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 and '23. 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; and Mr. Vincent Tung, General Manager, Finance. The briefing will begin with a slide presentation by Ms. Fiona Lau and Mr. Stephen Chau, followed by Q&A session. [Operator Instructions]. Now may I invite Mr. Lau and Mr. Chau to begin with the presentation, please.

Good afternoon. Thank you for joining us on the typhoon day. I'm pleased to be presenting to you together with Allen, Stephen and Vincent, our annual results for the financial year 2022 and '23. Overall, despite a challenging macro environment and continued intense competition, our mobile business has been very resilient. The service revenue has grown 1% year-over-year. Underlying profit has grown 4% year-over-year to $470 million, supported by promising roaming recovery with a 49% growth, especially in the second half of the financial year as well as continued growth in our 5G home broadband business, you see that it delivers a 100% growth. Despite continued price competition, our postpaid ARPU has been steadily growing to $224 million. It represents a 5% growth year-over-year. We have benefited by continued 5G penetration, which is now up to 37%. I also want to highlight that Enterprise Solutions have seen double-digit growth. Although this is still a small part of our business today, we see strong growth potential, which I'll talk more about later. Over the years, SmarTone has a proven track record for delivering a very stable business. Thanks to a diversified set of products and services across our retail and business markets and a solid base of loyal customers. Year-over-year, we have seen a 1% service revenue growth. During the year, our roaming revenue registered 49% growth to $424 million for the full year. Now most of the growth comes from the second half of the year where we see a more significant uptick in travel footprint. This trend has accelerated in the last couple of months. As you can see, the roaming revenue increased from 47% to 55% from June to December, but now has reached 83% versus pre-COVID level as of July. While personal travel recovered quickly, especially in the second half of the year, business travel has experienced a somewhat slower recovery rate but we do see an uptrend month-over-month as business activities increased. Our 5G home broadband business continued to perform strongly during the year. Over the last 2.5 years, it has proven to be a successful addition to our portfolio of products and it is a truly incremental revenue stream. Our customer numbers, I'm very happy to report, has reached over 100,000 and the revenue for last year has increased by 100%. This is something we are only able to do because of 5G and it also opens up a new avenue for us to tap into the household market. We are confident that the growth will continue. In terms of our core base, the mobile postpaid ARPU has been resilient. It has grown 5% year-over-year to $224 million. Intense price competition continues and we are working hard to sustain this by giving customers a differentiated network and service experience. You see that 5G penetration is still growing nicely and steadily up to 37%, which is a 9 percentage point higher from last year. The penetration is roughly in line with the market, but still relatively low. We believe that this will continue to go up as the requirements on speed and data usage go up. This will grow together with the use cases and an ecosystem of 5G technologies. On the cost side, we see challenges coming from high electricity costs and labor costs. Now our some savings were achieved from sell-side rental, which is reflected under the depreciation on the right-to-use assets. Our principle is that we will give a tight cost control and manage the overall cost level. We will invest restfully into key growth areas such as 5G home broadband and Enterprise Solutions. We aim to give an overall stable operating expense level, but better resource allocation as well as operational efficiency improvements. CapEx. CapEx has peaked last year and has started to come down as the bulk of our 5G network investment has already been made. We expect a steady level going forward. Likewise, looking at our spectrum utilization fee schedule, it has peaked at $542 million in the past financial year and looking ahead, it will be kept roughly at a steady level. On the balance sheet, we maintain a very strong balance sheet. During the financial year, we have generated $1.6 billion net cash from our operating activities, which represents a 17% growth year-over-year. Therefore, this brings us to a net cash position to HKD 1.1 billion. It gives us a very solid foundation to run our business and invest in where we see growth and to improve and evolve our platform that suits the needs of our customers. Our abundance of caution and prudence in reflecting the latest market situation, we have in this financial year made the provision of the potential loss of certain debt securities that the company has intended to hold to maturity. Such provision will not affect our cash flow and will not affect the dividend payout, supported by a healthy balance sheet and a resilient business operation. The Board proposed a final dividend of $0.175, representing a 75% payout ratio of the profit attributable to equity holders. This brings the full year dividend to $0.32 per share. Stephen and I will now begin the business review section. I would like to start by saying that our network is really core to our business and SmarTone is renowned for our exceptional network performance. I'm pleased to announce that SmarTone has recently been recognized by OpenSignal as a leader among Hong Kong mobile operators in both coverage and consistency. OpenSignal is a leading global provider of independent insights and data integrating network experience and market performance across converged wireless and broadband operators. In addition, other influential media has also recognized the wide coverage and stability of our network. We are extremely proud of the recognition and we'll continue to invest in our network to deliver an even better experience for our customers. With this, I'd like to pass to Stephen, our CTO, to give you an update on the innovation and the network enhancement that we've been working on. Stephen, please?

Thank you, Fiona. Good afternoon, everybody. We are, of course, very pleased to receive this recognition and endorsement from both global and local industrial bodies. I would say it's always SmarTone DNA to provide best-in-class customer-centric all around user experience to meet people stayed indeed and across their demand for ever increasing good quality of communication services. Over the years, we continue to invest in new innovations to lead the mobile industry to new standards with our world-class 5G network. We have embarked on a new initiative, leveraging on AI, machine learning and utilizing the big network data analytics. This implementation enable us to better understand customer experience and utilize their experience and scoring in our network performance platform, which will be able to help us to optimize our service and performance. We have introduced AI-powered automated network optimization tools. By analyzing customer demand and usage patterns, we can allocate our network resources to optimize network coverage and capacity automatically. People ensure our network meets the specific needs of our customers, providing them with a seamless experience across the network. We also implemented smart real-time network resources management. This unique dynamic resources allocation mechanism enable us to prioritize and allocate network resources in real-time, ensuring an optimal customer experience across different platforms and applications, whether they're streaming, gaming or browsing, our network will automatically deliver the best experience. We have also taken a proactive approach to serve experience assurance. By capturing every single individual user experience in some of our mostly use applications, we have gain very useful insight into the performance and identify the potential issues and address them before they actually impact our customers. Our goal is actually to ensure every single customer enjoy consistent and superior network experience, both locally and also when they travel abroad. Next, please. I would say in SmarTone, we aim at providing exceptional network performance where it matters most for our customers. We understand that staying connected is essential as a daily life as people navigate their busy life and rely on seamless connectivity during their daily commute. To address this, we have taken the lead and deployed our exclusive 850 megahertz frequency band to expand our network capacity in all of the most busiest stations and interchanges in MTR. We've also extend our 5G coverage to encompass all highways and tunnels. I would say, in fact, we are the only operator in Hong Kong to achieve this, allowing customers to enjoy seamless connectivity wherever their journey, whenever they take. Recently, we also partnered with KMB, Kowloon Motor Bus to provide 5G WiFi on buses, enhancing convenience and keeping people connected. As socializes resume normal post-COVID, people are embracing outdoor gatherings and concerts. The demand of instant share increase the need of much greater network capacity. SmarTone has placed at a critical location on all these 5G small cells in all these events to ensure sufficient network capacity and also [indiscernible] user experience. As well, people are increasingly going outdoor, while engaging in activities like hiking, cycling and exploring in all the country parts. Our widest coverage utilizing our wearable mid-band or low band frequencies will enable seamless connectivities during their outdoor activities, especially during an emergency situation. Having customer eccentricity in mind and taking the customer feedback seriously, we are confident we would continue to lead the market in offering the best level performance in people's ever-increasing expectations. With this, I would like to end my part of the presentation and hand back to Fiona. Thank you.

Thank you, Stephen. Now building on our exceptional network as well as our excellent customer engagement over the years were recognized by Kantar, which is a global independent brand agency as the top 10 brands in Hong Kong, alongside other leading brands in the other industries. I'm happy to report that we are the only operator -- only mobile operator receiving such recognition among the top 10 brands. And the report is that "30 years on SmarTone still leads the market in consumer fundamentals, such as customer experience, convenience and trust." This speaks well into our mission that we commit ourselves to and the customer-first mindset that we embrace. If you look at our roaming products, I talked about it as a growth driver. In preparation for the travel resumption, we have taken over the last 9 months, a number of initiatives that improve our customer experience. We rely not only on what our roaming partners tell us, but we actually send our staff to the popular travel destinations to test the network and to study how we can improve on the ground experience for our users. We also offer 24/7, free of charge hot line for our customers using our products. We want to make it easy and want to make it better. In addition to our network, we have also listened to our customers' feedback and we are now able to convert many customers who in the past will only use other ways for roaming, such as WiFi A or prepaid cards. What we see is that given cybersecurity is of increasing concern and that convenience and reliability of the abstained connector is really critical when you travel. We have launched a series of products and for instance, multi-day pass, we're able to convert with -- and with that, we are able to convert a higher number of travelers to switch to our roaming products. On 5G Home Broadband, I'm pleased to say that our service is going from strength and strength. We have by now accumulated quite a substantial mass of customers who like our service. Despite the fact that COVID ended and work from home has largely ended in Hong Kong, we're still seeing fair steady growth. We continue to improve in terms of our products and our service. We have launched applications, which make it easy for our customers to install and find the best locations at their home for which to install the WiFi. Today, we are on the typhoon session, even I'm using this Home 5G Broadband product. I think it gives a lot of people, the peace of mind as a complementary WiFi connectivity solution. And then obviously, for those who live in buildings where there were no fiber assets, this is a much better product and much cheaper. Next, I'll provide a brief update on our SmartHome solution. I talked about Enterprise Solutions as a fast-growing segment and we see a lot of potential in that. We are partnering Sun Hung Kai, our parent company to offer a SmartHome solution, which allows residents to control their homes through their mobile devices such as lighting, air condition and curtains. And these can be extended to other applications they see fit within their households. While we originally offered this to the Sun Hung Kai Group, we want to build a scalable platform and want to extend it to other developers as well. Going forward, we want to make sure that with this and with our 5G Home Broadband product will be able to come up with a true home proposition to tap into the household market, which we were not able to do before the 5G connectivity. On the Smart Construction, also through our Enterprise Business solutions, Smart Construction offer a number of solutions that actually tackle the pain points of construction workers and the construction sites. The solution offers various features such as Smart Helmet and Smart Health stations to enhance worker safety while enhancing operational efficiency through SmartWorks, which is a one-stop integrated platform for construction companies. Through our long-standing partnership with our parent company, we are able to tap into many businesses opportunities, especially when the solution was first launched in 2019. I'm pleased to say that thanks to this, we've been able to build a strong brand around this and we know for this smart construction proposition that we're offering. As of now, Smart Construction is now protecting workers at over 100 construction sites, bridges and tunnels, drainage and sewage systems, and we'll continue to grow this ecosystem. We think there is a lot of potential in this area. Finally, on ESG, we would like to highlight some initiatives that bring about our care for the community. Number one, on cybersecurity. In recent years, there is a lot of -- there's an increasing trend of cybersecurity and crime impacting society as a whole. In response to that, SmarTone has set up a cybersecurity training program for our staff and cybersecurity awareness education from our customers as well. Through our own app, we want to make it easy for our customers to distinguish whether a message sent -- set to be sent by SmarTone, whether or not it is really SmartHome. We want to make it easy for them by making use of our app that is available on their mobile devices. Number two, on energy efficiency initiatives through the modernization of our network equipment application of AI-based network solutions, which Stephen talked about, we have improved energy consumption efficiency by double-digit percentage in the past year. And number three, connecting the community. We have undertaken a number of initiatives, including supporting our senior citizens homes, safety associations, elderly locating and health monitoring services as well as hosting smartphone workshops and SIM card real name registration talks to the elderly. We'll continue to work on ESG initiatives, caring for the community is core to what we do and speaks well to our efficient and mission. With that, I'd like to conclude. All in all, we are seeing a very resilient core business. While competition remains intense, work with my team to critically review what we're really good at and where we see long-term growth potential and invest our resources and our assets in them. The short-term challenges on competition, cost and inflation and no surprises. And these are just factors we need to tackle on caution and prudence. We will be taking the opportunity to simplify our platform. This will not only alleviate our operational burden, but also allows to provide a much better customer experience. The key growth drivers are solid and they fit well into our core proposition. Again, on roaming many of our premium customer base in both retail and business segments are frequent travelers. We'll continue to improve and evolve our product sets that fit their needs and to provide them with the convenience, reliability by using the built-in roaming products. We believe growth will come not just from the return of travel, but a high penetration of the roaming usage on our platform. On 5G Home Broadband, it goes without saying that being a mobile-only operator, this new proposition made possible by 5G fast connectivity brings true incremental value to our business and we will continue to grow that. While we will maintain tight cost control with a solid and healthy balance sheet, we will not be shy to invest in key growth areas such as enterprise solutions and tap into the SmartHome segment, which we have started. Being a premium brand, we will also continue to invest in various digital initiatives to bring better customer experience overall. With that, it concludes our presentation for our financial year results. Thank you.

Thank you, Ms. Lau and Mr. Chau. Now we will have the Q&A session. [Operator Instructions] Now here comes the first question. How much has roaming recovered over the past few months?

As you can see, our roaming recovery is on a very healthy trajectory, not only has travel resume, especially among the retail segments. Our penetration has also increases. We want to offer our customers an affordable, easy-to-use and convenient roaming product. And as a result of that, our roaming recovery has resumed close to 90% of pre-COVID. We see that the business -- on the business side is a little bit slower. And I think that ties to the overall business activities. But on a month-on-month basis, we do see that it is growing. So we're confident that in the coming year, on a full year basis, there will be continued growth.

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Next question. With the pandemic has ended, do you expect there is any impact on the growth of 5G Home Broadband?

As I mentioned, I think what we're seeing in the last 2.5 years is a very steady increase in our Home Broadband business -- 5G Home Broadband business. This is really possible because of the fast 5G connectivity. Even after the return to office and school, we still see steady growth. And I think that is because there is a lot of demand among those who live in buildings, whether it's no fibre access in the more remote areas or people who simply want an additional or complementary WiFi backup solution at home. I think this -- it has proven to be quite a strong proposition and the fact that we are a mobile -- we only have a mobile business means that we will invest resourcefully into growing the business.

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