HKT Trust and HKT Limited (6823) Earnings Call Transcript & Summary

Good evening, and welcome to the HKT 2022 Interim Results Presentation. In attendance, we have Susanna Hui, Group Managing Director; and Patrick Poon, Chief Financial Officer. We will start with the presentation followed by Q&A. I'll now turn to Susanna.

Good afternoon, ladies and gentlemen. Thank you for joining this interim result presentation by HKT. Basically, we commenced -- actually, we commenced the year 2022 with some positive momentum. Unfortunately, the onset of the fifth wave in February led to a return to lockdowns and relatively strict social distancing measures, as you all know. And Hong Kong's borders relatively remaining shut, which adversely impacted the overall economic activity. GDP contracted by 3.9% and 1.4% in Q1 and Q2, respectively. In the face of these challenges, actually, HKT still managed to record steady growth, although I must say that it's at a slower-than-expected rate. Revenue grew by 3.3%. And if we exclude mobile product sales, revenue was up by 5.4%. EBITDA and AFF were both up by about 2%, respectively. This has allowed us to announce an interim distribution of HKD 0.3136, representing an annual increase of 2.15%. Looking ahead, I think positive factors, which might bring in a rebound in the coming months in the second half of the year include further relaxation of quarantine rules and also boost of retail sentiment by the most recent round of consumption voucher schemes as well. Let's focus on mobile now. During the first half, we continued to consolidate our market leadership with subscriber base growing 1% to over 3.3 million, representing net additions of 42,000 for the past 12 months. And in particular, you can see here that our premium 1O1O base also expanded by 2%. Despite a widening churn of 0.7% to 0.9% in the recent few months amidst the relatively weak macro conditions. And also, we saw an escalating impact of emigration during the period. Mobile services revenue increased by 2%, driven by 5G upgrades and also mobile enterprise solutions. Contribution by roaming and IDD was still relatively insignificant, although we did see a slight improvement from a low base in 2021. Future meaningful contribution can only be expected after quarantine rules are further relaxed. Postpaid ARPU was steady at $187. Looking at the 5G penetration, it's still on the growth trajectory. Our 5G customer base hit 918,000 in July, and we expect that by the end of the year, penetration will reach 30%. This upgrade cycle has to be supported by a worldwide range of 5G handsets and other devices. So including here, not only are the mobile -- popular mobile handsets such as iPhone and Samsung. And we expect that second half will be with the new iPhone launch, usually the take-up will also accelerate. And we also have exclusive access to new mobile phone disruptors such as the Nothing Phone as well as a wide range of IoT devices. This actually positions us well to support the growing system of AR, VR applications and eventually applications developed for the metaverse as well. Looking at our 5G network. Our leading position in 5G is underpinned by having the leading 5G network in Hong Kong and delivering the best speed and reliability on the back of the largest number of cell sites as well as well connected by fiber backhaul. And starting with the acquisition of dedicated 5G spectrum in 2019, we have rapidly achieved territory-wide coverage over the past 3 years, and we have now achieved territory-wide coverage for all the 5G. Obviously, we will continue to improve the network to provide the best experience for our users. And I think our network is well distinguished by the fact that we have deployed a large scale -- on a very large scale, massive MIMO for the C-band as well as 4x4MIMO for the low-band spectrum, including the recently acquired 700 megahertz to enrich capacity layer as well as uplift the overall network speeds. And looking ahead, the -- most of the mobile CapEx has been spent. Most of the 5G Mobile CapEx has been spent, and we expect to complete the rollout of other C-band spectrum in 2023. As well as launch our MMA spectrum in 2024, which will allow us to offer campus-style coverage and also network slicing. We are also pleased to announce that our team rapidly deployed 5G network to cover the new East Rail Line Cross-Harbour Extension, which was opened in May this year. And obviously, in the -- along all the MTR stations, we are the only operator which has dedicated reform of the 2,100 spectrum for 5G. And therefore, you can see from the various independent testing -- speed tests, basically, the HKT users are enjoying the fastest download speed. Now another critical and unique element of our network is, of course, the integration of fiber and mobile. So again, we are pleased to share with you all that we are the only operator which has 10-gig capacity for the entire network, 10-gig fiber capacity for the entire network. And so this is important because it not only has the -- obviously it delivered the last mile access to provide reliable fiber broadband service, but it also provide high-speed backhaul to all of our cell sites. So during the first 6 months, we continued to expand our reach and speed particularly in villages and remote areas. And for instance, areas like Tai O, we also have 10-gig coverage for the fiber to the home and in support of the government broadband subsidy scheme for remote areas. Obviously, in further remote areas where physical connection is still not feasible, we are utilizing 5G for last mile access as well. Now looking at the -- our broadband services, with the onset of the fifth wave and obviously, the continuation of the hybrid work arrangements, consumer demand for our reliable broadband network remain very robust, which obviously benefited our Fiber-to-the-Home subscriptions as well. As you can see here, we have 5% growth in terms of the -- our Fiber-to-the-Home subscriptions to 964,000 as at June end. Overall subscriber base remained very steady at $1.46 million, and this is already after the -- taking into account the headwind of heightened emigration trend in the first half. And also in order to support the multiple broadband users at home, we also saw a growing uptake of home WiFi with the subscriber base growing to 339,000 with an ARPU uplift of HKD 96. And we also see growth in terms of the B2B side as we continue to win a large number of new projects with different property developers who view smart living solutions and new developments, a must have to new home owners. And we continue to launch new product and technology upgrades in order to spur demand and improve user experience. In March this year, we launched a Stay Home Super Combo, basically cross-selling the different services to the household, catering for the different needs of the different individuals and offering Flexi plans as well. And we have seen satisfactory results on that. We have also launched interactive AI robot, Kebbi, which is a child-friendly curator service, aiming at promoting new language acquisition and interactive STEM learning at home. Again, this is targeted to a new segment, hopefully, also increasing the revenue on the consumer side. Another new service that we have launched is the 2.5-gig Fiber-to-the-Home service to optimize the high speed, especially with the new WiFi 6 routers available in the consumer market. And this is not only targeted at the tech-savvy gamer segments, but also, it will help solve the bottlenecks of multi-users and home as everyone in the household are using broadband at the same time. Obviously, another key component in our HVT home proposition is the pay TV services on Now TV. Now TV has the widest content portfolio with sports, kids and education content as well as obviously drama and Hollywood titles and unique documentaries. And as the home of sports, we are the only platform which can provide a full suite of simultaneous live football coverage, including Premier League, Champions League and other popular sports such as tennis, golf and F1. And we are also pleased to announce today that Now TV has secured the exclusive broadcasting rights of all the 64 matches of the World Cup. And this time, the World Cup matches will be played in Qatar in November and December this year, and the matches will be broadcast in 4K and as it matches time are quite audience friendly, it started from early evening from 6:00 p.m., and we expect that this will provide a further uplift to the subscriber base as well as to the ARPU for our Now TV services. And for the first 6 months, we are able to report sustained growth in our subscriber base, which hit 1.38 million, a growth of 2% amidst a very intense competition from the various D2C offerings as well as we mentioned before, there is an escalated levels of emigration during the period. And during the first half, we also launched a new Android TV box in conjunction with Google, which allows users to enjoy Now TV as well as other Google Play apps. And we have also included localized Cantonese voice command in this new set-top box. Now on the commercial sector. Our enterprise business continued to fare well, and later on our CFO will be able to share with you that the -- actually, the revenue from the commercial side has increased by almost like 6% to 8%. And this is possible -- made possible by, again, our unique offering of the fixed and mobile converged solutions, leveraging on our 5G and fiber infrastructure. So it's a blend of the use of 5G and fiber in order to support the various industry verticals such as the retail property and construction segments. Beyond Hong Kong, we are expanding into China, Mainland China as well. So we have accelerated our build and sales coverage in China. HKT has established significant presence in the Mainland Chinese market, deploying over 65 PoPs in more than 45 cities offering end-to-end network and managed services such as managed enterprise managed services, premium Internet and SD-WAN as well. We have been able to win significant contracts in terms of the retail segment across the different parts of China. So I think domestic as well as the multinational enterprises, and especially focusing on the cross-border networking. Recently, HKT was also awarded the SD-WAN Cloud Network Convergence Award from the MIIT in China. And we have also established strategic partnerships with the 3 telecom operators in China to extend our market reach. And with the current momentum, we are targeting to grow this revenue from China to around HKD 1 billion within the next 3 years. International business has had a relatively robust first 6 months as we benefited from a rebound in terms of global voice revenue as well as the booking of some cable sales, cable project sales. And we are expecting quite a decent growth in the second half as well. Now leveraging our market position on the telecom side. We are also scaling up our new digital business for the past few years. And center to it is our loyalty and e-commerce platform, The Club. It made significant strides forward with now over 3.63 million members registered on The Club platform, which represented a 10% increase. And with the convergence of the -- both redeem and shop experience, we see the gross merchandise value grew by more than 18% in the first 6 months. And again, in the first half, we have also launched a new credit card together with Citibank, co-branded card with Citibank in May, which provides card owners with very compelling redemption options and also a lot of attractive merchant offers and the flexibility to convert Citi Reward points into Club points as well as use of Club points for credit card payments. So this will increase the liquidity of our Club point as a sort of currency. Turning to our payment service is also another new area in the digital side. Tap & Go is also participating in the new round of CVS in April and also in the second round, which started in August. And this is obviously to help promote the digital payment initiative by the government across the whole of Hong Kong. As a result of the CVS, the consumption voucher scheme, a number of -- the number of accounts [ under determined ] goal reached 3.5 million by June end. And transaction values, we have seen increase of 253% for the period. And it's worth noting that our customer base is quite unique, which are mostly Gen Z and millennial customers and obviously, a lot more tech savvy. And at the same time, on the merchant side, we also see increased adoption of our merchant payment solutions, which increased by 156% during the first 6 months to 7,200 subscriptions. And with the next round already started a few days ago, we are confident that the adoption of Tap & Go and our merchant services will expand further. Now another new pillar under the digital business is the DrGo, the medtech platform. We saw accelerating adoption and usage during the first half, especially in the midst of the fifth COVID wave. And the platform now has over 330,000 registered users, representing a growth of 85%. And monthly video consultations handled on this platform exceeded 1,100 in the first 6 months. So in terms of the service portfolio, we have also extended to include not just GP, but also pediatrics, traditional Chinese medicine as well as mental wellness counseling sessions. And we have also expanded the partnership to include more than 15 consultation partners, pharmaceutical companies to provide vaccines -- vaccinations of various sorts as well as insurance partners as well. And in addition to the expanding -- the products and services available on the DrGo Health Store. And with a view to the future, HKT has also staked a claim in the metaverse by partnering with Sandbox to deliver a new digital experience for our customers. And given our broad portfolio of assets across HKT as well as the PCCW Group, I think we are well positioned to provide innovative and unique experience, and we have a role to play on the various aspects of the metaverse, including the content side, the platform side, the infrastructure side where we have all the 5G. And also the enabler, which include the identity verification and also as just now, we talked about payment as well. So we are well positioned to play a role in all the different aspects of the metaverse. Of course, this is still in the initial stage, and we just want to empower our teams to think hard to see whether there are opportunities for us in this new digital world. And we are obviously looking forward to providing services in the metaverse. Turning to our corporate social responsibility. On supporting our community and building a sustainable future. In the first half, we have stood by the community in many ways, and we have also leveraged our expertise to help city -- to help the city stay connected in this critical time. We have provided free telecom service to the 8 new quarantine facilities in Hong Kong. And also close to 1,300 quarantine units, 3,000 government COVID hotlines as well as free mobile service to health care workers as well as the underprivileged. And through offering 100,000 free consultation sessions on our health tech service DrGo, will help alleviate the pressure on the health care -- on the public health care system as well. We also have a team of very passionate volunteers helping the NGOs as well as showing care to the elderly and the underprivileged sectors in Hong Kong. And as for the -- tackling climate change and building a sustainable future, we took multifaceted actions, including securing sustainability-linked loan facilities, reducing our energy consumption, our operations' carbon footprint as well as promoting upcycle mobile products for consumers to create shared value. Looking ahead on the consumer side, I think we will continue to maximize the synergy of our core play, cross-selling every services to our household -- to every household and to every individual and leverage our group assets to establish new competitive edges. On the B2B side, we are committed to helping enterprises and public bodies in Hong Kong to accelerate the digital transformation journeys whilst in parallel expanding in China, as I shared with you just now. And we will continue to nurture our expansive digital ecosystem, integrating our loyalty program and provide a wider area of online services. And with our multipronged growth, strong and diversified base, we are confident that HKT will be well positioned to capture any upside in the post-COVID economy. And with that note, I will pass to our CFO, Patrick, to share with you the financials. Thank you.

Thank you, Susanna. Let's have a recap on our key financial lines for the first half 2022. Our AFF continued to show a solid growth of 2.2% year-on-year to USD 305 million -- made in U.S. dollars. Our service revenue was up by 5.4% to $1.91 billion and including handset sales, total HKT revenue went up by 3.3% for the period to $2.071 billion with lower year-on-year mobile product sales, which dropped by 16% to USD 165 million. Growth is mainly driven by continuously strong broadband and local data connectivity demand, encouraging 5G uptake on the mobile side as well as high international voice wholesale revenue in the first half. Our total EBITDA for the period was up by 2.1% to USD 748 million, and our NPAT grew 0.5% to $245 million. Looking into the details of our TSS segment. Our local TSS service revenue grew by 3% year-on-year, reaching $1.022 billion for the first half. Local data and broadband services continue to be the key growth drivers. As mentioned by Susanna just now, the accelerated demand for digital transformation and smart city initiative, from both enterprises and public sector in Hong Kong as well as Mainland China, leading to our global data revenue to increase by 8% year-on-year, leveraging our fixed mobile integration technology. With the hybrid work arrangement and online learning being the new norm, especially during -- under the fifth wave of COVID-19, demand for our high-speed and reliable broadbrand network remains strong and increasing. As such, our broadband services revenue recorded a 3% year-on-year growth for the first half. And the total local data services registered a solid revenue growth of 6%. Pay TV services revenue edged down by 2% to $154 million due to challenging economic conditions, competition and emigration impact. But we countered the impact with our comprehensive contact [ lineup ] with various live sports portfolio and also the Asian and Western drama series to real learning activities and entertainment for the young segment. And if to include our international business, of which the revenue rose 9% year-on-year, driven by the global voice wholesale business. Our total TSS revenue increased by 5% to USD 1.487 billion. But owing to the thin margin contributed by the global voice wholesale business, TSS EBITDA margin was slightly dilutive to 35% versus 37% last year. However, the overall EBITDA of TSS business has maintained a steady 2% growth to $526 million for the period, also benefiting from the continued operating efficiency and conscious cost control. Now let's turn to our mobile business. Mobile service revenue rose 2% to USD 468 million for the first half 2022, of which local core revenue was up by 2% from $442 million to $450 million, driven by expansion of postpaid customer base to $3.31 million by the end of June. And also the expanding share of premium 1O1O customers, the continued uptick of 5G customers reached to 867,000, representing 26% of the total postpaid base and also the higher revenue contribution from mobile enterprise solutions. Postpaid exit ARPU was stable at HKD 187 at the end of June. Our sales of handsets slowed down by 16% year-on-year to $165 million as a result of supply chain disruption and the positive impact in the first half of 2021 from the delayed launch of popular handset models. Total EBITDA -- mobile EBITDA was up 2% from $266 million to $172 million. Mobile services EBITDA also up by 2% to USD 270 million, with mobile service EBITDA margin steady at 58%. Let's have a closer look at our operating expenses. TSS and mobile achieved 10% and 7% OpEx savings, respectively, attributable to our continuous focus on efficiency improvement across each business segment. Through accelerated business process digitalization and optimizing off-line to online, O2O sales channels and retail footprint. On mobile network operations side, efficiency gains will also captured mainly from the sale side reconfigurations. Overall, the group reported an 8% year-on-year OpEx savings to USD 281 million, with OpEx to revenue ratio improved from 15.2% to 13.5%. Apart from OpEx, we are also exercising cautious control over our CapEx spend. Our total CapEx for the first 6 months was further lowered to $152 million, representing a 2% year-on-year savings. We record a 10% savings on mobile CapEx as we have completed our territory-wide 5G coverage rollout. TSS CapEx was stable year-on-year, with focus on meeting continued demand for our fiber-to-the-home services and customized solutions for enterprises. Accordingly, the overall CapEx to revenue ratio has dropped from 7.7% to 7.3%, which is well contained within our stated guidance. Next is the AFF. We have already covered EBITDA down to CapEx just now. CAC and license fee went up from $69 million to $76 million, mainly due to the reassigned 900-megahertz and new 700 megahertz mobile spectrum fee paid during the period. Fulfillment costs, in respect to customized commercial projects increased to $14 million. Payment for right-of-use assets, which is representing rental payments decreased significantly from USD 104 million to USD 88 million, reflecting our effective and successful shop rationalization strategy. Payment for finance costs increased to $45 million caused by higher market interest rate. This was partly offset by the lower tax payment during the period, mainly due to timing variances as major payments will be made in the second half. As a result, the overall AFF for the first half of 2022 grew 2% year-on-year to USD 305 million, translating into an interim distribution of HKD 0.3136 per SSU in issue. Income statement. For the detailed P&L, we have basically covered from revenue to EBITDA line just now. Depreciation and amortization increased by 3% year-on-year to $362 million. This was mainly caused by the higher 5G mobile license fee amortization costs. And as explained in the AFF side, our P&L finance costs also increased by 12% to $80 million caused by higher market interest rate. Income tax expense was steady at $56 million. And our net profit for the first 6 months of 2022 was kept steady at USD 245 million, up by 0.5% year-on-year. Turning to our gearing position. Our total gross debt at end June was USD 5.69 billion. Corresponding gross debt-to-EBITDA ratio was still being maintained at around 3.45x same as December last year. As of today, we have total liquidity of around USD 1.8 billion, including undrawn banking facilities of around $1.6 billion and $261 million cash on hand. We continue to carry an investment-grade rating of BBB or Baa2. Lastly, on the debt maturity profile. We don't have any bank loans or bonds maturing this year. Our effective interest rate for the first half slightly went up to 2.6%. And our current proportion of fixed to floating rate debt is approximately 60% to 40% compared with the 50% to 50% December last year. More debts are now on fixed interest rate to counteract the potential adverse impact from the interest rate hike. We shall continue to monitor the market environment such that we can further enhance and optimize our debt profile and structure when appropriate. The average debt maturity is approximately 4 years. This ends my presentation. Thank you.

Let us now let's now open it up to questions. The first question, what is the outlook for roaming services given the recent relaxation in quarantine time?

Thank you for your questions. I think -- in the first 6 months, actually, we already saw roaming up by around 6%. As I say, it was from a very low base. So if we look at the current situation, we saw that the roaming revenue actually dropped by -- dropped to around 20% to 30% of the pre-COVID years. So with the current relaxation, I do think that the roaming will continue to increase, which will obviously contribute to the bottom line. But overall, I think it would be -- the increase would not be very significant. It might go back to 30%, 35% of the pre-COVID years. And we just have to hope for further relaxation, taking away the -- even those 3 days hotel quality, which will help.

The next question, what percentage of revenue do you expect the new digital revenues to represent in the medium term?