SmarTone Telecommunications Holdings Limited (315) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to SmarTone Telecommunications Holdings Limited's annual results announcement and management presentation for FY '20. First, may I introduce you to the executives here with us today: Mr. Allen Fung, Deputy Chairman and Executive Director; Mr. Stephen Chau, Executive Director and Chief Technology Officer; Ms. Josephine Lam, Head of Marketing and Sales; and Mr. Stephen Leung, Head of Finance. The briefing will begin with a slide presentation by Mr. Allen Fung and Mr. Stephen Leung, followed by a Q&A session. [Operator Instructions] Now may I invite Mr. Fung and Mr. Leung to begin with the presentation? Mr. Fung and Mr. Leung, please?

Thank you. The agenda for today will be -- will -- I'll first give an overview. And then Stephen, on my left, will talk a little bit about the financials. And then I will talk a little bit more about the business review and outlook. And then we can have Q&A after that. 2019 and '20, the financial year, is clearly a very challenging year to us, primarily because of the drastic decline in travel and hence, roaming. And because of that, our underlying profit dropped about 24% from $581 million to $440 million. Roaming revenue declined about 25%. And the drop of the profit, as we will explain later, is really fundamentally because of roaming. Because our core mobile business remained quite resilient, customer number actually grew about 6%. And when we look at the mobile postpaid, it also increased 4%. And our churn rate is actually very low, at a historical low at about 0.7%. And excluding roaming revenue, our group service revenue actually increased. On top of that, I think we have maintained a rather stable OpEx, even though customer usage of data has increased year-on-year quite substantially for the last 4 or 5 years. And we'll talk a little bit also about our CapEx investment, which is very prudent and which is very much within control. Our final dividend is going to be $0.15. So the full year dividend is 75% of our underlying profit, not the reported profit, but the underlying profit because we actually have a one-off impairment that will not be counted. It will be based on the $440 million of underlying profit. Now the outlook for the next 6 to 12 months is uncertain, primarily because it is difficult to predict when roaming and travel will come back. But management is doing a number of things, which we'll explain in this call, to explain what we are going to do to beef up the company financially and to capture revenue opportunities available to us. And we'll talk a little bit more about that. With that, I hand over to Stephen Leung, our Head of Finance, to talk a little bit about our financials for the previous year.

Thank you, Allen. I will cover the key financial information for FY '20. As mentioned by Allen, FY '20 has been a challenging year for the company. However, despite the decline in roaming because of COVID-19, our core mobile business remained resilient. FY '20 was the first year our company adopted a new lease accounting standard, HKFRS 16. To ensure like-for-like comparison, we show our result comparison on non-HKFRS 16 basis between FY '19 and FY '20. On a like-for-like basis, our group service revenue was down 3%. This was mainly due to a 25% decline in revenue of the high-margin roaming business, which has put pressure on our profitability. Excluding roaming, our core mobile business remained resilient and grow 1%. Under the new accounting standard, our core mobile services revenue increased by 3% in FY '20. During the year, our customer base grow 6%, reaching $2.7 million despite the COVID-19 pandemic. Excluding MVNO customers, our mobile postpaid customer number increased 4%. Our average mobile postpaid churn rate improved to an industry low of 0.7% compared to the 0.8% a year ago. Mobile postpaid ARPU was down 6% to $210, largely due to COVID-19's impact on roaming. Handset and accessory sales record a decline in FY '20. This was a reflection of reduced wholesale trading opportunities, weaker consumer demand under COVID-19 and lack of hero handsets during the year. Nevertheless, we expect better prospects in FY '21 with the much anticipated 5G iPhone. Under the company's keen focus on costs, on a like-for-like basis, our total CapEx was stable or with a little bit decline. OpEx is one of the key areas impacted by the new lease accounting standard. Under the new standard, lease expenses are recognized in depreciation below EBITDA instead of OpEx. Consequently, reported OpEx under the new standard reduced 26%.

This is an area -- may I add to that? This is an area we'll toggle back to talk a little bit more about later on because we do feel, as a management team, that there are opportunities to reduce the OpEx further. Even though I think we have kept a very strong cost discipline, but we think there are opportunities that we can bring it down further.

Under a like-for-like comparison, depreciation and amortization was relatively steady. However, under the new lease accounting standard, these expenses are recognized as depreciation below EBITDA instead of OpEx, and there is a corresponding reduction in OpEx I mentioned earlier. This page shows the comparison of our underlying EBITDA and underlying profit attributable to equity holders against last year on a like-for-like basis, by excluding the major onetime adjustment in both FY '19 and FY '20 as well as the impact of the new lease accounting standard. Regarding the major onetime adjustments in FY '19, we had a onetime cost reduction of $51 million. And in FY '20, we had a fixed asset impairment loss of $61 million related to our Macau subsidiary. On like-for-like basis, our underlying EBITDA was down 9%, and our underlying profit attributable to equity holders was down 23%. The decline in profit was mainly due to the collapse of the high-margin roaming business as a result of COVID-19. Under the new standard, our underlying EBITDA went up by 36%, mainly due to the lease expenses recognized as depreciation below EBITDA. Our underlying profit attributable to equity holders dropped by 24% to $440 million. As a reminder, our dividend is based on our dividend policy of 75% payout of the underlying profit $440 million. On this basis, a final dividend of $0.15 per share is proposed, bringing FY '20 total dividend per share to $0.295. During the year, there was a 15% growth in CapEx, which reflected prudent investments into 5G and digitalization to enhance productivity. Nevertheless, we expect total CapEx for the 5-year period of FY '20 to FY '24 will be similar to the total for the last 5 years. That concludes the financial review section. I will now hand back to Allen for the business review section. Thank you.

Before I move to the business review, I'll just explain a little bit more around our 5G investment philosophy and how we are going to -- what we believe to be important to achieve leadership in this area. We are very fortunate to have been able to negotiate with our main vendor, Ericsson, a very good partnership which can allow us to invest in 5G so that we can have good coverage, good speed. At the same time, do it in a very cost-effective fashion. Ericsson see SmarTone as a flagship for their business in Asia, so they have been willing to invest in us, both in resources and know-how. So because of that, our CapEx is actually going to be very manageable. Now the CapEx for FY '20 is at around $640 million. The coming year, the CapEx is probably going to be at about the same level. But after that, it will come down. So as Stephen has earlier has said, the total CapEx for 4G and 5G for the next 5 years will actually be very similar to the total CapEx for 4G alone in the previous 4 to 5 years. So we had a very, very good partnership with Ericsson in order to do that and which allows us to invest in the quality and the coverage of the network, which is important because, as I'll talk about, 5G is very important. So with that, let me go to talk a little bit about how we see the business beyond the financials and where we think the opportunities are. As I said, we believe that 5G is an important trend. Right now, we launched in May, but we already have the widest coverage in Hong Kong serving about 70% of the population. Our partnership with Ericsson, there's one more technical advantage, is that because of Ericsson's technology of dynamic spectrum sharing, which allows you to, based on demand, share your 4G spectrum to use 5G, this allow us to immediately boost up our coverage very quickly. On top of outdoors, we already also have about 60-plus indoor locations at launch. And now actually about 200 as well because indoor coverage is important. And we are also investing very heavily in our main spectrum, 3.5, which is the core spectrum for 5G and also upgrading our networks along MTR and highways. You may remember that in terms of spectrum, 3.5 is the most important band of spectrum. And on a per subscriber basis, we are very fortunate that we have the most spectrum per subscriber in Hong Kong for that spectrum. So we think that we are in a very good position to be a leader in 5G. Of course, it's only a couple of months since we launched, but we got already quite good feedback on the 5G. We actually went on the road show to many shopping malls. Many of them actually in Sun Hung Kai. And we have a many booths. I think some of you may actually have been to that. We find that actually a lot of people are interested in 5G. And in terms of customer intake, they certainly exceeded our original expectations. I think many people now understand 5G is not just around better gaming experience, just faster speed, but it really has applications that are very useful. For instance, if you use Zoom for 5G, it is much smoother, much faster. And we use it for online education is also much smoother, much faster. So there are many applications, either present or emerging, which can actually adopt 5G. And I think some of our customers are saying, "Look, we want to be faster. It's not that much more expensive. It's a little more expensive, but we would want to go for it." I think the numbers and the feedback is especially encouraging because a lot of our customers are iPhone customers. And the iPhone -- 5G iPhone will not arrive until probably October or November. But many customers already have committed to that, so we do see that as a very positive sign. As all of you know, 5G is not just about consumers. It's about enterprise. We are already starting projects with different verticals, including hospitality, property management, retail and construction or with Enterprise Solutions because many companies do want to digitize themselves and do want to use features of the 5G network and actually even just 4G network to improve productivity and to manage their operations better. We have seen an explosive growth in our Enterprise Solutions business. Over the last 4 years, we have seen about a 300% growth. And it's ongoing. It's ongoing even during COVID because companies think that they need to digitize themselves even faster because COVID doesn't allow physical interaction as much. So this is obviously a very strong development. We are doing some of that with hotels. Some of that actually were Sun Hung Kai hotels. We're also doing that with some highways and tollways. For instance, recently, there's a collaboration project with Route 3, where because of 5G, Route 3 is able to play some cameras in areas where it has been accident black spots. In the past, it's been difficult to place those cameras because there's no fiber line. Now because of 5G, that problem is solved and improve safety. So 5G do have many applications which are either present or emerging, which can potentially help businesses, and we can actually help them as well. Just to brag a little bit, we were awarded this year with a major award from the construction industry. The CIC Construction Innovation Award. It is very rare that a telecom company would get this award. But it is actually a self solution set that we have developed that we can improve safety for workers. So we'll have sensors to measure the worker's body temperature so that if he's overheated, we will know. And then we also warn workers when they are nearby some danger areas within the construction site. So we are actually very, very grateful that we get this #1 award, which is very unusual, and we want to build on this success. The other area about 5G that we are also about to launch is what we call 5G home broadband. What is it? Essentially, we have understood from our customers that about 20% to 25% of Hong Kong households suffer from either very expensive broadband fees or very low-speed broadband. Because for the latter, it's because they don't have fiber. They only rely on what they call ADSL. And for the former, why is it so expensive? Because usually, it is a single operator managing the line. So there's only one company providing that fiber service. So it makes it very expensive. I, myself, am paying $500 a month for my fiber line. It's extremely expensive. And we have basically done the research and find that there are probably about 20% or 25% of household in this either very expensive or very slow. Our solution is to use broadband to fulfill this unmet need. And what you have is a really easy to use plug-and play, basically, a router. You bring it home. You just need to plug it into the power supply. Immediately, you can use it. And the speed is actually quite good. The speed is -- can be up to 400 megabits per second. If there are a lot of people using it, it maybe go down to 70 or 80. But it's more than enough for you to watch Netflix 4K, do YouTube, do all the applications you need. I think this actually could catch on. I think this is something that we want to offer to our customers because it do address an unmet need, and we hope that we can use this to serve our customers better. As you can see, we are going to offer a rather competitive price. But you can use that device for mobile 5G. So that -- you can't take out the SIM card and say, I put it on my mobile phone, but you can use it at home with that router. And we think that with the plug-and-play is actually very easy to use and should have its proposition. The other area our customers are telling us is that they are very concerned about cybersecurity and data privacy. And I think this is justified because actually these days, if you unwisely download an app or go to a website, download something, you can easily download a spyware, where the other party can turn on your microphone, get access to your content list and even turn on your camera at their will. So there actually is a need among customers, they've told us on how to do better in terms of protecting themselves and protect their own data. One of the things we will do is that we will work -- offer more workshops for our customers to educate them what you should do and what you should not do. In some ways, we need good physical health. We also need good cyber health. What do they do? At the same time, we feel that there is a good market for offering cybersecurity offerings so that they know how to manage websites and apps better and will give them warning. For instance, one of our products will give you a warning if you are about to go into a website which is dubious or download an app which is dubious. We hope that, that could help our customers. And we have seen that actually the take-up early on in the last couple of months already is quite strong. And we think that, that will actually take off even more. And -- but the key is not just about financials. It's to help our customers, serve our customers better and to build our loyalty and trust among customers. If we help them, I think the financial consequences will come. So this is what we intend to do. I'll move to talk a little bit about our outlook and what we are going to do about it. I have to say, if you take away, if there was no roaming impact by COVID, if our roaming revenues are still the same, I think this presentation would have been a reasonably upbeat presentation because I think we have our cost under control. I think 5G is clearly bringing opportunities, and we are seeing a lot of opportunities in further selling additional services to our customers. We are growing our customer number. And also, our churn is actually quite low. So all these, the core business is actually quite strong. But unfortunately, the reality is that roaming does hurt our business quite heavily because it is a main -- one of the main revenue and also profit drivers. So what do we do about that? I think there are several things that we will do. The first thing, as I mentioned earlier, is that we are already launching a cost optimization program to deliver material reduction in costs and enhance our efficiency. Many of the costs are already bookable in this financial year. Most of them are actually in network-related areas because we are very cautious around impacting the quality of our network, but we will be able to do that. And one of the areas that we have done is, especially in our backhaul cost. Because we have been able to form partnerships with different backhaul operators, we have been able to find significant savings in backhaul even though our capacity will increase by 5x or 7x over the next 5 years. So there are a number of areas that we can already optimize, and we will do that to deliver a leaner and more agile SmarTone. The second area we'll do more is we will continue to invest in 5G and upgrade our customers to 5G. We feel that there's quite a lot of interest, and we think that we can actually both deliver superior customer experience and also help them just to pay a little bit more and enjoy the 5G experience. Thirdly, there are many opportunities that we talk about to improve revenue. We are doing a lot in terms of upgrading them to higher-priced plans. We are also identify various opportunities to increase the ARPU through value-added services. 5G Enterprise Solutions, as I talked about, is clearly an important driver of growth, and we will have a stream of new products and services. So to wrap up, I would say, it is uncertain because of roaming. But I think as management, we don't worry about things that we can't control. We work very hard on things we can control, especially both on cost and revenue. So with that, I will open it up for Q&A. Thank you.

Thank you, Mr. Fung and Mr. Leung. Now we will have the Q&A session. [Operator Instructions] [Foreign Language]

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The next question comes from Ryan Chen of UBS. What is the enterprise revenue growth in second half of 2020 and its contribution to its revenue and margin?

I think the enterprise growth has been around 30% actually per year. We haven't actually booked it down by the halves, but it's about 30% actually every year. The way we see its contribution, we need to explain. Enterprise Solutions is not a very high-margin business. I think we could share with that. It's not going to be a 50% margin business. Especially in the earliest, we want to be aggressive, it won't be. It's more like 10% 20%. But what we have seen is that the more growth we have with Enterprise Solutions, the better the stickiness of that Enterprise customer with us. So for instance, if they're doing Enterprise Solutions with us, the likelihood is that they will procure 100 phones and 100 SIM cards from us. We have seen that stickiness. So we are growing and investing in Enterprise Solutions partly for the revenue and margin potential, but also partly because it creates stickiness with our customers, and we build a better relationship with our customers. So that's our aim.

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The next question comes from HSBC's Neale Anderson. How does SmarTone plan to deploy its millimeter wave spectrum? What are the most attractive potential services, this frequency? Or SmarTone user for home broadband?

Thank you, Neale. Regarding the question on when we are going to deploy millimeter wave. I think it's subject to also when there's a terminal supporting a millimeter wave widely available in the market. We are seeing potentially will be second half next year. There will be a choice of some millimeter wave-capable handset. So that's the time when there's a need, we would also deploy the millimeter wave, especially in those hotspot traffic area. Regarding whether we will use a millimeter wave for the home broadband, definitely one of the consideration when the traffic demand grow and millimeter wave is excellent candidate to provide the ample capacity to meet the need. So basically, the deployment of millimeter waves, it will be on the hotspot traffic, high capacity area, and home broadband definitely is one of the key potential candidate for that.