|$13/100 Meg Profitably Sweeping Hong Kong|
|Written by Dave Burstein|
|Wednesday, 26 May 2010 17:28|
City Telecom/HKBN doubled their dividend as profits rose 54%. They added 73K broadband subscribers over six months while everyone else was flat to down. Chairman Wong Wai Kay has set a "10-year Big, Hairy, Audacious Goal (BHAG) of becoming the largest IP provider in Hong Kong by 2016. We are not only aiming at providing better service than the incumbent, but also services that they cannot match with the legacy network." They've now doubled up, offering a gigabit (really) for $27 (U.S.), an incredible story. Xavier Niel in France proved a low price strategy (30 euro triple play) can make money and HKBN is actually profitable enough to pay corporate income taxes.
ARPU for broadband fell from $23 to $17 (U.S.) but that was more than compensated by customer growth and sale of phone and other services. City is doing well enough to apply for an over the air free TV license and continue expanding the network. 100 meg is available to 1.68M apartments and 1,300 corporate buildings, with 1 gig only in those with fiber all the way to the apartment. By the end of 2011, they expect to reach 2.1M homes, about 90% of Hong Kong. Their cost per apartment passed is about $100 (U.S), crucial to the business model.
The prices for voice and video are competitive, but there are a few limits to the service. In particular, the speed out of country is capped at "only" 20 megabits. That's less of an issue than it would seem, because most services are available from in-country Google, Akamai, and other servers. Most p2p is fulfilled locally.
CFO NiQ Lai explains the low-cost model only works after the network is in place. "HKBN started the investment ten years ago, and we did not get a glorious result until two years ago. Most CEOs or management team in other companies would probably have been sacked in the middle of such a project before reaching the harvest stage. If you had HK$3 billion, instead of building our Fibre Network, you could have turned around a number of mid-sized profitable real estate projects in the past ten years. Why invested in the broadband business when there were so many other attractive businesses to make money in Hong Kong? In our case, our decade of focus and persistence is only just being rewarded today. However, now that we have an established “edge”, we believe will be here for the next generation,”
There's no reason that another carrier in a dense urban area (Chicago, London) couldn't do similar. (Special thanks to Glen Campbell of Merrill Lynch who first introduced me to the company.)
Here's a note from the Chairman explaining the strategy.
Dear Fellow Shareholders,
2009 marks the 10th anniversary of the incorporation of Hong Kong Broadband Network Limited (HKBN), our wholly owned subsidiary for the Fixed Telecommunications Network Service business.
Proud of HKBN
Our Big, Hairy, Audacious Goal (BHAG)
I am very confident that our 100Mbps and 1000Mbps broadband services will continue to lead the market in the next few years. From our market intelligence, we know that our competitors are mainly using the second generation of xDSL technology, e.g. ADSL2+ or VDSL2 to boost the speed of their legacy telephone lines to the upper limit. However, whereas our competitors are on a linear improvement path, we can upgrade our fibre based services logarithmically from 100Mbps to 1000Mbps on our existing passive fibre infrastructure which existing technology cannot accomplish using legacy telephone lines.
BETTER Customer Service
There is an old Chinese saying, "When life is good, prepare for the worst" (居安思危). So, what are the nightmares for us?
We are prepared to continue this kind of aggressive marketing programs until we hit our 10-year BHAG, preferably accelerating achievement before 2016. We do not see how our competitors could "copy" our marketing offers, as we believe we are the only operator to provide genuine 100Mbps broadband service on a mass scale as supported by our exceptional "word of mouth" standing amongst our existing customers.
Dominating the Market
Our Passion and Mission
The establishment of HKBN is not purely for commercial reasons. We have the mission and duty to elevate and maintain Hong Kong as the preeminent "Free Information Hub" in the region. Since I do not see our competitors doing this effectively, and even though I do not want to (because I think we can make more money in the short term by selling our current assets), we have to continue this mission until we reached our BHAG.
Change of Dividend Payout Ratio
I ask my fellow shareholders to be patient with us for a few years. Starting from this year, our management team has much more confidence because of:
Based on the improving cash flow stability from above and our net cash balance sheet, we proposed to increase our dividend payout ratio, from ~30% of "adjusted free cash flow", defined as (EBITDA-Capex-Net Interest) to 50%-75%. By reference to the closing stock price of HK$2.57/share as of 4 November 2009, the total dividend for FY2009 is HK19 cents per ordinary share (FY2008: HK6 cents per ordinary share), and the dividend yield is 7.4%.
For FY2010 Guidance