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

Good evening and welcome to the HKT 2025 Interim Results webcast. In attendance today, we have Ms. Susanna Hui, Group Managing Director; and Mr. Patrick Poon, Chief Financial Officer. We'll start with the presentation followed by Q&A. And with that, let me turn it to Susanna.

Good evening. Thank you for attending the analyst briefing for HKT 2025 interim results. Let me just start with the first slide. So basically, during the first half, obviously, Hong Kong's economy continued to face challenges with the global trade uncertainties, relatively sluggish domestic demand, which, of course, led to a lot of slowdown and delays in the enterprise investments as well. But despite these headwinds, HKT turned in a very solid performance underpinned by our network infrastructure, our continuous innovations, and of course, our sustained industry leadership. If you look at the slide here, we can see here that the -- in terms of top line, we delivered a 4% growth with revenue exceeding USD 2.2 billion. And with key growth cylinders being enterprise side, representing an 11% year-on-year growth as well as you can see from the slide, mobile services revenue grew by 5%. And EBITDA, therefore, reported a 3% improvement reaching USD 818 million, with a corresponding 3% growth in terms of the AFF at $328 million for the first 6 months. As a result, the Board of Directors today has declared an interim dividend of HKD 33.8 per share. Second slide, with the rapid advances in the AI technology, we have been introducing a lot of the AI tools and applications starting 2 years ago. And we have been able to harness its power to invigorate our consumer and enterprise offerings as well as on the other side of the equation, reshaping our business workflow Specifically, what we have done is that we have used AI to serve our customers with agility and intelligence through personalized offerings, curated improved customer experience. And therefore, we see successful in terms of increasing the conversion rate of upselling and cross-selling to our customers. As a result, customers subscribing to 3 or more services in our portfolio was up by 13% during the first 6 months. And on the back office side, we have pushed deeper into our own business workflow in terms of transforming automating processes and improving productivity, which led to savings of around 7% across the overall cost base. Next slide is our -- basically our fixed network. Of course, in order to embrace AI for our customers and for ourselves, we have to rely on the architecture. Basically, the ultra high-speed, low-latency fiber architecture. So this slide shows that at our core of the network is the -- basically the backbone with a 100-terabit core backbone network, which is enabled and set new standard for digital infrastructure and empowering not only the enterprise side but also consumer side with the foundation for innovation well into the future. So if you look at the consumer side, in terms of speed offers on top of the 2.5 to 10 gig for mainstream users, we have elevated the speed to up to 50 gig for premium users. And more importantly, for the enterprise side, we saw massive demand for high bandwidth requirements for AI, video, cloud computing and so on. So we have improved from 100 gig up to 800 gig services for our enterprise customers. So the next slide here is to show that this very unique 800 gig services, I think it's the only one available in Hong Kong. And this is specifically designed for the supercomputing era. And therefore, in terms of the services available, we have already basically provided coverage to connect all the data center classes in Hong Kong, including Tseung Kwan O, Chai Wan, Fo Tan, Cyberport, Tsuen Wan, Kwai Chung, and so on. supporting the AI-driven workloads and multipath routing with carrier-grade redundancy, which is very important for mission-critical tasks. And of course, we have also connected to the Lok Ma Chau Loop area in order to potentially surface the massive GBA data flow in the future. On the wireless side, during the first half, we are continuingly enhancing our network coverage and performance. In this context, we have extended coverage in terms of building new sites, 40 new sites both indoor and outdoor as well as utilizing expanded MM wave from 400 megahertz to 600 megahertz for 5G advanced capability in order to enhance the very important values for the mega events, for instance, a new Kai Tak stadium posting 50,000 capacity. Another important area is, of course, to enhance the 5G capacity in the -- along the MTR high-traffic stations, which we have done in the first half and with a target completion date by 2026. So benefiting from this as well as the utilization of AI for better data and offerings duration. Our mobile business added 45,000 new customers during H1 with ARPU expanding further to $193. And in particular, if you look at our 1010 and csl. segments, we have demonstrated significant strength in terms of customer base. We have expanded and reported a sustained low churn rate of 0.7%. Roaming revenue continued to grow in response to the strong resumption of global travel and also our expansion of different tailored roaming plans and also introducing value-added insurance coverage and so on. We saw that roaming penetrate -- active roam penetration to our base increased significantly to 69% now. And roaming net revenue, therefore, reported a 7% growth in H1, which is -- which reached 104% of the pre-pandemic level. And in terms of consumer outbound revenue, it increased by 11%, hitting over 140% of the 2019 level. Looking at the 5G adoption. We continue to see 5G subscribers increase and to almost 1.9 million as at June end, representing a penetration rate of 54% and an increase of year-on-year 21%. We also noted that the active AI users on handset consumes 60% more data than non-AI active users. So for the first 6 months, we are offering numerous AI applications as well as general training in order to boost the upgrade cycle as well as driving increased data usage, which hopefully will be driving further services revenue growth in the second half. Turning to fixed broadband. With expanding number of high-bandwidth applications, the demand for high-speed, low-latency home broadband solutions remains robust. And we also saw a up search in terms of the upgrading cycle to 2.5 gig services with subscript base growing by over 140%, contributing to an overall growth in fiber users by 3% to over 1.05 million. And this represents penetration of 70% over our total broadband base of 1.5 million. The next slide shows the Now TV content basically encompassing not only live sports, but also drama and movie series and including Viu, HBO, Netflix and the like. Now I think the highlight for the first 6 months is that we saw a significant increase in terms of the number of OTT customers, which recorded a 17% increase year-on-year and therefore, contributed to the overall expansion of the Now TV base to almost 1.5 million customers. Now the star performer, I have to say, for the first 6 months is our enterprise business. Despite the various market headwinds evident in the first half, our enterprise revenue performed very solidly with revenue expanding visibly by 11%. And this is driven by 14% growth in cloud projects as well as 6% growth in terms of high-bandwidth fiber lines. More importantly, we see very healthy pipeline. New project wins for the first 6 months was well over HKD 2.2 billion made possible by both horizontal solutions and applications across diverse industries as well as industry-specific vertical solutions. Now the following few slides show some examples in terms of the contract wins, including in the health care sector. For instance, we have recently secured and completed tailored solutions for a Chinese medicine hospital in Hong Kong in terms of digitalized workflow and real-time monitoring of assets and patients. We have also included an AI-powered automated solution for Hong Kong for another Hong Kong public hospital using robot system to automate material transportation as well as patient tracking. Another example of industry vertical, including setting up a smart ecosystem for cargo management for a leading logistics customer in -- at the Hong Kong airport, which involves interconnected autonomous driving, electric tractors, robotic usage and so on. Other examples obviously include usage of AI-driven solutions for utility companies, IoT and as well as network operating center in terms of providing AI-powered video analytics and so on. So we also have been benefiting from assisting enterprise customers to build resilience and diversity for their tech stack in terms of supply chain, in terms of incorporating dual brand design and solutions. Turning to the next slide, which is the China revenue. Originally, we thought that we would be a little bit concerned in terms of slowdown in the China business. But indeed, during the first half of the year, we saw China revenue actually grew by 13%, in particular, powered by our SD-WAN services demand growth as well as data center take up by the Mainland Chinese entities in support of their gold -- Hong Kong Gold ASEAN initiatives with Hong Kong firmly upholding the role of the financial hub as evident from the recent boom in the capital market as well as Hong Kong maintaining the role of super connector with the Mainland enterprises seeing Hong Kong as a gateway to global and regional expansion. So we are still optimistic in terms of growing the China business going forward. Now for our PCCW global international business, we continue to make significant strides for our software-defined network platform, Console Connect. We have launched a white label service to enable other carriers to benefit from the self-procurement capabilities of the platform. On the infrastructure side, we continue to invest in subsea cable on top of the investment in the CMV as well as the Transpacific Juno subsea cable, which are on track to be up and running for service, bringing top line and profit contribution in due course. In addition, we recently signed MOU to participate in the development of the Panacea express cables as well as the Asia, Africa, Europe cables, AE2 and which we see significant demand in terms of the pan Asia area. We also have partnered with a partner to help extend the LEO satellite coverage along the belt and low corridors. Next slide shows the -- our club loyalty platform. So we have continued to expand our digital ecosystem, which continue to serve as a flywheel by offering exclusive services and product to our 4 million members. With the 4 million members, we are able to not just improve customer retention by a stronger management and stronger member engagement. But I think the important point is that we can also see a lot of customer acquisition from the non-HKT base from this club members. Now during the first half, we have expanded merchandise selection and brand numbers. And more importantly, we are able to showcase clear differentiation to our base by including unique lifestyle experience vouchers, which includes concepts and mega events tickets on our shelves and also including GBA travel benefits as well. Another new business for us, the telemedicine service DrGo also have started a new chapter in terms of extending consultation to the GBA area and also selected destination in Asia, including the very hot destinations such as Japan, Singapore, Thailand and so on available to our HKT roaming and traveling customers. We have also launched a new DrGo one round a subscription plan for telemedicine, for synergistic integration into the insurance ecosystem. And we have also a partnership with an insurance company into the enterprise segment for employee benefits, which will help accelerate mass adoption of telemedicine. The next slide is on ESG. We have continued to be focused on stain sustainability, community engagement and so on. Volunteer hours is rising nearly 80%, and we continue to support in the government's striving right program. We also contributed to improving digital literacy through ongoing AI workshops and also participated antifraud in anti-fraud detection and education to the community at large, including other sustainable finance and also energy efficiency initiatives and so on, we -- our efforts have been recognized with an MSCI ESG rating for the fifth year. Looking ahead into the coming months of 2025, I think short-term challenges aside, we saw a lot of silver linings in terms of boom in capital market, creating personalized effect and improving our consumer sentiment. We saw mega events like concerts and football matches currently underway, bringing goodwill and reviving tourism. We saw AI continue to drive enterprise transformation in both public and private sector. And specifically to the recent enhancement and strengthening of the balance sheet and also the lower HIBOR alleviate the interest outflow. All this help positive growth in terms of the AMF. And of course, just how we talk at length in terms of the advent of AI, how this helps our organizational agility, help our competitive differentiation and sustained industry leadership. So overall, we continue to support Hong Kong strive to be a leading tech and innovation hub, and we are confident of the business growth and therefore, the dividend growth in the second half of the year. And with that positive note, I will pass to Patrick to walk through the financials.

Thank you, Susanna. Let me first recap our key financial lines for the first 6 months, 2025. Our AFF continued to deliver a solid growth of 3% year-on-year to USD 328 million. Both total revenue and service revenue report a 4% growth to $2.22 billion and $2.09 billion, respectively. The service revenue growth was driven by the robust demand for our local data service in the enterprise segment. as well as the continued growth in mobile service revenue from higher 5G adoption and also expansion of customer base. Our EBITDA for the period was up by 3% to $818 million with margins stable at 37%, and our NPAT grew by 4% to $265 million. Now let's go into the segment performance. The segment first, from the chart on the right-hand side, you can see our local TSS revenue grew by 5% year-on-year, underpinned by the continued growth in local data and broadband revenues. Local data revenue achieved an 11% robust growth. attributable to the continued growing demand for our unique digital transformation solutions, utilizing the latest technologies incorporating 5G, AI, IoT, cybersecurity and multi-cloud application, et cetera, across diverse industries, in our enterprise segment and also coupled with a 13% year-on-year growth in the China business. Our broadband service revenue registered another 3% year-on-year growth, driven by the increase in demand for our high-speed, high-bandwidth, ultra-low latency, reliable fiber-to-the-home services. Our 2.8 service customer base surged 141% growth year-on-year, spurred by the acceleration adoption of Home smart devices and escalating bandwidth requirement from data-intensive activities such as video streaming and online gaming. As a result, local data service report a solid 8% growth year-on-year. Pay TV service remains resilient with now OTT customers growing by 17% year-on-year. Overall, local TSS revenue expand by 5%. Our international business revenue grew steadily by 1% year-on-year, driven by the increased global data revenue and also growing demand for our console connect services. Overall, total TSS revenue increased by 4% to $1.61 billion. TSS EBITDA grew 3% to $567 million filled by further operating efficiency improvement. EBITDA margin was stable at 35.3% versus further 5.6% for the last year. Now let's turn to our mobile business. Showing on the chart, you can see mobile service revenue rose consecutively by 5% year-on-year to $537 million, underpinned by a 7% increase in roaming revenue may contribute by an 11% growth in consumer outbound roaming. Secondly, further expansion of our postpaid customer base to 3.48 million, a net gain of 45,000 year-on-year. of which the 5G adoption momentum continue with 5G base growing by 21%, reaching to 1.89 million, representing more than 54% of total postpaid customer base. And also the higher mobile wholesale revenue and growing demand for our enterprise solutions deploying 5G and IoT technologies. Postpaid exit ARPU was up to HKD 193. Product sales grew by 3% to $130 million, steered by initial AI features of the new handset model, despite generally weak on consumption sentiment. Total mobile EBITDA grew 5% year-on-year to $309 million, with mobile EBITDA margin stable at 46%. Let's have a closer look at our operating efficiency achieved. We attained an overall 4% OpEx savings, down from $257 million to $246 million, with OpEx to revenue ratio improving from 12.1% to 11.1%, reflecting our continuous efforts in streamlining business structures and reshipping business workflows while AI to achieve higher efficiency. This initiative generate remarkable productivity gain and cost savings for the company. Apart from OpEx, we also keep on exercising causes control over our CapEx spend. You can see here, our total CapEx for the first 6 months was lower to $138 million, representing a 3% year-on-year saving. CapEx-to-revenue ratio further improved from 6.6% to 6.2%. Mobile CapEx registered a 4% saving to $46 million, reflecting the efficiency gain from the capacity upgrade and network maintenance following the completion of our Tech 5G coverage. CapEx was lower by 2% to $84 million, with investments last to support the growing demand for our integrated fixed mobile solutions for enterprise customers. Next is AFF. The EBITDA down to CapEx lines had just been covered. On the CAC license fee, which dropped by 4% to $88 million, mainly due to lower CAC as a result of improved sales channel efficiency. Payment for right-of-use asset also edged down by 3%. These savings were partly offset by the higher fulfillment costs to support our growing base of consumer and enterprise customers. Operating AFF before tax net finance costs grew notably by 8% year-on-year to $468 million. Benefiting from the lower cost of finance linked to HIBOR and also the successful deleveraging than last year. payment for finance costs decreased by 14% to $98 million. Tax payment was stable at $25 million together with the additions of working capital requirement to mainly finance the enterprise project delivery, which brings positive net cash flow upon completion. Overall, AFF for the first 6 months, 2025, grew 3% year-on-year to USD 328 million, translating into an interim distribution of HKD 33.8 per SSU. Income statement. For the P&L, we have covered from revenue to EBITDA line. Depreciation and amortization slightly increased to $354 million, of which depreciation decrease, reflecting our continued effort in managing down CapEx in recent years, but amortization increase attributable to higher fulfillment costs incurred for the enterprise projects and explain our P&L costs decreased significantly by 19% to $113 million, driven by lower market interest rate, coupled with reduction in borrowings. Income tax expense increased to $53 million as a result of higher profit level with the effective tax rate steady at around 15%. Profit for the period increased by 15% to $295 million. The NPAT attributable to the SSU holders grew by 4% to USD 265 million after the sharing of our MI. Turning to our gearing position. Our total gross debt at the end of June was $5.57 billion as compared to $5.94 billion last year. corresponding gross debt-to-EBITDA ratio improved to 3.11x. The lower debt level was due to the successful completion of deleveraging at last year-end. And as of today, we have around $2.3 billion total liquidity, including undrawn banking facilities of around $2.05 billion and also $250 million cash on hand. We continue to carry an investment-grade rating at BBB or Baa2. Our current proportion of fixed to floating rate debt is approximately 60 to 40 more than on fixed interest rate to come the adverse impact from the interest rate fluctuation. Our effective interest rate dropped below 4% to 3.96%. The average debt maturity is now approximately 3.2 years, no imminent need for refinancing this year. There is a USD 750 million bond due in July next year. But as mentioned, we have around $2.3 billion liquidity on hand sufficient enough to redeem the bond when they become mature. And we will keep monitoring the market situation and minimize the interest cost going forward. This ends my presentation. Thank you.

Thank you. We'll open up the floor for questions. The first question is what is the guidance for interest costs in the second half, given that the impact of lower HIBOR only started in May.

Overall, I think for the first half, we did record a savings in terms of interest cost of around 19%. So assuming the -- there is no significant spike in terms of HIBOR again in Q3 and Q4. We do expect that full year interest savings will be at least 25% to 30%.

The next question is, will enterprise growth of 11% be maintained for the full year 2025?

11% maintained for full year 2025. I think overall, we have already secured a very significant and healthy pipeline. And given the fact that the recent -- and in fact, it is the release of data today, seem to point to a very -- some recovery in terms of the Hong Kong economy as I can read it here from this headline, Hong Kong grows faster since 2023 as spending stabilized. And therefore, I do see that we can be a little bit more optimistic in terms of the enterprise growth, especially with the AI drive. And so I think to is what we will be targeting for full year. .

The next question is, do you expect the strong roaming revenue growth to be maintained for the remainder of 2025?

Again, I think the answer is positive because if you look at the roaming growth in the past 24 months, the driver is mostly coming from consumer outbound revenue. And for the corporate side, the commercial revenue -- commercial roaming revenue the recovery as compared to 2019 is only 70%. So with the recent pickup in terms of activities in the capital markets, and we have also heard news that some of the bankers and people from private equity are acquiring property again in Hong Kong. So we will be optimistic that the commercial roaming revenue will also increase. And also with the mega events with the football and also a lot of the concepts and so on, we do expect that inbound roaming can also improve. And therefore, a very long answer to the question is that, yes, we do expect that it will be -- the growth can be maintained in terms of roaming revenue.