HKBN Ltd. (1310) Earnings Call Transcript & Summary

Welcome to the HKBN FY '23 Interim Results Investor Presentation. We are glad to see you again physically, and also welcome to those joining us online through webcast. [Operator Instructions]. Today's interim result will be jointly presented by William Yeung and NiQ Lai. Without further ado, may I invite William Yeung, co-owner and Executive Vice Chairman of the HKBN Group; and NiQ Lai, co-owner, group Chief Executive Officer of HKBN.

So first of all, I must thank wholeheartedly our 5,000 talents without whom these results will be impossible today. It's incredible to work with these colleagues throughout the lockdown and really build the company so that we're ready to unleash the full potential of our network today. This is my 19th year in the company, and I would say that this sort of presentation coming up is the most exciting presentation that I am giving because you will see the up sprout of our major transformation from a telecom company to a full ICT powerhouse. You will see very clear signs of that coming through today. Today, we are, by far, the second largest carrier, over 13 billion. In the enterprise space, we -- in the enterprise space, we offer seamless telecom and system integration services. As the world becomes more complex, CIOs want to talk to a single point of contact rather than have multiple points of contact, and that is what we are offering today. In the residential space, we are proud to be Hong Kong and make Hong Kong the first place in the world to see a dual guaranteed money back guarantee on speed and latency. And in William's section, we'll go into depth about what that means for the population in Hong Kong. We have a solid set of results. If you consider that our business is actually a 2-year forward contract business. Typically, we signed 2 years contract. So that means there's a 1- to 2-year lag of our business in terms of the revenue recognition, versus, say, the OpEx today, which is recognized monthly. So these results are a little bit of kind of rearview mirror looking. Yet despite this fact, a very solid set of results in the conditions that we operate in. Revenue was actually up 2% EBITDA, down 6% in AFF due to the interest -- due to the interest increase. $0.20 dividend is the same as the second half of last year. If you look at where we are, we are in the middle of an incredible journey. I would say this is beyond our wildest dreams 6 or 7 years ago to have a 6x increase in our company from 2 billion to 13 billion today. To put it in context, what does 13 billion mean? 13 billion means that we are more than 2x our biggest trailing competitor, HGC. HGC, we have begun in every respect by more than double, whether it's residential revenues, whether it's enterprise telecom revenues or SI -- and this industry is all about scale. If you don't have the scale, you will not survive. We have the scale, and that is what you will see in the numbers coming through. This is world-first. I am so proud to be representing my 5,000 colleagues today to launch this world-first that would put Hong Kong at the forefront of network for the masses. In the enterprise side, we will show you how we have commercialized our 3 networks that we have combined together from HKBN, New World Telecom and Wolf TNT. Today, we have [ weaponized ] the capability to take market share. On the residential side, I talked about the latency breakthrough. What we are doing now is that we are transforming the company from a discount to the incumbent, our price positioning, to, over time, we aim to be a premium to be incumbent. Because of these world-leading, world-first innovations that our team has put together in the last couple of years. The J-curve. People talk about it, we execute it. If you look at this, it's obvious. But what's more important to emphasize is that this turnaround is still lagging by 1 to 2 years because the slowdown in business from 2 years ago is only [indiscernible] throughout our numbers now. The increase in the order book will come through in the next year or 2. And we have more slides to walk you through that process. And that is why we are more than optimistic. In fact, we know the numbers. We know the revenue backlog in the coming year or 2. Enterprise Solutions. This is now 80% of our business. It used to be 20% of our business. We have already transformed in that respect, and we will continue to transform with system integration or ICT pulling up the growth rate of our fixed telecom services. Recognizing our tri-carrier advantage for the benefit of Hong Kong. Now traditionally, large multinational financial institutions, banks would typically actually double-pay their telecom needs and use 2 carriers and then patch it together so that you have carrier diversity. That means only the biggest companies can do that. What we are doing is democratizing this for Hong Kong. We have tri-network. Back end is all integrated seamlessly so that we can offer you true triversity carrier with dual-link redundant access to your point for a Hong Kong company on 1 single bill. Think about that. This is a global first. Actually, that's kind of dramatizing things because there are not that many networks around the world that are the aggregation of 3 overlapping networks. So we have an incredible LUCA. In our company, we'll always talk about LUCA, legal unfair competitive advantage. We have a massive LUCA in terms of how we can deploy for local companies, not just for the upper edge loans or the mega multinationals. I would challenge you to do 1 thing when you finish this presentation today go downstairs and walk about 100 meters and then count the number of manholes. And note, which are one's that are HKBN, New World or WTT, and that will be a multiple of the incumbent and an even bigger multiple of the next player, say, HGC. That's why we can do incredible things that other carriers cannot do. That is our differentiation point. When we talk about SI, let's move to the SI side, system integration. SI is a bit of a dirty word when it comes to financial performance because most people think of SI as a very low barrier of entry. 10 people can come together and set up an SI shop. That is true. But that is traditional stand-alone system integration. We are not in that space. The analogy I would use is if you're a GP, you can easily set up a GP clinic and be it small or large of a general practitioner medical care. So the barriers of entry are very low. That means your profit margin are very normal, unlikely to be exceptional. We're different. So imagine there's only 2 LASIK machines in Hong Kong, of, say, 30 billion and above investment. In our case, we spent 25 years building this LASIK machine, and there's only 2 of them in Hong Kong. And then talk about the scalability, a very high 80% type gross margin that you can generate. And as long as you can load it up, then the returns are phenomenal. And that's what we're doing. We're loading up a fixed cost infrastructure that took us 25 years to build a very seriously high war, both in terms of time and in terms of money. And arguably, it'd be very difficult to do even if you have both today because under Hong Kong, it's so congestion. It's so congested with all the various [indiscernible] overlaying each other. So even if you have the money, you'd be very hard to replicate. And that's why we are a strategically important asset. If you talk about the OSI 7-layer model for networking, we can offer services from 1 to 7. But where our sweet spot is, is on the lower levels where the infrastructure heavy returns are most prominent. Layers 1, 2, 3, 4 and a bit of 5, right? This is where the LASIK machine comes into play. This is if you start a GP, you'd be playing in the middle level and there's no barriers of entry. We do not really play at the heart surgeon level at the Layer 7, where it's very specific, it's very specialized and it's not scalable. You can make money, but on an individual basis, you cannot scale it. In our case, we look for repeatable business, business that can be easily modeled T, something that when we do something for 1 major bank is 90% the same as the next 8 major banks and 80% the same for the next 100 financial servicing institutions, FSI. That's the kind of scalability we're talking about, mass product scalability, moderate modification, but great profit protected by [ 30 billion moat ] over 20 years -- 25 years. That is our sweet spot. And it's a big, big sweet spot. In fact, if you look at the -- within the ICT sector, telecom is only less than 10% of the total ICT space. So the SI space is more than 10x the size of telecom only. Just go to your CIO of your company today and ask them how much they spend. What's the total budget? Ask them to separate what you spend on actual telecom services is actually less than 10% of his total budget. Think about it. If you're in a financial bank, you're talking about security, you talk about productivity, you talked about access everywhere. That's the area that we are growing into. Now having shared the concept, let me show you a more specific example. This slide is not intended to be read. So don't try and squint your eyes and read line by line. Just focus on the 2 bubbles. This is a typical midsized financial institution, 20 branches, say, 1,000 people or 1,000 laptops. So that would probably spend at least $40 million on the system integration portion versus, say, less than [ 10 ] for the telecom side. That's how we're moving up the funnel. Now for us, it's highly integrated. Now if you're a CIO, you will prefer to speak to a single responsible party that can sign off on a service level agreement, SLA, from end to end rather than if you have a problem, you call 1 guy for the SI portion, system integration portion, you call another guy, another carrier for the connectivity portion and typically, they're arguing about whose fault it is. We will have a single point of contact for your end-to-end connectivity. And this is a brilliant business because it's ongoing. There's a very long tail. If you do $40 million of project, that's typically 10% to 20% of annual recurrent maintenance on top. That is just kind of rolling, rolling revenue. So it's actually a great business. In the past, when we're selling just telecom services, our primary point of contact is actually the procurement manager. Today, we are sitting down, often work shopping with the CIO and helping the CIO plan their 3-year budget. So we help them set their budget. In the past, we're fighting for a small portion of their allocated budget. This is a game changer. And then what we do now is a telecom service rather than separating it out and having a separate RFP, request for proposal is bundled into the whole package so that the pricing is not the most relevant point. If you ask what keeps a CIO awake at night, it's about failure, service failure, right? It's not about paying 10% more for the cheapest cost network. This is why I say this is the most exciting presentation I've made in 19 years. This is orders. These are new orders that we have signed that will come -- be converted into revenue. For example, if we sign a $2,400 contract over 2 years, it would take 2 years booked at, say, $100 a month for 2 years to fully recognize the revenue. But these are contracted orders. So this is essentially money in the bank. The flow-through rate from orders to revenue is close to 100%. So we spent a lot of time on our core telecom tri-network. We spend a lot of time on the transformation to ICT. Now let me spend a little bit of time on the Greater Bay and China in general, Mainland China, because this is a business that we bought as part of our acquisition of JOS. JOS was an acquisition we did 2 years ago. We are growing the business. In China, we had over HKD 1 billion of annual run rate today. And we think we can double that within the next 3 years. And after doubling that, that will still be low single-digit market share. So literally, the sky is the limit. But we are not aiming for the sky. We have a specific focus in China. We will start by targeting Hong Kong-based companies with a strong presence in China. There are many Hong Kong retail brands that actually have more shops in China than in Hong Kong. Yet the headquarter where they make the decision is in Hong Kong. That's our ideal base. We will follow these customers into China. So there is a clear path for us. And this is 1 of the big, big growth areas for us. The advantage that we have over an SI-only company is that we can essentially buy the capacity. So we have 80% -- 75% gross margin network, fixed network business in Hong Kong. We need capacity in China. So we go into the 3 Cs, China Telecom, China Mobile, China Unicom, and we essentially exchange capacity. I buy some of theirs, they buy some of ours. Effectively, we have a virtual network in China, Pan-China, at 75% gross margin because we bartered it back. We didn't write a check or just rolled a one-way deal. And then we can use the same kind of economic model we have in Hong Kong throughout China. An SI-only company cannot do this, we can. This is the dream team. We have an incredible team. During COVID, nobody really wanted to move. Good people, bad people didn't want to move because people were just happy at home, right? So but in the last 10 months alone, look at these superstars that we have attracted into our company. And in the process, we have also expanded the opportunity and the growth for our existing talent base so that we can do much more. Where did they come from? This is the all star list. I would say this literally is the dream team. I don't think you can build, even if you had unlimited draft resources, I don't think you can build a better team than this. This is what we are super proud of. And these teams are in addition to the existing talent we have. Now hiring people in SI is basically a circular function. Either you're on your virtual cycle up or you're on a virtual cycle down. And the reason for this is, if you are a very good salesperson in system integration, in ICT, you want the best support function. We call it the [ kitchen ]. So you have the most to sell. And when you sell a product, you can look the CIO in the eye and say, I would deliver it, and I would way exceed my service level agreements with you. The best salespeople want to come to our company because they make the most money, simple. The support team wants to join our company because they get to play with the latest toys. If you're in a kitchen, you want the best ingredients. And as you saw with the video in opening, the ingredients that come from the likes of Cisco, VMware, Huawei, et cetera, we play with the best ingredients and is that magical combination that spirals us up. Having said all that, let the numbers do the talking. So in conclusion, just look at our numbers. These are incredible numbers. Pipeline is 3x our revenue. That's a very healthy number. We're not going to convert 100% of our pipeline, but we will convert probably at least 1/3. And the good thing about having a healthy pipeline is that we can start being choosy. We can start focusing on the customers that we want to do based on the scalability. This is a modular customer that are really know the blueprint for and I can repeat and repeat again, or is it a one-off? If it's one-off, we can push it to the back of the queue. We can also be more price setting because we have a backlog, we've got more work than people. We can start to discriminate in terms of prioritizing which customers we want to deal with. So that's why the outlook is very positive. Just look at the number of HKD 20 million deals. We have more than doubled that say, versus, say, a year ago. And these are the showcase deals that will cascade into a mass deals. With that, I'm happy to pass over to William. Thank you.

Thank you, NiQ. Thank you. So let me share with you the exciting story in the enterprise market. But for the residential market, with my close to 18 years of experience at HKBN and my background of growing the residential markets. I think I'm the only 1 or the big brother in the telecom industry in Hong Kong to talk about the residential market. So if our enterprise market is scaling at 5 stars, I think I can still get 4 stars. Residential market. For the last 6 months, all kinds of subscriptions are on the uptrend. The broadband subscriptions grow the high bandwidth over [ 1,000 meg ] also grew and also the paid premium OTT entertainment content with servers also grew. So you see that all this will result in increasing revenue on the residential market. But of course, when we say [ we have these ] subscribers, some of them are signing advanced order from us. That means we may start billing like 3 months or 6 months later -- starting back from first half of financial year '23. So starting from midnight tonight, we will have a heavy advertisement to bring the residential market to another higher level as a leader in broadband. Our name is HKBN, Hong Kong Broadband Network. So broadband is our core. Fixed broadband is our competitive advantage over all the other players. So while some of players are certainly selling 2 gig or above in just like maybe 10% or 15% of Hong Kong's area, we are providing 2 gig service to 100% of actual HKBN's coverage. That means starting from midnight, there were 2.5 million households able to enjoy the service of 2 gig speed and also latency with the money-back guarantee. Let me remind some of our friends that money back service guarantee is not new at HKBN. Because back to more than 10 years ago, when we were selling the 100-megabit broadband speed, we also have this money back guarantee or refund. Whenever customers cannot achieve like 80%, i.e., 80 meg of their 100 meg speed, then we fund, provide the monthly fee to them. That is more than a decade ago. Today, we are even more demanding. We are talking about putting this speed layer to 2 gig and then the low latency. So it is talking about money back, i.e., 2x of weighted monthly fee on both speed and latency refund. I guess we should be world #1 to launch this. So if this is different from the fact or the -- or anything that you know, please share with us and we will even bring the layer even higher. So instead of doing the talking, let's [ see a small ] demo showing that the high latency and low-digit latency is very important for people like the gamers or the young population in Hong Kong. So for the high latency, [indiscernible]. Low latency hits at the same time. So you will notice the difference. And go back and ask your friends or your kids who play games, then they will know who's the winner or who can like us over guarantee or money back guarantee of this [ J curve ] going up. Last but not the least, is talking about some time on the ESG. With our core purpose, make our home a better place to live. HKBN is very serious on ESG. Unlike some other people that are doing just taking the box because of the regulatory requirement. We do need to exceed the target, really doing something better with person. So we, HKBN, is the #1 in Hong Kong telco and top 9% among the global telco players in the ESG performance with the third-party benchmarking agents or organizations score. Like MSCI from AA last year to AAA this year. And we are also leading in some other areas, while the incumbent or other players, they are in the red, very much worse than us. But that is not enough. We are really, very demanding. So not doing any talking, just walk or run, we set our ESG KPI. In financial year '24, that means that we still have about 1 year and 3 to 4 months from now. We need to have electricity reduction of 14% financial year '24 versus financial year '22. Its percentage or electricity reduction KPI is an aggressive one from what we know when we talk with those guys with our international benchmarking standard or with our consultancy view that will not only help the environment, but also help our finance with a saving of about [ $21 million ] of OpEx. That actually was going into our EBITDA or our AFF much like our co-ownership. Our DNA is the skin in the game. Don't just talk about the KPI. You need to have skin in the game, you need to tie in. So we will propose a [ ping game ] to our Board to approve -- subject to their approval. But of course, when they approve the whether this 14% is aggressive one. What we are doing is really recognized as global, something like that. So once they approve, NiQ and I and the ES team will have part of our salary on the [ ping ] game. For NiQ and I, if financial year''22, we cannot achieve this 14% saving on elasticity, we will have 10% of our annual salary deducted. That is what we intend to propose to our Board. So I hope that if there's competitors viewing us online, please join us. Okay. Simply today, both ES enterprise service or the residential solutions, both areas, I will say, we are entering into the growth path. The worst is behind us. We just make sure that in our execution, we will deliver faster than others such that we will deliver good results to our shareholders and our co-owners. One point I want to highlight is that last time, I shared with you our co-ownership for scheme that is the EBITDA of financial year '23, '24 and also '25. Now we have passed 1/6 of them. I strongly believe with confidence that we are on the right track of meeting or exceeding our [ zeal ] for EBITDA targets covering financial year '23, '24 or '25. With what we are doing, including the pipelines, the orders, the backlogs on hand, something like that. So in the markets, I believe NiQ and I, our experience our hands-on management will make things happen. Thank you.

Next, we will move on to the Q&A section. [Operator Instructions]

Neale Anderson from HSBC. I've got 3 if that's okay. They'll be quite quick. And first 1 is Enterprise Solutions. So compared to the first half of last year, it was up 3%, but I thought that might be a little bit higher because presumably the business conditions last year in the first half were quite tough. And you've seen some reopening in this half. So if you could address that.

Should we take one at a time? So the first 1 I mentioned, there is a lag. So the slowdown from 2 years ago is playing through to the revenue line today because of the 2-year contract. So you imagine that business flow is down 2 years ago, you recognized it today. And also the business that we're picking up in the last 6 months takes 2 years to recognize. So there's a 1- to 2-year lag latency. You can say that latency guarantee is not part of our money back guarantee.

Okay. And the second one, the EBITDA declined 6% year-on-year, I assume that's higher costs relating to the expansion in the enterprise business, but can you clarify that? Because it's a little bit hard to see in the results?

Yes. Once again, it's a combination. So the revenue is not coming through because of that 2-year program, 1- to 2-year latency, right, but the expenses are coming through every month. And we've been building the team, we've been investing in the network. We saw in the last 3 years, it was hibernation for the world the last 2 years, but we were working very hard behind the scenes to make things happen.

And the last 1 on the interest costs, so a big increase there. And I think your hedge expires at the end of May. So what's the outlook for the next 6 months, if you assume a sort of similar HIBOR rate, what do you think your interest costs are going to trend?

I think our interest cost is quite transparent. It's HIBOR plus couple of 100 basis points. We have $11 billion outstanding. We are in open discussions with banks today to do and extend and amend. As part of that process, we will probably consider lifting our hedge ratio to about 50%. Currently it's at 1/3. I think we really don't want to take a position -- I mean, taking 100% is also taking a position. So we really want to focus on our core. We think a 50% hedge ratio is a fair number.

Any other questions from the floor?

Actually, I would like to take this opportunity to introduce William -- William, you now have a mic. William Ho. And perhaps you can just add some color to what we're doing in terms of the transformation -- please come up.

So I think NiQ actually highlighted in some of the slides talking about what we've been executing in the past 6 months. And also, the forward-looking for the upcoming 6 months -- looking at what we have changed, if I look at the organization, if I look at the overall team structure and also the business structure, what we have seen is, #1, again, the question about looking at the number, still haven't seen a very strong rebound on to that. What we really measure in the first 6 months is really about the orders and bookings that we can do so that once you win the contract, you translate that to the revenue. So we see that we're getting really strong momentum in that space, meaning that we're winning a lot more business. And that business is going to be translated into revenue in the next second half. And that's why William and NiQ are very confident about the second half because we do have the pipelines that we see as well as the orders that we want. So that's 1 [ full ]. The other 1 is I'm not sure if you guys actually saw the slide highlighting our core business. I look at my core telecom business, we have about 6% growth comparing to the previous 6 months. I think that's substantial because core telecom business connectivity is primarily a flat market. So if I look at my peers, they're looking at minus 1%, minus 2%, and we're doing approximately 6% growth. I think the team has done a really good job on keeping that business going. Now the second piece that I look at is the -- what we call the SI business, right, the system integration business, and that's primarily what we have acquired from JOS, and we see a 7% growth for the first go. Now I think as much as we say, hey, 7% in single digit, that's really the star of the what we call the sales transformation journey that we're running right now. Having more people joining us, having a very different go-to-market strategy, focusing on not just the box moving or managed service, but more on the data center, we're going to focus on cybersecurity, we're going to focus on cloud, all the growing areas that we focused on. And we see the pipeline coming up. And if I -- I don't think we have that number show here, but it's an absolute double-digit growth that we're seeing already. And the momentum of the pipeline for the second half is even better. So I would say the core business in terms of core telecom and SI, I think we're doing a pretty good job overall. The China business is about 2% year-over-year growth. And most of you can imagine that in the past, if you look at the past 6 months, Q1 is actually a very tough quarter because part of our operation is actually based out of Guangzhou. And Guangzhou had a shutdown for almost 1.5 months, impacts the overall productivity as William mentioned a little bit earlier. What we also experienced during that time was we have contracts that we're waiting for customers to sign, but they got locked down, they were not able to go to the office and sign it. So a bit of a delay in Q1, but we saw a pretty good rebound in Q2. And looking at the forecast for Q3 and Q4, I think we've got a pretty good pipeline on that as well. So the core 3 areas that we try to execute, the work that we put in, in the past 6 months, I think we've done a really solid job in terms of to grow the business, restructure some of the content of the business, as well as bringing in extra resources and skill sets to help us to go moving forward. A bit of a sharing pipeline, it's about $6 billion. If you look at that as a very healthy 3x of our target for the next 2 quarters, meaning that we do see those projects in the pipeline. We are engaging those projects, right? So a 3x pipeline is actually a pretty -- a pretty healthy number. $20 million project, that really reflects to the results of how we engage the strategic accounts in Hong Kong. The biggest account, the top 20 accounts in Hong Kong, last institution. I can't mention the name, but typically, CapEx over [ billion dollars ]. We're winning a significant amount of those projects in the first 6 months. Comparing to last year, we're at about 4 projects-ish. This year, we have more than 10 and the pipeline shows that we have even going to double the number of projects that we've won. So really good momentum there. Happy about the team that we're getting some really good executives joining us and they bring their team to us. So I think overall, if I have to wrap up core business, very solid. China, I think we're solid. We're going to have some good numbers in the second half pipeline, $6 billion, [ 2.89-ish ] good number and large projects for strategic accounts, also a very solid pipeline. So I hope this gives you guys a good high-level view on where we're heading. I think Q1 or first half, still a bit struggling because we see the border open in the past 2 months. We're seeing a lot more activities, but the result of that is going to be shown in the second half. So very confident about how we're going to execute and deliver in the second half.

There is actually a follow-up question regarding on China. The question about what's the growth plan and timing in the coming years for Mainland China market, especially the Greater Bay Area? And how is the contribution of Mainland business to the overall revenue?

Okay. So the China business is approximately 15% of my -- of the overall enterprise business. And I previously announced that we're going to double the business in 2 years. So we're expecting 25% plus year-over-year. Now this first year is 2% growth. It's a bit -- in my opinion, a bit lagging comparing to what we like to do because of the shutdown and because of the challenges. But we see that the market is actually opening. So we see a very solid second half. And for the next 2 years, we're looking for 25% plus for the upcoming 2-year growth. So that's the outlook. GBA, our strategy is actually like twofolds. One is to work with the Hong Kong companies investing into GBA to help them to grow in the area. And we have a list of customers lineup. Some of them is actually in retail, some of them are MNC. We're going to go there and help them to set up and expand their business. The second part of the business is actually working with the MNCs, like the big auto players, for example, Volkswagen, BMW, the KPMG, the Big 4, McKinsey. I mean the -- they are our customers in China. And we see them reinvesting into China. I mean I've been talking to their MDs and CEO of some of the companies, and they do -- they all have very solid plans to invest into China. So we see that as part of our growth in China as well. The third piece is, if I look at the JOS China business, we primarily resell some of the box moving and resell a lot of network equipment, especially the [ recognized ] switches that we've been selling into the manufacturing, high-tech manufacturing space. In the new year, we're actually getting a lot more support from the global vendors. I can't name them, but Tier 1 technology companies that as part of our part of technology vendor and partner enable us and help us and joint go-to-market, to grow our business in China. So I would say we have a good plan for China. We have a very solid foundation. It's already a $1 billion business. And we have more than 1,000 people, have 10 offices across the board. So we're very well set to grow the company to the next level.

Is there any other questions from the floor? If not, that will be the end of our presentation today.

Let me take this opportunity to introduce our team with our team members. Please come and join us on stage, please. We're going to need a couple of rows. So some people want to get everyone in this -- so please don't look at our faces. That's not what's important. Rather look at our shoes because pull up your trousers. And these are specific to our company's socks because they represent the dual path that we are democratizing in Hong Kong that represent the dual speed and low latency money back guarantee. We are launching as a world first for Hong Kong. So it's with great pride that I share this team with you. We are the team that would deliver the shareholder returns in the coming years. Thank you.

Thank you.