a much richer consumer mobile experience through the vast improvement in speed and latency. And we are preparing content in terms of AR, VR, cloud gaming and multiview broadcasting to our consumers. A lot of these will become commonplace with the coming of 5G.

Now admittedly the 5G revenue model is still unclear. We will take reference from successful overseas launches, such as Korea, in formulating our 5G strategy. And as mentioned before, we are on track to introduce our industry-leading 5G network by midyear this year. Now I will now discuss the outlook for both the industry as well as SmarTone.

For the coming year, we foresee the mobile industry remaining intensely competitive in the near term. The social events from last year as well as the recent outbreak of the coronavirus have put additional severe pressure on the economy, which will significantly affect both the enterprises and consumers alike. Some aspects of our business will be adversely impacted. For instance, roaming will be significantly affected due to the reduced traveling. With this uncertainty in mind, our teams at SmarTone will remain vigilant. We'll maintain vigilant control on investment as well as on costs and implement productivity measures to alleviate the short-term negative impact and enhance our long-term viability and profitability. We will also double down on the core local business by delivering outstanding network performance and also superior customer experience, but last but not least, a key focal point for this year will be the successful launch of 5G, which will bring much improved user experience and upgrade opportunity for both consumers and enterprises alike.

So that ends our presentation today, and we are now opening up for the Q&A session. Thank you.

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Unidentified Participant, [5]

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Thank you, Ms. Yip and Mr. Chan. Now we will have the Q&A session. (Operator Instructions)

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Questions and Answers

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Unidentified Participant, [1]

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The first question comes from Danny Chu of Bank of America. Based on Korea's 5G experience, the operators experienced ARPU uplift. Should we expect similar situation here in Hong Kong? Or do you expect the 5G operators will set 5G tariffs same as 4G tariffs in order to drive up customer uptake?

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Anna Yip, SmarTone Telecommunications Holdings Limited - CEO & Executive Director [2]

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Thank you, Danny, for your question. As I mentioned earlier, we are referencing the use -- the experience of different markets that have already launched 5G in Asia and in other parts of the world, and Korea certainly is one of the prime examples. As you rightly pointed out, the operators did manage to increase their ARPU, as we understood. And they also offer a lot of content and great experience. For us, I think that is a very useful reference case for us because we do believe that with 5G consumers and enterprises alike will experience much faster speeds, lower latency, in short a much better consumer experience. And that is a good basis for upgrade of the customers. So we are cautiously optimistic that on the ARPU side we can see an uplift.

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Unidentified Participant, [3]

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The next question is also from Danny of Bank of America. As a follow-up question: Could you share with us what kind of business model you will adopt when providing 5G service to enterprise or industrial consumers? For example will be revenue sharing, lump-sum payment or based on data volume usage.

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Anna Yip, SmarTone Telecommunications Holdings Limited - CEO & Executive Director [4]

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Thank you, Danny, again for your questions. And for the enterprise customers, I think we do see a lot of different examples of how the revenue model could happen. In many cases, the enterprises will need to experience or experiment, right, what 5G could bring to them, probably together with the telecom providers. And in some cases it is very obvious, and in some cases it is through some sort of like a joint testing and so on. So there are different models. And we have seen revenue sharing. In some cases, we have seen like a subscription model also in Europe in different cases, so I think it is a bit too early to say. And certainly, it may not be just one model. I think it will be a combination of like the usual connectivity, like a subscription base plus other type of fee arrangement.

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Unidentified Participant, [5]

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(foreign language)

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Kai-Lung Chan, SmarTone Telecommunications Holdings Limited - CFO & Executive Director [6]

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Unidentified Participant, [7]

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Kai-Lung Chan, SmarTone Telecommunications Holdings Limited - CFO & Executive Director [8]

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Unidentified Participant, [9]

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Anna Yip, SmarTone Telecommunications Holdings Limited - CEO & Executive Director [10]

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Unidentified Participant, [11]

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(foreign language)

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Kai-Lung Chan, SmarTone Telecommunications Holdings Limited - CFO & Executive Director [12]

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(foreign language)

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Unidentified Participant, [13]

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The next question comes from Neale Anderson of HSBC. Congratulations on a service revenue growth in a tough environment. However, it looks as though, pre HKFRS 16, OpEx grew in line with service revenues. Can you comment on the profit outlook in the enterprise segment, please?

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Anna Yip, SmarTone Telecommunications Holdings Limited - CEO & Executive Director [14]

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Thank you, Neale, for your question. And you're right. I think the OpEx growth is something that we need to explain a little bit. The rise of the growth is partly driven by the costs of services provided, which was driving the growth of the key initiatives, for example, Enterprise Solutions. And if we take that out of the picture, the overall growth of the other OpEx is actually below the 4%. And just the key items, for example, like network expenses are kept way under that. It's more like about 1%. And this is continuing to be a focus for our team in managing down the OpEx following this -- obviously we are in a extremely difficult operating environment; and this is a key focal point for us, to manage the OpEx very tightly or even more tightly than the last period.

For the Enterprise Solutions, as you rightly point out, we do need to invest in order to drive the growth, but with increased customer base and the larger scale, we do expect the profitability of the enterprise segments to continue to improve. This is a segment comprising a number of different businesses. We sort of group it under enterprise segments, and they have different profitability profiles. And some of them have a much higher profitability versus some other projects that are more kind of like a project-based. And the costs of services provided could be higher for those projects. So it's hard to comment on the -- sort of like a one number in terms of the profit outlook for all because their natures is different. So we are looking at different subsegments within the enterprise segments, and with the path to higher profitability is very much the focus for us. I hope that answers your questions.

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Unidentified Participant, [15]

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The next question comes from AASTOCKS' (inaudible). Could you give us the 5G CapEx guidance for the year? How is it compared to the 4G era? You mentioned also that the mobile industry remains intensely competitive in the near term. Does it mean that the mobile postpaid ARPU for SmarTone will be pressured?

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Kai-Lung Chan, SmarTone Telecommunications Holdings Limited - CFO & Executive Director [16]

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Okay. Thank you, [Eli], for the question, yes. As I mentioned, the 5G CapEx will start to incur this year, which is already included in the full year CapEx of $600 million to $650 million. I think what is important is, if we look at the group, the total group CapEx, including 5G, of course, as we roll it out in the next 5 years, or shorter, look at 5-year period, the total CapEx for the next 5 years will be similar to the group CapEx for the previous 5 years, okay? In that case, that means the 5G CapEx as a group will actually be lower than the 4G period. If you look at our 4G CapEx about 8, 9 years ago, [there was big hum] in those 2 years when we invest in 4G. That will not happen when we roll out 5G in the next 5 years. So the 5G CapEx will be similar to the past 5 years. But obviously, in the first 1 or 2 years, it may be a little bit higher, but then it will not be like the [hum] that we've experienced in the 4G era.

Second part of the question is the mobile postpaid ARPU for SmarTone. Again, it depends on the competition. If 5G, the whole industry can enjoy an uplift in revenue like in Korea, for example, that has been quoted many times, then ARPU will be quite healthy; and then also, I think, the enterprise solution. The enterprise solution, if that business continue to expand, again that would also help ARPU. So it very much depends on the competitive environment, how the industry launch their 5G strategy in the second half of our financial year. So it -- I will say it's remained to be seen, but then one risk, as I, we already pointed out, is in the second half of the financial year roaming will be hit. And that will affect the ARPU for the second half of the financial year, and that depends on the development of the coronavirus in the next 6 months.

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Unidentified Participant, [17]

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Anna Yip, SmarTone Telecommunications Holdings Limited - CEO & Executive Director [18]

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Unidentified Participant, [19]

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The following question comes from [Keda Wago] of Maybank Asset Management. How much was the CapEx in the first half? And can you give an updated CapEx guidance for the full year, please?

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Kai-Lung Chan, SmarTone Telecommunications Holdings Limited - CFO & Executive Director [20]

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Thank you, [Keda]. The CapEx in the first half was $150 million. That is relatively low. We should have some kind of seasonal pattern in the project that we completed. So the first half is a little bit on the low side. For the full year, we are expecting $600 million to $650 million. That include 5G, but that's not all 5G. There's a lot of other business system upgrade, digitization. Basic capacity expansion will be done in the second half. So the full year will be around $600 million to $650 million, inclusive of the 5G CapEx.

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Unidentified Participant, [21]

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The following question comes from Neale Anderson of HSBC. Can Stephen give us his views on when he expects the millimeter-wave handsets and services to become available?

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Stephen Chau, SmarTone Mobile Communications Limited - CTO & Executive Director [22]

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Thank you, Neale. You ask me about the millimeter wave. On the network side, actually it's already ready. So the network can support the millimeter wave already now. On the handset, I think you're probably aware, also it's available in some of the market. They may not be available in Hong Kong. I will expect, let's say, 12 months from now, then there should be choices of millimeter -- handsets that support millimeter wave as well. So it's market demand and the -- that's the question rather than the technology question.

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Unidentified Participant, [23]

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Anna Yip, SmarTone Telecommunications Holdings Limited - CEO & Executive Director [24]

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Unidentified Participant, [25]

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The following question comes from Tam Tsz-Wang from DBS Bank. Handset and accessory sales was $1,845 million, whilst cost of inventory sold was $1,854 million. How was the profit or loss in handset sales?

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Kai-Lung Chan, SmarTone Telecommunications Holdings Limited - CFO & Executive Director [26]

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Thank you, Tsz-Wang, for the answer (sic) [question]. Basically, the handset business comprises of 2 main portion. One is the basic handset sales to our customers and also the wholesale trading business. That is making profit. That is making a very small profit, as previous year. As mentioned earlier by Anna and myself, we have done some short-term promotion campaign for our selected high-end customers, particularly during the change of the sort of popular models in September and October. Some of these selected promotion offers, we do the handset subsidy and increase the handset subsidy a little bit more. So there's a small loss in the handset subsidy. So net-net, that offset the handset-only sales and trading business, resulted in a small amount. That's correct.

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Unidentified Participant, [27]

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The following question comes from Bloomberg's Shirley Zhao. Are there any details of the recovery plan after the protests and the virus outbreak? What other business opportunities are there? How much revenue have these opportunities generated already?

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Anna Yip, SmarTone Telecommunications Holdings Limited - CEO & Executive Director [28]

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Thank you, Shirley, for your questions. Actually, we don't wait for the -- for everything to end before we start a lot of new initiatives because life goes on. Business goes on. We need to do a lot of things now. Given that a lot of people are now -- they are not flying. They're in Hong Kong. They actually do use a lot of data and both for their personal use and also for their home business use because, instead of going to the office, they are working from home. There are a lot more conference calls a lot of people do. Their daily life consists a lot of Zoom calls, for example. And we are offering a lot of them in terms of the B2B side, right, a lot of initiatives to help our corporate line customers to work from home and also to support a lot of the local enterprises and as well as the government in driving their initiatives in the local market. Because what we need to emphasize is that, while roaming obviously goes down because everybody -- many, many people are in Hong Kong now, a lot of activities actually -- it goes on. Businesses goes on. And the local data needs from both individuals as well as enterprises also carries on. So we are doing a lot of things to cater to the needs of our customers for their local data needs. That's the revenue side. On the costs side, as we mentioned multiple times earlier, is also extremely important because this is a really, really difficult time for a lot of us. And given the tough operating environment, we have to be extremely prudent in terms of our costs and also investments. I wouldn't repeat all the things we have already said, but I just want to say that, while we are exerting very tight cost control and investment control, it wouldn't affect our 5G rollout. So our 5G rollout is going on as planned, and we are still planning to roll it out middle of this year.

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Unidentified Participant, [29]

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Stephen Chau, SmarTone Mobile Communications Limited - CTO & Executive Director [30]

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Unidentified Participant, [31]

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We will now take the last question before concluding the briefing today. (foreign language)

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Kai-Lung Chan, SmarTone Telecommunications Holdings Limited - CFO & Executive Director [32]

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Stephen Chau, SmarTone Mobile Communications Limited - CTO & Executive Director [33]

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Kai-Lung Chan, SmarTone Telecommunications Holdings Limited - CFO & Executive Director [34]

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(foreign language)

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Unidentified Participant, [35]

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This concludes today's briefing. Thank you very much for joining us today.