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Edited Transcript of 215.HK earnings conference call or presentation 28-Feb-20 10:00am GMT

Full Year 2019 Hutchison Telecommunications Hong Kong Holdings Ltd Earnings Presentation

, Mar 24, 2020 (Thomson StreetEvents) — Edited Transcript of Hutchison Telecommunications Hong Kong Holdings Ltd earnings conference call or presentation Friday, February 28, 2020 at 10:00:00am GMT

Hutchison Telecommunications Hong Kong Holdings Limited – CEO & Executive Director

to discuss our 2019 annual results. Today, we have Kenny Koo, Executive Director and CEO; and Suzanne Cheng, CFO.

Before we begin, I would like to read out the cautionary statements. The content of this analyst and investor Q&A section contains forward-looking statements. Statements that are not historical facts, including those about the beliefs and expectations of Hutchison Telecommunications Hong Kong Holdings Limited, are forward-looking statements. These statements are based on current plans, estimates and projections, and therefore, undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made, and the company has no obligation to update any of them publicly with respect to any information or future events.

Forward-looking statements involve inherent risks, uncertainties and assumptions. The company cautions that if these risks or uncertainties ever materialize, or the assumptions prove incorrect, or if a number of important factors occur or do not occur, the company’s actual results may differ materially from those expressed or implied in any forward-looking statement.

During the presentation, feel free to raise your questions in box. Q&A section will follow after Kenny and Suzanne presentation.

Kenny will now begin the presentation, followed by Suzanne.

Sing Fai Koo, Hutchison Telecommunications Hong Kong Holdings Limited – CEO & Executive Director [2]

Welcome to our 2019 annual results announcement. 2019 was a challenging year in terms of both social and economic conditions locally, yet the group has achieved certain significant milestones. So let me recap some of the important ones.

In January, we unveiled the 3.OneWorld, our main theme for 2019, to promote our premium mobile experience. This campaign illustrated our strategy to support customers’ international digital lifestyle, especially for travelers who can enjoy a seamless network experience across digital services globally. In March, we’ve revamped 3Supreme service by brand-new customer touch points via refurbished 3Supreme shops, web page and My3 app, and privileged benefits to engage new customer and local subscribers — loyal subscribers who are high-spending customers.

In May, we acquired the noncontrolling interest from our strategic partner entity, DOCOMO, for a consideration of USD 60 million. Since then, the group has 100% interest in this mobile business.

In October and November, we acquired a 5G spectrum in the 3.5-gigahertz and 3.3-gigahertz bands for a total fee of HKD 401.5 million. This acquisition represents the group’s long-term plan for revolutionize its network infrastructure as well as our dedication in developing our 5G service in Hong Kong, in particular, to expand and improve the coverage of its services to customer, while at the same time, maintaining its competitive telecommunications service offerings to our customers.

So the group demonstrated resilience and deliver a set of solid results with satisfactory earnings growth for the full year amidst the challenging operating environment in 2019. Particularly, during the second half of the year, with key focus on customer segmentation strategy and new roaming products, the group achieved strong growth in both local and roaming revenue.

Total revenue improved by 22% from the first half of 2019, despite a 29% drop against last year. With the implementation of various efficiency measures and cost-savings initiatives, key costs, which comprises of CACs, staff cost and other operating expenses, decreased by 4% year-on-year. Correspondingly, EBITDA and EBIT improved by 4% and 16%, respectively, against last year and improved by 17% and 60%, 6-0, respectively, comparing with the first half of 2019, reflecting the realization of benefits from cost control measures during the second half.

Profit attributable to shareholders amounted to HKD 420 million (sic) [HKD 428 million] on a like-for-like pre-IFRS 16 basis, an increase of 6% compared to 2018. Earnings growth in second half of 2019 was 29%. So we maintained our dividend policy of 75% payout of recurring profit, and the final dividend proposed is HKD 0.0375. In total, it means full year dividend amounts to HKD 0.0668, which is 6% increase year-on-year.

Although the group’s service performance was affected to a certain degree by the operating challenges occurred during the first half of 2019, service revenue picked up its momentum and turned around with an encouraging 3% growth in the second half of the year. On a full year basis, service revenue marginally decreased by 1% against last year. Similarly, service EBITDA and EBIT both reported strong growth in the second half with 15% and 57% increase, respectively, while service EBITDA and EBIT grew 6% and 26%, respectively, against last year.

So following, I will pass over to our CFO, Suzanne, to go through the detailed financials. Suzanne, please?

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Wai Sin Cheng, Hutchison Telecommunications Hong Kong Holdings Limited – CFO [3]

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Yes. Thank you, Kenny. So we’ll look at the revenue. The total revenue that we reported is HKD 5,582 million, which has decreased by 29%. It was mainly because of the decrease in the hardware revenue. The service revenue contributed around 65% of the total revenue. Although there is an intense competition in the mobile telecom market, which affects the group revenue in the first half of 2019, but by comparing the performance in the first half and the second half of the 2019, we can see the satisfactory 3% growth. This mainly result of the effective customer segmentation strategy.

Overall, service revenue moderates — dropped by 1% to HKD 3,613 million from 2018 as a result of the market competition and the local data tariff, which largely compensated by the strong growth in the roaming service revenue as well as the higher contribution from the corporate solutions.

On the other hand, the service EBITDA, on a pre-IFRS 16 basis, increased by 6% from 2018, primarily driven by the cost control in — to improve the operational efficiency. Service EBITDA margin remained healthy at 32%, which is a 2% point growth comparing with last year.

We’ll look the service revenue. The local service revenue is actually adversely affected by the price pressure or the local data tariff during the first half of the year. With the effective segmentation strategy that we imposed and also the higher contribution from the corporate solution, the local service revenue gradually picked up.

Comparing with the first half of 2019, the local service revenue actually grew by 2% for the first half — comparing with the first half. Demand from the corporate to improve performance and enhance efficiency have rapidly increased. In 2019, the revenue from the corporate solution actually grew by 75% against last year. With the 5G network being available in the near term, we are expecting the revenue stream will continue to be growing in the future.

Roaming service revenue, which accounted for 20% of the group’s total service revenue, reported a growth of 8% against last year. The growth of — is because of the substantial 21% increase in the roaming data revenue, reflecting an increasing popularity of our innovative roaming product and the package for the travelers and also our vantage leveraging from the group global reach.

In terms of the total customer number in Hong Kong and Macau, we have increased by 12% from 3.3 million in 2018 to 3.7 million in 2019, mainly due to a 23% increase in the prepaid subscription, driven by the increase in the demand of the prepaid SIM card from the traveler as well as the casual user and also — which are also showing our continuing growth in the prepaid market share.

Our monthly postpaid churn improved to 1.2%, which was mainly attributable to the success of our customers segmentation strategy, as mentioned, as well as the effort in improving the service quality. After taking away the handset proportion of the handset plan, the net ARPU for the year is HKD 176 per customer.

It is encouraging to see that data demand are rapidly growing since earlier 2018. We have recorded a double-digit growth in the 4G network data usage of 45%. The group continued to offer large data plans, such as — like 15-gig and 25-gig plans, to serve customers’ growing data needs.

In terms of cost, as mentioned by Kenny earlier, we experienced a decrease by 4% year-on-year. This was mainly built on the group’s discipline on cost control as well as continuous focus on the process simplification as well as the automation to drive the further operational efficiency.

CapEx, consistent with the other previous years, was the subject of the control that we have imposed. We scrutinize all the CapEx with due care and prudency. So current year, CapEx spending is HKD 503 million, which accounted for 14% of the service revenue. We are not expecting to have any major change in the CapEx level and for — especially — even though with the 5G rollout in the future.

Net cash position remained healthy at HKD 5.4 billion. The cash will be used for supporting the future operation needs as well as the network enhancement for 5G. The lower net cash position, which comparing with 2018, was mainly because of the distribution of 2018 special dividend and also the interim and final dividend during the year and the consideration that we have paid for acquiring the noncontrolling interest from DOCOMO in May 2019.

So I think that’s it for the financial session. I will pass it to Kenny to talk about the business review as well as the development.

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Sing Fai Koo, Hutchison Telecommunications Hong Kong Holdings Limited – CEO & Executive Director [4]

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Okay. After going through the financial results, let me give you more details of how the business is progressing and the future outlook. In 2019, we are committed to offering more innovative products and services to facilitate customers’ ever-growing needs. So we are transforming into a digitally enabled organization, offering more diversified solutions to enhance overall customer experience in both the mass and corporate markets.

So our strategy mainly focus on 4 key areas: one, the 3.OneWorld strategy, which we transformed from a telecom business model to a digital service provider model; second, a tri-band strategy to enhance customer segmentation to better serve diversified customers’ needs; third, QoS, the quality of service, as a proposition, promising quality service to bring excellent customer experience; and the last, but not the least, 3InnoCity, to build an ecosystem to capture more IoT applications and nurture future B2B revenue streams. So I will go through each of these strategy in more detail as the following.

As mentioned earlier, 3.OneWorld was our key strategy from 2019, focused on leading customers international digital lifestyles. By collaborating with members of the CK Hutchison Group as well as other first-class telecoms partners, Internet and technology partners, we offer our customers hassle-free and travel ever you like — whenever you like mobile experience in various innovative service pillars. In 2019, for example, we have joined forces with a local fintech pioneer to promote a 3Money new phone and cash plan. Customers can enjoy new handsets and instant cash in one go.

We have also launched the handset switch service for a customer who want to change new handset for any reason. By paying a fixed monthly fee, customers can get fast access of new smartphones and entitled to change their handsets for 2 times during the contract period. And the introduction of handset vouchers for bundled tariff plans also allow the customer to enjoy a piece of my handset selection and priority in ordering popular and new smartphones, especially the 5G handsets upcoming.

For our consumer market strategy, during the year, we deepened customer engagement and facilitate diversified customer demands by what we call the tri-band strategy. 3Supreme brand targets high-tier spending customers, and we offer bespoke services with dedicated personal assistant and special counters to handle request by well-trained service representatives to provide mobile device and application consultations.

We have also continued utilizing our well-recognized 3 brand to serve the mainstream customers. Retail shops and hotline are always available, as usual, with the excellent quality. Also, we have introduced a new second brand, what we call the Mo+, to target the user segment keen on value for money, especially from the young adults and casual user segment who prefer digital support by our enhanced My3 app application or online channels such as AI chat bots. And this well-defined customer segmentation strategy to enable us better to serve our customers and improve the customer loyalty.

For QoS as a proposition, to cater for the customers who are looking for premium services on network speed. We offer this QoS as a proposition and launched the first in market, what we call the Net+ service. Customers subscribing to this service are prioritized on our network with more resources allocated and can enjoy a seamless experience even in the congested areas. And this helps to differentiate our network offerings to various corporate and consumer customers, such that we can better enjoy a monetization of our network resources by this kind of innovative packaging and pave the way to upgrade the customer to 5G.

On the B2B end, we are committed to becoming a driving force to help develop Hong Kong as a world-class smart city in preparation for the 5G era and the new digital Internet economy. Our 3InnoCity program support startups, industry leaders and scientific research talent to build a digital economy ecosystem. And we collaborate with them to develop and promote enterprise IoT solutions, helping enterprises to enhance their operational efficiency. Riding on the success of the 3InnoCity program to accelerate development of commercial and corporate solutions, we have established a corporate sales force to promote digital solution offerings, aiming to facilitate customer adoption to forefront technology, enhance productivity and communications. The program was well recognized by the industry and was granted various awards for our contribution this year. And this program measures continued growth of our corporate solution revenue.

To prepare for 5G, in 2019, the group acquired 5G spectrum resources, particularly in the 3.3 and 3.5 gigahertz bands. This acquisition represented the group’s effort in continuous network infrastructure enhancement, while ensuring our customers continue to enjoy advanced mobile service despite surging data usage and demands.

Meanwhile, we are also planning to reform some of the existing bands to achieve a full territory-wide coverage, especially for those areas with limited 3.3 or 3.5 gigahertz bands reception due to the licensing conditions. The deployment fits well with our plans to integrate the group’s existing network, reform some of the existing spectrum to facilitate provision of 5G services and unleash new business opportunities in a cost-effective manner.

So following, let me share the outlook for this year. First of all is the 5G strategy. The launch of 5G will be our key priority this year. And our strategy focus on 4 major areas. First, the progressive network rollout. By leveraging our full network capabilities, we strive to delivering an outstanding 5G network in town to enhance the overall user experience.

Second, 5G [will advance] our ARPU uplift, particular by our early adopters as the speed of 5G services is 10x faster than 4G, and we are formulating the 5G service charging models that enable users to enjoy the best of 5G. So monthly 5G plans are expected to include massive data entitlement, but the price per gigabyte of data is expected to be lower than that of 4G.

Third, devices revenue boost. We have been working closely with the handset manufacturers worldwide to bring in the whole array of low-end, mid-range and high-end 5G smartphones to cater for various customer needs.

The last, but not the least, the enterprise 5G solution revenue streams. So we target to offering our customer the best 5G experience and bring in new applications and solutions for corporates and enterprises. But for further details of our 5G launch and tariffs, it will be communicated very soon. And we aim to be one of the first 5G operator in the second quarter this year.

And on the B2B side, we have the 5G — enterprises and corporates are evaluating internally on how to enhance their operational efficiency and revolutionize their current (inaudible) to take advantage of it with the faster speed and greater connection. Meanwhile, we have actively looking into advanced smart city application, related to smart property management, smart retail and smart parking, for example, in order to enable enterprises, tenants and individual customers to enjoy our 5G and IoT services. A couple of examples that we did were the installation of integrated 5G system now in the Hong Kong Convention and Exhibition Centre and the collaboration project with CK Access Holding Limited (sic) [CK Asset Holdings Limited] to build the first group’s 5G-enabled shopping mall in Tsuen Wan. So we are expecting more of these types of collaboration with other industry and market segments will happen in the coming months.

Going forward, other than the [hassle-free] telecommunication offerings, we will continue to extend our 3.OneWorld portfolio to a wider market, covering more industry, such as the outpatient, the VHIS scheme, home and travel insurance, for example. Last but not least, we target to offer a total solution for all our customers such that they can enjoy a one-stop full spectrum of lifestyle offerings via their mobile devices.

This is the end of our presentation. Thank you.

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Questions and Answers

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Unidentified Company Representative, [1]

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Thanks, Kenny and Suzanne. We will now begin the Q&A section. (Operator Instructions)

So I see some questions coming in. The first questions come from Chris of DBS. So what will the impact of coronavirus to our service revenue in the future?

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Sing Fai Koo, Hutchison Telecommunications Hong Kong Holdings Limited – CEO & Executive Director [2]

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Thanks for the questions. I think everyone knows that the virus outbreak has been impact to the whole economy a bit. So far, we see that our impact on the service revenue is still limited, mainly because of, I think, telecommunications is the essential elements of the daily life and — just like the utility, like the electricity and the water supply. And so far, we think that’s still in a manageable manner. But we will keep eyes on closely with the impact of the ongoing development, so that we will try to react very responsibly so as to manage the negative factor. Thank you.

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Unidentified Company Representative, [3]

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Thanks, Kenny. We have a question from Neale Anderson of HSBC. The question is, the roaming data performance is strong. Do you think the roaming revenue data can continue to grow, say, this year?

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Sing Fai Koo, Hutchison Telecommunications Hong Kong Holdings Limited – CEO & Executive Director [4]

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Thanks for the question. As I said, I think the current situation have uncertainty on the travel industry. So definitely, there will be a certain effect or impact to the roaming service revenue in the coming months. So we’ll keep eyes on to react to the impact to this particular situation. But I think that will be definitely affect the people’s travel pattern and — but we think if the situation keep improving in later months, the demand of roaming will rebounce back very quickly. Thank you.

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Unidentified Company Representative, [5]

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Thanks, Kenny. We have a question from Jack. After the HGC disposal, the Board promised to return some cash if there’s no good investment opportunity. So what’s the plan in future about this excessive cash?

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Sing Fai Koo, Hutchison Telecommunications Hong Kong Holdings Limited – CEO & Executive Director [6]

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(inaudible)

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Wai Sin Cheng, Hutchison Telecommunications Hong Kong Holdings Limited – CFO [7]

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Yes. I think, yes, we have got HKD 5.4 billion cash on hand. What we are doing now, as what mentioned by Kenny earlier, is we are now working on the 5G investment, including the infrastructure as well as the spectrum. I think it’s better for us to make sure the spending plan is on schedule first, and then we will have a look later, and then — as well as the cash flow, and then we’ll decide in due course.

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Unidentified Company Representative, [8]

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Thanks, Suzanne. We have a question from Varun of CS. Looks like the corporate solution revenue was a positive surprise in second half 2019. How do you think the trend in 2020?

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Sing Fai Koo, Hutchison Telecommunications Hong Kong Holdings Limited – CEO & Executive Director [9]

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Thank you for the question. We enjoy a growth of 75% year-on-year in terms of the corporate solutions revenue as mentioned earlier. We still have a quite positive forecast or expectation on the continuous growth of the corporate solutions revenue mainly for some reasons. For example is the 5G is coming in this year, and I think the industry is quite expecting that 5G may help their corporate operation efficiency improvement as well as different kind of application to enhance or transform their business model. So I think this year, we will pay quite a lot of effort on how to monetize the 5G from the B2B market. So we still expect the corporate solutions will enjoy a quite positive growth. Thank you.

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Unidentified Company Representative, [10]

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Thanks, Kenny. We have another question from Neale of HSBC about the cost. So where are those opportunities to take further costs, say, in 2020?

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Wai Sin Cheng, Hutchison Telecommunications Hong Kong Holdings Limited – CFO [11]

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Maybe I can answer this, Neale. On the cost side, yes, we have got the 4% decrease in the cost. In 2020, we are still working on a number of process simplification as well as the automation. So we are expecting that the cost will be controlled. So of course, we always expect that it will be further going down. But — no guarantee, but we are still working very hard on that.

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Unidentified Company Representative, [12]

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Thanks, Suzanne. Thanks all you for attending, and that’s all for our presentation. Thank you.

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