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

Good afternoon, ladies and gentlemen. Welcome to SmarTone Telecommunications Holdings Limited Interim Results Announcement and Management Presentation for 2020/2021. 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. Today, we're going to go through both the financials and also the business outlook and business review of the company. Let me just give a high level overview. The last 6 months has been a difficult environment for the company. The market is still very competitive. But the bigger loss to us is that because of the stoppage or near stoppage of traveling. It impacted our revenues and profit from roaming, which is a very, very substantial component. But in spite of such headwinds, we have been able to report a profit, largely steady, at $267 million. So very similar to 6-to-6 months and year-on-year. What management has tried to do over the last 6 months is to ensure that the company is resilient despite the collapse in roaming revenues. These are difficult circumstances, and management has taken a number of initiatives to improve the company. We're happy to report that the launch of 5G was encouraging and the customer uptake was encouraging as well, and we'll talk a little bit more about that. Our 5G network has been referred and adjudged by independent research to be the best preferred network in Hong Kong, and we are very pleased with that, and we have a very wide coverage in Hong Kong. Management has also launched a number of initiatives to cost-optimize so that we can have more agility and actually more room for future investments. All these cost optimization do not impact network performance or customer service. They are more about how we negotiate better with our vendors, how we actually become more productive and how we basically streamline our operations. Our handset profit improved a little bit because of the Hero handset as well. Over last 6 months, we also focused on developing new revenue streams, new enterprise solutions based on 5G technologies as well as, for the last few months, 5G home broadband, which has quite encouraging response. We will continue to invest in the 5G network. We think it benefit the customers and it benefit Hong Kong, and also, it will ultimately benefit the company as well. Our interim dividend is set at $0.145, which is the same as the interim dividend last year. The company's intention is to continue to pay 75% of our profit after tax on a full year basis. With that, let me give -- hand over to Stephen to talk a little bit about the financials.

Thank you, Allen. I'll cover the key financial information for the interim results. As mentioned by Allen, last 6 months has been a challenging period for the company due to the ongoing travel restrictions under COVID-19. It has significant impact on our roaming business, which is one of our high-margin revenue drivers. The impact actually reflect on the drop of our roaming revenue. However, our core local service revenue remained resilient. It rebounded 3% compared with second half FY '20. During the period, we've seen early contributions from 5G. We have been able to retain customers with increased ARPU with or without 5G upgrade. We continue to see strong performance in our Enterprise Solutions business, but we do have certain projects got delayed due to COVID. Our 5G uptake is encouraging. Now we have 10% of our MNO customers on our 5G. Our average monthly fee 5G premium is between $50 and $100. During the period, our customer base continued to grow, increasing 6% year-over-year to reach 2.8 million despite COVID. We continue to lead the industry in having the lowest average mobile postpaid churn rate, which is at 0.8%. Although our mobile postpaid ARPU dropped compared with the same period last year, due to a decline in roaming revenue, the rebound of our core local service revenue during the period stabilized our ARPU compared with second half FY '20. Although our handset revenue dropped compared to first half FY '20, it almost doubled compared to second half FY '20. This is due to the higher demand of the new 5G mobile handset launched during the period. In terms of profitability, the new 5G mobile handset gives us higher margin and improved our EBIT. During this period, the company was able to achieve substantial cost reduction through the successful execution of cost optimization initiatives. This has resulted in lower staff costs, decline in network maintenance expenses, savings in our backhaul costs as well as reduction in sales and marketing costs, which reflected the benefits of our digitalization efforts. Despite the low cost base, we have been able to maintain our high level of network quality and services for our customers during the period. Our overall depreciation and amortization decreased by 2% compared with first half FY '20 despite our investment in 5G. The decrease is mainly from decline in right-of-use asset depreciation. Under the lease accounting standard, rental expenses is booked under this item rather than operating expenses. The rental reduction for properties, including stores and cell sites, have been achieved from our proactive efforts in the lease negotiation. We expect there will be more rental savings to come. However, the reduction was partially offset by amortization of new 5G spectrum utilization fees. In summary, despite the challenges posed by the ongoing COVID, both EBITDA and profit rebound compared with second half FY '20. Our EBITDA improved from $1,155 million to $1,273 million, and our underlying profit increased to $267 million. On a year-over-year basis, both EBITDA and profits were steady. This was made possible as the decline in roaming was offset by the successful execution of cost optimization initiatives as well as the improvement in the local service revenue and handset profit. I will now hand back to Allen for the business review section. Thank you.

5G is important. And this map is actually a third-party, not a smartphone map, but it's a third-party test on the coverage of 5G in Hong Kong. And actually, if you go to the website, you'll find that we -- they claim that we have the best coverage. So the purple area is the area covered by 5G. The orange and red area are the areas covered by 4G. So if you look at it, you'll see that most of the areas covered by orange and red are already covered by purple as well. So basically, we have invested heavily to ensure that we have a good and very robust 5G network. And we already are pleased to tell you that we already have more than 95% of coverage of major population areas. You see that most of the areas that are 4G, there is also 5G for us. Several companies have also said that based on their research, we are the best preferred 5G network. We did invest a lot in the 5G, in terms of making sure that the connectivity is good. We have already invested in more than 250 key indoor locations. Sun Hung Kai offices and malls, obviously, but many other areas as well. Major locations, major malls. We also invested heavily in terms of ensuring connectivity within MTR stations. We know that our customers care a lot about connectivity when they are in MTR. So we have invested accordingly. We also already covered 17 major tunnels, and some of the tunnels is only SmarTone only. So for instance, the Route 3 and the Tai Lam Tunnel, one of the major tunnels in Hong Kong, only SmarTone covers with 5G, nobody else does. In addition, we also extend 5G coverage to what we call health entertainment hospitals. Because of COVID, a lot of people are going hiking, going to country parks. We think this will continue to happen even beyond COVID. So we are investing in covering 5G for country parks, cycle tracks, hiking trails and nature trials. This is not just for convenience, it's also for safety. Because if you are covered well, people know where you are, when you are -- when there are unfortunate accidents, you can immediately report very quickly. So we have actually extended coverage to those areas. When we reflect where we are in terms of the 5G penetration, we have -- as Stephen said, we have about 10% -- nearly 10% of our MNO postpaid people. So we are -- in term of numbers, we are comfortably above 100,000 5G users. But when we reflect what we -- how we are doing, we actually find that -- we recently did a survey to try to understand whether people understand the degree of coverage 5G already has for us. And on the left-hand side chart, you see that most people are not aware that we are already covering 95% of the major areas, nobody does. Everybody thought that there's still time before actually good coverage is there. But in fact, it's not the case. So we need to do a lot more education to our customers and potential customers. And I think that once they know that, in fact, our coverage is already so strong, many more will join 5G. The second thing, which is the chart on the right is that we also find that even though we have quite a lot of 5G adopters already, there are a fair amount of people. In fact, there are -- the people who already have a 5G-enabled handset, there are slightly more than 50% of them who hasn't has a 5G plan. So you have a very interesting situation where they have a 5G phone but they don't have a 5G plan. Our hypothesis is that many of them have not seen fully the benefits, have not experienced the full benefits. So what we're going to do is to basically give them free trials so that they realize the benefits of 5G. And we are quite confident that once they taste it, they will upgrade. As I said just now, we are indeed covering more of the country parks and hiking trails, and I'll ask Stephen to talk a little bit more about this.

Yes. Thank you. As Allen said, nowadays, people does go to hiking a lot and also travel around the country parks. It's a really popular outdoor activities now among friends and families. You see more people now in country park over the weekend than a busy place like Mong Kok or Causeway Bay. So we recognize there's a strong need to have a consistent and reliable mobile coverage to serve the customer while they are traveling on all these country parks, be it -- whether they want to send a beautiful picture on the way or they want to communicate. So we have been investing heavily to extend our coverage to basically all over -- to cover all over the country parks. Today, our coverage in country park already exceeding 90%. And actually, most of the country park also served by 5G as well. So we are determined to provide the best coverage around all the country parks, 4G and 5G. That is somehow SmarTone commitment to serve our customer better and best. Thank you.

The other area where the company is focusing on is on Enterprise Solutions. I think COVID accelerated digitization within companies. They need new applications to help them to operate more efficiently and also to improve customer experience, And Enterprise Solutions business has grown quite substantially, and 5G actually further enabled this. And we have already launched a number of different projects on 5G, working with different companies. Let me give you 2 examples. The one on the left is what we call SmarTransport. We did that together with Route 3 and the Tai Lam Tunnel. In the past, when Tai Lam Tunnel staff want to come monitor the security of the tunnel, in terms of whether there are jaywalkers, whether there are accidents, whether there are animals intruding, sometimes it happens, they need to use the human eye with the camera. And the Tai Lam Tunnel is a very, very long tunnel and the Route 3 is also very, very long. So it's actually not that easy to do it to using a human eye. So what we have been able to do with this project is that we used 5G to sell 5G-enabled cameras and we combine it with AI analytics so that the machine can automatically identify whether this is a jaywalker, whether this is a car, this is an animal, so that if there are any breaches and potential threats to security, the staff will be alerted. The benefit of this is that you don't rely on human eye as much and then you cover much bigger areas. And this really plays to the strength of 5G as well because for 5G, upload link is very, very fast. And that allows the uplink of images back to the staff center for processing. In fact, actually, 5G, we predict that more and more people will use 5G for any video applications, including Zoom, because the uplink capability is much faster and it is now much more stable when you're using video. So that's 5G as SmarTransport. The other area we have started to do is what we call Smart Malls, and we have already implemented in MOKO in Mong Kok as well as Metroplaza in conjunction with Sun Hung Kai. There are different applications for that. One of them is a 5G Robot, which basically is able to sanitize. It also actually inspects and help to monitor the mall. So for instance, when it identifies there are wet patches which are slippery, they will immediately alert the staff. When they see some suspicious objects in the mall, they will alert the staff. So all of this will improve customer experience and also help in terms of productivity. We also have an application called Smart Restroom, which basically monitors how many people are lining up in the different bathrooms so that people would kind of know how many minutes do I have to wait before I can get into that. This application also constantly monitors the air quality and also the supplies within the bathroom. So you never have the problem of not having the hand gel anymore because when it's low, it will automatically alert the staff and you will not run out of toilet paper anymore because actually when it is low, the staff will know as well. So these are just the beginnings of 5G applications. There will be more and SmarTone will invest to ensure that we have enterprise in that. Finally, we also want to talk a little bit about the 5G Home Broadband. We launched it a few months ago. And our price, I think, are very competitive, $148. And so far, we have actually quite encouraging take-up, even though it's just about 3 or 4 months. Most people find it very, very easy to use. It's essentially plugging in the router and then key in the password and you can usually use a QR code to do that. And the speed is very fast. The speed is 200 megabit per second, which is actually quite fast, clearly much faster than a lot of home broadband. And the price is good. And in the beginning, we thought that the major customers will come from people now where their home WiFi is low. So people who only have ADSL and low speed. That turns out to be true. Actually, a lot of those customers actually sign up because this is much faster. But we also find that many people who already have fiber at home also subscribed to this service. Then their explanation is the following, is that, look, our WiFi is actually getting quite congested because I have 3 device, my son have 2 device, and so we decided that why don't we have an extra router so that I give that to my son or daughter and I will enjoy my home WiFi and then they will have a separate one. In fact, we have actually customers who bought 2 or 3 because they say it's not that expensive, but it actually improves life and boost speed substantially. So we do believe that there is a very good opportunity here. Our price is very competitive. I mean there are still a lot of people like myself paying $500 or $600 per month for a fixed line. Why do you need to do that when you can enjoy $150 for 200 megabit, why do you need to do that? So we think that's a very good opportunity for them. Finally, I'm going to talk a little bit about outlook and the priorities for the coming year. I think the general economic environment is not strong and COVID has still basically -- still affecting global travel substantially. So we do not expect roaming to come back fully very soon. It will probably take a while. But having said that, roaming will come back. Roaming will come back because, like in Hong Kong people, we all love to travel. As soon as we have a chance to travel, we will travel, and people will come to Hong Kong. So it's just a matter of time and we just need to be patient. And even if just China opens to Hong Kong, we think the impact for us will already be very positive because China is the biggest market in terms of roaming for us, historically, both inbound and outbound. So for the next 6 months to 12 months, it will still be competitive, it will still be challenging. But what we're going to do is to do several things. One is continue to ensure that we are the #1 network provider, we have the best speed, best coverage for -- together -- working together with our partner, Ericsson. We will continue to drive our cost optimization so that it creates agility and flexibility for ourselves. We will continue to help enterprises in Enterprise Solutions, and we will invest in 5G to ensure that our network leadership is maintained. As I've said before, we have been able to be strong in 5G without actually having to invest disproportionately. We have been able to invest in 5G, build a robust 5G network very efficiently and partly it is because of the help of our partners like Ericsson. They're willing to co-invest with us. So we would want to maintain that advantage and continue to further that advantage. Finally, we would want to use our 5G network to drive Hong Kong Smart City development. We believe 5G is a critical infrastructure. I think there's a perception somehow that Hong Kong is very slow in 5G. This is not the case. The fact is that Hong Kong is probably globally #3 in terms of the depth and speed of rollout, just behind China and Korea. And I think in SmarTone, we are very proud to be able to invest in a first-class 5G infrastructure and to be part of this effort to make Hong Kong a 5G-enabled city. This is good for Hong Kong, this is good for our customers and this is good for us. With that, thank you.

[Operator Instructions] The first question is from Sara of Morgan Stanley. Do you think the 5G ARPU lift is sustainable?

So far, it has been. So far, it has been, the ARPU lift, and we still have a lot of customers who haven't upgraded to 5G. I have to say so far, if you think about it, the number of 5G applications are not that many. I mean, obviously, it's faster. Obviously, if you do e-learning, it's great. If you do Zoom, it's great. So I feel that, look, for the amount to pay $50 to $100 more, this is a very good deal. But I really expect that there will be more applications coming in. So there will be more people kind of subscribing to 5G. So in our view, I think we are actually quite -- when we look at the trends, we see that actually, there are a lot of people who are willing to upgrade to 5G when their contract expires. And we have confidence that, actually, it is sustainable.

[Interpreted] Next question from [ AAStock, Edward Lam ]. Can the company disclose the amount of 5G ARPU right now? In the first half of the year, how much of the CapEx has been spent? For the second half, what is your projection of CapEx? Besides, we would like to know your views about the registration of NIM for those data cards. Are you going to give advice to the government? If this is really implemented, will there be any impact on your prepaid business?

[Interpreted] Well, there are a few questions asked. Let's answer them separately. Let me answer the question about registration of name of data cards. And for 5G ARPU, well, Joseph (sic) [ Josephine ] can take it. CapEx for first half and second half, Stephen Leung will comment. Now let me answer the question about those data cards. For us, the impact is being assessed right now. But I don't think the impact will be very big. Those are called prepaid cards. And a big part of our prepaid business is Birdie, which you may be using, and it is already based on registration of name. We ask that customers register their name. So the impact should not be very big. But we are still getting more understanding about how the government is going to execute it before we come up with a detailed analysis. But we do not worry a lot about any negative impact.

[Interpreted] Let me comment on CapEx. Some time ago, we offered the full year estimate of CapEx. And for the whole year, it is $650 million to $700 million. For the first half, CapEx is $290 million. And the remainder for the second half, around $300 million to $400 million.

Regarding 5G ARPU, Allen and Stephen already said that our ARPU gives a premium of $50 to $100 comparing with other base plans. That is our average ARPU that we have already provided. For the upgraders, usually, it is even higher. So 5G ARPU is really quite satisfactory.

Next question is from Neale Anderson of HSBC. Where can additional cost savings come from, given the headwind of high spectrum amortization charges in the next couple of years?

Maybe I'll take this question. Actually, you have already seen that we have already booked some cost savings. But we will have more to come because they are actually not the full year impact. We are starting to do that. There are a lot of different cost-saving opportunities. Just to give you a few examples, one is on stores. Actually, many of our stores are on the streets, actually, there is a substantial renegotiating going on, and you'll see the impact of that. That's actually very substantial in terms of savings we can get. In terms of office charges, there's a lot on that. We are working on the spending on cell sites, which is a major, major cost item in terms of our OpEx. And we already have some success. I think we will see -- you will see more success around that. So there are quite a number of areas on that. And I forgot to mention backhaul. We have -- we renegotiated our backhaul contracts with our suppliers. In Hong Kong, the benefit is that there are many backhaul suppliers, there are not that many customers. So even though over the next few years we will actually have substantially larger traffic in terms of data gigabytes, we will actually, on absolute level, see declining backhaul charges. So that's another area. There's a further area, which is around our people productivity. I think in the past, I think we have continuously done productivity improvements in this is part of the process, and we have found that they are duplicating teams and so on. So you will see more, actually. You will see more, and the numbers are actually quite material.

Thank you. The following question is also from Neale from HSBC. Are you able to give customer numbers or any color on the mobile broadband service, please?