Sun Hung Kai Propert : SmarTone Telecommunications Holdings Limited 2011 / 2012 Interim Results Announcement

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SmarTone Telecommunications Holdings Limited
(Incorporated in Bermuda with limited liability)
(Stock code: 315) 2011 / 2012 INTERIM RESULTS ANNOUNCEMENT
(All references to "$" are to the Hong Kong dollars)

• Service revenue increased 31%, driven by continuing growth in both customer number and ARPU
• Increasing competitiveness through quality and innovation
• Data revenue increased 54%
• EBITDA increased 52%
• Net profit increased 48% to $475 million
• Interim dividend of $0.46 per share with a scrip dividend alternative

CHAIRMAN'S STATEMENT

I am pleased to report the results of the Group for the six months ended 31 December 2011. Financial Highlights The Group achieved significant improvements in financial results in the period under review with continuing strong growth in service revenue, driven by increase in both customer number and ARPU, as well as increasing usage of data services. These drivers, together with improved operating leverage, resulted in an EBITDA growth of 52% and net profit growth of 48% over the same period last year.

Total revenue increased by 83% to $5,060 million, with a 31% growth in service revenue. EBITDA increased by 52% to $1,406 million. Interim profit attributable to equity holders increased by 48% to $475 million. Interim earnings per share increased to 46 cents, compared with 31 cents (adjusted for the bonus issue in April 2011) in the same period last year.

Dividend

In line with the Group's dividend policy of full distribution of profit attributable to equity holders excluding extraordinary items, your Board declares an interim dividend of 46 cents per share, which shareholders have the option to receive new and fully paid shares in lieu of cash under a scrip dividend scheme.

Business Review Hong Kong

SmarTone continued to generate strong growth in service revenue, from both increased customer number and ARPU, in the period under review, reflecting our increased competitiveness through quality and innovation, and thereby providing better value for customers.

Service revenue grew 31%, compared to the same period last year, amidst a highly competitive market. Customer number increased by 12% to 1.62 million, of which 70% were higher value postpaid customers. Postpaid mobile churn rate maintained at a healthy level of 1.1%. Fully blended ARPU, defined as service revenue divided by number of SIM cards in issue across all service portfolios, increased by 15% to $277, driven by increasing customer adoption of data services using smart devices.

To maintain its leadership in providing a superior mobile broadband experience, the Company continued to invest to improve network quality and coverage. The 850 MHz HSPA+ network is being rolled out to further increase network capacity and enhance in-building coverage. The network modernisation program to upgrade to the new generation of multi-mode multi-band base stations is also well on its way to be completed by the middle of 2012. This modernisation program will enable a flexible and efficient implementation of LTE which the Company will implement on the 1800 MHz frequency band for its superior in-building penetration radio characteristics and cost effectiveness.

SmarTone continues to innovate through proprietary services to better engage customers, further differentiate in the market, and to generate additional revenue. Call Guard, a cloud service, enables our smartphone customers to easily collaborate through an app to screen out intrusive unsolicited marketing calls that have become increasingly prevalent in Hong Kong. Customers have come to value the dramatic reduction in these disturbances. Our HK Credit Card Privileges app enables a customer to find out instantly all the dining, shopping and lifestyle promotional offers available on the credit cards that the customer owns - this is proving to be a boon to the more value conscious customers. A new model of HomePhone+ telephone was introduced for our wireless fixed-line service, incorporating new service features including HelpNow. HelpNow provides 24x7 access to a trained HelpNow operator for instant advice and help in all household emergencies, including calling and assisting emergency services where required. Recently, SmarTone introduced its own PockeTabTM homescreen software to launch with the Samsung Galaxy Note. This has helped in selling SmarTone's services and apps, deepening engagement, and has generated favourable response from customers.

Your Company continues to invest in improving its customer care across all touch- points, including our stores, customer hotlines and online, further enhancing customer engagement and satisfaction.

Macau

With improving operations, SmarTone Macau registered growth in both revenue and profit in the period under review.

Prospects Amidst the weak global economic environment, the Hong Kong economy is faced with increasing uncertainties and inflationary pressure.

The Group will continue to focus on delivering more valuable experiences to customers and further extending its leadership in network performance, proprietary services and customer care.

SmarTone is well positioned to capitalise on the increasing adoption of smart devices and data services. Your Group will continue to expand network capacity in a cost effective way through implementing 850 MHz HSPA+, re-allocating network resources from wireless fixed broadband to the higher margin mobile business, and launch LTE at the 1800 MHz frequency band.

The Group expects to launch its LTE network within 2012 when Release 9 LTE
handsets become available.

Your Group's balance sheet remains strong, providing flexibility in a competitive market as well as allowing us to capture new opportunities, bringing value to both customers and shareholders.

Appreciation I would also like to take this opportunity to express my gratitude to our customers and shareholders for their continuing support, my fellow directors for their guidance as well as our staff for their dedication and hard work. Raymond Ping-luen Kwok
Chairman Hong Kong, 21 February 2012
MANAGEMENT DISCUSSION AND ANALYSIS Review of financial results During the period under review, the Group achieved continued growth in service revenue, EBITDA and net profit. Service revenue grew by 31% to $2,807 million (first half of 2010/11: $2,145 million). EBITDA rose by 52% to $1,406 million (first half of 2010/11: $927 million). Profit attributable to equity holders of the Company increased by 48% to $475 million (first half of 2010/11: $321 million).

Revenues rose by $2,301 million or 83% to $5,060 million (first half of 2010/11:
$2,759 million).

• Service revenue rose by $662 million or 31% to $2,807 million (first half of  2010/11: $2,145 million) driven by customer growth and increase in ARPU.
  The Group achieved a 12% year-on-year growth in its Hong Kong customer base. Hong Kong blended ARPU rose by 15% to $277 (first half of 2010/11:
  $241) driven primarily by data services, with increasing subscriptions to high price point data bundled plans by both new and existing customers.

• Handset and accessory sales rose by $1,639 million or 2.7 times to $2,253 million (first half of 2010/11: $614 million) attributable to increased sales volume and average unit selling price.

Cost of inventories sold and services provided rose by $1,674 million or 1.9 times to $2,540 million (first half of 2010/11: $866 million) largely due to higher cost of inventories sold.

Operating expenses rose by $129 million or 13% to $1,095 million (first half of
2010/11: $966 million). The increase in operating expenses scaled less than the growth in service revenue, resulting in improved operating leverage. Network costs rose by 10% as the Group continued to enhance its network capacity, quality and coverage. Staff costs grew by 25% as a result of headcount growth, general salary inflation and share-based payments. Sales and marketing expenses remained broadly stable. Other operating expenses, including rental and utilities, rose by 15% collectively driven by cost increases to support the growth in business volume.

Impairment loss of financial investments of $20 million (first half of 2010/11: nil) arose from the decline in the fair value of the available-for-sale financial assets.

Depreciation and loss on disposal increased by $27 million or 12% to $261 million (first half of 2010/11: $233 million). Handset subsidy amortisation rose by $220 million to $463 million (first half of 2010/11: $242 million) as a result of increased customer acquisitions and upgrades using subsidised handsets, in particular smart devices. Mobile licence fee amortisation rose by $5 million to $41 million (first half of 2010/11: $36 million).

Finance income fell by $3 million to $15 million (first half of 2010/11: $18 million). Finance costs rose by $22 million to $74 million (first half of 2010/11: $52 million) mainly due to higher bank charges for credit card instalment in respect of handset bundle subscriptions. Accretion expenses or deemed interest on mobile licence fee liabilities and interest on bank borrowings increased by $8 million collectively.

Income tax expense amounted to $97 million (first half of 2010/11: $57 million).

Macau operations reported an operating profit of $42 million (first half of 2010/11: $16 million). Revenues rose by 35% to $179 million (first half of 2010/11: $132 million) driven by higher revenue from both local and roaming services. Cost of inventories sold and services provided rose by 22%. Operating expenses remained broadly stable. EBITDA rose by $40 million to $71 million (first half of 2010/11: $31 million).

Capital structure, liquidity and financial resources During the period under review, the Group was financed by share capital, internally generated funds and short-term bank borrowings. The Group's cash resources remained robust with cash and bank balances (including pledged bank deposits) and investments in held-to-maturity debt securities of $1,878 million as at 31 December 2011 (30 June 2011: $1,653 million). The Group had short-term bank borrowings of $650 million as at 31 December 2011 (30 June 2011: $550 million).

The Group had arranged committed 12-month Hong Kong dollar denominated revolving credit facilities from certain banks totalling $650 million, of which a sum of $650 million was utilised as at 31 December 2011.

The Group had net cash generated from operating activities and interest received amounted to $1,671 million and $18 million respectively during the period ended 31 December 2011. The Group's major outflows of funds during the period were payments for additions of handset subsidies, purchase of fixed assets, mobile licence fees and 2011 final dividend.

The Group's current liabilities exceeded its current assets by $634 million as at 31 December 2011 (30 June 2011: $593 million). The growth in subscriptions of handset bundled plans resulted in corresponding increases in handset subsidies included in non-current assets, and non-refundable customer prepayments included in current and non-current liabilities. Both handset subsidy and non-refundable customer prepayment will reduce gradually over the contract term of each subscription. Excluding the non-refundable customer prepayments of $796 million (30 June 2011: $641 million) included in current liabilities, the Group would have net current assets of $161 million as at 31 December 2011 (30 June 2011: $48 million).

The directors are of the opinion that the Group can fund its capital expenditures and working capital requirements for the financial year ending 30 June 2012 with internal cash resources and short-term bank borrowings.

Treasury policy The Group invests its surplus funds in accordance with a treasury policy approved from time to time by the board of directors. Surplus funds are placed in bank deposits or invested in investment grade debt securities. Bank deposits are principally maintained in Hong Kong and United States dollars. Investments in debt securities are denominated in either Hong Kong dollar or United States dollar, and having a maximum maturity of three years. The Group's policy is to hold its investments in debt securities until maturity.

The Group is required to arrange for banks to issue performance bonds and letter of credit on its behalf. The Group may partially or fully collateralise such instruments by cash deposits to lower the issuance costs. Pledged bank deposits amounted to $109 million as at 31 December 2011 (30 June 2011: $411 million).

Functional currency and foreign exchange exposure The functional currency of the Group is the Hong Kong dollar. All material revenues, expenses, assets and liabilities, except for the Group's United States dollar bank deposits and debt securities are denominated in Hong Kong dollar. The Group therefore does not have any significant exposure to foreign currency gain or loss other than from its United States dollar denominated bank deposits and debt securities. The Group does not currently undertake any foreign exchange hedging. Contingent assets and liabilities Fixed-mobile interconnection charge

As at 31 December 2011, the Group had contingent assets and liabilities in respect of fixed-mobile interconnection charge of up to $351 million (30 June 2011: $285 million) and $243 million (30 June 2011: $197 million) respectively as disclosed in note 13 to this results announcement.

Performance bonds

Certain banks, on the Group's behalf, had issued performance bonds to the telecommunications authorities of Hong Kong and Macau in respect of obligations under mobile licences issued by those authorities. The total amount outstanding as at 31 December 2011 under these performance bonds was $709 million (30 June 2011: $658 million).

Lease out, lease back arrangement

A bank, on the Group's behalf, had issued a letter of credit to guarantee the Group's obligations under a lease out, lease back arrangement entered into during the year ended 30 June 1999. This letter of credit is fully cash collateralised using surplus cash deposits. The directors are of the opinion that the risk of the Group being required to make payment under this guarantee is remote.

Employees and share option scheme The Group had 2,024 full-time employees as at 31 December 2011 (30 June 2011: 1,951), with the majority of them based in Hong Kong. Total staff costs were $317 million for the period ended 31 December 2011 (first half of 2010/11: $253 million).

Employees receive a remuneration package consisting of basic salary, bonus and other benefits. Bonus payments are discretionary and depend, inter-alia, on both the Group's performance and the individual employee's performance. Benefits include retirement schemes, medical and dental care insurance. Employees are provided with both internal and external training appropriate to each individual's requirements.

The Group has a share option scheme under which the Company may grant options to participants, including directors and employees, to subscribe for shares of the Company. During the period under review, 1,642,500 new share options were granted; 1,393,000 share options were exercised; and 675,000 share options were cancelled or lapsed. 38,766,000 (30 June 2011: 39,191,500) share options were outstanding as at 31 December 2011.

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