Earnings Call: H1 2021

Apr 21, 2021

Good afternoon. Welcome to HAPN's FY 2021 Interim Results Presentation. There will be a Q and A session after the presentation. If you have any question at any time, just click on the Q and A button at the bottom of the page So let us begin today's presentation. May I introduce to you the presenter for today, Nick and William. Thanks. 1st, welcome, everyone, to our interim results. It's with great pleasure that we are able to share with you our results. But the most important segment to thank first is our 5,500 colleagues who, without whom these results would be impossible. Together, as a company, we have over we are overcoming COVID. Hong Kong Broadband is a talent obsessed company. Talent comes ahead of everything that we do. We believe we have to wow our 5,500 talents in order for them to exceed expectations for our customers. You cannot be customer centric unless you start with talent obsession, and that is how we run our company. As a company, we offer a lifeline service. Imagine life COVID life without broadband today. How would you work from home? How would you study from home? How would you entertain from home? Broadband is a lifeline service. So at Hong Kong Broadband, when we see an emergency such as COVID, we run towards it. Our colleagues, our 5,500 colleagues run towards it. What COVID has facilitated is massive change, change at an unprecedented level for our company. The way we operate our company going forward is completely different to the pre COVID situation. The way we interact, the way our responsiveness, etcetera, is completely different. We have to change. In our company, we talk about change or die, and we want to live. If you look at our set of results, we are incredibly proud of these results. We talked about talent obsession. Let us quantify that in numbers. Since COVID, we received about $200,000,000 in government subsidies throughout the regions we operate in, and we have essentially passed through 100% of this to our talents because we believe they need it more than us. We are a profitable company. The subsidy being passed on direct to our talents makes a huge impact to their ability to look after their family. For example, in Hong Kong, if you earn about $19,000 a month, which is the cap that the government has set, we have passed on about 3 months subsidy to the individual talents, and they, in turn, can look after their family with that balance. So we're incredibly proud of that. In other regions like Singapore, where we just had an unexpected subsidy deposited into our bank account, we likewise surprised our talents with an unexpected pass through of the subsidy to their bank accounts. So this is something that we are incredibly proud of. If you look at our results, this is inclusive of 100% government subsidy pass through. We believe in doing that, we have set the foundation for an incredible recovery post COVID because of the loyalty that we have with our colleagues. Percent of results. If you break it down into Enterprise and Residential, Enterprise now represent about 80% of our business. Enterprise is on a phenomenal runway. Over the last few years, we have done 5 acquisitions that have completely transformed our business from a $2,000,000,000 revenue company 5 years ago, 80% residential to a in excess of $10,000,000,000 revenue run rate company with 80% enterprise. So the enterprise has got a very long runway to take off. We will be harvesting the synergies and the transformation for years to come. On the residential business, we have to be frank and direct. We have hit a glass ceiling. If we don't change, we will no longer grow. Or in our case, we can change or die. We have to transform our residential business. Similar to how we evolved from IDD to broadband, now we have to evolve from broadband to unlimited services per customer rather than just serving the household. And we are doing all sorts of things to make this transformation a reality, working with MVNO, working with OTT. Now when I refer to OTT, I'm not just talking about content providers, but I'm talking about home security. I'm talking about cloud gaming. I'm talking about all sorts of content beyond just, say, movie content. That's what we're doing, transforming the business. We are no longer a telco. We are transforming into a lifestyle company. When I show you the dividend slide, this is something that is incredibly dear to our co owners because this is our bank balance. For 9 30 co owners, this is a part of our income. In fact, for William and I, this is the majority of our income. Our dividend income exceeds what we're paid by the company by a multiple. If you look at our growth profile in the last, say, 5 years, we have grown from a $0.20 a year dividend to $0.40 a year dividend to about $0.75 today, yet our salary has not changed. So we are dependent personally dependent on dividends as our personal income, our personal AAF. And that's why this company is far more aligned than any other company because of our co ownership structure. We have real skin in the game, we benefit from the upside, and we share on the downside. If you look at our revenue profile, I want to emphasize one thing and explain the difference between the 40% revenue growth and the 2% EBITDA growth. The main reason for this gap is the acquisition of JOS, Jardine One Solution. Jardine One Solution, JOS, is a HK4 billion dollars revenue company. At the time of acquisition, it only had a 2% EBITDA. That's why when you consolidate those numbers into our overall numbers, this is the impact that we have. Now when we bought the company, we didn't buy it for the current business. We bought it for the customer reach. Over time, our intent is to sell our 80% gross margin fixed telecom services into that customer base in order to drive our overall profitability. This requires a long term change from product sales to relationship management, which I'll go through in a little bit more detail in the coming slides. Our balance sheet is incredibly strong. We are stronger today than when we entered COVID. During the last 12 months, we have refinanced over $10,000,000,000 of debt on much better terms, and we're happy to be sitting on a balance sheet with a 4.6 year refinancing profile on around 3% average funding cost. So it's a very, very strong position for us to ride this COVID situation and hopefully position us very, very strongly for the post COVID rebound. This is something that is fundamental to our company, and this is incredibly difficult to do. No other telco in our industry is able to do this. We are transforming from product sales, selling individual products, to a relationship management. We are upgrading from selling broadband to the procurement manager to having a detailed workshop with the CEO and CIO on how we can help them do more business. We are no longer selling services. We are helping companies other companies transform, and we start by selling or eating what we cook first. We transform our company first and then use the lessons that we've learned through the pains that we have experienced in our own transformation, and that's how we can handhold our customers into their transformation. So this is a it's a very, very deep change, and it doesn't happen overnight. But we are well into the process of making this switch to relationship management. We want to make competition for commodity telecom services irrelevant because that's just part of the service. That's only a small part of the service that we offer our customers. We are now towards the tail end of Co Ownership 3. When we set up Co Ownership 3 about 3 years ago, that was well before COVID. The world has changed. But as co owners, we are responsible for factors, whether they're in our control or outside the control. This is ownership. This is like having a child. You are responsible for the good and the bad irrespective. So chances are, given the current trajectory, we are unlikely to meet our CO3 targets, KPIs, the long term KPIs. We have a majority of us have an entry price of $14.15 At today's, our share price of below $12 we are losing money. That's part of ownership. Our plan is that we are now proposing, subject to shareholder approval, a Co Ownership 4 program that will allow us to effectively roll over our Co Owner 3 into co owner 4 in order to have an extension of time so that we can create value together for ourselves and for the mass shareholders. It would extend the life of our ability to create a positive return. On that note, I'm pleased to pass on to William. Thank you. Thank you, everyone. Let me share about why we go for HomePlus, the e commerce platform. For us, we have footprint for 1,000,000 homes on average having 8 to 10 years billing relationships with us. So we have very supportive and loyal customer base talking about 1,000,000 families over 3,000,000 population assuming 3 family members per household. That's why the purpose is to extend from double play, triple play or core play to infinite play, so that our revenue from our customers is not only from the telco related services, but extending from our core telco services to other services that for example, we are now charging HKD 190 ARPU per broadband subscribers. But for each family on average in Hong Kong, they are spending HKD $2,300 only on those grocery items related to supermarkets spend. So if we can help our 1,000,000 household to have some savings by buying similar products from our HomePlus platforms, which has products, including supermarkets and Beyond products and even services. Then we are helping them to save more money on those areas. And we are helping them, we are helping the merchants and we are also helping us to increase the revenue per home and also to increase the stickiness or retention rate of our 1,000,000 customer base. So on this like bundling with HomePass coupons or bundling with HomePass products by marketing collaborations with those merchants, We believe this is helping the retention of our core telecom based customers and even helping our acquisition of new customers. That is why we go for HomePlus. So HomePlus, very simple. Asset light, scalable, because we have JV partner like Taichung Hung and Cairo Logistics. Tai Chung was very strong in distributing food and FMCG products to many of Hong Kong's retailers. Kari Logistics is very strong, very big logistic companies. In Hong Kong, they have their strong fleets of trucks, talking about like 600 or 700 trucks, something like that. So for us, we do not need to spend money, time or or management resources on the warehouse or on the trucks, something like that. All these are provided and supported feasibly on time and real time by Kary Logistics and Given Taijuan Hong. Let me challenge you, think of any other e commerce players in Hong Kong that know about the turf, our own turf in Hong Kong with the partnership of HKBN, having big customer base, loyal customers, strong distribution power like Taichung Hung under the Citigroup and also Carrier Logistics. So we are here to win and we are here to help our core telecom business, our OTT business through bundling with these e commerce products. Can we have a video to share with our investors? Basically, you will see HomePlus is a strong entity with great and strong partners. And one point very important, HKBN is the one to lead and manage HomePlus operations and lead the growth of this e commerce platform. So to share with you some data for the past few months since we launched in the middle of November last year. So all these figures that occurred for those few months, I will say we are on the right track. All the 3 partners agreed to have an initial spend or I mean investment of more than HKD100 1,000,000 as the initial stage. So we are here to grow together by sharing the resources of each other. So if you look, we are not satisfied with just monitoring the, I would say, the boring traditional telecom business, but we are here to grow with diversified resources to help such that we can pay reasonable dividends to our shareholders and focus on high growth in years ahead. Before we handle the Q and A together with Nick, I just want to highlight one point. For guidance of DBS for the whole financial year, we are expecting a mild single digit growth for the whole financial year, but strong, strong growth after the COVID recovery. Thank you. Nick? We will now have the Okay. The first question is from Tina Hao, Goldman Sachs. Any specific targets for Co Ownership 4 plan? We're in a proposal stage for Co Owner 4, so we can't be specific on the targets. But the core remit will be alignment, real ownership. There will not be a single share or stock option given unless the talent puts real skin, real money, real family savings into the company. That's the fundamental of our co ownership. In this company, we have never given anything for free. Every co ownership share benefit requires an anchor investment by the family. We have to have true ownership. Thank you. Second question from Mr. Chris Cole, DBS. Could management share the Enterprise Solution revenue growth excluding JOS consolidation? And what should we expect for a normalized level of changes in working capital? Will this turn negative in the course of normalization and impact our AFF growth? So let's start with the first question first. Without the aggressive acquisitions, transformative acquisitions in the last 5 years, this company will probably be part of the normal industry trend of a contracting industry. If you look at our industry peers, they're reporting revenue declines. We will be part of that trend. It's only because of the transformation that we can be the exception to that trend. So without JOS, yes, we will face similar industry pressures. But with JOS, we are transforming from a telco into an ICT space. If you think about a corporation, they spend far more on ICT expenditure, IT and other systems versus then just telecom services. So we are playing in a much, much bigger space. The second question relates to working capital. Part of our improvement in working capital is structural. We have better managed working capital structure from the companies that we have acquired. So this is a structural improvement. Part of it is timing. So it's a combination. Yes, we do expect that timing, you're going to have to some years, you're going to have a positive some years, you're going to have a negative. That timing element will normalize over time. Thank you. Next question from James Wang, UBS. Why did service EBITDA decline 8%, but EBITDA grew 2%, which number should we focus on? At the end of the day, you look at the total EBITDA. We manage the total company. We don't manage specific silos. So the number that we focus on is group EBITDA, group AFF and eventually working towards the dividend, which is normally close to 100 percent of AFF. Okay. Next question from Ma Hugh Leung, HKBN. How Homeplus will do and deliver profit for HKBN fixed line business? As I mentioned, Homeplus is sort of an extension of the offers from HKBN. So whenever we think of our Home Bus, we will consider it as a part of the bundle of our HKPN's core business. So you can imagine that in the near future, our customers will receive a bill including HKBN Telecom Services plus offers from Homebase. It can be coupons like $2,400 over 24 months, something like that or some freebies or some discounts to buying products in Homebase, something like that. And vice versa, when Homebase is offering something to acquire their members or increase the spend of the e commerce customer base, they will also writing on the offer from HKBN's telecom offer. So I would say both units are helping each other, but I can't say standalone how the lumber moves, but both will help each other to grow. Okay. Thank you. Next one from Alex Shue Macquarie. What's the Homeplus business model, 1P or 3P? The Homeplus business. Is it both? Combination. It's both. Okay. That's all the questions that we have for now. Thanks, the presenters for today. Thank you. Have a nice evening.