Earnings Call: H2 2021

Oct 28, 2021

Afternoon. Welcome to HKBN FY 2021 Earnings Results Investor Presentation. There will be a Q&A session after the presentation. If you have any questions, you may click the Q&A button at the bottom left corner of the page to enter your question. We will answer your question after the presentation. Now let us begin. May I pass the stage to Mr. NiQ Lai, Co-Owner and Group CEO, and Mr. William Yeung, Co-Owner and Executive Vice Chairman. Thank you. Can I have the clicker? First of all, sorry. First of all, I'd like to thank all our almost 5,000 talents for really coming together in these tough times. We looked after each other, and we got through this period, and we are stronger for it today. In terms of our results, the key theme is that over the COVID period, we are now emerging. The COVID period is not yet over, but through experiencing the COVID period, we are emerging stronger and transformed for growth. This is a fantastic time to be a shareholder or more specifically, a Co-Owner of HKBN, because over the last few years through our merger and acquisitions, we have acquired all the key components that we need to drive to the next stage of growth. All it takes now is execution, and we are known for our execution. In the residential space, we have just signed an exclusive broadband distribution with Disney+. This is going to be a major game changer for us going forward and should propel us to the next era of our growth. In enterprise solutions, we are making great progress with the integration of JOS into HKBN. Now remember, for the first 18 months of our acquisition of JOS, we did the entire integration by Zoom or by video call. So it was actually quite difficult. Over the last six months, we have been able to see each other in the office and really talk through and accelerate the integration. So this is why we are confident in the near future. Finally, our shareholders have approved our Co-Ownership 4 program, which will allow us to top up and roll up our Co-Owner 3 program, thereby aligning us for growth for the next three years. William will talk through this in more detail in his section. If you look at our results this year, we are very proud of these results. These are a decent set of results considering the environment that we are in. 4% revenue growth, 3% EBITDA growth, 2% AFF and DPS growth. Reasonable growth. However, if you look at what we did to achieve these growth, we are incredibly proud of them in the sense that the entire government employment support scheme that we received during the COVID period, we passed 100% to our colleagues. This is what it means, living and breathing our core value to make our home a better place to live. Every region that we receive government subsidies, be it Hong Kong, China, Macau, Singapore, we passed on the tax subsidies direct to our colleagues. If we had not, our DPS will be HKD 0.82 or will be up 9%. Looking back, this is what makes us proud of our colleagues. This is our track record since our IPO in 2015. We are by far the fastest growing telco in Hong Kong, and we aspire to remain the fastest growing telco going forward. We have achieved 14% compound growth rate since our IPO in terms of dividend per share and free cash flow. For us, this is not a subjective number that is given to shareholders. This is the family life savings. This is a family life cash flow of our Co-Owners, our 870 Co-Owners. This is something that has direct meaning to us. If you look at our businesses, enterprise, residential solutions, predominantly green. I won't read out line by line. We are proud of what we achieved during these difficult times. But what's more important is look forward. What is absolutely incredible is our reach. This is the most valuable part of our business. In enterprise solutions, one in two active companies are our recurrent monthly customer. In residential services, one in three households in Hong Kong is our recurrent monthly relationship. This means we have incredible reach and being more aggressive and more dynamic and more willing to partner with people that match our business case. This is how we will outgrow even these numbers when the timing is right. And this is why we are very proud to work with partners. And once again, William will go through some of the detailed partnerships that we have secured recently. These are the achievements over the last three years. You can see that we continue to grow through the COVID period, a bit at a slower rate as we reset and transform the company when the post-COVID period arrives. This is our operating cost. Very efficient drivers. If you look at this year, our operating cost is down 6%. More impressively, as a percentage of revenue, it's fallen from 22% to 17%. That's a significant decline. But we have a lot more runway to go on this. If you look at our headcount, we've gone from 5,900 to 5,200. So the full year impact, the full year savings from this headcount reduction, this efficiency gain, will drive our growth going forward. In terms of our balance sheet, we currently sit on 4.6 times net debt to EBITDA. Our covenants ceiling is 5.5, so we have a lot of headroom, especially as we grow EBITDA and this number continues to come down. On that note, let me pass you to William, who will take you through the second part. Thank you. Thank you. Thank you. Okay. Let's look at the enterprise solution first. I will say skin in the game is the DNA for HKBN. In the ES structure, all the commanders, when we say commanders, they are the head of six sales units. All of them have their skin in the game, ranging between four months' salary to six months' salary to tie in with their individual team's targets for financial year 2022. If they do not hit the targets, they will lose or suffer a reduction of salary by four to six months. But if they gain, exceed the target, they will have multiples of those investments. This skin game culture is unique in HKBN, and I believe none of our competitors dare to do something similar. On this skin in the game foundation, we have three pillars to help us to grow. One is the one-stop premium ICT solutions. Having around 18 months internal integrations with JOS and also WTT, and also four discussions with key partners. We believe we have everything, products and services, that is required by any enterprise, be them small SMEs or mid to high-tier corporates. When we talk about industry enterprise, we are saying that our talents are more experienced, higher caliber than our peers, because we do not just go out and sell or serve, but we are certified by related industries or services standard, such that we are really having professionals to serve our customers. Strategic partners. Partnership is a term that is abused by many people. But at HKBN, when we are talking about strategic partnership, we are serious, real. We do not just having meetings or sharing those boring PowerPoint. We come together, sit together, share our internal KPIs, the financial expectations. Then both companies or partners also having some sort of skin in the game and go for common KPI that is quantifiable financial figures. We do have many partners. Today, I am happy that we have some partners that they are happy to share their voices with us towards our investors, our analysts. Please share some of the videos. Cisco and HKBN has fostered a strong partnership in helping our clients to realize their business goal over the years. Our growing partnership in many services in Hong Kong and Greater China helps the client to accelerate their digitization journey using HKBN's comprehensive SI capability and Cisco world-class solution, whether this is remote operations, multi-cloud, automation, and many more. We look forward to our partnership, helping our clients to achieve better business results, bringing more positive impact to the community, and achieving greater business result together with HKBN through our expanding partnership. Hybrid working is the way to go, and the means to real workplace is on the cloud. Both Microsoft Hong Kong and Hong Kong Broadband Network, we share same ambitions to provide an integrated, secure workplace solutions, including email, collaboration tools, voice with Microsoft 365, Windows 365, Teams, and professional consultancy service and support service. We are confident with the partnerships. We can work together, at least double our business in Hong Kong and Greater Bay Area in 3 years' time. We are happy to work with HKBN's committed team and witness their agility as we roll out cybersecurity assessment and manage security services to the market. After seeing the surging needs among companies during the pandemic, companies, especially SMEs, now enjoy an enterprise-grade cybersecurity services backed by HKBN's domain expert with cybersecurity, connectivity, cloud, and system integration capabilities. Hong Kong Broadband run the top culture with the teams get stuff done attitude. We shape how companies and businesses experience cybersecurity services, no longer piecemeal, but all around. As you see, partners like Cisco, Microsoft, PwC, they are willing to work together with HKBN's enterprise team to jointly sell and serve customers in Hong Kong and also beyond Hong Kong. Share with you our internal structure about the enterprise solutions after our successful integration with JOS, the SI team, and also our WTT. Basically, we segment the enterprise markets into six categories, and each category is under a BU commander. Each commander is responsible for a number of EBITDA. As I mentioned before, each commander has invested about four months to six months' salary to tie in with their own team's EBITDA for coming financial year. This is the skin in the game that I challenge all the other peers that none of them are willing to do this. Behind them, they are supported by our kitchens. When I say kitchens, it is the product team, and the pre-sales or the architecture teams from the fixed telecom side, from the ICT side, and also from the SI system integration or IT area, mainly from JOS team. Basically, when you look at the blue color or the orange color, we are in a growth mode. We are increasing resources, we are increasing manpower, and we are developing more partnerships. We are doing much harder so that we can go back together internally with our commanders, our Co-Owners, and externally with our partners. That is why we are confident in delivering the higher targets. This page is just some of our snapshots about our full suite solutions to different categories of customers in Hong Kong, in Macau. Different categories of customers that they will need our service beyond the basic access of the fiber broadband, but solutions, everything required by any departments or the entire company. To the residential area, as Nick mentioned, we just signed the exclusive partnership with Disney to launch Disney+, the very popular OTT contents that we will carry and bundled with our fixed broadband and our mobile services to our existing customers and our new customers in the market. One point I want to share with you is that Disney is very serious and very committed in making sure that Disney+ will win, will stand out in Hong Kong market. That's why if you, yourself or some of your friends, your family members, used to paid monthly fee to the existing pay TV provider, you will find or realize that some of the programs or channels offered by Disney before were stopped in the past six months. Why? Because Disney is focusing on Disney+. They move all the contents or all the popular contents to Disney+. Such that when Disney, together with Hong Kong Broadband, launched the Disney+ OTT contents in the middle of November. All those hungry customers that missed the Disney contents for the past six months, they can now resume watching at Disney+, by joining the exciting new offers, the bundle offers from HKBN, be it fixed or mobile. HOME+ is our e-commerce arm, which will strengthen the InfinitePlay of our residential solutions. When we offer our service to any homes in Hong Kong, broadband or fiber broadband is our core. With this core, we like to add on everything required by the homes, through creating more value for our customers, such that our customers in all homes in Hong Kong can enjoy much better value with smaller payment. WiFi 6 Gateway. It is hot, but it is not something new in us because it is already our second enhanced version that we will provide for our customers, to make their homes much smarter. Even the router will be Disney router to help them experience much better, more enjoyable OTT offers. In short, in the residential markets, growth is our mode. We want growth in subscribers. We want growth in revenue. We also want better stickiness, i.e., less customer attrition. That is what we want. If we cannot achieve all these three in a balanced way, if you ask us only one point, one thing that our residential service want to achieve in the coming one or two years, I will say market share subscribers is the main key focus for HKBN. We will grow aggressively. We will grow crazily in order to achieve much more subscribers, because we want a bigger base for future revenue growth. So we are going to set a much bigger customer base, a bigger foundation for huge growth in near future. That's why we will be very aggressive. Our competitors, when you are watching us, please be alert. Wait for us. As we mentioned, the partnership with Disney is not a transactional partnership. We are partnering together to grow together in the next few years, at least. The partnership is not happening in just a few months. In fact, it took us more than two years to discuss, exchange views, such that Disney noticed that we are, in fact, the one who has been very successful in bundling OTT contents to grab market share and grow together with OTT partners. When talking about OTT, it is not something new at HKBN. We did launch OTT more than five years ago. So, Disney people, they're smart. They know us. Let's also hear their voice about us. Thank you, William and Nick, for inviting me to speak with you all today. We are thrilled to collaborate with one of the leading telecom operators, Hong Kong Broadband Network, for the upcoming launch of Disney+ here in our market. On November 16, we will be delivering endless entertainment on Disney+ directly to HKBN customers across the city via its million-strong customer base. Whether at home or on the move, this exciting collaboration will allow consumers to be entertained and transported to new worlds through our iconic brands and franchises. Consumers can warp to galaxies of epic adventures with Star Wars, be inspired and delighted at Pixar's animated offerings, zip through the multiverse with Marvel's Loki, explore and learn about the hidden wonders of the world from National Geographic, enjoy an extensive range of general entertainment content from Star, as well as relive the joy of their childhood with a treasure trove of classics and new stories from Disney. With over 1,200 films and 16,000 episodes of shows available, including exclusive Disney+ originals and Star originals, blockbuster films, bingeable series, documentaries, plus an exciting slate of upcoming local language content, there will always be something for everyone to enjoy every day with Disney+. Thank you, and I hope to see you on our service soon. Basically, Disney and HKBN, two companies as one entity to wow in Hong Kong markets with the broadband bundle plus OTT. That is the way for the near future at HKBN's residential market. Here is a snapshot of what we are preparing for launching and promoting Disney+ in different areas. The billboards around Hong Kong, the exhibition or promotion venues along MTR stations and also some big shopping arcades. We are increasing manpower resources to make sure that we will hit or exceed our target in a much shorter time together with Disney. As I mentioned, InfinitePlay. InfinitePlay is a theme interaction for HKBN's residential solutions. With HKBN's broadband service, the fiber broadband is core. We bundle with different OTTs, Disney, Netflix, myTV SUPER. Basically, whatever global or local popular contents you want, we offer. When you look back, our ES, enterprise solutions, our residential solutions. Basically, we have everything together with our key partners to offer for our customers. CO4, Co-Ownership 4. We will target for dividend payment of HKD 2.70 or above for coming three financial years, financial year 2022, 2023, 2024. Nick and I will each invest at least one year's salary into CO4, and we believe many of our Co-Owners will roll over their investment of CO3 and, some of them, including some other Co-Owners, will also increase or add up their investment here on CO4. Basically, if you take HKD 2.70 divided by three years, it is an average of HKD 0.90 as compared to HKD 0.765 for last year. Excluding those employment support scheme, one-off items, then you will more or less know where we are. When we compare CO4 and CO3, I would like to share a little bit more. We could not deliver CO3 because I will say two reasons. One is because of the long period of COVID's impact, almost 18 months of time. That's basically the economic activities are slowing down. We cannot meet people in person. We cannot serve our customers in person in a better way. That slowed down a bit, drag our targets a little bit behind. The main reason is that there are some one-off spend that happened in period of CO3. For example, the 100% transfer of the government's ESS amount, which is talking about HKD 85 million entire amount to our few thousand talents. We also waived one month service fee in February and March last year to our enterprise customers and our residential customers. We also offer 10,000 free broadband lines for some customers in need through about seven to eight NGOs. I.e., even the customers, if they were paying us monthly fee for broadband service before, if they were referred by those NGOs, they renew a contract with 24 months broadband service free of charge. That is something that we did in honoring our core purpose, make our home a better place to live, by TTT, Tough Time Together campaign, over the last 18 months. Those one-off support to customers, to our talents, is one-off support behind us. That will be reasons for missing the CO3 targets. Over the last 12 or 18 months, we have already successfully completed our internal integration. Now we are very strong. Very strong, that means we already done everything inside the gym. Now we go out to run for the full marathon. This is the last page we want to share with you. ESG. Everyone noticed that it is quite a hot and important topic that every company need to focus. I'd like to share with you that HKBN is staying ahead of the market, staying ahead of all the others. We have already started our ESG for two or three years in a very committed way as part of our efforts to fulfill our core purpose, make our home a better place to live, such that we have much manpower resources in doing this. I won't go for the details. I just want you to know that HKBN is grade double A. The industries or external benchmarking entities, when they did the benchmarking, triple A is the highest grade. Double A is, I would say, is good. So we are now aiming from good to great. Double A, as far as we know, by benchmarking entity like Hang Seng, we are the leader or number one, or the one with highest score among the telecom players in Hong Kong. We believe we will still be very committed to do better, to lead and set a good example for others to follow. So that is what we want to share with you at HKBN, profit and purpose. Two Ps. We are focusing on that. I think, Nick, can we come up here for Q&A? The Q&A session will begin now. If you have any questions, please press the Q&A button at the bottom left corner. Okay, we will start with the first question from Sarah Wang, UBS. DPS growth 2%, is this lower than management's expectation? What's the key reason behind? Sarah, thank you for the question. Being in management requires us to make strategic choices. We have to choose. In our case, we could choose between make our home a better place to live, our core purpose, and actually live and execute this, or 10% DPS growth. We mentioned that if we had just simply kept the ESS government subsidy, we would have grown at 9%. If we had not done the many things that William referred to, such as one month free service for all our customer base, such as 10,000 free charity lines, such as hiring 100 extra interns during the peak of the down cycle, et cetera. We would have easily exceeded 10% DPS growth. So for us as a company, we make choices. In our case, make our home a better place to live is our priority. Thank you. Question from Neale Anderson, HSBC. Can you give a view on dividend growth for this year and whether you will follow a J-curve approach to CO4? The DPS growth of this financial year over last financial year is 2%. Neale, I think what we can say is that the coming year-on-year growth on DPS will definitely be better than last year. Neil, there's a couple of things to look at. A key is to focus on the three-year cumulative number, the HKD 2.70. That is what we're driving for together with the hundreds of Co-Owners that we have. That is the most important thing. Often when we sign a two-year contract, the first six months is loss-making. The faster we grow, the more of a mini J-curve. Each subscriber is a mini J-curve. If there is a pleasant surprise, if there's a massive overrun of subscribers that come through after the Disney launch on November 16th, that will put some short-term pressure, but they will be guaranteed profits within the two plus years within the Co-Owner 3 program. The other point I would emphasize, if you look at William and I, don't listen to our words. Don't listen to what we tell you on this call. Rather, follow our bank account. Both of us will invest at least one year of our salary. We will work for cash free in exchange for shares because we have conviction in Co-Ownership 4. Like what Nick said, Neil, I think it is an art for us to lead with our hearts, such that we make a right balance for the DPS per year versus the long-term, more robust growth of the company. By making right balance between DPS per year and the robust growth in future, we make sure that our team will give a good scorecard, a good result to our Co-Owners and our shareholders. Okay. Next question from Tina Hau, Goldman Sachs. Does your CO4 target factor in a rebound from COVID? It doesn't need a complete rebound. What it does not factor in is sustained lockdown. As long as the environment is similar to where we are today, where business activity is rolling over, I think that's a good baseline. If the travel ban comes off and business activity goes back to full pre-COVID levels, that would be an added plus. Also for your information that, in fact, no matter COVID will continue or will be behind us, not only HKBN, but also our business partners, we will not sort of a standstill and do our things in a passive way. We do it in a proactive way. One example is that when the whole world, everybody is talking about the shortage of a chipset, calling different vendors to chase for the supply of the equipments that involve a chipset, something like that. So people need to wait for 3 months, 6 months, or even 9 months for those supplies. Why not we also recommend and take the initiative to sell something that will not rely on the equipments? For example, more items on the cloud. That is why that is one of the key initiatives. We will work with the partners who just shared their views, their voice with you. In fact, we have two teams working together focusing on those stuff that will not be fearing about the shortage of supply on equipment, something like that. So you got to be very flexible. We should have different alternatives, different plan B or plan C in order to achieve our financial targets. Next question. Can you elaborate your strategy on Disney+? Any subscriber growth targets? Today in our residential markets, we have about 886K customers. Internally, we think if we cannot hit 1 million after this financial year or in next 12 months, I will give the team or myself a grade C. Again, I like our competitors to notice that, watch out your customer base. We are going after you. Okay. We have time for one more question. Is 5G affecting your fixed line broadband business? A strict no. N-O, no. This is not a new question. In fact, the government has already released some figure one or two weeks ago. People boasted about 5G for two years, and as of today, 5G's penetration in Hong Kong is just about 6% or 7%. Let's spend less time on 5G. Let's focus on fiber broadband. Okay. A similar question on the market competition. Some industry players are aggressively bringing down the prices of commercial broadband offering. What is your strategy? We don't do commercial broadband only. We do Infinite-Play. We want to make broadband one gig only at less than HKD 100 a month irrelevant because that's not what households want. You don't just want the pipe. You want entertainment. You want security. You want insurance. You want HOME+ bundles. That's where we focus on. We're leaving that legacy space. We're moving out of that box and focusing on Infinite-Play. As mentioned before, we have industry experts. Experts won't sell the SS lines only. Okay. Thanks, Nick and William. That's the end of our Q&A session. Have a nice evening. Thank you. Thank you. Bye-bye. Good night.