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Edited Transcript of 6823.HK earnings conference call or presentation 7-Aug-19 9:30am GMT

Half Year 2019 HKT Trust and HKT Ltd Earnings Presentation

HK Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of HKT Trust and HKT Ltd earnings conference call or presentation Wednesday, August 7, 2019 at 9:30:00am 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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Unidentified Company Representative, [1]

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Good afternoon, and welcome to HKT's 2019 Interim Results Presentation. We will start the webcast today with a presentation followed by Q&A. And with that, let me turn over to Susanna.

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Hon Hing Hui, HKT Trust and HKT Limited - Group MD & Executive Director [2]

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Good afternoon, ladies and gentlemen. I'm pleased to report that HKT delivered another solid set of results in the first 6 months of this year. While we achieved modest growth in revenue of 1%, our successful efforts in enhancing operating efficiencies drove improvements in terms of EBITDA and margins as well as a 3% growth in cash flow conversion. These results are a testament to the market-leading position of all of our lines of business, our unmatched scale and our focus on delivering innovative, value-adding services to our consumers and enterprise customers. And following the Board meeting earlier this morning, the Board has recommended a distribution of HKD 0.3001 per SSU, representing a 3% growth in terms of the interim distribution.

I would like to start with some sharing of the current market dynamics. Price competition in the consumer market, both in the mobile and the broadband side, remains intense, especially so in the value-seeking segment. Similarly, keen competition is being felt in the small, medium enterprise market as well, which is further aggravated by the general slowdown in the local economy. But on a positive note, we are experiencing healthy spending from large corporates and public organizations as they accelerate to embrace more digital technology.

And with this market context, let me provide a detailed operational review of each of our major lines of business. Consumer broadband business. Despite the competitive market conditions, we have successfully maintained our leadership position in the consumer broadband market. Our customer base continue to grow steadily to 1.446 million, which we served through 3 brands, the LiKE100 for the value-seeking segment, the mass market navigator and the HKT Premier. This multi-brand strategy enables us to provide a customized solution and help us manage the intense price competition evident in the lower end of the segment.

And particular focus was also spent on customer retention, resulting in an industry-leading level of churn rate 0.8%. Retention is particularly important in a price competitive market as retention cost is generally lower than the customer acquisition cost for new customers, and it, therefore, contributes to the improvement in our operating margin and cash flow conversion. With our fiber network now covering 88% of our households, we continue to swap the assets and migrate our customers to fiber services, yielding higher ARPU, resulting in over 800,000 customers on our Fiber-to-the-Home service, and this represent an 8% expansion as compared to first half of last year. It also represents a penetration rate of 55% of our total sub base.

In addition to fiber upgrade, further top line initiatives include up-selling innovative and value-added services to enhance the home broadband experience. For example, our home WiFi solutions have, in particular, gained significant traction with over 300,000 households, signing up to the service already. This represents a penetration rate of over 20% of our sub base and obviously, providing more room to grow our top line. And these customers generate incremental ARPU of between HKD 58 to HKD 200 (sic) [288] per month. Our latest service offering is the Samsung Smart Wifi -- SmartThings WiFi. And this is an example of how we partner with a wide range of technology vendors to offer the most advanced solutions to our customers.

On the right-hand side of the slide, you can see the overall smart home solutions that we provide. And in fact, we have been working on a B2B2C model for a new revenue stream as well. What we have been doing is that we collaborate with various property developers to embed smart home solutions such as home networking, home security monitoring services into the new residential developments. We are pleased to share that to date, we have already secured 90 such partnerships with contract value worth around HKD 30 million -- USD 30 million, which will be recognized over time as and when these new builds are completed.

Turning to our enterprise solutions. As consumers become more digital savvy, enterprisers increasingly feel the need to invest in technology solutions such as AI, data, video analytics and so on. On the one hand to help serve their customers better to enhance their top line, on the other hand to improve the agility of their business operations to improve their bottom line. Based on our scale and breadth of our relationship with the enterprise segment, we become a partner of choice for many leading and emerging technology partners. And combined with our unrivaled fiber-based network and our deep vertical expertise, this allows us to transform beyond pure connectivity to solution-centric services to serve our enterprise customers. With this unique competitive advantage, we have been successful in executing a number of projects of -- for large corp and public sector.

And you can see here that for the first half, revenue in this -- from this large corp. and public sector increased by 16% year-on-year. Total secure orders in the first half also grew by over 60% with contract size amounting to more than HKD 2 billion right now. One notable example of such large-scale contract wins is a major contract from the Department of Transportation signed in the first half. This involves a territory-wide deployment of a new generation of over 12,000 parking meters with a total value of HKD 680 million. These parking meters will be mobile connected and include features that improve user functionality such as sensors for the drivers to detect empty parking space and mobile app for the drivers to allow remote top-up.

Another such example of contract win is the contract from the Hong Kong International Airport, and this involves managing its private LTE network and also its cable management system for a smart airport. This is particularly important in preparation for the advent of the 5G. Now all of these illustrate that we are moving into an increasingly connected IoT world, and we believe that there are a lot more opportunities for such large-scale projects, which requires complex integrator skills, deep vertical expertise and of course, network superiority, where HKT has an unrivaled edge over others.

Turning to our mobile market. We retain our leadership in the mobile market amidst the competitive environment and a period during which handset sales were relatively slow and sluggish. In face of a longer handset replacement cycle and consumers awaiting the release of 5G models, our postpaid customer steadily grew to 3.25 million, met by continued strong growth in the higher-spending segment with the 1O1O customers increasing by 17% year-on-year. And we also benefit from the tie-ins and new offerings from The Club, our loyalty program, which result in an improved churn rate for the postpaid side from 1.1% to 1%. Postpaid ARPU also increased by 2% from $195 to $198 as we continue to offer an expanding choice of value-added service to drive further spending.

Several of the more popular services include tie-ins with PCCW media content. And this includes the cross-promotion of the Now E content, which includes sports and soccer; Viu content, which include drama; and MOOV music services to our mobile customers, which have demonstrated a good takeup so far. Another area of focus has been to revive the roaming revenue by offering frictionless easy-to-use roam passes as well as roaming VAS packages to win back those customers from using low-quality dongles and prepaid roaming sims. These initiatives are beginning to bear fruit as we have seen the reversal of the declining roaming trend from a drop of 9% for full year last year to an increase of 4% in the first half of this year.

And turning to the topic of 5G. As we all know, globally, there are already quite a few operators having rolled out the 5G services. And as the market leader in Hong Kong, HKT is well prepared to offer the highest quality 5G services to customers, leveraging our rich fiber infrastructure and extensive radio network. Earlier in the year, HKT was allocated 400 megahertz of spectrum in the 28 gigahertz band in April. We were the first mobile operator in Hong Kong to conduct a 5G use case demo in this spectrum, which achieved an end-to-end latency of below 10 milliseconds and peak downloading speed of 2.6 gigabits per second. As these high band provide ultrahigh speed and massive connectivity, it is good for coverage in airport, exhibition area, large compound and large campuses. And right now we are working to negotiate wins from enterprise customers for private network solution deployments, including network build-out and network management for the different industries and different verticals.

Recently, the OFCA, the CA has also recently announced further details regarding the mid-band 5G spectrum, with a core 3.5 gigahertz auction scheduled to occur in October this year and spectrum to be released in April 2020. We appreciate that the government has set the minimum reserve price at a more reasonable level this time, and we would participate in the auction. We expect to launch the 5G services in Q2 of 2020 when this spectrum is available to cater for the early 5G adopters with premium and innovative services. Of course in handling the 5G business case, we would be targeting to provide the best mobile experience while balancing the objective of maintaining a healthy AFF growth.

In terms of building a digital ecosystem, to better serve our consumers and enterprise customers, we have been building this ecosystem as an enabler to provide a seamless platform across the customers and merchants. In the center of it is, of course, our loyalty program, The Club. While originally serving as a loyalty program, it now has an active base of 2.8 million members, an increase of 13% year-on-year. This large and growing base is extremely appealing to our merchant partners with more than 500 merchants joining the ecosystem now. And this, of course, feed back into an enhanced service offerings and experience for our own club members. And during the first half, we continue to extend the service offerings into various adjacencies, such as Club Travel with -- together with Travel Insurances as well as online shopping platform. Although these are at early stage of execution, we believe that there will be growth potential, and we will share more as the business progresses and gathers scale.

In terms of the HKT financial services, our aim is to maintain a balanced portfolio of best across multiple verticals and timescales. On the consumer side, our secure digital payments platform, Tap & Go, continued to gain traction. It has now amassed 2.1 million accounts with new services and function constantly being added. For instance, it now supports Hong Kong Dollar, RMB, wallet and dual currency transactions, overseas worldwide remittances via Western Union and event ticketing. In the first half, we saw our transactions volume grow by 60% year-on-year.

On the merchant side, we launched -- we have launched a smart point-of-sale service terminal that allow merchants to accept a wide variety of payment methods as well as offering data analytics to how merchants improve their understanding of customer preferences and better performance tracking. We also offer digital application to merchants and service providers to improve their efficiencies. For example, to school caterers for ordering of student meals daily. Another example is to property management company by using the Tap & Go platform to collect the monthly management fees and dissemination of no notices to their dwellers in some of the Hong Kong private housing estates, such as the Redhill and Tregunter.

And finally, with regards to our virtual banking joint venture with Standard Chartered and Ctrip, we are working towards launching the virtual banking early next year, and offering an even broader range of tailor-made financial services to our customers. More details will be announced by the JV at a later stage.

Conclusion is that while we face challenging headwinds in terms of competition and general slowdown in our local economy, the coming 5G and digital transformation efforts from the large corp. and public sector do furnish certain tailwind for our growth prospects in the near to midterm.

And with that note, I would like to pass the floor back to Evan for the financial review. Thank you.

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Hong Kit Wong, HKT Trust and HKT Limited - CFO [3]

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Thank you, Susanna. Then let's first take a look at the summary of performance of our key financial lines for the period.

As just mentioned by Susanna, our AFF service revenue and EBITDA also a steady growth by 3%, 1% and 2%, respectively, for the period. And if to include the mobile product sales, our total revenue for the period was USD 1.937 billion, a decline by 11% on a year-on-year basis. The decline in mobile handset sales for the period was mainly due to the lengthening of the handset replacement cycle by the consumer across the whole industry.

Our service EBITDA margin has been maintained steady at a level of 42%, and our overall blended EBITDA margin has increased from 33% to 38% mainly due to the reduced dilution impact brought by the lower margin handset sales. Our NPAT for the period has increased by 16% to USD 277 million.

Looking into the details of our TSS segment. Our total TSS revenue has increased by 1% to USD 1.309 billion, in which our broadband and local data business continued to be the key growth pillar in this segment. Our broadband revenue has increased by 5% to USD 292 million, and this growth in revenue was contributed by the continuous increase in our broadband subscriber by 1% year-on-year to 1.615 million by end of June.

At the same time, we continued the expansion of our Fiber-to-the-Home services, of which our total Fiber-to-the-Home assets line has increased by 8% year-on-year as compared with June last year. And also, the revenue growth is supported by the deepening traction of our value-added services and solutions, including our home WiFi solutions as well as Smart Living products.

On local data business, the revenue has shown a strong growth by 12% to USD 172 million. The growth is supported by the continuous rising demand for our digital transformation initiative as well as cloud-based and solution-based product offerings from both public and private sector across different industry verticals. For international business, the revenue has declined by 5% to USD 441 million. In the period, we continue to see the international data revenue to report a growth by 3% year-on-year at the back of the growing demand for global data connectivity, but the impact was offset by the decline in voice wholesale business with certain international carriers.

On local telephony business, we have managed to contain the decline in revenue to 1% level to USD 207 million for this traditional service while the demand is migrating towards our other broadband and mobile product offerings. The other revenue in TSS segment also recorded a growth of 2% to USD 197 million, which was representing the increasing sales of CPE equipment alongside with our increasing network solutions and infrastructure projects. On the whole, underpinned by the diversified business portfolio, the total TSS EBITDA has grown by 2% to $491 million with the EBITDA margin contained steady at the level of 37%.

Then let's turn to our mobile segment. The total mobile service revenue has also recorded a growth by 1% to USD 497 million. The growth in service revenue was supported by the continuous upgrade of our subscriber base to higher-tier service plans. In particular, our premium 1O1O subscriber has increased by 17% year-on-year, which is helping to make a higher ARPU contribution to our mobile business as a whole. And at the same time, we are also seeing increasing popularity of our various mobile value-added services, including our different kinds of roaming data pass, which has helped to stimulate the growth of our roaming revenue by 4% year-on-year.

Before these positive impacts, our postpaid ARPU has increased by 2% year-on-year to HKD 198 by end of June despite the keen market competition, particularly in the value-seeking segment. Our total postpaid customer base was at 3.247 million by end of June 2019.

On the mobile product sales, the amount has declined to USD 172 million due to the lengthening of handset replacement cycle, as I just mentioned. And the overall EBITDA for mobile segment has increased by 2% to USD 283 million with the blended EBITDA margin increased from 30% to 42%, again, due to the reduced dilution impact for -- by the lower margin handset sales. If we take out the handset sales, the mobile service EBITDA margin was kept steady at the level of 57%.

Turning to the operating expenses. We continue to focus on maximizing operational efficiencies across our all lines of business, which has resulted a 4% OpEx saving for this period. Areas of improvement include enhanced staff efficiency, full business process automation as well as the cost savings from our retail shop rationalization taken during the period. Our overall OpEx-to-revenue ratio has moved from 14.8% to 16.1%, which was just due to the lower amount of handset sales being recorded during this period.

Then on the CapEx. Our total CapEx spend for the period was kept steady at a level of USD 171 million. On mobile side, CapEx was continuously spent on our infrastructure enhancement and network capacity expansion, so as to support the data traffic growth as well as to prepare ourselves for the upcoming 5G rollout. On TSS side, we continue to invest in undersea cables as well as the local fiber enrichment, so as to meet the rising demand for our Fiber-to-the-Home services. Our overall CapEx-to-revenue ratio has also moved from 7.9% to 8.8% for the current year, again, was due to the increased amount -- reduced amount of handset sales for the period, and this is still well contained within our 10% guidance.

Then quickly on the details of AFF. First just discussed about the EBITDA and capital expenditure. Our total customer acquisition costs and license fee has reduced to USD 51 million, while our fulfillment costs has increased to USD 35 million, which was reflecting the course of customized equipment provided to the customers by our increasing solution-based service offerings. The payment for right-of-use assets, which is representing the rental payment, was kept steady at USD 109 million.

The AFF before tax and finance cost has improved by 3% to USD 374 million. Our tax payment for the period was kept fairly stable at USD 24 million, and our net finance cost paid for the period has increased to USD 61 million, which was mainly due to the increase in HIBOR across the period. And after the positive change of -- in working capital by USD 2 million, our total AFF for the period has increased by 3% to USD 291 million, translating to an AFF of HKD 0.3001 per SSU in the issue during the period.

On the details of our income statement, we have just covered from revenue to EBITDA. Our depreciation and amortization expenses has declined to USD 304 million. This was contributed by the decrease in depreciation charge on right-of-use assets following our retail shop rationalization as well as by the lower amortization charge in relation to intangible assets recognized upon -- in our CSL acquisition back in 2014. Our net finance cost charge has increased by 6% to USD 85 million, both by the increase in HIBOR across the period.

Our overall effective tax rate has been maintained fairly stable at 19%. And before this, our NPAT for the period has improved by 16% to USD 277 million. And on our leverage position, our total gross debt outstanding was maintained at the same level of USD 5.18 billion as compared with debt by end of last year with the corresponding gross debt to EBITDA multiple contained at around 3.2x. Our total liquidities on hand is USD 1.45 billion, including undrawn facilities totaling around USD 1.17 billion, and we continue to carry the investment-grade rating at BBB and Baa2.

And on our debt maturity profile. As you can see from the diagram, we don't have any immediate refinancing need till 2021. Our current mix of floating to fixed-rate debt is approximately 50-50 at the moment, and our effective interest rate was approximately 3.1% for the first half of 2019.

With that, it concludes my financial review section.

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Unidentified Company Representative, [4]

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We're asking questions now?

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Questions and Answers

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Unidentified Company Representative, [1]

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First question is regarding 5G. Can you give us more insights on the estimated spending on 5G, both in terms of spectrum payments and network infrastructure?

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Hon Hing Hui, HKT Trust and HKT Limited - Group MD & Executive Director [2]

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I think in terms of the spectrum payment, just now we already mentioned that the government has set the minimum reserve price of the mid-band 5G spectrum at quite a reasonable level, 2 million for the 3.32 (sic) [3.3], 4 million for the 3.5 and 3 million for the 4.9. So I think this is overall -- in the overall interest of the industry, and obviously, will be beneficial to the consumers at large. In terms of the network infrastructure, I think over the years, HKT has already invested substantially in the fiber network, which will form a very robust foundation in 5G. And for the real 5G rollout, it will be built on a nonstand-alone basis over the 4G layer. So overall, it will be on a modular basis. And we believe that some of these incremental CapEx will be basically absorbed by the existing 4G capacity CapEx as well. So with that, we do not expect that there will be any sudden surge in CapEx. It will be able to be absorbed by the existing CapEx budget, and we will be maintaining our CapEx-to-revenue ratio guidance of below 10%.

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Unidentified Company Representative, [3]

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Next question is, how have the recent events in Hong Kong affected HKT and your outlook for the rest of the year?

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Hon Hing Hui, HKT Trust and HKT Limited - Group MD & Executive Director [4]

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I think overall, everyone in Hong Kong will be affected one way or another. We do see a notable contraction of economic growth and quite challenging business environment, especially for the small to medium enterprises. Consumer sentiment, of course, will be affected as well. But overall, I think telecom services is essential service to the Hong Kong economy as well as to all consumers in general. And in that aspect, we can say that our business is relatively more resilient. And in the midterm, I think 5G as well as the enterprises' need to basically engage in digital transformation to help the business would help counter these headwinds. And we are especially confident that in terms of the competitive advantage, as compared to other operators, we possess the superior network. We also possess the complex integrator skills, and we also adopt a very agile approach in terms of partnering with the different service providers, technology players in the ecosystem. And we, therefore, are cautiously optimistic, especially when we have mentioned just now that we have secured quite a large order book already. So we are cautiously optimistic in terms of the outlook for the rest of the year. But needless to say, we will have to be very vigilant. We will continue to monitor the situation, and if necessary, we will have to tighten our belt.

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Unidentified Company Representative, [5]

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The Next question is regarding mobile handset sales, what caused the significant decline in mobile handset sales in the first half? And do you expect this to recover?

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Hon Hing Hui, HKT Trust and HKT Limited - Group MD & Executive Director [6]

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Evan, you want to take this?

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Hong Kit Wong, HKT Trust and HKT Limited - CFO [7]

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Yes. Sure. As I mentioned in the presentation, actually, the -- we are seeing that the overall trend in the industry regarding the consumer behavior and as well as on the handset replacement cycle, we are seeing multiple changes compared with a few years ago. And in particular, in this current period, the -- in the market there hasn't been any [Hello] handset being launched in period compared with the year before. So that explained the situation where we are in the first half in the year. Regarding the outlook for the future. As you will also be aware some of the customer will be expecting or waiting for the launch of the 5G handsets, which is expected to be in more large scales or being launched in the market. With that, we are seeing the growing trend on the handset demand. But as you can see from our financial result, as a whole because of the relatively lower margin that is brought by the handset stand-alone sales to our business as a whole, you can see even with the decline in handset sales being recorded for the period, we can still maintain our profitability as well as the EBITDA margin and EBITDA growth. So that will be -- we will be working hard to strengthen our profitability and don't necessarily rely on the sales of mobile handset on our cash flow. Thank you.

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Unidentified Company Representative, [8]

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The next question is regarding virtual bank. Would you be able to tell us more about your virtual bank, rollout plan and strategies? And how do you see the likely contribution of the virtual bank in the coming periods?

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Hon Hing Hui, HKT Trust and HKT Limited - Group MD & Executive Director [9]

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Well, I think in terms of the virtual banking business, it is a JV, and I really can't steal their thunder here. The only comments that I can make is that we target to launch the service in early 2020. And our initial focus will be, of course, the retail banking products. I would have to wait until the JV make further announcements when appropriate. And in terms of contribution in the coming periods, I think it would be too early to discuss right now. Thank you.

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Unidentified Company Representative, [10]

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Next question is regarding mobile tariffs. Given that you increased tariffs at the end of 2018, will you be lifting mobile prices again in the second half this year?

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Hon Hing Hui, HKT Trust and HKT Limited - Group MD & Executive Director [11]

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I think competition remains very keen, especially in the value-seeking segment as some of you may have known. Of course we will continue to monitor the market to see if there is any window at all in terms of further price hike. But I think the more important thing is not just to look at general price increase, but of -- but to drive increased spending from customers to lift ARPU. And we are hopeful that in terms of the various value-added services that we are right now cross-selling, it would be -- the ARPU will be further uplifted. In the medium term, as we can see from the overseas experience, some of the other global operators, which have already launched 5G services, they did achieve an average of 30% uplift -- 30% to 40% uplift in terms of the ARPU. And therefore, when the -- as and when the 5G ecosystem becomes more mature, hopefully, there will be more applications for mobile gaming and innovative content and so on. That would be able to provide a welcome boost to ARPU generally.

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Unidentified Company Representative, [12]

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The next question is regarding local data. Can you explain the driver in the first half and whether you can sustain the double-digit growth in the revenue for the rest of the year?

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Hon Hing Hui, HKT Trust and HKT Limited - Group MD & Executive Director [13]

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In terms of the local data revenue, I think for the first half, overall, we achieved a 12% growth year-on-year, which is quite encouraging. And this primarily reflected the demand from the large corp and the public organizations. And as mentioned, our secure orders right now exceed HKD 2 billion, and it will be -- we'll be able to recognize these in the coming periods as and when we complete these projects. So overall, we are cautiously confident that similar growth will be achieved in H2.

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Unidentified Company Representative, [14]

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The next question is regarding mobile roaming. Do you expect roaming revenue to continue its growth trend?

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Hon Hing Hui, HKT Trust and HKT Limited - Group MD & Executive Director [15]

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I think, overall, in the market, we have witnessed consumers switching from the low-quality dongles and prepaid sims. No longer -- they no longer basically take all the trouble to replace sims and so on when they are out traveling. So our recent initiatives of the roaming passes as well as the monthly VAS packages proved to be quite successful in terms of appeal to the travelers, and it has gained traction. And that's why we saw the roaming revenue in the first half grow by 4%. We are, again, cautiously confident that this trend will continue.

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Unidentified Company Representative, [16]

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The next question is regarding market consolidation and whether it's had any noticeable impact on HKT, for example, the recent WTT-HKBN merger.

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Hon Hing Hui, HKT Trust and HKT Limited - Group MD & Executive Director [17]

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Honestly, competition has always been keen in the telecom market in Hong Kong. Now as a matter of principle, I think consolidation should be beneficial to the industry as it should lead to greater focus on service and innovation-based competition rather than just relying on price competition. It's high time that all the operators should focus more on service and innovation rather than price. Now obviously, on our side -- we cannot comment on what the other operators are doing. But on our side, we constantly critique ourselves and see how we can improve our offerings. And as I said, we are in a unique position of combining fiber with the future 5G, and also because of our long-standing enterprise relationship and the scale of our business and the integrator skills that we possess. We do believe that we are well positioned to take advantage of these opportunities in the future.

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Unidentified Company Representative, [18]

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That was the final question. Thank you for joining today's webcast.