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Edited Transcript of 6823.HK earnings conference call or presentation 12-Feb-20 10:30am GMT

Full Year 2019 HKT Trust and HKT Ltd Earnings Presentation

Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of HKT Trust and HKT Ltd earnings conference call or presentation Wednesday, February 12, 2020 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hon Hing Hui

HKT Trust and HKT Limited - Group MD & Executive Director

* Hong Kit Wong

HKT Trust and HKT Limited - CFO

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Presentation

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Hon Hing Hui, HKT Trust and HKT Limited - Group MD & Executive Director [1]

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Welcome to our HKT 2019 Annual Result Announcement. Firstly, some highlights for the year 2019 performance. Obviously, it doesn't need a lot of elaboration. 2019 was a challenging year, particularly in the second half, as Hong Kong economy suffered a significant slowdown in the midst of social unrest. Despite the headwinds, HKT business remained resilient and conquered with our market leadership, scale and diversity of business. We achieved a solid operating and financial performance during the year. Our consumer broadband and mobile businesses proved very resilient, gaining new customers, improving customer retention and increasing average spend, while our enterprise business continued to reap benefits from the growing digital economy. Looking ahead, we are excited at the prospect of our 5G service launch, which we believe will usher in a new suite of differentiated services to consumers and business transformation solutions for enterprises. This will be supplemented by our newer service offerings on the platform of our loyalty program, The Club, and our soon-to-be launched virtual banking partnership, all of which will enrich the customer experience and deepen our engagement with them. Although the beginning of this year has presented us with further challenges, I'm hopeful that the resilience of our businesses and our maturing growth initiatives will help HKT sustain its steady growth, if not reach new heights in the year 2020.

In all humility, I'm pleased to report that we achieved a solid financial performance in 2019 given the very difficult economic and social conditions as well as the intensifying price competition in both the broadband and mobile businesses, particularly in the budget mass segment of the market. Against this backdrop, services revenue, excluding handsets, recorded a 1% growth. Of course, handset sales remained weak during the year in the wake of dampened consumer sentiment and generally longer handset replacement cycle further lengthened by the anticipation of the new 5G models. To counter the soft market conditions, we doubled down our efforts in extracting operating efficiencies, which allowed us to grow our EBITDA by 2% and improve margins as well. Cash flow conversion remain our primary focus with AFF expanding by 3% for the full 12 months. I'm therefore happy to report that the board has recommended a distribution of HKD 0.4037 per share, representing 100% of the payout, which together with the interim dividend results in a total distribution of HKD 0.7038 and an implied yield of 5.94% dividend yield.

Let me now provide a review of each of our key lines of businesses. In the consumer broadband segment, market conditions continue to be very tough with aggressive price promotions everywhere, particularly, again, in the value-seeking end of the market. Nevertheless, we sustained our 12th consecutive year of revenue growth on the back of our network leadership, our differentiated service offerings with the unique sports and entertainment content, backed by our affiliate Now and Viu. And in addition, we employ a multi-brand strategy to cover the entire spectrum of customers, adding on to our acclaimed NETVIGATOR brand, the HKT Premier to serve the high-end customers; and LiKE100, showing the -- offering the vanilla type of broadband connectivity service. As such, we continue to record positive net adds during the year with our customer base now hitting 1.45 million. We also continue to see growth in high-speed adoption, a 6% growth year-on-year, with fiber to the home and VDSL now reaching 70% of our base. Together with the up-sell of Smart Living gadgets and Home WiFi solutions with penetration now reaching 300,000 customers, ARPU also improved. This upselling is enabled by our extensive use of data analytics in customizing our service proposition. It helps manages our churn at a steady rate and a sustained low level of 0.8% during the year despite the very severe competition that we see.

Here, we show our unparalleled network as the backbone for the digital economy. This is a full all-fiber, fully redundant local network that we are showing. It provides a resilience and reliability that the enterprises customers demand. It supported a number of major data network and transmission projects in both the public and private sector during the year. In addition, the extensive fiber and interconnect backbone linking up the enterprises and the major data centers are also very important. And this is already able to support the upcoming 5G-enabled solutions and serves as a very important mobile backhaul for the 5G era.

In particular, we have recently added the Ultra Express Link, which provides the shortest link between the data center hub Tseung Kwan O and Chai Wan area. It provides added diversity and ultra-low latency to the various ISP and enterprises.

Complementing our local infrastructure is our international network that is highly resilient and global in scope. It comprises a Tier 1 global IP backbone and a transmission network, with 125 points-of-presence across 76 cities and over 60 diverse cable system worldwide that we have invested over the past many years.

New additions during the year 2019 include JUPITER, connecting Japan and the U.S., a well sought-after route; and PEACE cable system, providing the shortest route from China to Europe and Africa. HKT, therefore, possesses unparalleled combined local and international network with resilience, diversity and security, which forms the backbone of the digital economy. These core capabilities are further leveraged by our international team, our PCCW Global, to on sell and deliver value to other carriers, other service providers and multinational enterprises beyond Hong Kong.

Let's take a look at our enterprise segment, the commercial segment. Although the commercial segment was negatively affected by the general slowdown in the economy, in particular, in the second half and especially evident in some of the sectors like the hospitality, luxury brand, retail and F&B. But digital transformation is sweeping across all businesses with swift adoption, in particular, by a number of verticals. For one, the public sector. It is quickly embracing digital technology to ensure swifter, better and more cost-effective, efficient services to provide to all citizens and to transform Hong Kong into a smart city. Examples of these contracts that we have won include the smart parking meters in Hong Kong and also contracts to build fiber to remote village areas.

Another industry is the financial industry facing big waves of technology disruption as they have to allow consumers and businesses to transact securely realtime with their applications with the mobile devices. The event of 8 virtual banks to be launched this year also create a lot of new opportunities, revenue upside for us. We are asked to help them build a highly secure data network. And indeed, we have already won several contracts in this area.

Utilities, for instance, is another example deploying technology solutions to drive efficiencies and improve operations through multilayer resilience and network monitoring. These benefits become even more evident, more necessary in recent times of social disruption and in the face of health incidents that we are seeing right now. So HKT has been partnering with these different enterprises in different industries to build vertically customized solutions for digital transformation. All of these help contribute to a total of 13% growth in terms of local data, enterprise revenue for the year 2019. And indeed, we are very happy to share that we have secured new contract wins during the year to the tune of around HKD 4 billion. This is particularly important to form the foundation for us to help weather the expected headwinds in this challenging year 2020.

Turning to mobile. We continue to see severe competition, obviously, which has led to the rotation of consumers to a lot of low-priced plan tiers offered by our competitors. Our strategy has been to focus on share of wallet rather than pure market share. We succeeded in acquiring and retaining customers in the higher ARPU segment through our CSL and 1O1O brand. In particular, we can see that in terms of 1O1O customers, our Premier brand grew notably by 13% year-on-year in the year 2019. Churn has also been held steady at 1%. ARPU was up to $200 from $198 last year, reflecting the full year impact of our price increase in the last quarter of 2018. The higher ARPU was also a result of many other factors, one of which is the contribution by the enterprise SMS messaging revenue from our commercial customers, including banks, credit card companies, corporate customers sending their marketing messages to their consumers as well as our success in cross-selling a wide range of mobile value-added services on the consumer side. And these VAS include our own media services, such as Viu, Now E box, MOOV services and the increasingly popular roaming applications. We have continued to improve and enhance our roaming apps and the UI -- and the enhanced UI, which facilitate the user convenience to choose tailor-made, targeted offerings in terms of the roaming. And with such, we are able to stimulate the outbound roaming revenue growth, which saw a 7% year-on-year jump in 2019. Obviously, with the impending 5G launch, we believe that the breadth and the quality of the value-added services which we can offer will be further enriched.

Talking about 5G then. Following the completion of the spectrum auctions last year, we have been working diligently on making our 5G network ready for service. Currently, we are still aiming to be the first operator in Hong Kong to launch our 5G service in April this year. We have come up with a new slogan called See the World Differently under the CSL 5G lens. With our largest share of comprehensive spectrum holding of almost 700 megahertz across multiple bands, largest amount of cell sites with territory wide coverage and also an unparalleled extensive fiber backhaul network, we believe that HKT is uniquely positioned to showcase the benefits of the 5G technology while, at the same time, not compromising the quality experience of the 4G users.

Now if you take a look at our slide showing the various band, you can see here that the low band will continue to provide coverage for the 4G and also as a coverage layer of our NSA 5G rollout. The mid-band 5G, 3.3, 3.5, 4.9, is the main band for building out the 5G network. It will provide a capacity layer and coverage layer for both indoor and outdoor locations. Obviously, the 4.9 gigahertz spectrum is also critical to cover the major restriction zones in Tai Po and Stanley area. The high-band mmWave will also be used at high-traffic hotspot areas and also for private campus style solutions in which we deliver private network solutions to large-scale users.

As we usher in the 5G era, I must say respectfully that 5G is not just about price. It's not just about more data. It's about how we use the data. It's about unique experience and content that we can provide to our consumers. Of course, the other important point is about digital transformation for enterprises. While, of course, at this stage, we cannot disclose details of the specific offers and our monetization models, an initial preview will be as follows.

On the consumer side, we'll be working with our content media group to provide extensive and unique content portfolio to enrich the media experience of our customers. And examples include our exclusive Now TV Euro 2020, which will include immersive VR and HD experience, 360-degree multi-angle views and also 24 bp streaming, music streaming via our MOOV apps, all made possible now by the low-latency characteristics of our 5G.

Gaming, of course, will also be a focus, which, together with the recent developments in cloud gaming and eSports and also enabled by the low latency and, of course, the edge computing on our unparalleled network, can bring in unique experiences to die-hard gamers. I'm sure that this will be a new source of ARPU driver as well.

And of course, on the extensive fiber network and the various partnership with the technology side, we'll be able to support a wide range of enterprise solutions in the areas of smart city utilities, health care and transportation.

Talking about digital transformation. While at the same time, we have been undertaking digital transformation to our enterprise customers, obviously, HKT itself has been doing this. We have been going through this digital journey to help serve our customers better and to improve our process, business processes to cut down our operating costs, to improve operating efficiencies. So what we have done in the past year is that we have increasingly been steering our customers' interactions online, encouraging them to use our digital channels. This not only improves the quality of our customer service, cut down our cost to serve, this is particularly important in the recent months given the social situation in Hong Kong and also the current virus that we are facing, which means that we have to reduce the -- cut down the opening hours of our shop or even close out some of our retail shops in order to help reduce the traffic in society. So the digital channels and the digital interactions have been increasing and have been successful. This also allow us to consolidate our physical store requirements, so you'll be able to see the presence of some co-run shops already with both broadband and mobile presence. Of course, this also help better insights into our customers, and extensive use of data analytics will help us customize our propositions in terms of sales and offerings to our consumers and thereby increasing conversion. Targeted sales hit rate improved. Cross-sell and retention rate also improved.

Talking about The Club, our loyalty program. It has now grown to a base of approaching 3 million members. It expanded by 8% over the past 12 months, and this growth in membership has been matched by an expansion in our coalition and redemption partners, which is now a number over 800. They offer over 4,300 units of redemption items. This is instrumental in driving loyalty for our HKT services and proves to be able to uplift ARPU and reduce churn. It is also a more cost-effective way to acquiring customers. By directly engaging with members, HKT also has the potential to capture a share of the customer wallet beyond just telco spending into the revenue share model with brands from a variety of industry. This is still early stage, but we believe that it has upside potential.

Finally, the financial services. Of note is our Tap & Go wallet, with its prepaid card in Asia, it is a secure payment mean, particularly popular amongst young online shoppers. Right now, the accounting service has already reached 2.5 million as of December 2019. It provides reliable, easy-to-use features such as instant overseas remittance, RMB transactions, transportation, ticketing, insurance and some more new services to come.

Transactional volume over our platform is also consistently growing and reached approximately HKD 180 million for the single month of December last year. On the merchant side, we have introduced the 9-in-1 mobile POS terminals and solutions. And since launch in June, we have now achieved over 1,000 subscriptions. We have added the O2O capabilities, wireless payments, dashboard and analytics on these POS on top of the normal broadband fixed mobile connectivity.

Finally, good progress is being made on our digital banking partnership with Standard Chartered and Ctrip Finances. It is expected to launch in the coming and -- but given the recent outbreak of the novel virus, a lot of VBs have announced that they will postpone the launch to Q2 or even later. But of course, we would leave it to our partners to announce the coming launch of our new VB services as and when appropriate.

With that, I will ask our CFO, Evan, to share with you the financial results.

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Hong Kit Wong, HKT Trust and HKT Limited - CFO [2]

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Thank you, Susanna. Let's first take a look at the summary of performance of our key financial lines in 2019. As mentioned by Susanna earlier, our AFF service revenue and EBITDA has shown steady growth of 3%, 1% and 2%, respectively. And if you include the mobile product sales, which are mainly the handset sales, our total revenue for the year was USD 4.244 billion, representing a decline of 6% on a year-on-year basis. The decline in handset sales was mainly due to the continued lengthening of mobile handset replacement cycle as well as the weak consumer sentiment since the second half of 2019. But due to the minimal margin contribution brought by these mobile handset sales, the decline in mobile product revenue does not have any material impact on our EBITDA, net profit or cash flow. So as we all can see, our net profit for the year has shown a strong growth of 8% to USD 669 million.

Looking into details of our TSS segment. Our TSS revenue has increased by 1% to USD 2.814 billion, in which our broadband revenue has grown by 2% to USD 643 million. The continuous growth was supported by the increase in our fiber to the home customers as well as the sustained market demand for our broadband value-added services, including our Home WiFi solutions and Smart Living products.

On our local data business, the revenue has grown by 13% to USD 355 million. The strong growth is supported by the rising demand for digital transformation initiatives as well as the demand for our managed network facilities and cloud services alongside with our high-speed fiber network connectivity.

On international business, there is continued demand for the international data connectivity. But due to the industry-wide decline in voice wholesales and IDD revenue from certain international carriers, the total international revenue has declined to USD 942 million, with a 2% drop year-on-year.

On local telephony business, the decline in revenue for the year is contained at the level of 2% to the level of USD 418 million, while the demand is gradually migrating towards our other broadband and mobile product offerings. But as a whole, underpinned by our diversified business portfolio as well as our continuous cost control, our TSS EBITDA has shown a growth of 2% to USD 1.072 billion with a steady EBITDA margin at 38%.

Let's turn to the mobile business. Our mobile service revenue has reported a growth of 2% to USD 1.079 billion. The growth in service revenue was supported by the continuous upgrade of our mobile subscribers to higher-tier service plans. At the same time, we are seeing increase in popularity of our various mobile value-added services, including our different kinds of roaming products. As a result of all this, our postpaid ARPU has increased from the level of HKD 198 by end of 2018 to HKD 200 by end of 2019. Our postpaid customer base has slightly increased to 3.25 million.

Our mobile product sales, as I mentioned earlier, due to the decline in handset sales, the sales amount was reduced to USD 436 million. But due to the minimal margin contributions by these product sales, our overall mobile EBITDA continue to report a steady growth of 2% to USD 650 million, with the EBITDA margin improved from 35% to 43%. If you exclude the mobile handset sales, our mobile service EBITDA margin was kept steady at 61%.

Turning to the operating expenses. We continue to focus on maximizing operational efficiencies across all lines of business, which resulted in an overall OpEx saving of 3% to the level of USD 577 million. The overall OpEx-to-revenue ratio has moved from 13.2% to 13.6%. But if you exclude the mobile product sales, the OpEx-to-service revenue ratio has actually improved from the -- from the level of 15.8% in 2018 to 15.1%.

In terms of CapEX, the total CapEx investment for the year has increased by 4% year-on-year to USD 346 million. On mobile side, CapEx has been continuously invested on our infrastructure and capacity enhancement so as to prepare ourselves for the imminent 5G service rollout.

On TSS side, apart from our continuous investment in local fiber enrichment, in this year, we have also been investing in different local and international undersea cables, which are expected to bring in further business opportunities to us in foreseeable future. The overall CapEx-to-revenue ratio has moved from 7.4% or 8.2%, which is still well contained within our 10% guidance.

Next is on the detailed AFF statement. We have discussed about EBITDA and capital expenditure just now. The customer acquisition cost for the year has reduced by USD 7 million while our fulfillment cost has increased to USD 63 million, which was reflecting the cost of customers' equipment and installation provided alongside with our increasing solution-based offering to our customers. The payment for right-of-use assets is referring to the payment of rental has also reduced to USD 211 million as benefit from the savings that we have achieved from our retail shop consolidation.

Down to the tax payment line. Because of the timing of tax assessment notices by all companies in Hong Kong with December financial year-end was deferred, the tax normally paid by us in the fourth quarter of the year has now been deferred to the year 2020. So as a result, the total tax cash payment for 2019 has dropped materially as compared with 2018. But at the same time, we have accrued for the corresponding expected tax payment amount as part of our changes in working capital. So as you can see, the cash outflow in terms of changes in working capital has also increased correspondingly.

As a whole, our AFF for the year has improved by 3% to USD 683 million, translating to an AFF of HKD 0.7038 per SSU in issue.

For the detailed income statement, we have discussed from revenue to EBITDA. The depreciation and amortization expenses for the year has declined by 4% to USD 657 million. This was mainly contributed by the decrease in depreciation charge for right-of-use assets following our retail shop consolidation as well as the impact of periodic review of useful lives of certain network assets pursuant the requirements of accounting standards and policies. And after the income tax charge of USD 133 million, our net profit for the year has improved by 8% and to USD 669 million.

Then on our gearing position. Our total gross debt outstanding by end of 2019 was steady at the level of USD 5.2 billion, with the corresponding gross debt-to-EBITDA multiple at 3.18x, a slight improvement as compared with 3.22x as we reported in a year ago. Currently, the total liquidities on hand has exceeded USD 1.5 billion.

And finally, on the debt maturity profile. In September 2019, we have issued a new bond of USD 500 million 10-year bond for refinancing of part of our existing bank loans. And after this refinancing, as you can see from the chart, we don't have any further immediate refinancing during the remaining of 2020. On the other hand, in light of the current market volatility of HIBOR, our current fixed to floating rate mix of debt is managed at a level of around 7:3. We will continue to monitor the market situation closely, so as to fine-tune our fixed to floating rate profile from time to time.

And with this, it ends our 2019 results presentation. Thank you.