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

Good afternoon, ladies and gentlemen. Welcome to SmarTone Telecommunications Holdings Limited's Interim Results Announcement and Management Presentation for 2021/'22. First, may I introduce you to the executives here with us today: Mr. Allen Fung, Deputy Chairman and Executive Director; Mr. Norman Tam, Executive Director and Deputy Chief Executive Officer; Mr. Stephen Chau, Executive Director and Chief Technology Officer; Mr. Vincent Tung, General Manager of Finance. The briefing will begin with a slide presentation by Mr. Allen Fung and Mr. Norman Tam, followed by a Q&A session. [Operator Instructions] Now may I invite Mr. Fung and Mr. Tam to begin with the presentation. Mr. Fung and Mr. Tam, please.

Thank you for joining us for this presentation. So what we will do is to first give you an overview, and then I will take you through our finances, what we have achieved over the last 6 months. Norman is going to talk a little bit about the business review. And I'll come back with what we think is the outlook of the business. So last 6 months, I think the business is -- show its resilience. The core business actually is able to deliver stable performance despite the ongoing pandemic, which has obviously hit us hard because there are substantial reduction in terms of the roaming revenues. But our reported profit attributable to equity holders hold up, and it's actually at $251 million. It's slightly down, 6% down from last year, but last year, we had the government subsidies. So if you take away those subsidies, actually, the current period's profit increased by 30-ish percent, 34%. So quite a substantial increase. And why is that the case? One of that is that we are back to growth. We are back to growth in our revenues, and we'll talk a little bit more about that. And we see encouraging 5G performance. Penetration of our postpaid MNO customer base that is our customers, SmarTone customers, it's already reached at 20%. And we are really able to charge a premium when they upgrade. Our Home Broadband, 5G Home Broadband service is ramping up very well, and we see that continuing, especially in the current environment and it's starting to contribute to profitability. And our Enterprise Solutions business also has increased by a strong double digit. So there are quite a number of growth drivers which are helping us. At the same time, we have been focusing also on being more productive, being more efficient, and that has brought about material [ point ] savings, and those savings are recurring. Over the last 6 to 9 months, we have acquired further 5G spectrum to expand our capacity. Our goal is to build and have the best 5G network in Hong Kong. I think many people say that we are indeed the best, we can talk a little bit more about that. But this is important for us. And then our dividend is the same as last year, $0.145. And overall, our dividend policy remains at 75% underlying profit. So that's the overall overview of the last 6 months. Let me take you through a little bit on the finances and the key metrics that we measure ourselves. In terms of the revenue growth, as discussed, if you exclude roaming, the upper half is exclude roaming, we are back on a growth track. We are growing because of the reasons we talked about, that there are people upgrading to 5G. And actually, we see momentum actually getting stronger, and they're willing to pay for a premium. And then the 5G Home Broadband and Enterprise Solutions, those are things that are helping. Roaming, on the other hand, has not improved at all. Roaming remains at a very low level. So if you look at the below, we are still actually -- if you include roaming, our service revenue is still quite a bit down from, say, 3 years ago or even 2 years ago. But other than that, our growth is good. In terms of our ARPU, and this number actually is our postpaid ARPU, that means that it includes our own customers as well as our MVNO. We also saw an increase. As I said, when people uptick to 5G, they pay premium. But we also see that even people who renew at 4G, actually, we're able to keep the -- keep the fees actually stable with a little bit of increase as well. So overall, the ARPU evolution is actually a positive one. In terms of customer number, the bottom, it may seem that we have declined. Actually, this is a little bit leading because this number includes a lot of prepaid cards. And many of these prepaid cards are travel prepaid and actually of extremely low value. And in fact, we actively try to [ push ] them. So that's not a metric we worry too much about. What we do focus a lot about is whether our postpaid MNO customers, that is SmarTone customers, has increased. In fact, it has. Actually it has grown over the period. But just as some basically prepaid, extreme low value prepaid, which we don't think actually is our market has decreased a little bit. In terms of handset and accessory sales, I think we are on a good trend. We are able to have, both in terms of sales and EBIT, getting higher. But those of you who have followed SmarTone Home for a long time, this is actually a relatively small number compared with, say, 5 years ago. But nonetheless, it is actually increasing from previous years. And we see that people are buying 5G handsets. And 5G handsets are actually priced rather competitively as well. So it actually enables a lot of people to have a 5G handset and use 5G without paying a lot of money. We also talked about how to be more -- to have even more discipline in terms of our expenses. We are in no way sacrificing quality by reducing costs. We actually would not make any trade-offs in terms of quality. So I think in terms of the service level, we have not. In terms of our network coverage, in fact, we have spent more on network to ensure coverage is great. But many of our cost-efficiency programs are really on productivity improvements and also on some of the renegotiation with our vendors, sometimes our landlords, our base station landlords, our stores and so on. So we actually were able to get quite a bit of savings on a recurring basis. So if you compare with 2 years ago, we have actually come down quite a bit on operating expenses. You see that compared with last year, the decrease is not as big, largely because last year we had quite a number of one-off measures, like we didn't actually have a bonus and we have actually some no pay leave in financial year '21, which is about 18 months ago. But last year already, we paid good bonus. We already are raising salaries. So even with that, actually, we are still reducing expenses. So that's the first thing. The second thing, on the bottom half of the chart, you see depreciation on right-to-use assets. Under new accounting rules, all your rental agreements become -- actually are capitalized and become depreciation charges. So you can see that we have actually come down in these rental substantially. It's stores, our office, our sell sites. So these are in addition to the operating expenses. We'll continue to look for operational efficiency, we think there are still room to do that. And -- but as I said, we will never do it with any sacrifice in terms of network quality or our service quality. But we have shown that we have been able to do that without doing that, and the savings are quite material. I think one of the terms you'll hear us use a lot is resilience. These are very difficult circumstances. roaming used to be a very big contributor to our profit. Now we lost a lot of it. And obviously, it is actually not that easy to do business and acquire customers in the pandemic environment. But if you compare -- actually taking away subsidies, if you take away subsidies, which is -- which happens in financial year '21, and compare apple to apple, our EBITDA actually is higher than pre COVID and our EBIT is also higher than pre COVID. And I think there's more room to grow. I think that's basically because we're able to grow our revenues again, and we are also able to get recurring savings from quality efficiency. We do see quite a lot of momentum in terms of business growth, which Norman will talk a little bit about. So overall, we are cautious, but we know that the environment is actually quite difficult. But then I think we have shown our resilience, and we have shown that we can actually bounce back to growth. And with that, let me hand it back to Norman.

Thank you, Allen. I will now begin the business review section. To further establish SmarTone as a provider of the best 5G network in Hong Kong, in September last year we launched a large-scale advertising campaign featuring actor Nick Cheung, who is recognized as one of the best, award-winning actors in Hong Kong and also a long-term customer of SmarTone for more than 20 years. This echoes the theme of our campaign, the best choose the best. The campaign have reinforced SmarTone's 5G leadership in the following areas: leading in network technology; fast, stable and smooth 5G network; and having the widest coverage. It was a very successful campaign and has strengthened our brand leadership. Consumer [ finance ] after the campaign showed that SmarTone continues to be the most preferred 5G brand, and it was well-reflected in the robust growth of our 5G customer acquisition during the period. In October last year, the company successfully acquired an additional 65 megahertz of 5G spectrum, spreading across the 700 megahertz, 850 megahertz and 4.9 gigahertz spectrum bands at a reasonable cost. The 4.9 gigahertz spectrum will be used to expand 5G capacity and improve performance, including in the 3.5 gigahertz restriction zones in Tai Po and Stanley. The 700 and 850 megahertz will be used to enhance in-building coverage. The newly acquired spectrum will further expand SmarTone's spectrum holding, already the highest on a per customer basis, and we will enhance the company's ability to provide the best mobile experience in the city. We believe that we have the best-performing network in the city. And in fact, it's not only SmarTone saying this. Six credible and well-established media such as DCFever, ezone, hk01and Mobile Magazine have conducted network benchmarking tests that have proven SmarTone's excellence in network performance and coverage. The tests were conducted across the MTR station, hiking trails, shopping malls and popular hotspots, and they show that SmarTone provided a smooth and seamless experience on applications such as video streaming, video conferencing and online gaming. Next, we will give you an update on our 5G lab, which is established to raise awareness among the business and consumers on 5G and to demonstrate how 5G infrastructure will support Hong Kong Smart City development. Since its launch in May 2021, the 5G lab has now welcomed over 400,000 visitors, including senior government officials and executives of major enterprises who hope to leverage 5G application to help their businesses. As part of SmarTone's 5G lab school outreach program, we bring 5G into schools by launching the 5G STEM classroom, offering STEM courses for local students to experience 5G innovations with a guided tour at our 5G lab. As of December of last year, over 200 schools, which is almost 1/3 of the schools in Hong Kong have joined the 5G STEM classroom and 5G lab tours. We believe that the more our young generation understand the potential of technology and how it will change their lives, the more they will be interested in studying science and technology that will help Hong Kong transform itself into an innovation hub [indiscernible] international [ 14 ] 5-year plan and help the integration with the Bay area. During the period, our Enterprise Solutions business continued its strong growth momentum. Our Smart Construction solution has already been adopted by tens of leading construction companies at over 100 sites, such as building sites, bridges and tunnels and drainage and sewage systems. It provides worker safety monitoring, danger zone surveillance and improvement of site management efficiency. Another example is our Smart Elderly Care. This solution provides health tracking, teleconsultation and smart wearables to enable care center automation. There has been very good response to this service, and it has been deployed at over 100 community centers and clinics. We also have a Smart Mall solution for the retail industry. A typical use case is to enable intelligent crowd and queue management as well as fever and mask detection, which are essential under the pandemic. It has been adopted by hundreds of shops and malls, providing real-time monitoring and management of amenities. The last one is our Smart Transport, which empower bus terminal safety monitoring and intelligent scheduling. But some large information of bus occupancy can also be provided to the passengers at bus stops. We also joined hands with KMB to launch the first 5G bus where passengers can enjoy free 5G WiFi service. In summary, we will continue to look for scenarios where our Enterprise Solutions and leading 5G network can be applied and work with more partners to expand our solution coverage. Now for an update of our 5G Home Broadband service. We are pleased to report that the service has received very, very encouraging response. During the calendar year 2021, our subscriber base actually has grown by over 300%. Based on a customer survey, the top reasons for choosing this service include, for example, there's no installation and traditional appointment required. And also there's no installation fee. And there's unlimited data and the speed is smooth no matter how much data you have consumed. So to consumers, it just worked like a [ home ] service. It's also of great value. We believe that [ 180 -- 48 ] monthly fee is actually quite competitive compared to other broadband services. Sometimes it even performs better than the existing broadband service. This is especially evident in buildings where fiber broadband is not available. We will now take this opportunity to conduct a demo of SmarTone's 5G Home Broadband.

Thank you, Norman. Welcome, everyone. This is our WiFi 6 5G broadband router. the design is handy and chic. Simply insert a 5G SIM card, power it up and you can be connected within 40 seconds. You can play anywhere you like. It's just a plug and play mode. Not even relocation charges is needed when you move homes. Our service comes with unlimited 5G data at ultra-high speed. It is extremely useful during this pandemic period if you and your family use Zoom meeting and online classes at home at the same time. Besides, we offer a flexible 6-month contract. You can either rent a router from us or get one of your own. As you can see, the router [ is ready, just ] scan a QR code and start using. First of all, let's check the speed. You can see the meter is running very fast, 400, and now up to 700 megabits per second. Let's play a 4K video on YouTube. The streaming goes well, very smooth and there's no buffering. Lastly, let's do a Zoom. Our colleague is waiting for me. Hi, Keith, can you see me?

Yes, it's very clear.

Okay. Thank you. Getting a personal broadband is just that simple and easy. Try it out and you are going to love it. Thank you, everyone. Back to Norman.

Thank you, Tracy. So as you can see from the video, it's actually very easy to set up the home -- the 5G broadband service. So moving forward, we will continue to accelerate our sales coverage in the key target segments such as someone living in the villages or stand-alone buildings or with more areas where only the broadband service is available. It's also very attractive to people living in areas where there's only one broadband service provider which usually charges a very high service fee. In other segment, we are -- those who already have a board band service that would like to have an add-on or a personal broadband so that they don't have to share with other family members. And this demand is particularly strong under the current COVID wave, where parents and kids are constantly fighting for bandwidth resources as they are both doing work-from-home and study-from-home. So besides -- and the same [ dynamic ] can also happen in household in the same building. So to address this demand and also as a support to the community, we have offered a short-term 6-month contract that provides flexibility for those who are in need. We will continue to drive sales in these key segments, and we expect ongoing strong growth in this service. So now I would like to give you an update on our new and upcoming value-added services. The first one is our Smart Guardian service, which is designed for hiking, and available as a function in our Smart Care app. So with this service, you can provide your family members with real-time updates or location tracking when you go on hiking. And we will send SMS or notification to your emergency contacts when there's a danger detected. Next is our Data Guard and Call Guard service which is offered as a voice and data security combo to our customers. While Call Guard provides the network level blocking of spam and junk calls, Data Guard provides data security protection, such as instant alert to stop you from clicking on suspicious links. We believe it is very important to protect our customers from the ever-growing mobile and cybersecurity threat. In response to the current COVID outbreak, SmarTone has launched a customer caring program to help our customers under mandatory quarantine to stay connected with family and friends. We've provided free data and calls, free music and video streaming service, and we even deliver our 5G Home Broadband routers to those who are staying in the Penny's Bay Quarantine Centre. In fact, for this situation, we have particularly strengthened our 5G coverage in the Penny's Bay area. This initiative is part of SmarTone's commitment to help customers quarantine without losing touch. Our swift action has actually generated a lot of good media coverage. And more importantly, we received overwhelmingly positive feedback from our customers. So with the LeaveHomeSafe app now mandatory in almost -- most public areas and restaurants, some underprivileged elderlies do not have smartphones and therefore cannot access the app and go to these areas. So as part of SmarTone's support for the pandemic, we have joined the Jockey Club Digital Support Project for the Elderly. In this case, SmarTone provides smartphones and prepaid mobile service to elderlies through participating NGOs. And our volunteer team has actually hosted elderly-oriented workshops on smartphone and also app usage, especially on how to download and use the LeaveHomeSafe app. So as a leading operator, we will deploy all available resources to help Hong Kong get through this pandemic. This concludes the business review section, and I will now pass it to Allen.

Thank you. I'll end with some observations on the outlook for business. Firstly, on the business side, the operating environment continues to be challenging. Omicron is further delaying the resumption of international travel, so I think the recovery in roaming revenue will take a while, even with China, so that's a negative. And as we have said even the last time when we met, the mobile license fee amortization this year is going to exceed for the full year, $400 million. So this is driven by certain segments of the 4G spectrum deal we negotiated 3 or 4 years ago. So there are actually a lot of headwinds. So it's not an easy operating environment. But we believe that we have bounced back in a growth mode because of 5G uptick, because of new business 5G Home Broadband and the Enterprise Solutions and a number of other things. And we are also becoming much more cost efficient. We will work to -- work very hard to ensure that we deliver the growth again for our shareholders. And I think what we try to show as a management team is that we can actually deliver stable shareholder returns even when we have lost the majority of our roaming revenues. So obviously, when the roaming revenues come back, things were much better. But we are resilient, so even without that, we are still able to deliver stable shareholder returns. That's the objective. So that's the business side. But from a mission point of view, from a purpose point of view, this is a difficult time for Hong Kong. This is not -- the pandemic is raging. And our objective is to build and develop the best network, especially the best 5G network for Hong Kong, in Hong Kong. That is important from a longer-term perspective, because it basically is a key infrastructure based on which innovation can come. And it's also a key infrastructure where businesses can leverage to digitize themselves. So the network is very important. We built this network because we feel that it's important for our customers, but we also feel that this is important for Hong Kong. As stated in the 14 5-year plan, Hong Kong want to be an innovation and technology hub, it needs a good network. China is a great network. We need to have a great network as well. So that's our purpose. But in the short run as well, as Norman talked about, we will work very hard to really serve the community by providing the necessary [ connectivity ]. There are still a lot of people without 5G Internet. And actually, the situation is going to get worse now that many people need to be at home and kids cannot go to schools and so on. So we will try our very best to use our mobile programs. We will offer it in discounts, in packages. Sometimes for underprivileged people, we will offer it for free to help them because that's the way to serve community. In the end, it's really ensuring that everyone has access to high-speed Internet. And that's our purpose. So our purpose, obviously, is about the business, about the returns, but at the same time, we hope that we can use the network to serve our community better. So with that, I'll end and open up for questions.

Thank you, Mr. Fung, Mr. Tam. Now we will have the Q&A session. [Operator Instructions] Mr. Fung, Mr. Tam, Mr. Chau and Mr. Tung will join the session to answer your questions. We'll read out a question and it will also be displayed on the webcast page. To make the best use of time, similar or repetitive questions will be grouped together for management to answer.

The first question is from Danny Chu of Bank of America. There are 2 parts to the question. Number one, a number of your peers recently lowered tariffs of 5G services. What is your view towards such marketing strategy? Number two, with 5G consumer service -- while 5G consumer services has been launched for a while in Hong Kong, apart from video streaming, what are the services that are popular among consumers?

Maybe I will take the first question. It's true that actually there are some other operators lower the tariffs of the 5G service. To us, we believe that we have invested a lot on our network, especially our 5G network, which provide premium service that deserves also a premium on the price. And I think we will focus on -- continue to improve the network and also to raise our customer service level, which is also a strength for SmarTone, as illustrated by the strong loyalty. So instead of competing on price, I think we will focus on the two above areas. And the second question, it's true that actually video streaming, whether it's for entertainment or for work-from-home is the most used scenarios for 5G consumer service. But I think in the long run, of course, there have been talks about a lot of VR-related scenarios like meta verse or VR games, that can potentially increase the usage of 5G on that areas, but it's still at a very early stage.

I'll also echo what Norman is saying. I think a lot of people thought that -- misunderstood I think that 5G is now kind of a commodity offering. I think everybody offers 5G , but a not so great network, 5G network, is still a not-so-great network. Actually, I never understand why people want to upgrade to 5G when the 5G network is not great. And I think there are great differentiations between a great 5G network and a so-so 5G network. That's why we have spent a lot of resources and invested a lot to build a truly great 5G network. And that's why we have a SmarTone, only SmarTone customers can use it, no MVNO can use our 5G. And that's why we also believe that, when we are monitoring our customers, they don't really care about that how small reduction in price it is. The first question is that, does your 5G network really deliver good experiences? And I think we can confidently say, yes, I don't know about our competitors. But that's the key. It's not a commodity offering. Some 5G networks are really way better than others, both in terms of coverage and consistent experience. And also on the second point, I think we have seen increasingly, especially in the last few months, a lot of use of video streaming. Video streaming -- people immediately think about it's about entertainment. But actually, a lot of people are using on Zoom. I think if you try to use Zoom on a 4G phone, you'll find that the difference with 5G is just enormously different. And I think a lot of people are now also using it for education, online education. Again, it's a big difference. So we will see more and more services where it's different. But again, if 5G network is -- a good 5G network is very good. A not so great 5G network is not that great.

Thank you. Next question is from Gary Yu of Morgan Stanley. Three parts to it. Number one, what is our -- what is your 5G uplift when you migrate a customer to 5G? And is this uplift going to be sustainable throughout the migration cycle? Number two, how much more benefits can we see on expenses from cost savings initiatives? Number three, how should we look at profit outlook for FY '22 given steady revenue growth, lower costs, but higher spectrum amortization.

Okay. I'll take the first question. Actually, our 5G ARPU uplift is at the range of around $50 to $100. And that uplift, so far for -- especially for the past period, it has been very stable.

For the second question about benefits from cost savings, I think you'll still see more, and partly because of full year [ effect finally ] additional things that we are doing. I think our team has gotten actually quite a bit of success in terms of renegotiating some of the fees from our base stations, and that's a big-ticket item. And also you'll see more savings from our backhaul costs as well. So there are quite a few things that you will see more. I think in terms of outlook of 2022, I don't know if we can actually give guidance. But I think it will be stable, I think that's what we're working for. I think it will be reasonably stable.

The next question is from Michelle of Citi. Could you give some color in the revenue and OpEx and D&A outlook in the next 3 years?

I think I'll take this question. And I think the revenue, I think we are cautiously confident that it will continue to go up. I think basically there is a full year effect of some of the increase in ARPU and customer numbers that we've seen this year. So we are quite confident. And we really see things ramping up, like our 5G Home Broadband, even in the last couple of months, it's ramping up quite well. Our 5G adoption rate is actually not slowing down, it's good. So that actually should go up. OpEx will still have quite a bit of room to go down, a little bit. D&A on the spectrum, it will remain high for quite a while, for spectrum costs, it will remain high for quite a while. But in terms of depreciation, I think I will more talk about CapEx, I think our peak CapEx has passed. We are now actually going down a little bit in CapEx, even though we are investing in more sites and so on. But the peak CapEx has passed.

[Interpreted] The next 2 questions are from Amy of Ming Pao. First, right now for 5G customer uptake, comparing with 5G Home Broadband customer uptake, how much are they? What is the exact numbers? Recently, in Hong Kong, the pandemic is more serious. Concerning 5G Home Broadband sales, what is the growth comparing the past? First question, for 5G uptake, we have announced that it accounts for 20% of our total customer base. 5G Home Broadband, in my presentation I said that last year in 2021 from the beginning of the year to the end, growth exceeded 350%. So that's the second question. In recent 2 months, of course, under the fifth wave of the pandemic, many people work from home, students study from home. So we can see that there is a lot of competition for bandwidth in the market, even though people may have broadband already. In the past 2 months, if you refer to our monthly growth, there is a big increase. And we expect that in the period to come, the upward trend will continue.

[ KC Lee ] of MAP Capital Limited. You have chosen to maintain your interim dividend. Does this decision about your dividend carry any message you want to send to the investment community?

I think -- thank you for this question. I think you can interpret it whatever they want. But I think what we can say is that you can be assured that we want to deliver a stable and good dividend for our shareholders. And the best way to do that is to improve our earnings. We remain committed to the 75% payout ratio, but we will work extremely hard to ensure that we are able to grow our earnings.

This question is from Sara Wang of UBS. What's the impact of the pandemic if it lasts longer than expected? Do you see further downside in your business?

Actually, even before the current fifth wave, we have constantly thinking about contingency plan and how we will tackle the pandemic if it has a prolonged presence. For example -- of course, there will be an impact to our store traffic, right? But very earlier than this happens, we already deployed a lot of resources, especially on the digital side or full digital channels so that our customers can still use our apps, our websites to renew or purchase new services. And also, we will make use of -- such as WhatsApp communication and other digital means to stay connected with our customers. And we also shift some of our marketing expenses to online media to capture the increase in the traffic. Another way to look at it is actually we also treat this as an opportunity, as we have covered a lot in the presentation, that our 5G broadband service has experienced a huge surge in demand. For example, in the past, actually in our stores, even the total traffic has dropped, but the uptick of 5G broadband service is actually even bigger than before. So that's a very strong indicator that this Home Broadband service is -- I would say gives us a very good opportunity to tap into market, not only for our existing customers, but also non-SmarTone customers, so that they can experience our premium 5G network.

The next question is from Nomura's Ethan Zhang. What's our target for 5G customer penetration for 2022?