Earnings Alert: 2H21 disappointed with net loss of HK$27m; sluggish local service revenue growth in 2H21
- Further deterioration in 2H21 with a net loss of HK$27m, compared to a net profit of HK$31m in 1H21
- Local service revenue growth slowed down from 4% in 1H21 to 0.2% in 2H21, a major disappointment
- Cut earnings by 49% and 44% for FY22 and FY23 respectively on slower service revenue growth and higher network costs
- Downgrade to HOLD, with a lower TP of HK$1.1 on earnings cut
FY21 and 2H21 results highlights
Revenue increased by 18% y-o-y to HK$5,385m in FY21, mainly attributable to 70% y-o-y growth in hardware and other product sales.
Service revenue decreased 1% y-o-y to HK$3,241m in FY21. Local service revenue grew 2% y-o-y to HK$2,980m in FY21, driven by 35% y-o-y growth corporate solution revenue. However, local service revenue growth slowed from 4% in 1H21 to 0.2% in 2H21, mainly attributable to lower local postpaid net ARPU of HK$159 in FY21 compared to HK$160 in 1H21.
Total customers decreased 1% from 3,233k as of Jun 21 to 3,202k as of Dec 21. Postpaid customers increased by 1% from 1,423k to 1,442k as of Dec 21, while prepaid customers decreased 3% from 1,810k as of Jun 21 to 1,760k as of Dec 21. Local postpaid net ARPU decreased from HK$160 in 1H21 to HK$159 in FY21, despite 5G penetration rising from 10-15% as of Jun 21 to 21% as of Dec 21 among postpaid customers.
Service EBITDA decreased by 21% y-o-y in 2H21 to HK$692m (vs. HK$723m in 1H21). Service EBITDA margin was down 6ppts y-o-y to 44% in FY21.
Net profit plunged by 99% y-o-y to HK$4m in FY21. Earnings had deteriorated to net loss of HK27m in 2H21 from net profit of HK$31m in 1H21 due to slower local service revenue growth and increasing network costs in 2H21, vs. net profit of HK$146m in 1H20 and HK$251m in 2H20.
A final dividend per share (DPS) of HK$0.0521 was proposed, same as FY20, totaling full year DPS of HK$0.2729, including a special dividend of HK$0.198 per share that was announced in FY21 interim results.
Outlook
The impact of COVID-19 has been longer than our expectations due to the various variant outbreaks globally and 5th COVID-19 wave in Hong Kong. We expect mobile roaming business to remain under pressure at least in 1H22. However, further roaming revenue shrinkage is unlikely.
Growth of local service revenue will be driven by expanding corporate solutions revenue, increasing 5G broadband users and customers upgrading to 5G. However, we cut our postpaid ARPU assumption by 2% and 3% respectively for FY22 and FY23 due to a sluggish recovery of local postpaid net ARPU in 2H21. We forecast ARPU to grow by c.3% each in FY22 and FY23 respectively.
Despite a 47% hike in capex in FY21 due to investments in 5G infrastructure, management expects capex to reduce to HK$400m-HK$500m in FY22. The company targets to maintain similar dividend to that of FY20 before earnings fully recovers and 100% payout going forward. Besides, after settling 5G capex and evaluation of potential investment opportunities, the company may consider declaring another special interim dividend in 1H22.
Downgrade from BUY to HOLD with a lower TP of HK$1.1
We have cut our earnings by 49% and 44% for FY22 and FY23 respectively after incorporating slower service revenue recovery. We expect earnings to grow from HK$4m in FY21 to HK$108m and HK$186m in FY22 and FY23. We downgrade Hutchison Telecom from BUY to HOLD with a lower TP to HK$1.1, which is based on sum of the parts: (1) HK$0.3 per share for the mobile business at 15x FY22 PE, in line with the target multiple for its major peer, (2) net cash of HK$0.8 per share.