SmarTone eyes better days ahead

Telecommunications company forecast to benefit from market changes in aftermath of HKT-CSL merger after lacklustre period

PUBLISHED : Monday, 01 September, 2014, 4:21am
UPDATED : Monday, 01 September, 2014, 4:21am

SmarTone Telecommunications Holdings, which has warned investors about a drop in net profit for the year to June, is likely to find its prospects turning brighter during this financial year after a lacklustre period in the mobile market.

In a report, analysts at Barclays considered "the poor second half of [the operator's] recent fiscal year results as well flagged, despite the likely magnitude of being bigger than what we and the market expected".

SmarTone, a subsidiary of Sun Hung Kai Properties, said last month it expected to post a 35 to 40 per cent year-on-year drop in net profit for the year to June.

The earnings results will be announced on Wednesday.

That was a downshift mainly caused by "lower handset business profits, and an increase in operating expenses and depreciation" from the operator's 4G mobile network build-out, according to chief executive Douglas Li.

It also reaffirmed the company's bearish outlook in February, when it posted a 32 per cent year-on-year drop in net profit to HK$311 million for the six months to December.

"SmarTone's profit warning implies that its second-half net income for the previous fiscal year declined by 37 to 38 per cent year on year," said Anand Ramachandran, the lead author of the Barclays report and the firm's head of telecommunications, internet and media equity research for Asia, excluding Japan.

"Nonetheless, we see the recent consolidation between HKT and CSL as a game changer for the Hong Kong wireless sector as we believe it should bring higher pricing power and better cost controls to [the remaining] operators … Given the HKT-CSL merger only took place in June, we expect the benefits to be felt from July."

HKT, the telecommunications arm of PCCW, received government approval of its US$2.43 billion takeover of rival CSL New World Mobility in May.

Despite the challenging past fiscal year, SmarTone has kept its focus on ways to bolster its mobile operations. Last Friday, the company ensured the continuity of its spectrum capacity and mobile services in the city through a deal with the industry regulator.

SmarTone said in a filing with the Hong Kong stock exchange that it had accepted the Communications Authority's offer to exercise the right of first refusal for the reassignment of its relevant 3G spectrum for 15 years, from October 22, 2016.

Under the terms of that acceptance, SmarTone will make a lump-sum payment by August 22, 2016, for the so-called spectrum utilisation fee that covered the relevant spectrum - the radio frequency bands over which wireless network services are provided - assigned by the government.

The authority had announced in November last year that the government would take back and auction off a third of the 3G spectrum in the 1.9 to 2.2 gigahertz band held by each of the city's incumbent 3G mobile network operators "to encourage competition and allow new investment to enter the local market".

SmarTone, CSL, Hutchison Telecommunications and HKT were to be granted right of first refusal to be reassigned two-thirds of the 3G spectrum they hold. Their licences for that spectrum expire in October 2016.

Following the approval of its CSL acquisition, HKT agreed to divest 29.6 megahertz of the existing 3G spectrum it had and to refrain from taking part in any 3G spectrum auction for five years.

SmarTone said on Friday it also submitted to the regulator "an irrevocable standby letter of credit issued by a bank in Hong Kong" worth about HK$1.7 billion. That represented the maximum spectrum licence fee payable, calculated as equivalent to HK$86,000 for every 1 kilohertz, for the reassignment of SmarTone's relevant 3G spectrum.

In July, SmarTone introduced its fixed-line fibre broadband service called "ST Fibre Broadband" for the home and office market segments.

A month earlier, the operator launched its "HealthReach" software application, through subsidiary Connected Health.

The app allows users to securely record, transmit, store and share their health-related information - including blood pressure, heart rate, blood glucose, body weight and electrocardiogram data - with physicians and close family.

Li said this service was developed in response to the increase in the number of Hong Kong adults with metabolic syndrome, which increases the risk of heart disease and diabetes.

Shares of SmarTone last traded at HK$11.44.