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 financial year 2023. First, may I introduce you to the executives here with us today: Mr. Allen Fung, Deputy Chairman and Executive Director; Ms. Fiona Lau, Executive Director and Chief Executive Officer; Mr. Stephen Chau, Executive Director and Chief Technology Officer. The briefing will begin with a slide presentation by Mr. Allen Fung; Ms. Fiona Lau; and Mr. Stephen Chau, followed by Q&A session. [Operator Instructions]. Now may I invite Mr. Fung; Ms. Lau; and Mr. Chau to begin with the presentation. Mr. Fung; Ms. Lau; and Mr. Chau, please.

Before we start the presentation, let me introduce Fiona. We welcome her to the SmarTone team to be the Chief Executive Officer. She only just came on board last week. So it's actually very new, but she's ramping up very, very quickly. And Fiona actually has worked in quite a number of multinational organizations, and she has also worked in a number of companies within the Sun Hung Kai Group most notably SUNeVision. And she has a very strong track record in terms of deliverance and also in terms of how to ensure we enable a very high customer satisfaction. So we're very pleased that Fiona is joining the team to lead the SmarTone team. And she will also talk a little bit about later on about what she sees in the business and the outlook for the business.

Thank you.

So today, let's just talk a little bit about the financial review for the last 6 months, as well as the business outlook moving forward. I think the overall main theme is that SmarTone is clearly firmly on the trajectory of growth. Our reported profit for the last 6 months is $256 million, which is up 2% from year-on-year. We have some growth and moderate growth in service revenue in ARPU, which is encouraging given how competitive the market is. And our service EBITDA and EBIT actually increased 2% and 12%, respectively. In many ways, the past 6 months have not been -- actually been easy due to multiple headwinds. Our spectrum cost which we'll talk about a little bit later, is at its peak at $272 million for 6 months. It will start to gradually come down. But this 6 months is actually the highest we will ever have at $272 million. The market continues to be very competitive, and we saw some recovery roaming. But by the end of this period, which is until December 2022, roaming revenue is still far lower than the pre-COVID period. But we see very encouraging signs starting in January. It's a totally different ball game, and we'll talk a little bit more about that. So there were quite a lot of headwinds. But even amidst such a situation, we're able to grow our revenue and profit and because of a number of factors. One is we continue to have ARPU growth, higher 5G penetration. Right now, it's above 35%. Our churn rate is still low. We have some recovery in roaming. We have very strong growth in our 5G home broadband customer base and revenue, we'll talk a little bit more later. And our enterprise solutions continue to be additional growth driver. So we expect actually the second half FY '23 to have upside, especially because of the roaming recovery. And we also continue to expect strong contribution from continuous uptake in 5G penetration, as well as 5G home broadband. Our interim dividend, we stay at 14.5 cents, same as last year. We expect to maintain payout ratio of 75% on a full year basis. Let's look at a few numbers. Firstly, on the left-hand side, you see our service revenue. You see that clearly, we increased our service revenue. But you see that actually, even without roaming, we have increased our service revenue, which is encouraging. Obviously, roaming has increased a little bit, but still at a low level. In terms of our ARPU, we have increased by about 6%, which is industry-leading in terms of ARPU number. Our 5G penetration has continued to be able to move up and now is about 35%. And this is -- we haven't seen a slowdown in 5G penetration. I think more and more, our customers say that we need higher speed. We need faster speed with low latency because there are more and more applications that require that. So there's still a lot of strong momentum for 5G penetration. During this period, as I said, our roaming has recovered. Overall for the period, it's around 50%. By December, it was [ 55% ], but for the period July to December it was 50%. But when we look at the numbers in January '23, we already saw it jumping up to 68%, even though basically China reopening did not happen until I think the 9th of January. So we already saw that, and I think February is going to be even stronger. And I think this is -- there are a number of factors. One is the China reopening. China is quite an important market for roaming. Also, it's also because Hong Kong is strapped, open street. It's completely open now, we are open for business. So we saw increased roaming. And what is interesting is that we saw some changing patterns of roaming usage as well. And Fiona can talk a little bit more about that later on. We saw that also in some countries such as the U.K. the roaming usage patterns and roaming revenue is actually higher than pre-COVID already. And so we do actually have some different patterns and also the patterns, I would say. Some destinations, at least for our customers are still quite low like Taiwan and U.S. But Taiwan, with the opening for individual travel, we expect it to rise as well. So the overall message is that up until December, the number is moderate, still at a low level, but we see quite rapid uptake since then. As I talked about, spectrum cost is a very heavy cost for us, and this number in terms of -- is the number which includes both the spectrum fees plus the associated financial cost accretion. You see that basically our cost basically, we compared 2 years ago, has increased substantially by more than $100 million over 6 months. But the good news is that it has stabilized and it will only come down. We are at, as I said, the peak spectrum for 6 months and it will gradually come down. And so that's an important factor for us. If you look at our operating expenses, we have increased a little bit for a couple of reasons. One is there is inflationary pressure. There's no doubt about that. We have salary increase, which is important to retain people, and also, there are some of the costs that we incur, like electricity has increased quite a lot. So that actually adds to the cost. And in addition, we also actually made additional investments into our network, our 5G home broadband and enterprise solutions. So we made some investments. All of this increase is not just cost escalation, but actually, we made some increases. The increase is manageable, but we obviously will need to be very vigilant in monitoring, managing our costs. We have already put in place efficient programs to minimize our cost pressure and really deploy the savings to growing revenue streams. And if you look at some of the things we have done, especially in the depreciation of right-to-use assets, which is essentially our sales size in our stores, you can see that we have actually a substantial decrease since 2020 financial year. Because we renegotiate with our landlords and we renegotiate on less expensive sale size. Has no impact on quality, but actually, we're able to achieve quite considerable savings. So we are looking at costs quite carefully, and we are also -- with that increase in cost, we try to make sure that this is actually for future revenue growth and not just simply cost escalation. When we look at our core business, our core service EBITDA, there's handset EBITDA. Handset EBITDA clearly is lower in the first 6 months of this year because some of the phones were not as popular. That's the fact. But our service EBITDA, you can see are still growing. So this is good. And we are able to continue to do that and we hope that, as we said, mobile things like upgrading people to 5G and how 5G broadband solutions can continue to help us to grow our service EBITDA. We are very careful with our CapEx. We manage it very well, and so far, if you have seen, we are -- our core CapEx for the network has basically been on a very steady trend, about $600 million. We are very careful on how to invest, but we have actually invested more than many than previously to ensure that our network has the best coverage and the best quality. But we are very careful in terms of how we spend our CapEx. So with that, we have completed the financial side, but I will talk a little bit more on the business side and business outlook together with Stephen and what we are planning, what our focus will be, and Fiona will talk a little bit about our outlook. One of the things we are very, very big on is the network quality. I think I can be reasonably objective to say that over the past 6 months, there were more -- actually before the last 6 months, but over the past 6 months, many influential journals and media do rank us as #1 especially in 5G. And we work very, very hard to ensure that our 5G quality is high. Now we have actually opened up a lot more channels for any user to complain of network gaps. And basically, we will have an engineering team to deal with all the gaps as much as we can. So if you feel that there are blind spots here or there, let's know, all right? We welcome you to [indiscernible] because you help us to make it better. And we actually commit to invest to improve those areas. So this will continue to be a major priority. We pride ourselves to have the best network. And I think because if you don't have the best network, if you don't have a good network, what's the point of having mobile communication. That's critical. We understand that's what customers want. So we are working very hard on that. And we feel that the other thing which is obviously very important is about roaming, and there's a clear tourism rebound. And even though actually, as I last looked at it, the number of flights to and from Hong Kong is only at about 30% to 40% of pre-COVID so that's a lot of upside, but already, there's a lot of resumption of cross-border travel through land as well as air and also international travel. A lot of people ask us what is our proposition. I think one of the major proposition is that we have a superior offering. What does that mean? The first thing is that in roaming, the quality of the network is important. So we are very careful. Obviously, when we are roaming outside, we rely on our network partners. Everyone does. You need your network partners to do that, but we really keep them in check. We have sent our dedicated crew running speed tests and trying to find whether there are blind spots where Hong Kong people have to go. Example, we have a team which went to Japan lately, Tokyo, Kyoto, to really try to measure whether they're delivering. And we have actually worked with our partners to address where there is blind spots. So it's not like we pass you to the overseas operator because actually, it's even more frustrating when you find their blind sports overseas. So we actually take quality well not just in Hong Kong, but also when you roam, so that -- this is not a service that kind of the people who give you the Wi-Fi egg or other people can give you. We want to ensure that if it's not working, we'll fix it for you. We want to ensure that you have basically good quality. And the other thing is that I experienced it myself and I think many of you experienced this, is that when you are abroad and roaming when you have problems, you don't know where to call and who to call. And it's actually very difficult in cost. We have provided for our customers 24/7 free roaming hotline. And you can call and you can tell us the problem. if there is anything what about cost, it's free. So that it takes away the worry. And the third thing, which you may not know is that we also have the widest 5G roaming coverage for all major destinations. For instance, in Australia, basically, us and only one other operator has 5G roaming. Other people may have 4G roaming. And we charge the same actually for 5G roaming and 4G roaming. So you enjoy 5G speed without additional cost if you have 5G at home. So that's what we provide. And there are more countries which are like that. So we think our offering is actually compelling. And we're offering some other services as well, which is -- many of you actually need a China local number. For instance, you want to do WeChat in China. You need a China local number. So now we can actually have a product called China Easy SIM. so you can actually go online, go to our app, and you can order it, we'll immediately assign a China number for you, which is actually very useful. Many of us who do need a local China number, we'll give it to you. And obviously, our roaming is very, very convenient. You just need to turn it on. You don't need to switch cards. You don't need to, use a Wi-Fi egg, so on and so on, drain up your battery. So there's just no reason why people don't -- who don't use it more in our view. So I will turn over also to Stephen to talk a little bit more about our network, what have we done and explain what are the investments we have made.

Thank you, Allen. Well, I would like to give you update on what we are doing on our network. First of all, as a leading mobile operator in Hong Kong, we are always very committed to bring the best network quality and a consistent user experience to our customers. The question is how could we do that? Well, we have the largest amount of low-band spectrum from 700 to 900 megahertz, which is extremely important, provide excellent in-building penetration. We also have already fully deployed the [indiscernible] of golden 5G spectrum, 3.5 gigahertz and 4.9 gigahertz which will allow us to provide sufficient capacity to meet the future traffic demand and also provide excellent speed performance. We also utilize big data network analytics to track individual customer user experience in our network and identify area for improvement. Altogether, I'm very confident that we are actually delivering the best-in-class network experience in Hong Kong, especially in all the Sun Hung Kai Properties buildings, including all the residential, commercial and shopping malls. In anticipating of the new development, for example, in the Northern Metropolis and the surroundings, we are actually taking the lead to invest and build a digital infrastructure around our area that will be part of the future digital infrastructure for the whole development. We are also working with Heung Yee Kuk to improve the coverage in the underserved village area. You may notice that in many of these areas, people there are still suffering from a good Internet connectivity. With our infrastructure world to this area, we will bring the true broadband experience to all the users, and they will also facilitate a smart village development. Of course, our budget coverage already extend to all the country parts and also the new transport infrastructure, for example, the new Shatin-Central Line and the Tseung Lam Tunnel. Also making use of the network upgrade to support SA mode that will give us a new feature network slicing and edge computing that will be important for us to develop very low latency, ultra-reliable secured service for different enterprises. So with that, I'm confident with our continuous investment and a focus in customer experience, we will continue to maintain our best network in Hong Kong. On this slide, I would like to spend a bit moment to share with you what we are doing in managing the energy consumption. We are always very mindful of energy consumption and its impact to the environment. Indeed, it's one of our major, major focus, and is one of our key ESG initiatives that we are working really hard. We've been modernizing all the base station with the latest generation of hardware and software, as well as utilizing AI-based network solution, altogether actually help us to bring down the energy consumption by 33% which is important. So while we are on the 5G network, we actually managed to maintain and keep the increase on energy consumption to the minimum. This is important to the company as it is one of our key ESG initiatives, and also, it's very important to us to keep the energy costs down. Thank you. With this, I would like to pass back to Allen.

Let me spend a few minutes to talk about some of the growth initiatives that we are engaging, and the first one is about 5G home broadband. I think we have actually grown very healthily. According to our research, we are by far the top player in the 5G home broadband service. And I think because we are one of the few who are truly mobile only, we do have baggage in terms of worrying about cannibalizing our fixed line. We don't have that worry. So we are able to provide very good service wholeheartedly. And I think multiple magazines have voted us as the best 5G home broadband service, and we'll be ranked in terms of network performance also as #1. What we have seen in the last 6 to 12 months is that there are different customer segments for 5G home broadband. The most obvious one is what we call the narrow-band people. So your place doesn't have fiber connectivity. There are probably around 200,000 to 250,000 of those households, which currently only have ADSL, which is actually very slow. And our proposition actually is very, very strong because we are much cheaper. We are probably 10x to 20x faster in reality, and we are much easier to install. And in fact, we actually see that this is kind of one of our ESG initiative for such a segment because for these segments, if they want to watch kind of a really -- high definition TV, they can't. If there are multiple people trying to use the Internet for watching movies, they can't. So many things they can't do. So actually, the fast Internet can help them to access content much easier. So for the narrow-band people, actually, the proposition is very high, and we are making very good progress in that. What is actually quite encouraging is that we found quite a lot of our customers actually do have a fixed line, a fiber fixed line already. And they are getting an additional line as our 5G broadband because they want an additional service so that they can use in their bedroom or sometimes take it back to their office for their personal use. We've seen quite a lot of that. And some people are also kind of saying, well, your 5G home broadband is actually much cheaper than my fiber because for some areas, especially into those areas where there's only 1 operator, the cost of a fiber connection can be $300, $400 or even $500 for your broadband. 5G home broadband is as good, but much cheaper. So we see that actually even people who have broadband who've already fiber broadband are using us as an additional broadband or switching to us. So we see that as actually quite encouraging signs. So that's on the 5G home broadband. The other area which we are working on is what we call enterprise solutions, which is helping companies to use 5G and technology to bring more efficiency to the company and to serve customers better. And we have been working with quite a lot of companies on that. And some of them actually we talked about before like in construction. I'll give you one more example this time, which is with Kowloon Motor Bus. Those of you who take Kowloon Motor Bus would know that there is already an app developed some time ago which allows you to know what is the next bus -- when does the next bus come, which is a reliable information, very useful. But what we have found in the Kowloon Motor Bus is that many people also want to know some other additional information. For instance, is the bus going to be full. So for instance, if I am waiting for a bus and this bus is full, should I wait for the second one? Because I don't know whether the second one is full or not or the third one. With 5G, we are able to provide that transparency. We are able to provide a transparency to customers immediately to say, oh, is the next bus full, or even if it's not, I'll wait for it, if not, I'll go for it. Or if you're planning a journey where you see all the buses are full, actually, then you may actually need to budget more time before you travel. So that's one side of the -- whether the bus is full. And an additional feature, which will be launched is that we'll have an indicator of number of people in the upper deck and hence, basically whether there are seats upstairs. So basically if it's full upstairs, you don't need to go up. So we basically want to minimize using the staircase, if not needed, the effort. And then if there is space, obviously, you want to, you want to go up. So the plan for KMB is to roll it out in Q2 and will serve around 2,500 buses, which is basically more than half of the buses of KMB. So that's one example, but there are many others in construction, in health care and so on, which the team is working with. And everybody is talking about digitization, everybody is talking about how to use technology to help customers and help efficiency. This is a good opportunity, and we are tapping into that. We talk about enterprises, but we should talk about consumers. For those of you who are SmarTone users, if you do not already know, actually, starting from December 1, you can already automatically earn the points from the point program, which is a loyalty program or SHKP. And you can earn points for every dollar you have made at The Point and also obviously at SHKP Malls, and you can redeem it through The Point app. I think some of the more popular users for those points, for instance, for free parking and sometimes people use it for spending credit as well. So this is actually any dollar you spend, it will be used. We feel that there's a lot of synergies between SHKP Malls and SmarTone in terms of joint promotion, in terms of giving benefits to both sides, and we will continue to leverage that and tap into those opportunities. So the previous 10 minutes I've talked a little bit about our financials and also talked a little bit about when we look back, what are some of the things we have done and pushing forward. I'll let Fiona talk a little bit about what she thinks the outlook of the business, what are some of the challenges and what are some of the upside we see. I'll hand it to you, Fiona.

Thank you, Allen. Good afternoon, everyone. It gives me great pleasure to meet you the first time after taking office as CEO since last week. I joined from our sister company SUNeVision, where I spent the last 5 years. Now I'm going to talk about at a high level our outlook for the coming -- for the rest of the year and beyond. Now I expect the challenges that we experienced in the past 6 months to continue, and they include price pressure, competition remains very intense and the pressure is real. High spectrum costs. In addition to the spectrum cost, which itself is very high, the tax policy also has a substantial adverse impact to our numbers. Now if you listen to the budget speech this morning, it seems to have taken note on this particular point, but we shall study the details further. Inflationary environment. This macro backdrop will mean that our costs will continue to go up. We must maintain a strong cost discipline in tackling that. There will be tangible upside, especially on roaming. We're seeing promising recovery trends, especially since the beginning of the year. December last year, we see about 55% recovery versus pre-COVID. In the past weeks, we are already seeing close to 70%. In fact, last week, it exceeds 70%. The reliability of our roaming services will remain to be a key differentiator, and the ability to turn on roaming instantly will be, in my view, increasingly valued by our customers. On 5G home broadband, we have gained nice momentum since our launch and we have the highest market share to date. As a mobile-only operator, this is an area where we're going to spend material resource and effort in. Now taking a longer horizon, the 5G conversion will grow, the upcoming device launches in AR and VR will certainly be positive drivers. Likewise, the IoT adoption, it is still at a nascent stage, but the technology is there. I look forward to bringing more innovation to our customers, especially via partnerships with our Sun Hung Kai Group businesses through our Enterprise Solutions team. Looking ahead and in sum, with mobile services an integral part of everyone's lives, our mission is to enhance the connected experience by providing customers the highest convenience and reliability. Our unique position as part of the broader Sun Hung Kai Group is that we have a platform on which to scale. We will deliver that by building a culture where we put customer first, and we will continue to innovate. I look forward to meeting all of you in person in the near future, and thank you.

[Operator Instructions] Here's the first question from Damian Robus. What is the competitive edge of SmarTone's roaming services in the market?

I think as Allen mentioned, there are a couple of things that we think we're really, really strong in. I think for one, the reliability of our network, the fact that we have the widest 5G coverage in all key destinations. I think that's something that our customers will appreciate. We pay a lot of attention to how the customers actually experience that on the ground. We send people to do the test, we send people to make sure that when they turn on the roaming services, it's instant as they arrive at the airport. We all know that there's a high level of anxiety these days where you do not have a connection to your mobile phone. So we pay a lot of attention to that. Our customer service, I think that's something we also spend resources in. We make sure that if you have questions, overseas, there will be people who can answer a question for you. So overall, I think the customer behavior is changing. I think they value the instant -- the ability to turn on the roaming services instantly, as well as the reliability of our network overseas.

The next question is from Dominic Young. How fast does management think roaming revenue will recover to pre-COVID levels?

I'll take that question as well. If you look at our numbers, the first half, in the first half, our roaming recovery has reached 50%. If you look at December last year, it's 55%. If you look at January, it's 68%. And if you look at the last 2 weeks, it's 70%. So we see a very nice and promising uptake of the overall roaming recovery even though the flight, if you look at the flight coming in and out of Hong Kong, is still at 30% and 40% percentage point. I think there will be pent-up demand for Hong Kong people to travel outside. It's been 3 years since we haven't traveled. So there will be maybe quite a lot of pent-up demand to travel within this year. And we are also seeing uptick in both our consumers, our direct customers, as well as our business travelers. So we actually see a consistent trend in that. How fast it will grow, it's hard to predict. But I think what we're seeing is that it will be quite positive.

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Next question is from [ John Mellon ] of KPM Investment. What is the network enhancement strategy?

Thank you, John. As I shared in my slide earlier, with the best mixed combination of the low and the mid band, we'll continuously invest in this area that there is people move, there's a need. We're also actually increasingly using network data to understand how the customer using our network using the data and also where they actually experience suboptimal experience, so as to enable us to identify area for optimization. So that will actually put us in a much, much better understanding on how we should strategize and prioritize our network resources investment. So we will continue to do that and make sure we actually deliver the best network in time.

Next question is from Joseph of [ Gate3 ] Capital. What is our view of ARPU in the next 3 to 5 years? If it will trend down, how can we offset cost inflation?

I think my view on the ARPU is that if you just look at the service element, excluding the roaming, I think it's stable. I think there is -- we could probably -- there is probably a small increase. The market is very, very competitive, but we have proven that we actually are able to -- to be able to raise ARPU. If we do the right things, if we enhance customer quality. But obviously with roaming, if it includes roaming in ARPU, obviously, it would be in the rising trend because as we said, the last 6 months, the results only reflect a 50% of roaming revenue. So that would be. And that is actually a major addition to that. So from that, I'm actually cautiously optimistic on that. And I think no matter what the ARPU is, we need to be very, very vigilant in ensuring that we manage costs well. I think if you compare our cost to prepandemic, we are substantially lower despite the fact that electricity cost is so much higher, labor cost is so much higher. And we haven't actually had anything any problems with quality. Actually, our quality is higher rather than lower. I think it's more about more active management of our costs. We are able to reduce our cost for cell sites. We're able to reduce our costs for our backhaul, we are able to reduce our costs with a number of partners. So we are able to do that. So yes, there's in general cost inflation, but I think we have quite good confidence that we can actually manage our cost quite effectively as we have shown. In the past few years, we have been able to do that.

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