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

Good afternoon, ladies and gentlemen. Welcome to SmarTone Telecommunications Holdings Limited Annual Results Announcement and Management Presentation for financial year 2022. 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. The briefing will begin with a slide presentation by Mr. Allen Fung and Mr. Norman Tam, [Operator Instructions] Now may I invite Mr. Fung and Mr. Tam to begin with the presentation. Mr. Fung and Mr. Tam, please.

Welcome to the presentation. Let me talk a little bit about the overview of our business in the past year. The reported profit for the company attributable to equity shareholders was $423 million this year versus $445 million last year. So we are down 5% but if you exclude the impact and the effect of government subsidies because the previous year, we actually got quite a lot of government subsidies. Our underlying profit attributable to shareholders actually increased by 16%. So we have actually a very healthy growth in our profit. Our reported EBITDA rose by 5%, and actually, it rose by 8% if we exclude government subsidies. All this is because we have a strong core business. We have 3% growth in our service revenue. Our mobile postpaid exit ARPU, which is a very important indicator, grew 5% year-on-year. It grew 5%. The ongoing 5G uptake is going on smoothly. We are now up to 28% of our postpaid MNO base. We have emerging growth from 5G home broadband, which we'll talk a little bit more later. And we also saw a rebound in roaming revenue, is still very modest, but the trend is going in the right way. On top of that, we also have some growth in our Enterprise Solutions business. So there is growth in our service revenue. And we also managed to exercise very good cost discipline without compromising quality of service. All in all, the Board proposes a final dividend of $0.155 per share, meaning the full year dividend is $0.30 per share, which is exactly the same as last year. Let me briefly take you through the financial indicators that we are looking at. As I said, the local service revenue has grown. And if you exclude roaming, it has grown 2% year-on-year. A lot of it has to do with the 5G penetration increasing. And also, we have emerging good performance from the 5G home broadband. Our total service revenue, including roaming, increased 3%. As I just talked about, if you look at our mobile postpaid exit ARPU, it has risen 5% to $213. This is clearly the highest among all the reported figures from operators. Our postpaid churn is also very low. And we also see a small increase in our postpaid MNO customers. In terms of our operating expenses, there are 2 types. One is the -- what is the operating expenses. It came down another 2% year-on-year. I think some of you asked the question, were our cost reduction in operating expenses sustainable last year with a more one-off items. I think what we have proven actually this year, and many of them are indeed sustainable and they went down further. The other is what we call the depreciation of right-to-use assets. They primarily are about our rental of stores, office and cell sites, and that has gone down 6% year-on-year. One thing I want to emphasize is that even though we were able to reduce our operating expenses and also the right to use assets i.e., our rental, they have not come at the expense of our quality. We have actually invested more in terms of quality like in network. So you have actually better network in MTR, you have better network when you go hiking. And we also have invested also heavily to ensure that if you call our call center, we will pick up your phone faster. So all these cost items have been achieved without sacrifice in quality. Finally, in this section, if you look at our EBITDA, our EBITDA has grown 8% which is a very healthy growth. And our EBIT actually has grown 25%. And we think that there's strong business momentum, and Norman will talk about why we are able to achieve what we did in the past year. I'll hand it over to Norman.

Thank you, Allen. So now I will go over the business review section. Exceptional network performance is always our key customer value proposition, and this is an area we are always striving to improve. In May this year, in the study conducted by OpenSignal, a leading global research firm on mobile networks. SmarTone is the winner of voice, game, video and downloads within the overall experience category among Hong Kong mobile operators. We are also named as the winner in 5G network rich, 5G video experience, network availability and consistent quality. And our superior network performance is not just confined in Hong Kong. Now SmarTone customers can also enjoy 5G roaming service in 15 popular charter destinations, including China, Japan, Korea and United Kingdom. Our 5G network is also well recognized. Over the past year, SmarTone 5G network has been ranked as the #1 network in 14 network tests conducted by influential local tech media. Many of these reports has cited that SmarTone 5G is particularly strong in MTR lines, MTR stations, hiking trails and country parks. And in MTR stations, our performance is consistent even at the peak hours. So all these test results have once again demonstrated our exceptional network quality. Despite a very competitive mobile market and challenging economic environment, over the past years, we still managed to have several key drivers to continue to grow our EBITDA growth. There are a 5G home broadband service, customer upgraded to 5G brands and also early rebound of roaming revenue and the continued growth of the Enterprise Solutions business. And I'll go for each area one by one. In the past year, our 5G home broadband service is definitely transforming itself into a very important growth engine for the company. On a year-on-year basis, our subscribers has grown more than 200% and our revenue from this service has increased by over 300%. And this service is particularly popular for those who live in buildings with narrowband or very slow Internet connections. The value proposition is very clear that our 5G broadband service could be 20x faster at a fraction of the cost that they are paying now. It's also popular for those who live in buildings when there's only one fixed network operator who usually charges a very high price. We are also seeing increasing demand for additional or dedicated bandwidth for study from home and work from home needs. And with more companies adopting a hybrid working model, we believe that this trend will continue even after the pandemic. Since the launch of 5G service in May 2020, our 5G penetration rate has grown steadily and now stands at 28% of our postpaid MNO base. As illustrated in our increase of local service revenue and the increase of exit ARPU, we have demonstrated that we have the capability to achieve ARPU uplift when our customers migrate to the 5G brands. So we will continue to focus to grow our penetration, 28% is still at a low base, and there is a lot of potential. And we will focus on getting our customers to experience the benefits of 5G, such as fast speed, fast download, low latency, such that they can have a better performance in the entertainment and also business applications. And the proliferation of 5G phones such as the upcoming launch of the flagship handset will be further positive factors to this trend. And we believe that our high-income customer base has a high propensity to upgrade to the 5G plan so that we can also achieve a revenue growth. With the gradual easing of travel restrictions and quarantine measures, we are glad to see that we have early signs of roaming revenue rebound. If you look at FY '22, our roaming revenue comparing to FY '19, which is the pre-COVID period, is actually 38%. And if you look at the month of July of 2022, it is actually 48% of July in 2019. So if the international travel continues and with more countries open up for individual travelers, we are cautiously optimistic that the rebound of roaming revenue will continue in the coming year. We are also improving our roaming package to cater to the travel patterns in the new normal. And as I said, we will continue to roll out 5G roaming in more countries. And over the past year, our growth in Enterprise Solutions continue. So these are the major solutions that we provide to our clients. For example, smart construction for site worker safety monitoring and danger zone surveillance through AI and video analytics. Smart Mall for intelligent facility management and crowd monitoring. And also SmartTransport for detection of occupancy, scheduling of passenger WiFi service. And Smart Hotel is actually for the digitalization of the hotel management and guest checking. And many of these applications are actually built on top of our 5G network. Apart from our network expertise and also technology expertise, actually, one of our key advantage is our synergy with our parent group, Sun Hung Kai Properties Group such that when we work with different group companies, we can have a lot of usage scenarios or pain points that we can incubate our solutions. And now we are not only delivering this service to our group companies, but also to other corporate clients as well. And our enterprise solution also expanded into the area of smart living. And once again, working closely with Sun Hung Kai Properties Group we are now providing Smart Home Automation service to new home buyers so that they can control, for example, the lighting, the temperature, the different appliances or sensors that they can -- they can manage for mobile devices or built-in control panels. We also provide comprehensive home WiFi system, again built-in in the threat that cover every corner of apartment so that the home buyers, they don't need to go through the hassles of setting up routers, match WiFi's or with a clutter of cables. So we are seeing an increasing demand or expectation from the new generation of homebuyers for such a service, which are readily available when they get a new flat. As an example, our smart living service will be available in the new residential projects such as [indiscernible]. And we are looking forward to continue to work with our parent group and also expand this service to potentially other property developers. Now I would like to wrap up the business review section by talking about some of the initiatives that SmarTone has undertaken to support Hong Kong's fight against the pandemic. First, SmarTone was the first operator to build out its 5G coverage for the 9 community isolation and treatment facilities. Our engineering team worked around the clock day and night and completed the build out in just 2 weeks. We were also the first operator to deliver 5G WiFi routers and free local data cards to residents and frontline healthcare workers staying there. To support the elderlies to cope with COVID, we also provide smartphones and free basic mobile service to senior citizens and also help them to download and use the LeaveHomeSafe app. We worked with NGOs to donate free SIM cards and 5G home broadband routers to underprivileged students for the e-learning list during the pandemic. As a leading operator, we are always listening and responding to the needs of the local community, and we are ready to deploy resources to help Hong Kong get through the pandemic. And now I'll pass it on to Allen for the company outlook.

If we look ahead, I think clearly, the operating environment is still very challenging. Our spectrum costs will actually peak in the coming year, but the increase is a modest one over the previous year. And after that, it would start to come down. But spectrum costs are very high and account for a significant amount of our cost base. And added to that, the economic conditions are uncertain and the market remains very competitive. So the operating environment is still actually very, very competitive. But I think what we see is that we are firmly back to growth. We are firmly back to an earnings growth trajectory, helped by several factors, which Norman talked about. Our ongoing migration to 5G, you see our ARPU increase -- a material ARPU increase. You see our 5G home broadband still actually a very small percentage of the market, but it's a growth engine for us. And even a modest increase can help our bottom line substantially. And you see the beginning, really the beginning of rebound in roaming business. We're still a long way of getting back to pre-pandemic level. But even if we get to a higher percentage, it will obviously benefit substantially. And then on top of that, the Enterprise Solutions business is also growing quite healthily. So the future is still uncertain in many ways. But what is certain is that we are back to growth. We are back to growth in revenues. We are back to growth in earnings. And if we keep our cost discipline, which we are, we are pushing for more productivity improvement. I think we are firmly back to growth and enhancing our return to shareholders. Thank you.

Thank you, Mr. Fung and Mr. Tam. Now we will have the Q&A session. [Operator Instructions] The first question is from [ Marcus Zhim from Y ] Capital. Do we see drivers for further ARPU increase?

Norman, why don't you take it?

Yes, I'll take this question. As we just presented, our ARPU increase primarily coming from first migration to 5G plans where we can achieve a revenue uplift in most of the cases and also the roaming revenue. And I think these 2 factors are also work hand-in-hand with better network experience and that will also increase the tendency to continue to use our roaming service when you travel. In fact, if you look at -- right now, the travel conditions is actually quite -- still potentially quite massive if you travel to countries that you probably would like to keep your existing SIM cards in case, for example, airports or travel agency will contact you. So I think these are the 2 factors that will continue to drive our ARPU increase.

Next question comes from [indiscernible] Partners. What is the 5G CapEx outlook for the next 5 years?

I think what I forecast for the next year, the network CapEx around between $580 million to $630 million. And then in the subsequent years, we expect will be going down slightly around 10%.

Next question comes from Neale Anderson from HSBC. Can you give an outlook for roaming if the current restrictions remain in place? Secondly, do you think network costs can continue to decline?

We are -- I'll take that. I think firstly, as Norman talked about for the whole year of '21, '22, we were at 38% in terms of roaming recovery. If we look at the last month in July, we are already at 48%. And obviously, the [indiscernible] was implemented in August. So you would -- I mean nobody has a crystal ball but you should carve even if it did remain in place, it should be at least at the level of 50-ish, 50% or so and probably better. So even if it in place, it's actually quite a bit of improvement over what we had for 2021, 2022. So that's point number one. And secondly, while our network cost decline, I think to be transparent, we are investing more in our network. But at the same time, we are having a lot of different initiatives to try to reduce network costs. For instance, in terms of our cell site costs, we have quite a bit of success in terms of reducing our cell site cost. So I think we can actually see that network costs can be managed quite cost effectively moving forward. Maybe...

I think we expect we will still can slightly reduce the network cost further, probably, it will stabilize in the further years down the road.

We actually -- you can argue that in -- when we are growing our customers, people are using more, and we have more 5G customers, you would have thought that we would increase our network costs. But actually, it's not. We would be able to still drive the rail cost slightly down, but it will not be a very dramatic amount in terms of reduction, but there would be some reductions.

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