HKBN’s collaboration with LeTV draws investor focus

It could boost subscriber acquisitions.

Barclays noted that it hosted investor meetings with HKBN senior management in Hong Kong.

According to a research note from Barclays, much of the attention focused around the collaboration with LeTV, which is expected to boost subscriber acquisitions in 2HFY16.

It should not de-stabilise the current rational competition landscape, though, in Barclays' view.

Overall, Barclays sees HKBN as offering an attractive combo of “growth and yield” – we forecast 9% EBITDA CAGR over FY2015-18E and a current yield of 5.1% growing into c7% in 2 years. We stay OW; our PT is HK$11.20.

Here's more from Barclays:

There was a lot of investor focus on HKBN’s collaboration with LeTV: HKBN highlighted its position as “OTT” neutral, i.e. the agreement with LeTV is non-exclusive and HKBN still has the option to work with other content providers in the future.

Likewise, LeTV also can work with other operators, but HKBN’s management highlighted that HKBN’s large subscriber base (relative to HTHK or iCable) and its content neutral proposition (relative to NOW TV or iCable) means LeTV will likely value its relationship with and dedicate more of its own resources to HKBN.

Management highlight that HKBN does not intend to make money on or subsidize the content, i.e. all content revenues will be passed through to LeTV.

HKBN needs to procure the LeTV box, which they will then pass on to subscribers who opt for the bundle offer. The cost on the box is at cHK$8/sub/month (on a 2-year contract). Management indicate they have enough flexibility in their financials to neutralize this impact – for instance, they highlighted the recent price increases of cHK$10 per month as a good example.

Management is confident that the “triple play” bundle offered by HKBN (fixed line voice + broadband + pay TV) will be at a much lower price compared with that offered by HKT (fixed line voice + broadband) and PCCW (NOW TV) combined. As such, management expects this to drive acceleration in subscriber acquisition and hence targets 120k net adds in FY2016 (vs. 62k in FY2015).

Much of this (c80k) is indicated as back-end loaded into 2HFY16 as LeTV’s EPL rights will start in Aug-16. ARPU is guided at cHK$180 for FY2016.

Other key takeaways: FY2016 planned capex is HK$400mn, c50-55k new home passes are planned in FY2016. Over the last few months, management indicated that two smaller operators (iCable and HTHK) has been quite active in the market in pushing various promotions, but has had no impact on HKBN’s subscriber acquisition pace.

The wholesale arrangement with SmarTone is indicated as progressing well – HKBN expect a much higher contribution from SmarTone in FY2016 (vs. FY2015) given SmarTone’s increasing market traction. The wholesale agreement was indicated as not margin dilutive (i.e. wholesale discount is less than HKBN’s own customer acquisition costs).