HKT Trust Interim result is lukewarm

There are many fans of Singapore Telecom plays M1, Singtel and Starhub and are pretty obsessed watching their share prices and their yields.

Perhaps they are best served spending time watching some telecom stocks that you can obtain overseas.

2 such hunting ground could be the UK and Hong Kong. The appeal is that there is 0% dividend withholding tax. (Note: China shares listed in Hang Seng have a 10% dividend withholding tax, which is rather low as well)

In UK, you have one of the largest telecom in Vodafone. Vodafone is mainly a wireless telecom operator, having numerous companies all over the globe (including 45% of Verizon Wireless)

In Hong Kong you have mainly HKT Trust, Hutchinson Telecoms and Smartone.

HKT Trust is a business trust of Richard Li’s PCCW, spun off in 2011 at a rather high yield. It is the incumbent fixed line and broadband operator with a > 60% market share in both. It currently yields 5.3%

Hutchinson Telecom is a balanced wired + wireless telecom operator. It currently yields less than 4%.

Smartone is a full wireless operator. The attractiveness of Smartone is that its EV/EBITDA is less than 6 times while having a dividend yield of 7% with zero debt.

This evening HKT Trust announced its half yearly results. Results look fair without much surprises.

I tend to be more interested in HKT Trust due to its extensive broadband operations. If we talk about economic moat, I find the advantage of a dominant fixed line operator to be more wide, due to the direction of technology in telecommunication space.

There are much things going for it:

• Its got a parent who provides content innovation. PCCW have a Pay TV station, IT consultation business, on top of other media offerings. They will drive the differentiating factor
• Hong Kong is dense and like Singapore will keep capex to a certain manageable level. HKT have just completed capex to deploy Fibre to the home (FTTH) to 80% of Hong Kong. Hong Kong have the fastest tested fibre speed in the world.
• Their mobile market share is only 11%. This is where the growth area is. PCCW/HKT is the only telecom operator in HK capable of providing Quad Play Bundling.
• With such an extensive broadband network, they have an advantage over competitors to provide WIFI off loading to improve QOS

There are caveats as well

• They do derive a chunk of their revenue from fixed phone lines, but are innovative to introduce a hybrid VOIP Android solution with subscription to their customer. In the latest report, this segment have stagnate. There are businesses and residential that will still prefer fixed line but we do expect this segment to weaken.
• The Hong Kong Government have plans to take back some of the spectrum and reallocate them amongst the telecoms at higher price. No doubt this will affect all the telecom operators sans China Mobile, my take is that this will affect HKT little since they depend much less compare to the rest on wireless revenue
• HKT have the highest net debt to assets at 33%. That looks still very manageable but compare to Smartone (no debt), Hutchinson (10%, they been paying off), Starhub (22%), they look the most leveraged
• Hong Kong have 5 telecom. Singapore have 3 telecom. Tells you enough how competitive it is over there.

From the looks for it, HKT Trust will build up and distribute HKD 0.46 for the  full year.  At a share price of HKD 7.81, yield have rose to 5.9%.

While its yield is higher than Starhub, measuring it by EV/FCF or EBITDA will indicate that it is more expensive than Starhub (Starhub’s FCF yield is 7% btw)

I have a sense after talking so much people will be more interested in Smartone haha.

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