HKBN Ltd. (1310) Earnings Call Transcript & Summary

Good afternoon, everyone. On behalf of HKBN Ltd., thank you all for joining the group's 2025 interim result 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 first half of 2025, followed by a Q&A session. Without further ado, now may I invite Executive Vice Chairman and Group CEO, William; and President and Group COO, Dr. Denis Yip, to walk us through the Group's overall performance and business performances of Enterprise Solutions and Residential Solutions. William and Denis, please.

Thank you. Thank you, all our partners coming to join our interim update. I will say our success is because of the full support from our talent and also your trust and support to us. I will start with this PowerPoint, a bit introduction, and then our COO and CFO will share a few of the details. Basically, revenue, EBITDA, net profit, AFF, all green, all grew. And I believe like the 5% year-on-year EBITDA growth is among the best or better than all the other market players. And before my team members share the details, I'd like to highlight three R's, which will be our drivers to really continue to deliver the sustainable growth. The first R is recession resistance; second R is recurring revenue; third R is robust #2. So I will further leverage these three Rs as a conclusion to let you guys know why we are so confident to continue delivering sustainable growth. Over to you, Denis. Thank you.

Good afternoon, all the analysts. Let me walk you through what we call the Enterprise Solutions and the Residential Solutions, the ES and RS strategy. And then I will pass to the CFO, Derek, on some of the numbers. So you see the EBITDA growth of 5%. So if you look at the Enterprise business, basically, we see the Enterprise Solutions revenue grew 4% in the first half of FY '25. The Enterprise core telecom revenue grew 2% and our system integration ICT business grew 10%. So it's a solid growth in all the different areas. A lot of you have seen this chart. We had this chart in the full year '24 results announcement. And when I met with a lot of the analysts, they asked about this chart. One of the core values that we have is -- the left side is telecom, the right side is the SI/ICT box moving. Now all of us know that telecom GP or margin is much better than the right side. So what we want is actually the bundling so that the customers have more and more enjoying both our telecom and the right side solution, ICT business. So if you look at a year ago, we were 57% telecom, 40% (sic) [ 43% ] SI/ICT box moving with 47% overlapping of customers bundled. Now we want to be on the right side now, which is much better in terms of 61% telecom backlogs, SI/ICT 39%. And the total bundling of customers increased from 47% to 50%. So this is a good story. I will talk more about it. Our RS, if you look at our RS business, our Residential business, basically, the left side, if you look at the core telecom revenue, we grew 1%. The ARPU grew to 3% around. And then we introduced a term called ARPH, A-R-P-H, average revenue per household and that's the household solutions. So we have the numbers for the last 1 year for ARPH, and we grew 5% to $212. And the total RS backlog grew 8%. So very healthy business on our RS business. Now let's deep dive into our strategy for Enterprise business. If you remember, we started the FY '25 in September. We actually launched a GigaFast campaign on the Enterprise business because we actually invested into the Nokia 25 gig, which is the only company that can do 25 gig on broadband. We also have Huawei, which can do 10 gig on the speed. And we really want to push for customers to go from the traditional 1 gig to what we call the 2-gig-plus. So you can see our uptake for the last 8 months, actually very good growth. And right now, on the Enterprise business, we are 6.1% having what we call the 2-gig-plus. So if we continue to increase this trend, the customers will pay us more and we have more margin. So this is a good news of having a good uptake on our GigaFast campaign. Now the other side is I talk about telecom business having better margin. So what we want is our solutions actually making sure that we bundle with the FTNS business. So we have the extended connectivity solutions that have almost 40 wins and $20-plus million in terms of contract value over the last 6 months. Now this includes the software-defined wide area network. This includes the secure asset service secured bundling, multi-cloud connect, what together we call the extended connectivity solution. So we purposely push on the extended connectivity solution so that the customers don't just purely use our line, they have the connectivity solutions that bundle with the line business. We also launched the iTEA, what we call the InnoTech Ecosystem Alliance. Now we signed this up in late January before Chinese New Year, 17 vendors. Now 17 vendors, a lot of them are Mainland China vendors. Now you hear in the news every day that actually a lot of Mainland China vendors right now use Hong Kong as the hub to go overseas to the Belt and Road countries. So this is the whole purpose of actually having more China vendors into the HKBN portfolio. So with this, we actually grew our international data average monthly fee of 40%. Now the 17 vendors actually have different areas like Yonyou as the ERP vendor, Suanova as the AI GPU vendor, Lark, OceanBase as the parallel one, Oracle Database type of vendors. So we have a lot of different new vendors that we partner with. And we see that actually is a very strong pipeline growth into our business. One example is, you all heard about AI NVIDIA. People are afraid that H20 will get sanctions or a lot of H20 orders. We actually partner with the MetaX, which is the AI GPU Chinese vendor. We are the exclusive partner in Hong Kong. So if NVIDIA is having issues in sanctioning, we actually have the China GPU that we can use for our customers. Next two pages will talk about what we call the go global. Actually more and more Chinese companies are going to ASEAN, Middle East, Europe, Belt and Road countries, not so much the U.S. So it's more Belt and Road countries, not the U.S. countries. But you see that Hong Kong is positioned to be an international hub, and a lot of international headquarters is now moving to Hong Kong. So you see the Chief Executive of Hong Kong went to Hangzhou looking at the six more dragons, which is the AI companies. And actually, he's inviting the six companies to be using Hong Kong as their international hub, international base. So we, in HKBN, wants to help this company to go global. And how do we help, right? We have the connectivity. We have the digitization. We connect from Chinese headquarters into Hong Kong. And then we also connect from Hong Kong to ASEAN, to Middle East, to international. So this is a piece of business that we are growing very, very fast in terms of going overseas. And this is the area of success that helped us to grow 5% EBITDA overall. Now the other thing is cybersecurity. Now Hong Kong is undergoing cybersecurity. Lucky enough, HKBN actually, with the lines, we bundle with our cybersecurity solutions. And also, we have a new practice called CyberZafe. Hong Kong actually just launched the cybersecurity infrastructure bill in March. And basically, we have what we call CyberZafe solutions, and we have 30-plus wins right now on the launch of CyberZafe, to help Enterprise customers going through the different cybersecurity practice and using the different cybersecurity solutions that we have. So moving to the Residential Solutions, right? This is a study from OFCA, Office of Communications Authority. You can see that 70-plus percent of the lines are 1-gig plus. So the fast speed is becoming more and more important in Hong Kong. Now HKBN is the first company to launch 1 gig in 2005. And then we, in 2023, we actually was the only company that can do the Dual Guarantee. And then last year, we are the first company that do the 25 gig. So like Enterprise business, moving up the speed is very important for our ARPU. So if our customers move up the speed, they are willing to pay more and our ARPU increase and our margin increase. So we did do very well. We have the GigaFast campaign since August, September last year. And you can see that in the last 6 months, we actually grew 80% on our uptake of 2-gig-plus customers. And right now with our 900,000 customers, we have about 9% already at 2-gig-plus. Imagine if the rest of the 91% of the customers, let's say half of them, will move up to 2-gig-plus, our ARPU will increase a lot. So this is the area that is very important for our strategy. Now I talked about ARPU, I talked about average revenue per household, ARPH. You can see that ARPU actually grew consistently. And it's not that easy, right? You look at the chart, it's so easy. But the pricing, we have competitors and every day we need to work out very flexible pricing execution. We introduced ARPH a year ago because we want our broadband customer to bundle with solutions, and we'll talk about why. But actually bundling solutions, we want the household to be using the Hong Kong Broadband. So we call this the Infinite-play solutions. So you see about 11 solutions here, right? Broadband is the core and then we go to MVNO and mobile. We go to OTT, which is a different TV platform. We have cybersecurity. We have Shoppy. We have the different WiFi solutions. Actually, we sold a lot of WiFi 7 routers bundle with our customers upgrading. We have the AXA travel insurance, home insurance. We have global SIM. We have the different Bowtie insurance, health insurance, voice communications, aging or elderly solutions or gerontech that we are putting. So we will introduce more and more solutions with broadband, and the recent really is to increase our ARPH, right, because the more solutions we use, the more sticky the customer is. Now if we look at OTT, for example. The top, we are the #1 telco partner for Netflix, Disney+ and myTV SUPER, myTV Gold, right? We have introduced new OTT service, iQIYI, Max, JOOX. So actually, our ARPU with OTT increased 12% over 6 months. You can see that why the solution is so important for our ARPH. Now elderly solutions, we actually have partnered with a company that do, what we call, the safety bell, [Foreign Language] in Hong Kong, right? And interestingly enough, this is the only company that actually will call the elderly every month and using volunteer to call to make sure that they are safe, they are happy, et cetera. And we did a survey actually a lot of times when we tried to do this business, we thought the safety barriers, whenever people have real emergency, should we use our customer center to let them call, et cetera. It doesn't work that way. So it's a total solution type of business that you need volunteer. The old people will call you anyway to try to talk to the customer center. So it's a very different business than broadband. And we will be introducing this business. We also will be using AI to look at the Wi-Fi sensing, the radar technology for, what we call, the fall detection. Actually, the AI will study the household, where the table is, where the chair is, what means falling. So it's an AI learning process that we'll be introducing. So the number of solutions, we also did a study, right? We call it Infinite-play. So whenever the customer has five-plus solutions, we call it Infinite-play. It becomes more sticky. And its growing adoption of solutions for us. So what we want is more than 4 solutions will be used in one household. So we will be mentioning that, we'll be introducing new solutions to have more stickiness on our broadband and telco systems. This is my final chart. So we talked about the left side on the backlog growth of telco, which is a more profitable business than the ICT and SI. We have strong demand for the tailored solutions. The right side is very important, right? You see the tall rise building. We have our infrastructure built already for the broadband. A lot of people really think about how much backlog we have, how much booking we have. One way to look at it is we have 900,000 subscribers on Residential, not even mentioning Enterprise. With the 900,000 subscribers, let's say they are paying at such $200 a month, right, the ARPU or the ARPH around $200. Let's say an average contract is 30 months. This is $5.4 billion of committed billing revenue already, $5.4 billion. So it's very huge numbers that we are dealing with. This is Residential only, not even talking about Enterprise. So this is the state of the business we are at. We are very happy to have 5% EBITDA growth, and we will continue to strive for, what the term is, sustainable performance. Thank you very much.

Good afternoon. William and Denis have shared quite a bit of the highlights and also like some of the strategic initiatives taken during the first half. So here's all the financials coming together. Starting with the Enterprise businesses. Charged by our GigaFast solution, our SI businesses, our telecom businesses and our ICT business in aggregate grew 10% year-over-year growth. On our Residential businesses, our Residential businesses, the GigaFast and also the Infinite-play delivered a positive 1% year-over-year growth on the direct subscription business portfolio. 1% year-over-year growth on the direct subscriptions business portfolio. We continued to adjust our strategy. Basically, we scaled down our less profitable reselling businesses. In overall, the aggregate, the business is actually about very flat and also a slight decline. But our EBITDA continued to gain lots of good momentum. Together with the ES, Enterprise Solutions, and also Residential Solutions, Hong Kong Broadband delivered a 5% year-over-year growth on the EBITDA. In addition, we are seeing the benefit of the improving finance costs. So our net income for the first half is $108 million. We are also seeing a very stable, sustainable AFF growth at 2%. Hong Kong Broadband continued to accelerate our operating efficiencies and generating a strong cash portfolio. The journey to embark the digitalization improved our operating expense ratios from 14.8% to 14.1%. On a year-over-year comparison, it's actually a 5% -- a 6% improvement. We increased our cash basically by 34% to a more than like a $1 billion balances. I'm very happy, very pleased to report to you, our net leverage ratio improved to like 4.79. Compared a year ago, 12 months ago, it basically is a more than 0.5 improvement in reduction. My priority remains the same. Number one, to generate very strong cash flow. Our cash conversions has remained very high at about like 80% to 90%. In the other words, every EBITDA that we earn, we manage to bring home $0.80 to $0.90. This allow us to continue with a very strong cash position. Deleveraging. Deleveraging is a long-term journey, but it's also my day-to-day priorities. So we successfully refinanced $6.75 billion the syndicate in a couple of months ago, thanks to like we get a very strong support with a lot of the relationship lenders and many of them actually in this room. Thank you very much. We actually have an oversubscription, basically more than 2x. And finally, EBITDA growth. We will continue to grow the EBITDA more than 5%, and that's how we target for the longer-term perspective. So these are the key priorities for me: generating a strong cash flow, deleveraging and continue the EBITDA growth.

Thank you, Derek. So before my conclusion, I want to share with you this page. This is talking about the ESG, the sustainability that in our industry, we are still getting those benchmark like AAA, something like that, that is above the players in the same industry. But talking about -- we are already like sort of secured $6.75 billion syndicated loan. Now we have remaining $4 billion to be due in April next year. Go back to this page. The $6.75 billion for the first one, we got 2x subscription. But now, thank you for the support of our relationship banks and many friends year-to-date, many of you are helping us committing to promise and secure the refinancing for us now even though the due date is in April next year. And with a rate, effectively, we believe is even better than the first tranche. So first tranche, 2x subscription. Now for the second tranche of our remaining $4 billion, we have 4.5x subscription -- or oversubscriptions. So Derek and [ Perry ] or our Refinancing Committee, they are taking different calls. Now they have a happy problem from our friends. So be patient with us, we will try our best. But at least, we want to let everybody know this that refinancing is something that we have done, we are certain. No more uncertainty from any like fluctuation in interest rate, whatever. So sustainable growth, we delivered and we will continue to deliver. Back to the 3 Rs. The first R, recession resistant. Our industry, basically, almost 100% local, domestic use, the fixed telecom or the fiber broadband for households and for companies. Nothing related to the geopolitics or the tariff war that involves import and export. In fact, we won't be complacent. We did study about the impact. The tariff war won't impact our industry, but maybe impacting some of our Enterprise customers like those involving in export. If we look at our Enterprise customers, we do have 5% customers are in the export industry. But according to the figure of Industry and Trade Department of Hong Kong Government, there are only 6.5% of the companies or players involving in exports to U.S. being impacted. So our 5% revenue related to exports times 6.5%, it is 0.3% of exposure on this revenue. So our [indiscernible] is 0. So basically, broadband is like utility, even better than electricity or water. You can use less water or less electricity at home or your office to save some of those costs. But for us, we have a fixed monthly fee on contract. So like this one, all these high-rise buildings. For our business, very simple, in Hong Kong, many high-rise buildings, majority being high-rise buildings. The broadband, the main chunk of broadband, the costs to enable connectivity to all these like 400 apartments within one building, just on average HKD 80,000 or HKD 200 per home over those 400 homes per building. So the cost was -- is minimal at one go and that then will continue to support the service for like next 3 or 4 decades. All our customers, I think Residential customers as an example, they are paying us $20 per month on average, already signed 30 months contract. Because we have 24 months, 36 months or 48 months contracts, but on average, like 30 months. So times 900,000 households. It is $5.4 billion contract dollar secured. But I myself don't look at this. For you guys or some of the analysts who have been following with us for the last decade since our IPO in year 2015, our monthly churn rate is below 1%. And for this 900,000 residential customers, on average, they have been staying with us for over 8 years. So one should imagine and use your own calculator to estimate and then you will know how much we are going to get in the coming decade. When you have low churn rate, when you have a competitive scenario, that is favorable to us, which I will mention later. So basically, we are sort of -- we won't be impacted by geopolitical issues or macroeconomic downturn because of our utility nature of business. And we are just having two money printing machines, one is in Residential and other is in Enterprise. I won't disclose the number in Enterprise. But look at how excited Denis is talking about, then you'll notice that our Enterprise contribution is even bigger than the Residential. And to be honest, we only are having less than 20% market share of revenue in the Enterprise area. That means we have huge room to grow. So that's why recession resistant, point number one. Point two, recurring income -- recurring revenue I just mentioned. And point three is the robust #2. Robust #2, I refer to remaining one archrival, the incumbent. And we have two decent #3 and #4 who don't have scale and don't have any strength to compete with us. So when we face the incumbent, we are on the offensive. When we look back on the decent #3 and #4, we are on the defensive because we are scalable. When we place an order to Huawei, Nokia, we are talking about buying things for more than 900,000 homes or almost 100,000 Enterprise customers. But the order size from the decent #3 or #4, I think they can never commit any MOQ or get any discount or better terms from any business partners. So we are well positioned to play, to attack the first one, but we get the third or fourth one. So this triple R will help us to sustain our growth in coming years. And last but not the least, I always like to use the old model of -- younger guys may not know, Michael Porter, Competitive Advantage, right? Talking about new entrants, competition. Looking at our industry. For the last 2 decades, there's no new entrants in the fixed broadband industry. It is very, very difficult. We have acquired New World. We have acquired Wharf. So together with HKBN's fiber network, with three fiber network underground and many infrastructure inside the buildings, with more than 25 years' time to build a network and own the customers and revenue to be where we are today. For anyone who want to replicate and compete with us, even they are 2x better to us, it will be like 15 years later. And also with more money because when we build our network, like having the fiber inside the building there, we have still enough space. But when we build, we jam-pack the space. There's no more space for other new entrants. That is why we are in a very well position to grow our business. One more point is that I think no one can speak longer than me. I am having 20 years' experience in the fixed broadband business. Before, I have 10 years in the mobile industry. I am still supporting our friends in the mobile industry, but I need to tell the truth. 5G or mobile cannot replace fixed broadband. It's two different engines, totally different. If people tell you that 5G or you use 5G router, then you do not need to use fixed broadband, not reliable, not trusted. They can never deliver 10-gig to 25-gig dedicated speed not sharing with others. But for the mobile, it's almost shared, not reliable. Ask all your 5G friends or those shareholders. If they're so confident on the 5G, ask them to cut their fixed broadband at the office, cut the fixed broadband in your banks, in [ our lives ] and see who's right. The truth will come. So we are very upbeat on our future growth, sustainable, and we'll be above all the other players. Denis and Derek, can we come? Guys, see if you have any questions for us. Thank you.

Let's move on to our Q&A session, right? So for all you investor here with us today, whether in person or joining through the webcast, feel free to ask any questions you have. We'll start with a question from the floor then we'll take a question from online participants. After that, we'll switch it up and go back and forth. If you're here in person, just raise your hand and our team will bring you the microphone. [Operator Instructions] So let's welcome our first question from the floor, please. Any questions? I guess our presentation is too detailed, very comprehensive. Okay, let's move on to our first online question we got, which is for the management. To what extent do you think the current trade war affect HKBN's business?

As I mentioned, we don't see any an impact, I want to say any significant impact. We won't see any impact on our business. We are very robust utility like recession-resilient, having recurrent income secured. So we are all good.

Sure. Thank you. Any questions from the floor, please? Don't be shy. No? Let's see if we have any from the online participants.

May I ask a question, any concern that you can think of that we will miss if you were with us sitting here leading HKBN for the growth path? Anything that make you awake in the middle of the night when you think of HKBN?

Yes. Even if it's not a question, just a comment. Any concerns, you're welcome.

Yes, please.

Let's see if we get anything from online. There is one question, this gentleman.

Yes. [indiscernible] from ING. So we heard the announcement that China Mobile is acquiring TPG stake. And I'm just curious, has this had any impact on your strategy? Have you had any discussions with China Mobile?

As of today, up to this moment, the transaction between these two, China Mobile and TPG, not yet complete. So I won't answer on behalf of them. But for us, my internal e-mail to all our [ talents ], we are business as usual. We continue to grow our EBITDA and continue to improve our cash position, continue to deleverage. Everything is fine. We are still talking to our vendors like Huawei and Nokia to speed up our network upgrade. All the operations are in full force. So internally, I sent an e-mail -- Chinese e-mail to my team. I can translate in English later. But for those who know Chinese [Foreign Language]. So we're still fighting. We're still eating the lunch and dinner of competitors to help our business performance.

Sure. Any more questions, please? Guess everybody is as confident as our management. Cool. So this concludes today's presentation. Thank you so much for coming. And thank you, management, for your presentation today, and hope to see you next time.

Thank you.