HKBN Ltd. (1310) Earnings Call Transcript & Summary

Good afternoon, everyone. On behalf of HKBN Limited, thank you all for joining the Group's 2024 annual results investor presentation. Today's presentation and Q&A session will be conducted in English. The management will present the business performance of Enterprise Solutions and Residential Solutions, as well as the financial performance of the year 2024, followed by a Q&A session. Now may I invite Co-Owner, Executive Vice Chairman and Group CEO, William, to walk us through the group's overall performance in 2024. William, please.

Thank you. Thank you for joining us. It is an exciting moment for me to share with you our results. And before that, I really want to take this opportunity to thank all our talents in Hong Kong and Guangzhou or somewhere else, who put much efforts to helping us to deliver a result which I myself would grade as B+. This is the result. And of course, thank you for all of your support to us. Let's look at the details. Solid performance. If you look at the revenue basically, slightly flat or year-on-year, minus 1% and the EBITDA is great. Second half versus last -- second half is an increase of 12%, year-on-year is increase of 6%, excluding the handsets revenue. So this is like similar benchmark of another player in the market. And then the AFF also increased by 27% year-on-year. Dividends, [ HKD 0.315 ] full year, representing around like 10% yield on our share. So this is the efforts from all our good teamwork. Enterprise. Whatever benchmark areas, it is green, green, green, green. Revenue increased by 1% and then backlog or booking 15%, 9% increase. And the Enterprise customers half-over-half also increased 1%. And here, I want to -- I think the words are too small, but I want to repeat, Hong Kong government OFCA's number, the last 12 months although not exactly 12 months, the market enterprise customers, in fact, decreased by 5%, but we increased by 1%. So even though the economy is not good, our team -- Enterprise team doing very good. Okay. This is the driving force behind how we deliver higher revenue, higher GP or higher cash or EBITDA or whatever. It is because of our ICT strategy. We did spend, I would say, a couple of years to integrate our SI and Telecom business together. We did face some difficulties. But I will say, starting from 6 or 7 months ago, we started to harvest from our hard work of integrating both areas together, such that we have much more better services and also products for different categories of customers, no matter they are large enterprise, mid or SME. Large enterprises, we have like project basis, high-margin, long time hard work on that. But on that, because of our increase of popularity, more people coming to us. Take cloud, as an example, more cloud service providers come to us and want us to bundle their account service into our services to our customers. So now we have like at least 6 different clouds to meet the market demand of multiple cloud for the enterprise customers. And for the mid or SME customers, very simple. Scalable 10 solutions for us to bundle i.e., Connectivity plus ICT Bundle together, wholesales at scale. And then on the right-hand side, all those green numbers, you see that, it helps us on ARPU, on the customer number and also what I want to highlight is the [indiscernible] what we call IT as a service token. I believe this is -- we are the first one who offer this bundle in our service to our customers on a subscription base. Nowadays, ask yourself, ask your companies, ask your IT department, every company no matter big or small, they are lacking IT talents. They are knocking IT resources. But we have a whole bunch of professional SI or IT talents in our company that can serve their needs on need basis. They basically buy tokens from us on monthly subscription fee, i.e., they pay us monthly fee, which includes certain hours of IT needs that they can come to us and then we can offer to them. So I will say on a subscription basis, this is becoming more popular. And we also explore the possibility and quickly come to the decision of working with Lenovo such that very soon, we have a Device as a service. So whatever Lenovo products you want, we bundle together charge customer subscription basis. That is where we are to do differently as a competitive edge over our competitors. This page is important. I think starting from this time. Next time, we will also present this page, similar. Why? Because this is telling you how we are successfully executing our ICT strategy by cross-selling products to the telecom area, the customers and also the ICT/SI customers. That means within our 98,000 customers, roughly 50% of them, 5-0, are using both of our services in a bundled way. On that, it increases the stickiness of our customers. In enhanced image of our professionals, in the eyes of their IT heads, including those CIOs, Chief Information Officers, such that we can deliver professional service on the complicated SI or ICT projects. Then they are willing to give the very simple combined telecom assets service, which was having 70% GP margin on that. So our strategy is very simple. Go in, your right hand is the entry tickets with the SI. And then over time, left-hand side is getting the high-margin telecom business from them, with the shared view, that is the way we go for our business before, last 6 months or 12 months ago. Today, I think we tell you how we harvest. If you take today as a snapshot, it is 50%. And I believe this 50% will increase more and more. So 6 months later, it won't be same 50%. It may be 60% or 65%, because when we go to our customers, we offer total solutions on that always bundled together. And when we fight with our competitors, we are not fighting on the products. They can also have the same ICT/SI products or service. They also have the same fiber but they have siloed organizations. Those two teams don't work together, but we are one team. And that's why you will see the green color of 15% increase on our backlog from HKD 4.1 billion in financial year '23 to HKD 4.8 billion in financial year '24. And this backlog, you just look at those circles, you can simply calculate 60% or more than half of them are high-margin telecom products. Residential Service. Last time I described them as a cash count. So this cash count continue to contribute. The revenue dropped by 2%. Here, let me elaborate a little bit. We do have two mobile operators being our reseller. But in our view, they are not giving positive value to us. So we are just defocusing their contribution such that the revenue drop, I would say, majority because of this reason, we defocused these two resellers, and we focus more on our own channels. No matter it is person-to-person or digital platform. ARPU continue to increase and then the subscriptions also increased. Last time, people ask us, will you continue to top in your subscribers, and we already said it topped, no matter in residential or in the enterprise SME. Now the number speaks for itself. ARPU, average revenue per user. When we renew, when we acquire new customers, it's always at a higher price with more bundled value to the customers. That is where we are and how we do our business. And I'd like to repeat that in our residential markets, we don't look at ARPU only because it is mainly focused on the fixed broadband. We look at ARPH, average revenue per household because we add more values to our household customers with just slightly higher monthly fee. Then it will come to us for all the services, including the roaming SIM card, including the household insurance, including the health care from Bowtie including different OTT contents. I won't say every month. But I would say every quarter we will have new services bundled in our essential market. All these stuff together, when I say bundle it's half bundle in one monthly fee, so it reduced our churn rate. Our churn rate is still below 1% per month in the residential market for financial year '24. And I believe it is performing like at par or better than the competitiveness in the market. This is a photo. I want to highlight that. I myself went to Guangzhou to visit our team on the mobile services or selling the roaming SIM card, because this is one of the new revenue stream that we want to highlight. We will increase more manpower no matter if it's a physical or electronic or digital. Because we -- we are not mobile operators. That's why we don't have any concern on internal cannibalization. We can always price very aggressively on the roaming SIM card. Whatever area you have mentioned China, APAC, whoever we will be very aggressive. And on the roaming SIM itself, it will contribute additional revenue to us. And again, we don't look at this small contribution like maybe [ HKD 10 million ] or [ HKD 20 million ]. It's peanuts when compared with the bundled, FTNS, fixed telecom network services, that is our own infrastructure service. So like something similar to [indiscernible]. That is how we increase the average revenue per household. And I believe our competitors, they will copy very soon. Okay. This is something that we will launch tomorrow, but let you have some preview. Don't repeat anything too much, but for the test kit to test if you have any virus or whatever, when you go out to the shops -- to the pharmacies, usually, they have different products ranging from HKD 60 to HKD 600. But we are talking about $48 per month for 2 times, including delivery to your home. So we have more partners, they come to us, want us to bundle to our bigger and bigger household base. That's where we are on the residential service. That's why I call them cash count. Network, I'd like to spend some time on the network. We at HKBN stands for Hong Kong Broadband Network. So we must be a leader in Hong Kong, we must be a leader in broadband. We must be a leader in our network. That's why this leadership must be sustainable and continue. Back to year 2005, we were the one in the world to launch 1 gig broadband speed. And then year 2023, we were the first in the world with dual guarantee, not only have this money back guarantee on speed, but also on latency as high speed, low latency, money back guaranteed. As of today, our competitors are not able to copy. But we stand here proud of our service and the capability to deliver this money-back dual guarantee. And now if you -- can we go 6 months ago in interim, we shared with you that we partnered with Nokia to start building our network to be able to provide up to 25 gig broadband speed. So by coincidence or with purpose, the upgrade completed last week. So now in our network, we are fully able to share, promote and install up to 25 gig broadband speed to our customers. This is important in the sense that we do have a window over our competitors. Because our competitors are mainly using one provider on this network equipment, and we are using two. One Plus and Nokia. Its during tough times that good partners can get together. With their support, we are able to start selling, starting from -- you're talking about 2.5 gig or above, starting from HKD 199 per month. We are now selling. You can go to our website and check. Why we are so excited? I'll explain few power points to share with you is that this is OFCA, Hong Kong regulated number. Talking about high-speed users, the portion is increasing. But OFCA is Hong Kong government a little bit behind when compared with us as the market leader. We are talking about 2.5 gig or above. But they grade 1 gig or above as high speed. But even if I have 1 gig or above this high speed, you can see that residential market above 70% of 1 gig or above. Enterprise market above 15%, 1 gig or above. But we have 2.5 gig to 25 gig to upsell to this huge base. When we have this, our competitors mainly are only selling up to 10 gig. So from 10 gig, 25 gig, we have a window of around 12 to 15 months to outperform our competitors in both Residential and Enterprise markets on this core high-margin business. So again this is the number from OFCA, increased by 8% or 7% compared with 1 year ago. So it is an updated benchmark between us and the other players. We have 5 green hits, they have less. And I believe this competitive edge on higher speed, lower latency will be our unique edge at least over coming 12 or 15 months. And then the -- and then some of them or maybe only one of them can catch up. So seeing is believing. Today, we want to do a demonstration from the 25 gig supplied by our good partner, Nokia and our CTO, Chief Technology Officer, Danny. Danny over to you to a short demo.

Thank you, Yeung. So I'm Danny Li. I'm the Co-owner and Chief Technology Officer of HKBN Group. So today, I will do a few demos of showing out our 25 GigaFast broadband. Before we do that, let's picture this, okay, lets picture is. When you're driving on the right -- on your left side, it is one link highway, okay? On your right side, you have a 25 links highway. And the one link highway you can only run at 10 kmph, but on the 25 links highway, you can run 250 kmph hours. Which way you would choose? This is exactly our 25 GigaFast broadband. That's what it is. So back to reality. Let's do a few -- real demo for you. So for example, you have shot a video, and you want to share to your colleagues or your friends, all right? So what you can do? I have prepared our 11-gigabyte, okay, gigabyte of video file and let's see how long it takes to download it. In order to do that, I need to help, okay? Let's count together and see how long it take on the 25 gig and 1 gig line. On the right is, of course, is 25 gig and on the left is 1 gig. Let's start. Let's count together. One, two, three, four, five. Done. And this is only 7% on the 1 gig, okay? So let's leave it together and see what we have download here, right? Let's see what we have downloaded here on the 25 gig. It's a 11-gigabyte, 11-gigabyte, 1 byte is speed okay? So let's open it and see. It is an 8K high-definition video and that is run a bit. The picture is so vivid, right? And that's because of the time, right? Sorry, I want to show the whole thing. But because of time let's show it in the middle, and show it to the -- at the last right, around like some 47 minutes. It is a true 49 minutes high-definition 8K video, downloaded in 5 seconds, right. Okay. Maybe you have some photo album to share as well. Let's do our photo album. I have a 5-gig photo album here, and let's see how long it takes to download the 5-gig photo album. And this time, I don't need your help to count, it's done. And here, it's only like -- maybe 70%, right? So let's see how -- what is inside, 5 gig photos, let's open it. Okay, it's like you're here. And this is a row file, 18 megabyte per files, and we can download in 2 seconds for almost 100 photos like this, right? Maybe I'll show a bit more, our handsome Vice Chairman and our CFO as well. Okay. This is finally done. After I show you the video download, I'll show you the photo downloads. Right? It's already done. And you can see this, this is so powerful on the 25 gig line -- open line. And I want to show you the power of this -- of our 25 GigaFast broadband and also the convenience that it can bring to our work and our life. Thank you.

Thank you, Danny. So apart from real-time on-site demonstration for the revealing of seeing is believing, let's also hear customer's voice. [Presentation]

It's good that we have some -- one of the customers who are paying us and also seeing our pages. So Derek, your turn. Thank you.

Good afternoon. Today, I'm actually very pleased to present the financial performance of Hong Kong Broadband and Network to you. Let's take a look at the second half of our performances. Overall, very solid performances. In the second half, like we delivered [ HKD 1.2 billion ] EBITDA which represented 11% year-over-year growth. As a percentage of revenue, that is like 25, 26 percentage of revenue. It's a very significant, like undertaking. Overall economy is still very challenging, especially under such a high interest rate environment. But even that not only we are able to recover our profitability positions, we are delivering profitability positions. Our AFF also increased from a year-over-year perspective. AFF in the second half increased 25%, 26%. And when we're looking at the full-year performances, it's no doubt that the overall handset and also the computing product still remains a very challenging environment. And yes, our core business is protected and sustained our performances. When we look at our full-year performance, FY '24, we delivered like a [ HKD 2.4 billion ], representing a 6% year-over-year growth when we excluded the handset. Overall, it's a very solid performance. When we look at our Enterprise Solutions, we delivered a stable performance, especially on our FTNS businesses. When we look at the -- our booking, our new order booking, William touched on, basically is a 9% year-over-year increases. And within that 9% year-over-year increases our FTNS, the fixed telecom network services, the most profitable businesses actually grew 4x quicker than the rest of the businesses. It's a very strong position helping us. And then on our system integrations and ICT businesses, we continue to gain good momentum, not only in Hong Kong market, but also in China and Greater Bay Area. We secured about like 8% to 10% growth in that territory. On our residential businesses, continue to perform a very stable performances. Our OTT Infinite Play delivered good results. Overall, William touched on, we have a slight negative growth on our overall revenue. Our focus is to focus on our own core subscriptions, direct subscription because that's sustained our performances. Our strategy right now is to slow down on our resell businesses. So that is actually a planned execution. That actually helps improve our overall profitability. In terms of our operation, our OpEx, our productivities, it has improved year-over-year by 13%. When we look at our efficiency metrics, it improved like from 21% to 18%. Most of this is not a onetime cut. It's a sustainable transformation from adopting a digital solutions by optimizing our delivery and also our very strong sales execution. A lot of that of you asking, there is a significant improvement in our second half. These are the primary reasons driving behind the reason. And a lot of these are sustainable. We continue to see the benefit in this upcoming year. Hong Kong Broadband Network generated very strong cash flow. Compared to our EBITDA, our cash conversions is converting at about like 96%, 97%. So what does that really mean? Every single dollar EBITDA that we earn and take home, we're able to convert at like [ HKD 0.97, HKD 0.96 ] into cash conversion. Cash on hand increased by 20% to [ HKD 1.2 billion ]. We are deleveraging. We are deleveraging. A year ago, our net leverage ratio is at 5.12x and then creeping up to 5.33x after the first half at a much higher level than we like. And when we finished the year -- exit the year, we are deleveraging down and improved to 4.93x. Deleveraging and also growing the business, improving the EBITDA at the top of our priorities. And we continue to make a very strong progress in those fronts. In the end, we're wrapping up. It's a strong performance. We're generating cash flow. We continue to convert cash. We will continue to focus on our deleveraging. We are making good progress, and we want to continue to focus that. And we are continuing to increase our EBITDA. Overall, we feel that we're making good progress and a solid performance for the second half. Thank you .

If some of you who know us well. Go back, look at the webcast 6 months ago in the Q&A section of interim, the last answer to the last question is about what Derek and I are focusing on what we are doing as Group CEO and CFO. And my answer is EBITDA and cash flow 24 hours, even waking us in the middle of the night its cash flow and EBITDA. And today, we delivered. Let me speak again, Hong Kong [indiscernible] we delivered. Cash flow and EBITDA. That help our deleveraging, and we will continue. Not only past tense, future tense, we will continue. One page share about ESG. Again, we are better than all the other players in our industry. Consecutively 3 years to 5 years getting AAA or AA plus above all the other players. And in ESG, we have an ESG committee at board level, very serious on that. We have investment of money and manpower to make this really work. Not only taking the box per regulator's requirement, but really want to contribute from environment, social and governance areas. But having said that, you guys know. Now ESG is sort of a must when companies choosing their vendors. They will ask where is your ESG? Where are you? Are you past credit or distinction? And then they will give assessment in the tender exercise. And I think this has been helping us, and we will also continue to help us in our business. So ESG for me, it is not only environment, social or governance. It is Enterprise Solutions Growth because of good ESG benchmark over the others. So very simple. The improvement in cash flow, the improvement in EBITDA and then deleveraging. Is it sustainable? Basically, G-R-O-W, grow OFCA's number talking about the demand of higher bandwidth. It supported us in building the 25-gig network ahead of other players. Our industry recession resistant even the economy is tough, enterprises, households still need fixed broadband or even much higher or much faster broadband with lower latency. And we, unlike other utilities, like water or electricity, you can use less and pay less, but we charge you a fixed rate per month with 24 months or above. So this income is sort of like guaranteed pocketed. And then we offer bundles in both Enterprise and also Residential. So basically, when people compare they will notice that we offer a much better value for money on both markets. And last one, worry-free competition. As I mentioned, while we are a strong #2, strong #2 is not talking. This #2 is on the offensive. We can always in the lunch of our competitors, no matter the incumbents or additional number distant #3 or 4. So that is where we are on our confidence. That is how these 4 areas support our upbeat status towards our growth. So from strong to stronger, I want to introduce our President and Group COO, Dennis to come out and share with you how you look at us. Denis?

I'm very excited to join HKBN. This is my fourth week of joining. And if you look at the slogan, Performance Delivered, and if you look at the demo that we have 25 gig and leased for 12 to 18 months above and beyond our competitor, we have a lot to do. And there's one word that I want you to remember, GigaFast. So you will see the GigaFast in the next few weeks of what we are doing as a marketing launch and we will continue to be Performance Delivered. Thank you.

Thank you Denis and thank you, management, for the very detailed presentation. Let's move on to our Q&A session. [Operator Instructions] So may I invite the first question from the floor, please. Yes, over there.

My name is Sara from UBS. I have one question on the Enterprise business. If I remember correctly, our backlog has been growing much faster than revenue for more than a year. So just wondering when shall we expect the revenue growth to eventually catch up with backlog? Or in other words, how long will it take for the current backlog to be translated into revenue?

I believe the time from order to revenue or to GP and EBITDA, which will be much shorter because over the last, I would say, 6 or 7 months, one of the main focus for the whole organization is on improvement of GP, on both Enterprise telecom product services, SI/ICT areas and also Residential areas. So we have many, many initiatives on cost control, and we have many, many initiatives on revenue increase. I would say with more than half of them you will see the full year impact in coming years and in a shorter time, okay.

So Sara, if you notice for the second half, like we actually have a very strong contribution on the EBITDA growth, 11%. And basically, we actually have like fine-tune our executions. The team actually has done quite a bit of work. As I touched on, we are actually having a more digital transformations, delivery and also sales executions. So allow us to be able to deliver a lot stronger results in the finance area. So we are actually -- you can see that part of the EBITDA growth is as a result of that.

So the first question from the webcast is that, what is your strategic plan to drive further growth?

I think, first, we continue to increase our more product offerings, source more products and services that will add value to both enterprise and residential customers. But just at a slight increase of the monthly fee to our customers. So we believe that is on the right track. And on that, we do increase our human resources, i.e. more leaders. So with Denis joining us. We have Denis. There will be more people joining us. Tomorrow, go and read the newspaper, we will have a press release for another doctor joining us. We have so many doctors. So we are upgrading our human resources pool. So it's talking about execution, execution, execution. And when others are talking about execution, we are not walking the talk, we are running the talk.

Any questions from the floor, please? Okay. We got another question from online. It's actually from Scout of Radisson Group and [ Casey Lee from Mac Capital ]. So they're asking about the CapEx. Can you please talk about the CapEx and laying-off plan in 2025? And can you explain why your CapEx dropped quite a lot? And what is CapEx likely to be in this year?

So in terms of the CapEx, this year, there's a little bit of the timing differences. And there are also -- we have been working with our strategic vendor to allow us to have a very strong like payment term. So in terms of the FY '25, we will continue to invest in the right area, be selective. There are areas that we will dial down the investment, but there are areas we will continue to invest. So it should be like back to a normal level our normal investment level on our CapEx.

May I invite the next question, please. Yes, from the floor. [indiscernible], please.

Congratulations on the very strong results. So I just have one question on the refinancing. So we have like 2 loans due by the end of next year. Just wanted to have an update on -- if we have any color on the refinancing progress or...

It's green [indiscernible].

So the first syndicate due likely in November '25. The second syndicate due in April '26. So make sure like we get the maturity date, right. We have been working very closely with our relationship bankers, many of them actually in this room. So we are getting ourselves ready. Everything is actually well planned according to our time line. We managed to get very strong support from a lot of our relationship banks. Everything under good progress, and we are in a -- we feel pretty good, very positive about the refinancing exercise and the mandate.

Next question is from [ Casey Lee ] again from Mac Capital Limited. So you mentioned that your gearing went down your shareholders' funds fell from [ $3 billion to $2.5 billion ], but your bank borrowings did not seem to have gone down. So could you further explain your gearing situation, please?

So if you look at the net leverage, there are many different metrics, right. On the gearing, gearing actually slightly increases, but I actually have more cash on hand. What's most important, I think, most of these people in this room can tell us is the net leverage. What it does is actually measuring like my gross debt versus my cash balances and then compared with our EBITDA. Our ability to generate like a cash flow to pay off the debt. So as I mentioned that the net leverage has been improving. A year ago, actually 5.12x and in the mid of the year, 5.33x. And then when we finished the year, it's actually by 4.93x. So this is actually the most important. I think most of the -- actually one of the look at. We have continued to deleverage. This is a good trajectory. So I think that's most important.

Any questions from the floor, please? If not, we have another question from online from Lester. What is the outlook of dividend for next year? And any plan for refinancing or improvement in long term?

Let me answer first. We are different from other management of other companies. We are management, but we are also co-owners. So our answer, we also speak on behalf of the Board or our shareholders. We will always put the right balance on dividends, on repayment of loan and the money for growth. It is the right balance of this that will help us to continue to deliver better than others.

Our refinance exercise has taken off already. It's on track. And it's based on our time line. So it's actually making a very good progress. We received a very favorable response and support from our key lenders. Thank you to their support. So we are in good shape. We are on track.

I invite more questions from the floor, please? No?

Sara again.

I forgot to mention, congratulations on the solid results. I have another question on the residential business. So it's encouraging to see that our ARPU is improving, but the total revenue is still under pressure. So how shall we think about the balance between like continue to improve the ARPU versus maintaining a stable revenue or subscriber base?

So you -- so I believe -- as I mentioned, the belief in slight drop of revenue is basically, we are defocusing those 2 resellers. But on our own channels, we are increasing manpower, we are increasing the acquisition and retention or upselling of our services through digital platform. And having said that, I think the core driver for us starting from today is GigaFast like what Denis mentioned. Because this network is high speed, is low latency. It's basically what we have today, and we didn't have yesterday. Or we have now and competitors don't have in coming 12 or 15 months. So it is this basic core that can drive us to go out, shout loud with heavy advertisement and promotion, to do more acquisition, do more retention, do more of selling, which may help a lot. All the other things like products or services for the bundling in our term, I would say that is VAS, value-added services that may help. But the fundamental core is our edge over the others. But as I mentioned, we have this time window, even the others want to catch up, they may still need another 12 months. So you can imagine within coming 12 months, we already secured more customers with 24, 36 or 40 months contracts. So we're done.

And Sara also by moving away from the reselling businesses and focus on our direct subscriptions is accretive to our bottom line on the EBITDA growth. So you may not see it like the instant impact on the top line, but from an EBITDA perspective for the residential is accretive and it's strong enhancing.

Thank you Kwong and Derek. If there is no further questions, this concludes today's investor presentation. Thank you for coming and hope to see you next time.

Thank you.

Thank you.