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

Good evening and welcome to the HKT 2024 Interim Results Webcast. Presenting today, we have Ms. Susanna Hui, Group Managing Director; and Mr. Patrick Poon, Chief Financial Officer. We will start with the presentation, followed by Q&A. And with that, let me turn it to Susanna.

Thank you. And good afternoon, everyone. Welcome, to join our HKT result announcement presentation. So let me just start by giving you overview of our performance in the first half. So you can see here that HKT has consistently demonstrated resilience amidst challenging economic conditions, which are marked by subdued retail spending and corporate investment in Hong Kong given the prolonged elevated interest rates. Look at our slide here. We have successfully delivered 3% growth in terms of service revenue, driven mainly by our enterprise revenue up by 7% year-on-year growth; as well as 5% growth in our mobile service revenue, benefiting from the roaming recovery. With continuous efficiency optimization, EBITDA also increased, by 3% to USD 791 million. AFF accordingly also improved by 2.7% to $320 million. As a result, first half distribution, 100% of the AFF is being distributed. And the dividend per SSU will be HKD 0.3292. The next slide here shows the -- our unique proposition and advantage of our network, mainly being the converged fixed and mobile network together. So if you look at the fixed network: In the first half, HKT launched 50-gig PON service in March. And this actually represents our next-phase upgrade to the existing symmetric 2.5-gig, 5-gig, 10-gig XGS-PON fiber services. All of these are now available to 80% of the buildings and households in Hong Kong. Complementing with our WiFi 7, this ultra-high-speed, low-latency fiber-based technology is designed to support next-generation applications such as cloud gaming, VR applications, online trading and so on. And consumers can, of course, access these services anywhere in their home through tailored solutions of fiber to the home, fiber to the room and also WiFi as well as wireless broadband on 5G. Again this reflects the unique proposition of our converged fixed-mobile network. The next slide shows the -- our mobile network. So what we have done in the first half of 2024 is to continue to enhance our network coverage to improve capacity and speeds. What the highlight is that we have added 68 new sites in the first 6 months, bringing our total mobile sites to more than 4,000, which represents a highest number of mobile sites amongst the Hong Kong operators. We have also leveraged our extensive spectrum portfolio, particularly using the [ dual C-band ] and also the 28-gig mmWave frequencies, to further enhance targeted areas, both indoor and outdoor, for example, the Hong Kong airport; the Central Harbourfront, for the mega concerts; as well as the new Kai Tak Sports Park. And we have also seen the evolution of our network from the original 5G to -- on an NSA, non-standalone, basis to SA, stand-alone, basis enabled since 2023, as evident from the fact that we can use network slicing in the -- in some of the events in October last year. And furthermore, with the rollout of our 28-gig spectrum onto our network, we are also witnessing the evolution of our network to 5.5 gig, which is the -- 5.5G, which is the 5G Advanced standard. Again, this would enable 10x speed faster than the original 5G and also low latency, which means that certain applications in terms of precision location positioning for geo-based coupon promotion push as well as specific equipment tracking and so on can be done very, very accurately. So a lot of these innovative use cases have been implemented and in both private and public's access, and feedback and impact has been really positive. And that's why you can see later on we would tell you the commercial enterprise revenue has been growing with strong momentum. So turning to our mobile business. We continue to witness growth in our mobile customer base, which represented a net addition of 50,000 subscribers during the period. We have also achieved a 2% growth in terms of ARPU, from $189 to $192. And furthermore, we have focused our efforts in terms of tapping potential ARPU uplift by offering different VAS and also premium quad-play services on our mobile base. So if you look at our premium 1O1O customer base, you can see that there is continuous growth in terms of the base. This particular high-ARPU segment expanded by 5% during the first half. And there is also improved churn from 0.8% to 0.6%. Next slide shows the recovery in the roaming revenue, which is of course very important in terms of contributing to the growth of our mobile revenue and also improving the margin overall. We see that, in the first half, basically the total roaming revenue grew by 55% year-on-year. And as compared to the pre-COVID period, it represents 98% recovery. And in particular if we look at the outbound revenue, outbound roaming revenue, it represents 104% of the pre-COVID level. Obviously the consumer outbound is -- in terms of growth, is even more significant, which represents more than 127% of the pre COVID. So right now the roaming revenue already represents 11% of our total service revenue. And we do anticipate that -- with continuous steady recovery in terms of inbound as well as the corporate segment of the outbound activities in the second half, we expect that there will be a full year growth for the roaming revenue as well. Now looking at the 5G adoption. During the period, we saw the 5G subscribers increasing to 1.57 million, representing a penetration of 46% of our total customer base and a 55% penetration of our higher-spending 1O1O and CSL segment. With the new AI feature phones coming into the market, increasing affordability of the 5G handsets and the growing bandwidth requirements of the various applications in the market, we have strong confidence that this upgrade cycle will continue. And it is also worth pointing out to you that the average ARPU for the 5G now represents more than a 40% uplift, as compared to the 4G segment. Now turning to our broadband revenue. I think, in the first half, we saw broadband revenue growth as well. And if we look at the consumer broadband sub base, it was very stable, adding 4,000 for the first 6 months, but the growth in terms of revenue was characterized by the continued upgrades to fiber to the home and accelerating uptake of the 2.5-gig services and also the success of our cross-selling efforts of our home broadband services into our mobile base. Now if you look at the slide here. Fiber to the home now reached 1.03 million subscriptions as at June end, and it now represents 70% of our broadband users. More than 50% of these 42,000 net addition were from our mobile customers. It is also worth noting, if you look at the right-hand bottom of the slide, that our customers are rapidly upgrading to 2.5-gig service as well. And this is important because it does lead to an ARPU uplift of HKD 80 per subscriber. And you can see here that subscription already reached 9x in the first half as compared to same period last year. Now turning to our pay TV operations. The highlight of the first half is, of course, our exclusive coverage and broadcasting of the EURO, covering all 51 matches. I'm sure that a lot of you will have stayed up early -- till early in the morning to watch the finals. We successfully, for this season, monetized the event across multiple fronts, including direct to consumer, commercial and advertising. Firstly, direct to consumer, we focused on cross-selling via the event -- sports event passes across our multiple customer base, including not just the Now TV customer base but also the broadband, the mobile and The Club customer base. For the commercial subscription, namely the restaurants and the bars and the hotels and so on, for this season, we did see a strong growth of 50% to over 380 and -- in their efforts in terms of stimulate their nightlife spending. Also for this season, we have introduced a lot of innovations to drive excitement around this content, which includes using our group artist from MakerVille for real-time game analysis as well as innovative price using our CSL AR lens application. And all these add to the sponsorship revenue and advertising revenue growth. And we look forward to continue with the coming premier league as well. Now another highlight that I would like to share with you is that we have refreshed and revamped our Now OTT service as well as the out-of-the-box solution. And the key highlights on the features are -- basically is instant activation, which can offer convenience and allow customers to enjoy basically without going -- without installation required. And early success can be seen on the EURO event passes, which represented a growth, as compared to the previous season. And you can also see that -- the Now OTT customers picking up very strongly by 13% year-on-year. Now turning to the -- our commercial team, the enterprise business. In the beginning, we already said that the enterprise revenue grow by 7%, which is a very remarkable growth despite the fact that in the market we are still facing a lot of challenges with weak conditions for the SMEs; soft retail and F&B spending, with a northward shift of the consumption pattern; certain relocation and downsizing of the MNCs in Hong Kong as well, but through the first half, our enterprise team is able to grow the pipeline of secured contract wins. And right now at the end of first half, in June, we already have a pipeline of $2.5 billion worth of contracts, which represented a 27% year-on-year growth. This is important because a lot of these contracts will be implemented in the coming 18 to 24 months. So in a way, we are very confident that full year enterprise revenue and, in fact, part of the 2025 enterprise revenue will be secured. So one important industry vertical which we have shown very good success is, of course, the health care industry. In fact, for the health care industry, we have added 2 additional large-scale public hospitals onto our portfolio, bringing our total award of hospital contracts to a -- to 16 altogether. And we have not just converted them into 5G hospitals. We have also upgraded the entire ICT infrastructure; as well as deployed customized smart tech solutions, including robot system, real-time location system, which are all aimed to enhance patient care, optimize operational efficiency and optimize their resource allocation and so on. Now not just the health care industry. For other industries such as utilities, we have also achieved a number of significant wins in the first half, including deploying a digital twin system for operations monitoring for a utility company in Hong Kong; as well as several contracts involving hotel chains, upgrading their infrastructure, and digital transformations as well. And of course, with the current AI and gen AI, ChatGPT and so on, a lot of tools are available in the market to help the enterprises in Hong Kong to achieve efficiency and help drive business. And so this also represents a very high potential for future growth for our commercial business. Now turning to the next slide is our China business. We have put our guidance in the past that we are expecting a full year China revenue of HKD 1 billion. And standing at where we are in terms of the first half result, we saw a very remarkable growth of 51%. And we -- and this is coming from mainly following the mainland companies embarking on regional expansion into the ASEAN countries, especially in view of the geopolitical challenges. And we also saw some Hong Kong customers going into China and also expanding into the ASEAN countries as well. And a lot of these, we are following our customers, in terms of giving them cross-border connectivity as well as integrated digital ICT solutions. So if you look at this slide, you can see that, on the left-hand side, we have provided for a Hong Kong entity to go into the GBA area, the Guangzhou area, for a cross-border connectivity and also SI solution in the Guangzhou area. The middle part of the slide represents a lot of the contracts being awarded to us in terms of the hotels in Macau. And also there is -- notably, we have successfully supported a -- the world's first transcontinental "from China to Europe" remote telesurgery. All these are testament to our capability, and that's why we are confident that we will be able to continue to grow the China piece. Now next slide is the -- our loyalty program, The Club. We continue to expand and enrich The Club digital ecosystem. Member base continued to grow to around 3.94 million. And we have included residents in mainland China and Macau as well. And also it's worth pointing out and sharing with you that more than 50% of The Club members are actually non-HKT customers who are using our e-commerce platform for various lifestyle spending as well as concert spending and so on. And this provides a very good source of potential new customers to HKT. On the right. In the first 6 months, another highlight that I would like to share with you is that we have established a JV, a collaboration with the members of the [ Bridge Alliance ] in terms of allowing our members and the members of their respective telcos to use our Clubpoints in their respective countries. So this has the benefit of, of course, generating member satisfaction; and also will stimulate more spending, whether it's in domestic or overseas for our customers. Now turning to the next slide is our Tap & Go and also merchant solutions. So starting from the right-hand side is the merchant solutions. So we have recently launched a soft point-of-sales app solution to support our SMEs, meaning that they can now use their handset device to receive payment. So it helps them save the rental for the physical point-of-sale terminal. And the other thing is we would be accepting e-CNY into the POS as well in H2. And we have now over 7,000 subscription for our merchant payment solutions. On the consumer side, on the left-hand side. For our Tap & Go, because of the spending pattern, a lot of northbound spending, we are following our customers. And basically we have expanded the merchant coverage in mainland China by collaborating and integrating the UnionPay and WeChat QR code into our app. And so now Tap & Go accounts reached 3.8 million as at June end, and transaction values increased by 6%. Finally, the -- our DrGo telemedicine platform. Suffice it to say that we see members continued to increase by 6% to almost 400,000. And video consultations continued to grow, by 12%. And the -- another highlight is that, in the first half, we have tapped into the GBA opportunities through the partnership with The GBA Healthcare Group so that we can offer medical insurance and assistance to the GBA residents visiting Hong Kong. Now finally, this slide is on the sustainability. We have partnered with a lot of the local merchants to help support the local economy. We have committed USD 3 billion in terms of sustainability-linked loans. We continue to reduce our absolute electricity and utility consumption. And we have also continue with the government and other NGOs in terms of helping the community, including the Strive and Rise Programme. And we also got recognized in terms of the S&P Global Sustainability Yearbook as well as having a AA ESG rating from MSCI since 2021. So with that, I will pass to Patrick for the financial sharing.

Thank you, Susanna. Let me first recap our key financial highlights for the first 6 months this year. Our AFF continued to deliver solid growth of 2.7% year-on-year to USD 320 million. Our service revenue was up by 3% to $2.01 billion. This was driven by the accelerate growth in mobile service revenue, lifted by higher contribution from roaming; further 5G adoption momentum and expansion of customer base; and sustained demand for our high-speed broadband and mobile data services; as well as the continuously robust demand for our smart city and digital transformation solutions widely adopt across diverse industries in Hong Kong and Greater Bay Area. And including handset sales, total HKT revenue was up by 2% to $2.14 billion, softened by the lower mobile product sales which dropped by 14% to 126 million. Our total EBITDA for the period was up by 3% to $791 million. Overall EBITDA margin was stable at 37%. And our NPAT grew by another 2% to $255 million. Looking into the details of our TSS segment. From the chart on the right-hand side, you can see our local TSS service revenue grew by 2% year-on-year, underpinned by the continued growth in local data and broadband revenues. Local data revenue went up by 7%, reflecting the continued demand for our digital ICT and converged solutions that include smart city and digital transformation solutions incorporating 5G, generative AI, IoT, et cetera across diverse industries. Our broadband service revenue report another 2% year-on-year growth driven by the increasing demand for high-speed and reliable "fiber to the home" services, especially our 2.5-gigabyte services which notched the fastest growth as customers upgrade their home broadband service to accommodate their work-from-home, video streaming and gaming requirements. Pay TV services remain steady, with total installed base stable at 1.43 million, benefiting from the exclusive broadcast of UEFA EURO 2024. Overall local TSS revenue register a stable revenue growth of 2%. Our international business revenue grew another 7% year-on-year, driven by increased global voice revenue and also growing demand for our software-defined cloud connectivity services. Overall, total TSS revenue increased by 3% to $1.55 billion. TSS EBITDA grew 2% to $551 million, fueled by further operating efficiency achieved, leading to a stable margin at 36%. Now let's turn to our mobile business. Also showing on the right-hand side the chart: So mobile service revenue rose 5% to $512 million for the first 6 months, underpinned by full recovery of our outbound roaming revenue leading to our total roaming revenue growth by 55% year-on-year; secondly, further expansion of our postpaid customer base to 3.43 million, with a net gain of 50,000 for the period, of which 5G adoption momentum continued, with 5G consumer base reaching to 1.57 million, representing 46% of total postpaid customer base. Postpaid exit ARPU also grew 2% to HKD 192. Handset sales was softer to 126 million, down by 14% year-on-year due to weak consumer sentiment and limited new handset features, but the new AI feature handset in H2 might add excitement. Total EBITDA for the mobile grew 5% year-on-year to $295 million, where EBITDA margin further improved to 46%. Let's have a closer look at our OpEx. We achieved an overall 5% OpEx savings, down from $271 million to $257 million, with the OpEx-to-revenue ratio improving from 12.9% to 12.1%, reflecting our continuous focus on efficiency improvement across each business segment through the consolidation of business operations, business process enhancement via suitable adoption of generative AI and also rationalization of our IT platforms. Apart from OpEx, we are also exercising cautious control over our CapEx spend. Our total CapEx for the first 6 months was lowered to $141 million, representing a 3% year-on-year saving. CapEx-to-revenue ratio further improved from 6.9% to 6.6%, with mobile CapEx register a 5% saving to $48 million, reflecting the efficiency gains from capacities upgrades and network maintenance following the completion of our territory-wide 5G coverage. TSS CapEx was slightly edged down by 1% to $85 million, with investments largely to support the growing demand for our unique integrated fixed-mobile solutions for the enterprises. The next is the AFF. We have already covered the EBITDA and CapEx just now. On -- CAC and license fee dropped by 10% to $92 million mainly due to lower CAC as a result of improved sales channel efficiency. Fulfillment costs in respect of customized commercial project and payment for right-of-use asset increased to $37 million and $94 million, respectively. These are to serve and support our growing base of consumer and enterprise customers. Operating AFF before tax and net finance costs grew by 7% year-on-year to $435 million. Payment for finance costs increased to $114 million, caused by general increase in cost of finance linked to HIBOR. Lower tax payments, together with positive changes in working capital, were recorded for the period. Overall AFF for the first 6 months grew by 3% year-on-year to $320 million despite the net finance costs hike, translating into an interim distribution of HKD 0.3292 per SSU. For the P&L, we have basically covered from the revenue to the EBITDA lines just now. Next is the depreciation and amortization, which was stable at $344 million. [ And explained ]: Our P&L finance costs also went up by 18% to $140 million, caused by the higher market interest rate. Income tax expense was lowered to $44 million, with the effective tax rate also improved to 15% mainly due to an increase in tax benefits enjoyed. As such, our net profit for the first half was up by 2% to $255 million. Turning to our gearing position. Our total gross debt at the end of June this year increased to $5.9 billion. Corresponding gross debt-to-EBITDA ratio increased to 3.42x. The higher debt level was due to cash spent on inventory and software solutions for various enterprise projects, which will be recouped upon project completion in the second half. The proceeds from the sale of an interest in the passive network business of $870 million which -- will be used for debt repayment. Therefore, in the pro forma, you can see the pro forma gross debt-to-EBITDA ratio will be improved significantly to 2.9x. As of today, we have over $1.75 billion total liquidity, including undrawn banking facilities of around $1.54 billion and $214 million cash on hand. We continue to carry an investment-grade rating at BBB or Baa2. Lastly, the debt maturity profile. Our current proportion of fixed to floating-rate debt is approximately 55 to 45, slightly [ more debts ] on fixed interest rate to counteract the adverse impact from the interest rate hike. Our effective interest rate was up to 4.26%. The average debt maturity is now 3.4 years. As shown on the pro forma debt profile, we may use the proceed from the sale of passive network to repay USD 500 million bond due 2025 and also the remaining floating-rate debt due 2026. Therefore, you will see there is no imminent need for the -- well, for refinancing within these 2 years. This ends my presentation. Thank you.

Okay, let us now open up to questions. First question refers to broadband. Broadband revenue grew by 2% in the first half. Do you expect the growth rate can return to mid- or high single digits?

If I can take this. Yes, thank you for the question. The broadband revenue grew by 2% in the first half. And if you look at our previous slides, we said that the total broadband base has been kept stable. And in fact, in the past few years, it has been plagued by, negatively impacted by emigration and so on during the COVID period, but we are seeing encouraging and accelerating uptake of the 2.5 gig, the higher bandwidth, which saw a more than 8% jump in terms of the subscriber base. Early days, but it does entail a higher ARPU, so we are hopeful that the broadband revenue going forward will have a higher percentage of growth. Thank you.

The next question. It was mentioned in the announcement that the sale of a partial interest in the passive network business was to help fund CapEx in the future. Can you provide some color on that? What needs to be invested and the likely CapEx trend in terms of the fiber network?

Thank you for your question. The -- basically I think the proceeds from the fiber deal will be used primarily to pay down debt, which will be obviously reducing our burden on the interest expenses. This is important. Of course, with the introduction of the 40% stake shareholder deal, some of the ongoing CapEx funding will be shared with the new investor as well, so in that sense, it will be reducing our CapEx funding, but in terms of the overall fiber CapEx for the fixed network, we have already said that we have future-proofed the network to even cover the 50 gig already. And of course, with the new areas, expanding into GBA or even overseas, there might be opportunities to support further growth; and only when that happened would the CapEx increase. Thank you.