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 '21. 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. Vincent Tung, General Manager of Finance. The briefing will begin with a slide presentation by Mr. Allen Fung and Mr. Vincent Tung, followed by a Q&A session. [Operator Instructions] Now may I invite Mr. Fung and Mr. Tung to begin with the presentation. Mr. Fung and Mr. Tung, please.

Thank you for coming to this briefing. We'll talk a little bit about how our business did over the past year, both financially in terms of business. But the overall picture is the following: Obviously, because COVID is still actually having a big impact on society, we have suffered from a substantial loss in our roaming revenue, which is a key source of profit. But despite that, I think we have been able through different initiatives to be able to still be maintaining our profitability. And I'm pleased to report that actually our reported profit this year is $445 million, up from $379 million last year, largely driven by resilient core local business and the implementation of cost efficiency initiatives. The current profit represents a small increase over the previous year, even we take out the one-off impairment charge last year. And last year, if you take out the impairment charge it's $440 million, we have this year is $445 million. We look at local service revenue, we actually increased. If we exclude roaming, we actually increased and it's on the positive trend. Our customer base is 2.7 million, and we'll talk a little bit more about that we see an encouraging customer upgrade to 5G. Our postpaid churn rate is still very low, probably at the industry low. During the past year, one of our major focus is about 5G. And we have built, we believe, an excellent network with near full coverage, including MTR lines, major roads, highways and tunnels. In fact, we actually are rolling it to more areas in country parks and hiking trails, acknowledging the changing lifestyle behavior of Hong Kong people. And we believe that 5G will be very important and the adoption will accelerate. 3 months ago, we launched a so-called 5G lab on the 100th floor of the ICC building, one of the tallest building in Hong Kong, showcasing 5G applications. The response has been overwhelming. We'll talk a little bit more about that later on. It had drawn so far about 200,000 people over the past 3 months, many of them on a paid basis. So there's a lot of interest on what we're doing in 5G and what 5G can do for us. Finally, I want to report that the Board has proposed a final dividend of $0.155 per share, bringing full year dividend to $0.30 per share. This represents roughly a near 2% increase in dividend per share. And this dividend is in line with the 75% payout policy or profit attributable to equity shareholders. With that, I'll hand over to Vincent to talk a little bit more in detail the financial situation.

Thank you, Allen. I will now cover the key financial information for FY '21. As Allen said, FY '21 has been a very challenging year for SmarTone and the industry due to the COVID. Despite this, SmarTone's local mobile business remains very resilient. Our local service revenue, excluding roaming, has increased 2% to $4,108 million. It's driven by encouraging 5G uptake with premium and the rebound of Enterprise Solutions segment as corporate increasingly adopt digital service. And lastly, the 5G Home Broadband started to ramp up. But due to the ongoing travel restrictions, our roaming revenues has declined. This has impacted our overall service revenue, which has decreased by 5% to $4,339 million. During the period, SmarTone's customer base has increased to 1% to 2.74 million with an encouraging numbers of customer upgraded to 5G. 5G customer now representing high-teen percentage of our postpaid MNO customer bases. Our average mobile postpaid churn rate was 0.8%. It is among the lowest in the industry. Our mobile postpaid exit ARPU improved strongly by 7% to $202 despite the roaming revenue has declined. It is driven by 5G service and expanding 5G customer base. Moving to our handset and accessory sales sector. Despite there's a slight decline in the revenue because of the global supply chain issues that lead to a lower supply of popular handset, our sales EBIT increased over 20x to $66 million because of the 5G, more to charge higher margin. On operating expenses, through a detailed review of our cost structures. Our ongoing cost efficiency program has strategically reduced costs and enhanced productivities without sacrificing our quality of service. Operating expenses has reduced to 10% to $1,945 million as the result of savings in backhaul charges through negotiations with vendor and the productivity improvement for digitalizations and transformations. Our savings in rental include cell site and stores are reflected in the decrease in depreciation of right-to-use assets, which has decreased 10% to $711 million. Majority of this year's savings is recurring. Initiatives are in place to deliver additional savings in the coming year through digital transformations. Saving will be invested to further improve our network quality and IT infrastructure. Lastly, our EBITDA has increased to 1% to $2,460 million, with the margin improved from 35% to 37%. EBIT has increased to 30% and to $674 million, with margin improved from 7% to 10%. It is driven by 5G upgrade, which drive both service and handset revenue or profit, and our cost efficiency programs has reduced operating costs that offsetting the declines in roaming revenue. In addition, when compared with the underlying EBIT of $605 million in last year, which excluding one-off impairment, our EBIT still increased 11%. In conclusion, despite the difficult conditions in FY '21, the stability of our core business has enabled us to deliver a stable profit to our shareholders. I'll now pass back to Allen for business review and actions.

Thank you, Vincent. You all have heard from Vincent that we talked a lot about revenue growth and also a lot about cost optimization, which we have done a lot, and we actually will be seeing more of the impact actually coming forward. But this is not our strategy to reduce investment, because we feel that there are areas where there's upside, we certainly want to invest more. And 5G is one of them. Our vision is to build the best 5G network and services in Hong Kong, a network that we can be proud of and that Hong Kong people can be proud of. We think this is important for Hong Kong, not just for SmarTone, it's important also for integration with the Greater Bay. Right now, I'm pleased to say that SmarTone 5G covers basically 99% of the population, all the MTR lines, major roads and so on. So if you basically used to use 4G, where you have 4G, it most likely we have 5G for SmarTone. We are also rapidly rolling out major hiking trails, in minor trails. And I think according to a recent third-party survey, we have voted the #1 consumer's best preferred 5G network because of the speed, of the quality and the consistency. We spent a lot of effort in ensuring that the experience is great, and we are investing to do so. You have to believe me, you can believe some are more independent. Actually, recently, there's a major international network management base in France, which has conducted an exercise of Hong Kong's network. This company is called nPerf. It has conducted millions of tests and billions of measurements a year, and they have done studies on over 50 countries, Belgium, U.K., Germany and so on. And their conclusion is that by far, SmarTone has the best coverage in Hong Kong. And we will continue to invest to a couple areas that are important, so that indeed, we will have the best network for Hong Kong. Some of you may actually have gone, and if you have not, I'm really encouraged to go is we have launched a so-called 5G Lab in early May, and 2 government secretaries come to officiate the event. And so far, the response has overwhelmed us. We have actually 200,000 visitors, many of them on a paid basis to come to the lab. And what is this lab? This lab effectively is showcasing some of the applications that 5G can bring. And there are many CEOs and owners of enterprises who come who are looking for opportunities to use 5G. So I think our overall message on -- in the 5G Lab is that 5G is already here. Take use of that. The digital infrastructure is already here, and we can make use of that. Why did we launch the 5G Lab in the first place? Firstly is because we believe that 5G is crucial to Hong Kong's transition into a smart city. And specifically, we want to raise awareness on 5G development and how it will help Hong Kong and showcases many early capabilities of 5G, like the faster uplink speed and so on, on many applications. We also want to showcase to the youth about technology. I don't know about you, but many of our younger generation actually all want to be lawyers and doctors. There's nothing wrong with that. But we think that there's a major opportunity for young to be involved in technology, and this will help the younger generation to be part of our efforts to become an innovation hub. We believe that the more young people understand the potential technology, the more it will interest them in studying science and technology. So not only are we opening the 5G Lab for everyone, we are specifically opening it for school business. We actually have already raised 300 high schools to visit the lab by June 2022. Overall, Hong Kong has only about 5 years of high school. So basically, we'll have more than 60% of high school students who visit our lab. They can learn more about technology and learn more about 5G. Hopefully, we interest them and make them be more aware and what their career opportunities are. I mentioned earlier that there are a number of -- quite a number of CEOs and government officials coming to the 5G Lab. And we have discovered that actually many enterprises are very interested in the potential of using 5G for their operations and to serve customers. We already have a head start in doing that, and we see the growth. And this is, I think, one of our major revenue growth streams. We see a lot of companies asking for help, asking for SmarTone's help to help them develop and implement solutions that can help them. Now some of these companies we put on this page are Sun Hung Kai group companies. But they are -- some of them are not fully owned. But we see substantial benefits. So for instance, in Route 3, we actually have been able to have a video analytic system that can actually basically monitor the route much more safely. Because in the past, sometimes there are intruders that we are not aware of. Sometimes we will just don't know that it's dangerous to just ride a bike and go into the tunnel. And sometimes, we actually have wild boars coming to the tunnel as well. But this AI video analytic system can actually help you immediately alert what is what, who is who intruded. So it was very helpful. We have actually implemented in Sun Hung Kai quite a number of smart property management applications using 5G. And those of you who pick KMB, basically, a now rolling out a feature using 5G that can tell you in real time how crowded the next bus or the bus after next is so that you can plan your trip better. So if you are seeing a bus that is very full, your decision is to decide, "Oh, should I wait for the next bus?" Now we can tell you. The next bus, is it full or not full. So we will have more of these applications rolling out. And these applications from Sun Hung Kai. But there are others whether we are serving. For instance, we are serving a top construction company and various government departments using what we call a Smart Helmet that can actually detect the health of the worker, whether he's going to get a heat stroke, whether his heart rate is too high, whether he's overheated, whether he's about to go into a dangerous area. It's very helpful. It's a very light helmet. They can do a lot of smart things. We are serving 2 leading health operators on smart clinic. So these are clinics in a van that actually go to different areas to serve elderly people. We also are serving the top lift operator in Hong Kong in monitoring lifts. Lifts actually are expensive to maintain and also sometimes dangerous if maintenance is not done properly. But the 5G applications can help them to monitor real time much more cheaply and much more effectively. These are just some of the examples of the clients and customers that we are serving. We think there are many, many more, and we believe that this will benefit SmarTone as well as many companies. The other area we are also focusing on is 5G Home Broadband. And we launched it basically about a year ago. We now actually have a very good customer size and it's growing, and the ramp-up is very good. And we basically allow people to try it for 7 days, and then when people try it, and they say it's great. And it's actually not expensive as well. It's $148 a month. Why do people like it? And after nearly a year, we now understand more. In Hong Kong, there are about -- we are research about 20% of the buildings that either have very, very slow Wi-Fi, fixed line, very, very slow. So if you want to watch a high-definition TV, you can. It's very expensive because that's a single operator. I think I said it even last time that I'm paying $600 for my fixed line. I have no choice because that's the only option I have. There's only one operator. I think there are many of those such buildings in Hong Kong, and we tabulate that they're probably about 20% of our buildings of people who actually either has to accept their slow Wi-Fi or paying very expensive Wi-Fi. So we actually were able to capture a fair amount of these people, and I think we'll capture more. But what we did not expect is that many people now use 5G Home Broadband as an add-on. So what they say, telling us is that we already have a fixed line, which provides Wi-Fi. But because these days, this is actually -- so much work is actually done at home, so much gaming, anything in sun at home. Our Wi-Fi is very slow because my son is using it. My sister is using it and every -- my husband is using it. So what they do is that they add an additional Wi-Fi, add a data home broadband. They just put it in the room, in the son's room or what have you. And then they have extra capacity, and they find it is much faster and they find it very convenient because the setup, I can guarantee you, is within 60 seconds. Even some who are not as literate as I can actually use it immediately. So we find that actually for both segments, that's actually very, very good growth. And this is, I think, a good service for a lot of people. And we also find a lot of business opportunities for ourselves. So when we talk about 5G, it's not just people operating in 5G, even though that's very important, but there are other services and products that we are rolling out, and we think that they are all with a lot of different opportunities. Finally, let me talk a little bit about our outlook as we see it. We think the operating environment will continue to be challenging. This financial year, we will see our SUF amortization, the spectrum amortization seems to rise materially not because of 5G spectrum, by the way, which was actually very inexpensive, but because of renewal of certain segments of 4G spectrum we did about 3 years ago. So secondly, actually, we also would not have any ESS government subsidies. And this is actually very unclear when international travel will resume and when it will recover. To be frank, even if China is opening up to Hong Kong, that will make a big help because a lot of our roaming revenue comes from China. But we have to wait and see when that can happen. So there's a big uncertainty. Having said that, I think management and myself remains cautiously optimistic because of a number of reasons. One is that we do see accelerating 5G customer uptake. And I can confidently say that we have a real premium. We are charging a real premium over 4G. We have built a truly premium 5G network and we do actually charge a premium. I think some other operators sometimes will say that they charge a real premium. But sometimes when they renew, they don't actually -- we actually are very insisting on the premium. Secondly, we think that there is a ramp-up of enterprise solutions. We are still at very low base. So we think there's a lot of growth. And I think the 5G Lab has helped us a lot. We have a lot of lease and we think that we will actually be able to serve our enterprise customers much more effectively. And thirdly, we also have new services such as cybersecurity solutions and 5G Home Broadband and so on. It's not just about revenue, it's also about cost efficiency. This year, you will see additional further savings from what we have achieved over the last 9 to 12 months. Firstly, because some of the savings we have made, the full year impact will be seen this year. Actually, a lot of them will be seen this year. And secondly, we have additional ongoing savings. Nearly -- I would say that nearly most of the savings does not impact quality. I would say, actually, I would say, actually, all the savings does not impact quality. It's just basically ensuring that we are more productive. We are negotiating better deals, either with our store landlords, with our office landlords, with our cell site landlords or even with our backhaul provider, we are negotiating far better these now. So these savings are recurring and will help the company to be even leaner. So we think that there are shareholder returns in the interim, especially shareholder return in the interim will be -- will get upside. And we think that we can actually still do reasonably well even without a full roaming recovery. And obviously, if roaming comes back, I think we'll be in a very good shape. So thank you.

[Operator Instructions] The first question is from Feiyun Fang of Citi. When do you think that the OpEx reduction due to digitalization will stabilize?

Firstly, let me clarify, not all of the OpEx reduction is due to digitalization. Some of that actually is basically due to better negotiation with our partners and partly is basically due to better productivity than we basically create certain structures to have greater productivity. Now next year, you'll see the savings if we compare it with the previous year to be more, right? So not only are the savings we see this year, but the savings were more next year. But we also have a number of initiatives to further increase basically the savings from OpEx. So you will see this year already, what I say is that FY '21, we already made certain savings. Next year, we'll see more. And then year after next, you will see more. Now after that, we don't know. But we actually have a program that we think is totally achievable that will, actually every year, basically be able to further reduce the OpEx.

The following question is from Angela Cheuk of HKEJ. How much of local services revenues from 5G? What is SmarTone's 5G customer number and ARPU?

As we said, let me answer the second question on the customer number. We are in -- for our -- what you call MNO customers, it is high-teens. I think you can check what high-teens is. It's actually slightly less than 20% but more than 15%. So that's where we are. The ARPU, we are not going to reveal, but it's actually a very, very good ARPU. I can assure you. I can assure you, it's a very good ARPU. I think from that, you can probably deduce how much is 5G. We feel that people usually move to 5G when they change the phone because I think if you buy once an Apple phone, then now all Apple phones are 5G enabled, they will change. So the next few months will again be a big change in that number. So right now, you say it's high-teens. So is it a lot? I typically say, but we think it was ongoing, but it's still actually a very material contribution. And that's why you also see why our ARPU has stepped up, why ARPU has stepped up quite substantially actually this year. A lot of the contribution actually does come from 5G.

[Interpreted] Next question is from [ AASTOCK, Elle ]. Right now, for upgrading from 4G to 5G, how much is the increase in ARPU? When there is more intense competition, will ARPU or 5G be under pressure? New iPhone will be launched soon. Does the company have new promotion plans to drive customers to upgrade to 5G?

[Interpreted] Stephen can answer part of the question and then Josephine.

[Interpreted] Thank you, [ Elle ]. Now your first question is in upgrading from 4G to 5G, how much is the increase in ARPU. Roughly between $50 to $100. Just now, Allen said that we can see that the market has good response to our 5G. So for acquisition as well as retention, there is upgrade when there is upgrading from 4G to 5G.

[Interpreted] Let me add a point. we put in a lot of effort to build the best 5G network. So we think that $50 to $100 is not a lot. People can feel that there is a lot of improvement if they experience it. There is a big temptation to charge less, but that is not the strategy we want. So far, our customers give good response. They are willing to upgrade, and we have done a lot of feedback -- a lot of survey and feedback is that they are positive. Well, $50 to $100 is not a lot. Well, that is just enough to get 2 Starbucks coffee. So, so far, we can see that customers are very responsive and acceptable. Josephine?

[Interpreted] For new iPhone model, are we going to have new promotion plans? Well, we monitor customers' needs and from time to time, we offer new promotion plans. Recently, consumption vouchers are popular and our response is good. Now 5G phones are getting more and more popular. And definitely, handsets can drive the growth in 5G customers.

[ Capital's KC Lee ]. Have other operators also launched the equivalent of your 5G Home Broadband service? Do you think there will be pricing pressure?

We understand some other operators actually have launched the equipment of 5G Home broadband. But I think we actually do have a little bit of advantage in some ways. I think because we are not an integrated telco, we don't have a fixed line business. When you have a fixed line business, you constantly think about, if I'm charging you $500 for fiber, why do I want you to move to -- which is exactly $148 home broadband. So that's just a fear of cannibalization. We don't have that fear. We don't have that fear because we are not integrated. We don't have a fixed line. And will there be pricing pressure? There could be. There could be. But I think actually, we welcome our other operators to offer it so that it becomes a bigger pie. Because if you just imagine, we now have 2 million households in Hong Kong. If just 20% of them actually use home broadband, that's a very significant number, and there's a very significant revenue stream for all the operators. So we don't mind competition, and there will be competition. There will be a strong competition. But what we are saying is there for a lot of the people who do not have access to fiber or actually thinking about adding an additional service so that they have more capacity or they think that the current basic service is way too expensive, I think 5G Home Broadband does offer customers more choices, a reasonable choice. And we don't need to be a very, very high market share in order for this to be a quite important revenue stream for us.

Next question is from Neale Anderson of HSBC. In which sector of the enterprise market do you see the most promise for 5G services?