HKBN Ltd. (1310) Earnings Call Transcript & Summary

Good afternoon. Welcome to HKBN FY '21 Annual Results Investor Presentation. There will be a Q&A session after the presentation. [Operator Instructions] Now let us begin. May I pass the stage to Mr. NiQ Lai, Co-Owner and Group CEO; and Mr. William Yeoung, Co-Owner and Executive Vice Chairman.

Thank you. Can I have the clicker? First of all -- sorry. First of all, I'd like to thank all -- our almost 5,000 talents for really coming together in these tough times. We looked after each other and we've got through this period, and we are stronger for it today. In terms of our results, the key theme is over the COVID period, we are now emerging. The COVID period is not yet over, but through experience of COVID period, we are emerging stronger and transformed for growth. This is a fantastic time to be a shareholder, or more specifically, a co-owner of HKBN because over the last few years through our merger and acquisitions, we have acquired all the key components that we need to drive to the next stage of growth. All it takes now is execution, and we are known for our execution. In the Residential space, we have just signed an exclusive broadband distribution for -- broadband distribution with Disney+. This is going to be a major game changer for us going forward and should propel us toward the next area of growth. In Enterprise Solutions, we are making great progress with the integration of JOS into HKBN. Now remember, for the first 18 months of our acquisition of JOS, we did the entire integration by Zoom or by video call, so it was actually quite difficult. Over the last 6 months, we have been able to see each other in the office and really talk through and accelerate the integration. So this is why we are confident in -- confident in the near future. And then finally, our shareholders had approved our Co-Ownership IV program, which will allow us to top up and roll up our Co-Owner III program, thereby aligning us for growth in the next 3 years. William will talk through this in more detail in his section. If you look at our results for this year, we are very proud of these results. These are a decent set of results considering the environment that we are in. 4% revenue growth, 3% EBITDA growth, 2% AFF and DPS growth, reasonable growth. However, if you look at what we did to achieve this growth, we are incredibly proud of them in the sense that the entire government employee subsidy scheme that we received during the COVID period, we passed 100% to our colleagues. This is what it means living and breathing our core value: to Make our Home a Better Place to Live. So every region that we received government subsidies, be it Hong Kong, China, Macau, Singapore, we passed on the tax subsidies direct to our colleagues. If we had not, our DPS will be $0.82 or will be up 9%. Looking back, this is what makes us proud of our colleagues. This is our track record since our IPO in 2015. We are by far the fastest-growing telco in Hong Kong, and we aspire to remain the fastest-growing telco going forward. We have achieved 14% compound growth rate since our IPO in terms of dividend per share and free cash flow. For us, this is not a subjective number that is given to shareholders. This is the family life savings. This is the family life cash flow of our co-owners, our 870 co-owners, so this is something that has direct meaning to us. If you look at our businesses, Enterprise, Residential Solutions, predominantly green. I won't read out line by line. We are proud of what we achieved during these difficult times, but what's more important is look forward. What is absolutely incredible is our reach. This is the most valuable part of our business. In Enterprise Solutions, 1 in 2 active companies is our recurrent monthly customer. In Residential Services, 1 in 3 households in Hong Kong is our recurrent monthly relationship. This means we have incredible reach and being more aggressive and more dynamic and more willing to partner with people that match our business case. This is how we will grow -- outgrow these -- even these numbers when the timing is right, and this is why we are very proud to work with partners. And once again, William will go through some of the detailed partnerships that we have secured recently. These are the achievements over the last 3 numbers, over the last 3 years. You can see that we continued to grow through the COVID period, albeit at a slower rate as we reset and transform the company when the post-COVID period arrives. This is our operating cost, very efficient drivers. If you look at this year, our operating cost is down 6%. More impressively, as a percentage of revenue, it's fallen from 22% to 17%. That's a significant decline, but we have a lot more runway to go on this. If you look at our headcount, we've gone from 5,900 to 5,200, so the full year impact, the full year savings from this headcount reduction, this efficiency gain, will drive our growth going forward. In terms of our balance sheet, we currently sit on 4.6x net debt to EBITDA. Our covenant ceiling is 5.5x so we have a lot of headroom, especially as we grow EBITDA, and this number continues to come down. On that note, let me pass you to William, who will take you through the second part.

Thank you.

Thank you.

Thank you, thank you. Okay. Let's look at the Enterprise Solutions first. I would say skin-in-the-game is the DNA for HKBN. In the ES structure, all the commanders -- when we say commanders, they're the head of 6 sales units, all of them have their skin in the game ranging between 4 months salary to 6 months salary to tie in with their individual team's targets for financial year '22, i.e. if they don't hit the target, they will lose or [ sacrifice ] reduction of salary by 4 to 6 months. But if they gain actually the targets, they will have multiples of those investments. This pain/gain culture is unique in HKBN, and I believe none of our competitors dare to do something similar. So on this skin-in-the-game foundation, we have 3 pillars to help us to grow. One is the one-stop premium ICT Solutions. Having around 18 months internal integrations with JOS and also WTT and also thorough discussions with key partners, we believe we have everything, products and services, that is required by any enterprise, be them small SMEs or mid- to high-tier corporates. So when we talk about industry enterprise, we are saying that our talents are more experienced, higher caliber than our peers because we don't just go out and sell or serve, but we are certified by related industries or services standard such that we are really having professionals to serve our customers. Strategic partners. Partnership is a term that is abused by many people. But at HKBN, when we are talking about strategic partnerships, we are serious, real. We don't just having meetings or sharing those boring PowerPoints. We come together, sit together, share our internal KPIs, the financial expectations, and then both companies or co-partners also having some sort of skin-in-the-game and go for common KPI, that is a quantifiable financial figures. So we do have our many partners. But today, I'm happy that we have some partners that they are happy to share their voices with us towards our investors, our analysts. So please share some of the videos. [Presentation] So as you see partners like Cisco, Microsoft, PwC, they are willing to work together with HKBN's enterprise team to jointly sell and serve customers in Hong Kong and also beyond Hong Kong. So share with you our infrastructure about the Enterprise Solutions. After our successful integration with JOS, the SI team and also WTT. So basically, we segment the enterprise markets into 6 categories, and each category is under a [ BU ] commander. Each commander is responsible for a number of EBITDA. And as I mentioned before, each commander has invested about 4 months to 6 months' salary to tie in with their own team's EBITDA for coming financial year. So this is the skin-in-the-game that I challenge all the other peers that none of them are willing to do this. And then behind them, they are supported by our kitchens. When I say kitchens, it is our product team and the presales or the architecture teams from the fixed telecom side, from the ICT side and also from the SI system integration or IT area, mainly from JOS team. So basically, when you look at the blue color or the orange color, we are in a growth mode. We are increasing resources. We are increasing manpower and we are developing more partnerships, doing much harder so that we can go back together internally with our commanders, our co-owners, and externally with our partners. That's why we are confident in delivering the higher targets. So this page is just some of our snapshots about full-suite solutions to different categories of customers in Hong Kong, in Macau, different categories of customers that they will need our service beyond the basic assets of the fiber broadband. But -- solutions, everything required by any department or the entire company. So to the Residential area. As Nick mentioned, we just signed the exclusive partnership with Disney to launch Disney+, the very popular OTT content that we will carry and bundle with our fixed broadband and our mobile services to our existing customers and new customers in the market. One point I want to share with you is that Disney is very serious and very committed in making sure that Disney+ will win, will stand out in Hong Kong market. That's why if you, yourself or some of your friends or family members used to pay monthly fee to the existing pay TV provider, you will find or realize that some of the programs or channels offered by Disney before were stopped in the past 6 months. Why? Because Disney is focusing on Disney+. They move all the contents or all the popular contents to Disney+ such that when Disney, together with Hong Kong Broadband, launched the Disney+ OTT content in the middle of November. All those hungry customers that missed the Disney content for the past 6 months, they can now resume watching at Disney+ by joining the exciting new offers, the bundle offers from HKBN, be it fixed or mobile. HOME+ is our e-commerce [indiscernible] which will strengthen the Internet pace of our residential solutions. When we offer our service to any homes in Hong Kong, broadband or fiber broadband is our core. But with this core, we like to add on everything required by the homes through creating more value for our customers, such that our customers in homes in Hong Kong can enjoy much better value with smaller payment. WiFi 6 Gateway. It is hot, but it is something -- it's not something new in us because it's already our second enhanced version that we will provide for our customers to make their homes much smarter. Even the router will be a Disney router to help them experience much better, more enjoyable OTT offers. So in short, in the Residential markets, growth is our mode. We want growth in subscribers. We want growth in revenue. We also want better stickiness, i.e. less customer attritions. That is what we want. But if we cannot achieve all these 3 in a balanced way, if you ask us only one point, one thing that our Residential service want to achieve in the coming 1 or 2 years, I will say market shares, our subscribers is the main key focus for HKBN. We will grow aggressively, we will grow crazily in order to achieve much more subscribers because we want a bigger base for future revenue growth. So we are going to set a much bigger customer base, a bigger foundation for huge growth in near future. That's why we will be very aggressive. Our competitors, when you are watching us, please be alert. Wait for us. Okay. As we mentioned, the partnership with Disney is not a transactional partnership. We are pairing together to grow together in the next few years, at least. The partnership is not happening in just a few months. In fact, it took us more than 2 years to discuss, exchange views such that Disney noticed that we are invest -- the one who has been very successful in bundling OTT contents to gain market share and grow together with OTT partners. When talking about OTT, it is not something new at HKBN. We did launch OTT more than 5 years ago. So Disney people, they as much, they know us. Let's also hear their voice about us. [Presentation]

So basically, Disney and HKBN, 2 companies as 1 entity to [ wow ] in Hong Kong markets with the broadband bundle that has OTT. That is the way for the near future at HKBN's Residential market. So yes, these snapshots of what we are preparing for long-term in promoting Disney+. In different areas, the billboards around Hong Kong, the exhibition or promotion venues along MTR stations and also some shopping arcades. We are increasing manpower resources to make sure that we'll hit or exceed our target in a much shorter time together with Disney. So as I mentioned, infinite-play. Infinite-play is a FIB interaction for HKBN's Residential Solutions. So with HKBN's broadband service, the fiber broadband is core. We bundle with different OTTs: Disney, Netflix, myTV SUPER. Basically, whatever global or local, popular content you want, we offer. So when you look at our ES, Enterprise Solutions, our Residential Solutions, basically, we have everything together with our key partners to offer for our customers. Okay. CO4, Co-Ownership IV. We will target for a dividend payment of HKD 2.70 or above for coming 3 financial years, financial year '22, '23, '24. NiQ and I will each invest at least 1 year's salary into CO4, and we believe many of our co-owners will roll over their investment of CO3. And some of them, including some other co-owners, we also increase or add up their investments here on CO4. So basically, if you take HKD 2.70, divide that by 3 years, it's an average of HKD 0.90 as compared to HKD 0.765 for last year. Excluding those employment support scheme one-off items, then you more or less know where we are. When we compare CO4 and CO3, I'd like to share a little bit more. CO3, we could not deliver CO3 because, I would say, 2 reasons. One is because of the long period of COVID impact, almost like 18 months of time that's basically the economic activities slowing down, we cannot meet people in person. We cannot serve our customers in person in a better way. That slowed down a bit, dragged our targets a little bit behind. And then the main reason is that there are some one-off spend that's happened in period of CO3. For example, the 100% transfer of the government's ESS a month, which is talking about HKD 185 million, entire amount to our few thousand talents. We also waived one month service fee in February and March last year to our enterprise customers and our residential customers. We also offered 10,000 free broadband lines for some customers in need, to about 7 to 8 NGOs, i.e. even the customers, if they were paying a monthly fee for corporate service before, if they were referred by those NGOs, they renewed a contract with 24 months broadband service free of charge. That is something that we did in honoring our core purpose, Make our Home a Better Place to Live by TTT, Tough Time Together campaign over the last 18 months. Those one-off supports to customers, to our talents, is one of support behind us that will be reasons for missing the CO3 target. But over the last 12 or 18 months, we have already successfully completed our internal integration. Now we are very strong. Very strong [ demands ]. We already done everything inside the gym, now we go out to run for the full marathon. This is the last page we want to share with you, ESG. Everyone noticed that it is a quite hot and important topic that every company need to focus. But I'd like to share with you that HKBN is staying ahead of the market, stay ahead of all the others. We have already started our ESG for 2 or 3 years in a very committed way as part of our efforts to fulfill our core purpose, Make our Home a Better Place to Live, so that -- such that we have much manpower resources in doing this. I don't go further details, I just want you to know that HKBN is great, AA. The industries or external benchmarking entities they -- when they did the benchmarking, AAA is the highest [ achievement ]. AA is, I would say, is good. So we are now aiming from good to great. And AA, as far as we know by a benchmarking entity like Hang Seng, we are the leader or #1 or the one with the highest score among the telecom players in Hong Kong, and we believe we will still be very committed to do better, to lead and set a good example for others to follow. So that is what we want to share with you at HKBN, profit and purpose. 2Ps, how we are focusing on that. So I think, NiQ, can we come up here for Q&A?

[Operator Instructions] Okay. We will start with the first question from Sara Wang, UBS. DPS growth 2%, is this lower than management's expectation? What's the key reason behind?

Sarah, thank you for the question. Being in management requires us to make strategic choices. We have to choose. And in our case, we could choose between Make our Home a Better Place to Live, our core purpose, and actually live and execute this, or 10% DPS growth. We mentioned that if we had just simply kept the ESS government subsidy, we would have grown at 9%. If we had not done the things -- the many things that William referred to, such as 1 month free service for all our customer base, such as 10,000 free charity lines, such as hiring 100 extra interns during the peak of the down cycle, et cetera, et cetera, we would have easily exceeded 10% EPS growth. So for us, as a company, we make choices. In our case, Make our Home a Better Place to Live is our priority.

Question from Neale Anderson, HSBC. Can you give a view on dividend growth for this year and whether you will follow a J-curve approach to CO4?

The DPS growth of this financial year over last financial year is 2%. I knew -- I think what we can say is that the coming year-on-year growth on DPS will definitely be better than last year.

Yes, there's a couple of things to look at. The key is to focus on the 3-year cumulative number, the HKD 2.70. That is what we are driving for, together with the hundreds of co-owners that we have, so that is the most important thing. Often when we sign a 2-year contract, the first 6 months is loss-making. So the faster we grow, the more of a mini J curve, each subscriber is a mini J curve. So if there is a pleasant surprise, if there's a massive overrun of subscribers that comes through after the Disney launch on November 16, that will put some short-term pressure, but there will be guaranteed profits within the 2-plus years within this Co-Ownership III program. The other point I would emphasize if you look at William and I, don't listen to our words, don't listen to what we tell you on this call, rather follow our bank account. Both of us will invest at least 1 year of our salary, so we will work for cash free in exchange for shares because we have conviction in Co-Ownership IV.

So like what NiQ said and knew, I think it is an art for us to lead with our hearts, such that we make a wide balance for the DPS per year versus the long-term, more robust growth of the company. And by making a right balance between DPS per year and the robust growth in future, we make sure that our team will give a good score cut, a good result to our co-owners and our shareholders.

Okay. Next question from Tina Hou, Goldman Sachs. Does your CO4 target factor in a rebound from COVID?

It doesn't need a complete rebound. What it does not factor in is sustained lockdown. So as long as the environment is similar to where we are today, where business activity is rolling over, I think that's a good baseline. Now if the travel ban comes off and business activity goes back to full pre-COVID levels, that would be an added plus.

Also for your information that, in fact, no matter that COVID will continue or will be behind us, not only HKBN, but also our business partners, we will not sort of stand still and do our things in a passive way. We do it in a proactive way. One example is that when the whole world, everybody is talking about the shortage of chipset, calling different vendors to chase for the supply of the equipment that involve chipsets, something like that. So people need to wait for like 3 months, 6 months or even 9 months for those supplies. Why not we also recommend and take the initiative to sell something that's -- we will not rely on [ these companies ]. For example, more items on the cloud. That is why -- that is one of the key initiatives. We will work with the partners who just shared their views, their voice with you. In fact, we have our 2 teams working together, focusing on those stuff that. We'll not be fearing about the shortage of supply on equipment, something like that. So you got to be very, very feasible. We should have different alternatives, different Plan B or Plan C in order to achieve our financial targets.

Next question, can you elaborate your strategy on the Disney+? Any subscriber growth targets?

Today, in our Residential markets, we have about 886,000 customers. Internally, we think if we cannot hit 1 million after this financial year or in the next 12 months, I will give the team or myself a grade of C. So again, I like our competitors to notice that -- watch out your customer base, we are going after you.

Okay. We have time for one more question. Is 5G affecting your fixed-line broadband business?

A strict no. N-O, no. This is not a new question. In fact, the government has already released some figure like 1 or 2 weeks ago, 5G people posted about 5G for 2 years. And as of today, 5G's penetration in Hong Kong is just about 6% or 7%, so let's spend less time on 5G. Let's focus on fiber broadband.

Okay. A similar question on the market competition. Some industry players are aggressively bringing down the prices of commercial broadband offering. What are your strategy?

We don't do commercial broadband only. We do infinite-play. So we want to make broadband 1 gig only at less than $100 a month irrelevant, because that's not what households want. You don't just want the pipe. You want entertainment, you want security, you want insurance, you want HOME+ bundles. That's where we focus on. So we're leaving that legacy space. We're moving out of that box and focusing on infinite-play.

As mentioned before, we have industry experts. Experts won't sell the [ ES ] lines only.

Okay. Thanks, NiQ and William, that's the end of our Q&A session. Have a nice evening.

Thank you.

Thank you.

Bye-bye. Good night.