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Edited Transcript of 315.HK earnings conference call or presentation 6-Sep-19 9:00am GMT

Full Year 2019 Smartone Telecommunications Holdings Ltd Earnings Presentation

Kowloon Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of SmarTone Telecommunications Holdings Ltd earnings conference call or presentation Friday, September 6, 2019 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 Company Representative, [1]

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Good afternoon, ladies and gentlemen. Welcome to SmarTone Telecommunications Holdings Limited's Annual Results Announcement and Management Presentation for 2018, '19.

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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Good afternoon, everyone. Welcome to SmarTone's FY '19 Annual Results Presentation. In the first part of this presentation, I will provide you with an overview of our performance for the period under review. Then CFO Patrick will then walk you through the financial performance in further detail.

After that, I will take you through the business review section of the presentation to discuss our strategies and outlook for the market. We will then open the floor for your questions.

During FY '19, the company's profitability has been under pressure from the intense competition in the Hong Kong's mobile market. That being said, the trend in SmarTone's core service revenue has remained largely stable. Our customer base expanded 7% to $2.55 million driven by growth in various customer segments. Our churn rate remained at an industry low of 0.8%.

FY '19 numbers are the first set of numbers to be presented under the new accounting standard, HKFRS 15. However, to provide a meaningful discussion on performance, comparisons are based on the previous accounting standard of HKAS 18, unless stated otherwise.

Regarding operating costs, due to the company's efficiency drive, costs were lower despite the growth in customer number and the data usage. Under HKAS 18, group net profit was down 1% to $608 million. However, excluding a one-off cost adjustment, underlying group net profit would have been down 10% to $556 million. Under HKFRS 15, group net profit was up 3% to $632 million. Excluding the one-off cost adjustment, underlying group net profit would have been 6% lower at $581 million.

On dividends, a final dividend of $0.21 per share will be paid, bringing FY '19 total dividends paid share to $0.39, in line with the company's 75% payout policy based on underlying net profit of $551 million, which excludes the one-off cost adjustment.

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 for financial year FY '19.

In this presentation, we have disclosed FY '19 numbers under both the previous standard, HKAS 18 and the new HKFRS 15. To facilitate a like-for-like comparison, we show the number under HKAS 18 first as this illustrates the underlying business trend. The item based on HKFRS 15 is shown on the right as separated by the dotted line. My comments, unless stated otherwise, are all based on the previous accounting standard.

During the period under review, our group service revenue was largely stable amid intense competition. As the growth in Enterprise Solution, Digital Brand and Hong Kong roaming helped offset weaknesses in postpaid and ethnic prepaid. Based on HKFRS 15, service revenue was lower due to the reallocation of part of handset-bundled plan revenue to handset sales.

Our roaming business has remained resilient despite the global declining trend. The growth in data revenue was -- had offset the structural decline in voice roaming. And roaming revenue now represents 14% of group service revenue based on HKAS 18.

During FY '19, customer number grew 7% to 2.55 million despite the challenging environment. We achieved growth in both postpaid and prepaid customers. Our average mobile postpaid churn rate is at an industry low of 0.8%.

SmarTone postpaid ARPU continued to be the highest in the industry. If we exclude the MVNO dilution impact, our SmarTone brand ARPU was stable. Including the dilution impact from MVNO customers, postpaid ARPU was down 4% to $247 million. Based on HKFRS 15, ARPU was $224 million as a portion of the service revenue relating to handset-bundled plan was shifted to handset revenue.

On the handset business, we had a challenging year due to lower demand for flagship handset and customer lengthening their handset replacement cycle. Due to decline in revenue and lower margin, the handset accessory sales EBIT dropped 42% to $36 million under HKAS 18.

On costs, our efficiency drive resulted in lower total OpEx by, 2% despite strong growth in customer number and data usage. The 4% increase in staff costs was in line with wage inflation last year. This increase already included additional resources for new initiatives and the additional costs for the company's share award scheme.

Network costs declined 6% despite the higher customer base and increased data usage. Even excluding the one-off cost adjustment, network costs still dropped 2%. Other OpEx dropped 3% due to the impact of the company efficiency drive. Based on HKFRS 15, OpEx was down 5% as sales commission was capitalized and amortized instead of expensed as incurred.

Total depreciation and amortization increased 7%, mainly as a result of higher handset subsidy amortization. This was due to popular demand of flagship handset in FY '17, '18 carried over to the current year. In fact, if you look at the handset subsidy capitalization, which is the cash handset subsidy, it actually dropped nearly 40% from over $500 million to just over $300 million in FY '18, '19.

Total depreciation and amortization based on HKFRS 15 was 21% lower as handset subsidy amortization was recognized upfront above EBITDA. The item in green, as you can see on the right-hand bar, represents the amortization of sales commission. This item was previously expensed as incurred under HKAS 18.

For FY '19, group net profit was down 1% due to competitive pricing, increase in handset subsidy amortization, as I just explained, and also weakness in the handset business. If we exclude the one-off cost adjustment, the underlying net profit would have declined 10% on a like-for-like basis. Under HKFRS 15, group net profit was up 3%, reflecting timing differences of the impact of HKFRS 15.

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. As mentioned previously, the Hong Kong mobile industry remains hugely competitive. In this challenging environment, SmarTone has adopted the following strategies to stay competitive: firstly, strengthening our brand differentiation and deepening the segmentation strategy by driving growth in our priority segments, such as family, travelers and millennials; number two, keeping up growth in the Enterprise Solutions business, we have been building on our strong position and capturing more opportunities in this growing market; number three, continuing to grow to drive digitalization and operational improvements to deliver great customer experience efficiently; last but not least, actively planning for 5G and Smart City applications, the 2 likely future sources of growth for the company.

Now if we turn to the first one, which is on our marketing side and segmentation side, let me just start off by introducing the new brand campaign that we launched very recently, SmarTone 5G Makes Us Smart. Our new brand campaign centers on a young lady who explores the future Smart City covered by the SmarTone 5G network. She discovers different possibilities brought about by the new technology in her life driven by her curiosity.

We are very encouraged that the brand campaign has been very well received and it really resonates with the public. We have seen a strong upward trend in terms of the preference for the SmarTone brand and enhanced brand perception on our 5G technology leadership, network quality and our trendsetter role.

Now one of the ways we managed to grow our customer number by 7% in a very competitive market is by deepening our customer segmentation strategy. During the year, we maintained our momentum in growing our family and traveler segment. In addition, in line with our focus on catering to the needs of the customers, we have recently launched new plans, including the university student and the working millennial segments after carefully studying the needs of these 2 segments.

During the year, SmarTone has won a number of awards, including 7 Hong Kong Retail Management Association, a very prestigious award, the Service & Courtesy Awards, and also 15 Smiling Enterprise Awards for the customer service excellence. These awards as well as our high Customer Satisfaction Score reflects the company's unwavering focus on delivering excellence in customer service.

Now I would like to take you through some of the new apps and services we have introduced during the year. In an age of increasing cybersecurity threats, we introduced our cybersecurity protection suite, which includes Norton Lifeguard, ST Protect and Call Guard. The first 2 products are designed to defend devices against ever-increasing cyber threats such as viruses and malware, while Call Guard helps to block junk calls effectively and safeguard privacy.

For the fun-loving millennial segments, we have introduced Playground, a convenient platform for gamers to shop for a variety of virtual gaming items. For the travelers, our Easy Number service is designed for them. With Easy Number, a customer can register for a Mainland China number in just minutes, and signing up for services, such as mobile payments and calling taxis in Mainland China has never been easier.

Last but not least, our Flexible Data Allocation service allows our family plan customers to allocate data by SIM card based on the needs of each family member. With the usage consumption of each SIM available at a glance, the Flexi Data Allocation service is also a good tool to manage, particularly the minors' phone usage time.

Now leveraging on our in-depth expertise on ICT solutions, SmarTone has recently launched its SmartHome Solution. The solution realizes the vision of smart property and brings an unprecedented level of convenience to the user. By using the Smart Home app on a mobile, the user can easily control home appliances and devices anywhere, anytime. The user can also be rest assured that they have access to a 24/7 dedicated hotline in an unlikely event that they encounter any issue.

Now I also want to say a few words about the digital savvy segment. Birdie, Hong Kong's first digital mobile brand, continued to register healthy customer growth in both local mobile and the travel segments during the year. We have continued to innovate following the needs and the preferences of our target segment.

For example, in March, we launched Birdie Farm, the first game in Hong Kong that allows players to grow our in-game rewards into mobile data. As a sign of the game's popularity, Birdie Farm was ranked first and second on App Store and Google Play, respectively, during launch.

On community and partnerships, using Birdie means you are part of a community of like-minded individuals. And it also means that you will regularly receive amazing offers. Whether the offers are for some goodies like ice cream or chickens or movies, they are sure to bright up the day of our users.

Due to the innovative design and business model, Birdie has attracted a large following and has received a number of awards during the year. We are very encouraged by the recognition and will double our efforts to make Birdie an ever more innovative service.

During the year, SmarTone has also continued to enhance our cutting-edge customer experience through digitalization. In addition to providing customers with a seamless O2O or online-to-offline and self-service experience at our stores, customers can also enjoy a greater level of convenience through the use of our online store and the SmarTone CARE App.

As a reflection of our focus on providing excellent outstanding customer service, SmarTone became the first operator in Hong Kong to launch a bilingual AI chatbot in June 2018. The chatbot is now accessible at the SmarTone website, CARE App, WeChat and is also available to Birdie users. Encouragingly, the number of chats handled by the chatbot has been increasing strongly, on average, about 30% per month.

The benefits to both the customers and the company are significant. First of all, the average response time to customer queries has been reduced, and also the deployment of the chatbot has also enhanced efficiency and scalability of SmarTone service center.

Now let me turn the attention to the corporate side. Our Enterprise Solutions business has been a major source of growth in recent years due to the increasing demand for digitalization and IT from corporates. According to a customer survey, there are 5 major areas of demand, namely cybersecurity, digital transformation, operational efficiency, IT modernization as well as driving new business.

Now we also see strong demand from a variety of industry sectors. Let me just highlight a few. For example, in hospitality, our SmartHotel Solution, officially launched at Hotel Alva -- a new Hotel Alva and it offers guests a digitalized end-to-end customer journey. On logistics, our SmartTrack Solution offers instant location tracking down to street level and real-time fleet resource optimization to enhance customer satisfaction and operational efficiency.

I've already mentioned cybersecurity, which is a demand requested by a lot of companies across sectors.

On property management, our smart property -- our Smart Building suite integrates several core technologies and innovative systems, including mobile IoT infrastructure, smart in-app data lake to provide a next-generation property and facility management solution.

Last but not least, our Smart Construction solution also helps construction site to boost their efficiency, safety as well as well-being of the workers.

While technology has done much to improve convenience, raise productivity and connectivity, in today's world, enterprises also face an increasing risk of cyber attacks. Such threats can result in data leakage and reputation damage. The financial loss and overall business impact can be huge.

In recognition of this risk, in March, we launched the world-class -- our world-class cybersecurity solutions to meet the enterprise evolving needs in the new world of cyber risk. SmarTone's cybersecurity offers enterprises a total solution to prevent and detect cyber threats and also responding to incidents. By adding this cybersecurity practice to our enterprise solution arm, we affirm our commitment to offering Enterprise Solutions to a wide spectrums of industries.

Now let me turn our attention to 5G, a very hot topic now. Compared to 4G, 5G has a range of benefits, bringing high speed, improved capacity with very low latency that makes it a superior technology. The new opportunities available to operators could include the following, for example, the replacement of fixed line, massive IoT connections, Smart City applications and also smart manufacturing, just to name a few.

We much welcome the government's policy to build Hong Kong into a world-class Smart City. As explained by the government, to pursue Smart City development, we will need to make use of innovation and technology to address urban challenges, enhancing effectiveness of city management and improves people's quality of living as well as Hong Kong's sustainability efficiently and safety.

The development of the Smart City represents a significant business opportunity. Due to our sizable Enterprise Solution business, SmarTone is already an expert in a large number of Smart City applications, including Smart Building, Smart Construction, as shown in this slide. We believe that we are in a very strong position to capitalize on the opportunities from the Smart City development.

Now what about the 5G rollout for SmarTone. In March this year, we became the first operator in Hong Kong to simultaneously conduct a field test on the 5 -- 3.5-gigahertz and the 28-gigahertz bands. The data from the field tests, including the outdoor coverage and the indoor penetration, are essential information for us to fine-tune the network rollout and delivering the future exceptional 5G experience.

As shown in the test, SmarTone will deploy both high-band and mid-band spectrum in our rollout. The high-band 28-gigahertz spectrum, which has a high data transfer speed, will be deployed via small cells at high-traffic areas such as bus shelters and so on. On the other hand, the core mid-band 3.5-gigahertz spectrum, which has superior propagation characteristics, will be deployed at rooftop sites with Massive MIMO technology to provide territory-wide 5G coverage. By simultaneously utilizing the high-band and the mid-band spectrums, SmarTone will deploy a multilayer network topology, which will be optimized for both high capacity and performance.

Now a powerful network performance has been a key point of differentiation for SmarTone and this will be reinforced for 5G. A small-scale 5G pilot network was set up in June to facilitate evaluation of the 5G system and application as well as cross-industry application development. In the coming months, we will conduct a lot of field testing as well as pilot launches across Hong Kong.

In terms of the timing of the rollout, to ensure we deliver a cutting-edge 5G experience, the company will progressively roll out 5G. We target to launch 5G in mid-2020 when the 5G ecosystem, including spectrums, network infrastructure, handsets are all expected to be ready.

Now let me just discuss the outlook for both the mobile industry and for us. We do expect the mobile industry to remain intensely competitive. Despite the near-term headwinds, the company will focus on doing the best thing for our brand and for our customers.

We'll focus on strengthening our brand differentiation and continue to deepen our segmentation strategy. We'll also keep up growth in our Enterprise Solutions business and continue to drive digitalization and operational efficiency. Very importantly, we will invest progressively in 5G and Smart City applications to capture business opportunities that 5G is expected to bring in the mid to long term.

That concludes our presentation today. Please feel free to raise any questions you have following -- in the following Q&A session.

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Unidentified Company Representative, [5]

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

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Questions and Answers

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Unidentified Company Representative, [1]

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(Operator Instructions) (foreign language)

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

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(foreign language)

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Unidentified Company Representative, [3]

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

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Unidentified Company Representative, [5]

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

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Unidentified Company Representative, [7]

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

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Unidentified Company Representative, [9]

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Kai-Lung Chan, SmarTone Telecommunications Holdings Limited - CFO & Executive Director [10]

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Unidentified Company Representative, [11]

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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 Company Representative, [13]

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The next question comes from HSBC's Neale Anderson.

Would it be possible to provide any quantification of performance in the Enterprise Service business? Margin and revenue growth rate would be much appreciated.

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Kai-Lung Chan, SmarTone Telecommunications Holdings Limited - CFO & Executive Director [14]

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Yes. Thanks for the question, Neale. Unfortunately, we will not be disclosing too much details about the Enterprise Service business. The margin is actually quite good, although it's a very big range depending on what kind of solution the customers are using. Some may be lower margin in the mid-teens, but some can be as high as over 50% or even 60% gross margin.

So it really depends on the type of solution that the enterprise customers acquire from us. Growth rate -- revenue growth rate, I think we can say last year, it was close to 50%, 5-0, albeit from a low base. So I think that's all we can disclose regarding the Enterprise Solutions business.

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Unidentified Company Representative, [15]

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Stephen Chau, SmarTone Mobile Communications Limited - CTO & Executive Director [16]

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Unidentified Company Representative, [17]

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Kai-Lung Chan, SmarTone Telecommunications Holdings Limited - CFO & Executive Director [18]

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Unidentified Company Representative, [19]

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Unidentified Analyst, [20]

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Stephen Chau, SmarTone Mobile Communications Limited - CTO & Executive Director [21]

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Unidentified Company Representative, [22]

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Anna Yip, SmarTone Telecommunications Holdings Limited - CEO & Executive Director [23]

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Unidentified Company Representative, [24]

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We will now take the last question before concluding the briefing today. The questions come from Nikkei Market's Benny Kung.

What is the biggest challenge so far for 5G trials and testing? Is it on schedule? Indeed, there are a number of factors affecting handset sales. Can management give a judgment -- give your judgment call or guidance on the extent of drop in the coming 6 months?

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Stephen Chau, SmarTone Mobile Communications Limited - CTO & Executive Director [25]

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Maybe I try to address the first question. I won't say they are challenges. I think so far, the testing on the 5G, on the -- both the mid-band and high-band, meaning the 3.5-gigahertz and 28-gigahertz millimeter wave so far was quite promising. There's a lot of learning. And learning actually give us a good foundation and understanding how to build the best-in-class 5G network in Hong Kong, utilizing both the mid-band and high-band. In fact, not just the mid-band and high-band, we also -- after the testing, we're also seeing how we can best mix of all the spectrum that we have, including the low band to provide not just the most powerful 5G network, but also the most extensive coverage, maximum capacity and delivering the overall promise that 5G can deliver. I would say the testing so far is really promising and actually achieving what we expect from our planning.

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

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On the second question, Benny, I think as I answered another question probably from the press in Chinese, the handset sale is highly uncertain. It have always been that case in the past 5 years, anyway, okay? But recently, there are more -- even more uncertainty in the macroeconomic environment. And we would not provide any specific guidance on the sales of handset. I mean it's just the feeling is there's a lot of uncertainty and -- although be quite cautious on the handset sale. Other than that, there's no guidance or no expectation of any extent of the decline.

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Unidentified Company Representative, [27]

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