CTEL Hong Kong Television Network Ltd. (MM)

Turnover grew by 14.2% year-on-year to HK$1,303.0 million due to strong Fixed Telecommunications Network Services (FTNS) business

Net profit up 3.3x to HK$125.2 million driven by record high FTNS profitability

Overtook Cable TV operator to become the largest alternative residential broadband Internet service provider in Hong Kong:

subscriptions up by 27.9% year-on-year outpacing market growth of 4.8%

blended average revenue per user (ARPU) for broadband subscription up 9.1% to HK$191 per month

churn lowered to well below 1.0% per month

EBITDA increased by 6.8% year-on-year to HK$378.0 million with EBITDA margin decreasing from 31.0 % to 29.0% due to increased discretionary investment in brand enhancement and increase in variable customer acquisition costs

FTNS turnover increased by 23.8% year-on-year to HK$1,011.0 million, with subscriptions growth of 118,000 to 801,000 during the year

Balance Sheet continued to improve with net debt to EBITDA down to 0.69x as of 31 August 2008 from 1.15x as of 31 August 2007

Basic earnings per share amounted to HK19.7 cents

Declared a final dividend of HK2 cents per share with a scrip dividend option

 

Turnover

 

Other revenues

 

Network costs and cost of inventories

 

Other operating expenses

 

 

Operating profit

 

Finance costs

 

 

Profit before taxation

 

Income tax benefit/(expense)

 

 

Profit attributable to shareholders

 

 

Dividends

 

 

Basic earnings per share

 

 

Diluted earnings per share

 

 

Non-current assets

 

Goodwill

Fixed assets

Other financial assets

Derivative financial instrument

Long term receivable and prepayment

Deferred expenditure

Deferred tax assets

 

 

 

 

 

Current assets

 

Accounts receivable

Other receivables, deposits and prepayments

Inventories

Deferred expenditure

Other financial assets

Pledged bank deposits

Cash at bank and in hand

 

 

 

 

 

Current liabilities

 

Accounts payable

Other payables and accrued charges

Deposits received

Deferred services revenue

Tax payable

Current portion — obligations under finance leases

 

 

 

 

 

Net current assets

 

 

Total assets less current liabilities

 

 

Non-current liabilities

 

Deferred tax liabilities

Long-term debt and other liabilities

 

 

 

 

 

Net assets

 

 

Capital and reserves

 

Share capital

Reserves

 

 

Total equity attributable to equity shareholders of the Company

 

Basis of preparation and accounting policies

These financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”) which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

The measurement basis used in the preparation of the financial statements is the historical cost basis except that certain financial assets are stated at their fair values or amortised costs.

The preparation of financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Up to the date of issue of these financial statements, the HKICPA has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended 31 August 2008 and which have not been adopted in these financial statements.

The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of the following developments is unlikely to have significant impact on the Group’s results of operations and financial position.

Changes in accounting policies

The HKICPA has issued a number of new and revised HKFRSs that are effective or available for early adoption for the current accounting period of the Group and the Company.

There have been no significant changes to the accounting policies applied in these financial statements for the years presented as a result of adoption of these new standards. However, as a result of the adoption of HKFRS 7, Financial instruments: Disclosures and the amendment to HKAS 1, Presentation of financial statements: Capital disclosures , there have been some additional disclosures provided as follows:

As a result of the adoption of HKFRS 7 and as compared with the information previously required to be disclosed by HKAS 32, Financial instruments: Disclosure and presentation , the financial statements include expanded disclosure about the significance of the Group’s financial instruments and the nature and extent of risks arising from those instruments. These disclosures are set out in the annual report.

The amendment to HKAS 1 introduces additional disclosure requirements to provide information about the level of capital and the Group and the Company’s objectives, policies and processes for managing capital. These new disclosures are set out in the annual report.

Both HKFRS 7 and the amendment to HKAS 1 do not have any material impact on the classification, recognition and measurement of the amounts recognised in the financial instruments.

The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period.

Turnover, other revenues and segment information

The Group is principally engaged in the provision of international telecommunications services and fixed telecommunications network services to customers in Hong Kong and Canada. Revenues recognised during the year are as follows:

 

Turnover

 

International telecommunications services

Fixed telecommunications network services (note 3(c))

 

 

 

 

Other revenues

 

Interest income

Other income

 

 

 

 

 

Total revenues

 

Primary reporting format — business segments

The Group is organised on a worldwide basis into two business segments:

 

 

 

The Group’s inter-segment transactions mainly consist of provision of leased lines services. These transactions were entered into on similar terms as those contracted with third parties.

 

Turnover

— External sales

— Inter-segment sales

 

 

 

 

 

Segment results

 

 

Finance costs

 

 

Profit before taxation

 

Income tax benefit

 

 

Net profit

 

 

Turnover

— External sales

— Inter-segment sales

 

 

 

 

 

Segment results

 

 

Finance costs

 

 

Profit before taxation

 

Income tax expense

 

 

Net profit

 

Secondary reporting format — geographical segments

The Group’s two business segments are managed on a worldwide basis in two main geographical areas:

 

 

 

In disclosing information on the basis of geographical segments, turnover and segment results are disclosed based on the geographical location of customers.

There were no sales between the geographical segments.

 

Geographical segments:

 

Hong Kong

Canada

 

 

 

 

Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Group, as a FTNS licensee, provides interconnection services to enable delivery of telecommunications service to customers of different operators. Since the FTNS license was granted by the Telecommunication Authority (“TA”) and interconnection services have been provided, HKBN has been billing mobile operators for the interconnection services provided to them and recognising revenue (“mobile interconnection charges”) based on management’s best estimate of the amounts it expected to collect. In prior years, majority of the mobile operators, however, rejected HKBN’s demand for payment. As a result of non-payment by certain mobile operators, in 2004, the Group asked TA to make a determination (the “2004 Determination”) on the level of mobile interconnection charges payable by one of the mobile operators to HKBN; and the effective date of the determined mobile interconnection charges.

In March 2006, TA issued a preliminary analysis (the “2006 PA”) on the 2004 Determination with respect to the rates of mobile interconnection charges payable by the mobile operator under dispute. However, as of 31 August 2006, the final level of mobile interconnection charges was still subject to the 2004 Determination to be issued by TA.

In March 2007, TA issued a revised preliminary analysis (the “2007 PA”) which superseded the 2006 PA. The 2007 PA set out the rates of mobile interconnection charges, which are different from those rates stated in the 2006 PA.

In June 2007, TA issued the 2004 determination which set out the rates of mobile interconnection charge payable by the mobile operator under dispute for interconnection services provided by HKBN for the period from 1 April 2002 to 31 August 2004, which superseded the rates stated in both the 2006 PA and 2007 PA issued by TA previously.

For the year ended 31 August 2007, the Group recognised revenue related to mobile interconnection charges of HK$40,877,000 based on the 2004 Determination which included charges for the year ended 31 August 2007 and additional charges for the years ended 31 August 2005 and 2006 previously measured based on the 2006 PA. The Group has also written back bad debt provision for mobile interconnection charges receivables of HK$9,404,000 to the income statement based on the amount it expected to collect for billings outstanding through that date.

During the year ended 31 August 2008, HKBN entered into contractual agreements with additional mobile operators which agreed to pay mobile interconnection charges based on the 2004 Determination for period from 1 April 2002 to 31 August 2004 and for the subsequent period at an interim rate stated in the agreements which will be adjusted based on further determination to be issued by TA.

In February 2008, HKBN requested TA to make a new determination with four mobile operators (the “2008 Determination”) on the rate of mobile interconnection charge and interest thereon. In September 2008, TA indicated that it accepted HKBN’s request for determination, which covers the mobile interconnection charges payable by the mobile operators under the determination, for the period from 1 April 2002 to 26 April 2009 (for those mobile operators who have not reached the relevant contractual agreements with HKBN) or for the period from 1 September 2004 to 26 April 2009 (for those mobile operators who have reached the relevant contractual agreements with HKBN), and the interest rate therefor.

For the year ended 31 August 2008, the Group recognised revenue related to mobile interconnection charges of HK$29,568,000 representing the amount of mobile interconnection charges management expects to collect.

Network costs and cost of inventories

Network costs and cost of inventories mainly include interconnection charges paid to local and overseas carriers, leased line rentals, program fees, production costs for the IP-TV service and costs of inventories sold, and do not include depreciation charge which is included in other operating expenses.

The Group estimates the Universal Services Contributions (“USC”) payable to PCCW-HKT to fund the costs of network development in remote areas in Hong Kong and includes such estimated costs as part of the network costs. TA periodically reviews that actual costs of the network development and revises the amounts owed to PCCW-HKT or to be refunded by PCCW-HKT to the USC contributing parties.

On 28 December 2007, TA issued a statement (“TA Statement”) on the USC and confirmed the actual contribution level for the period from 1 January 2005 to 30 June 2007. Based on the TA Statement, an amount of HK$7,617,000 was recorded as a reduction against the network costs of the Group for the year ended 31 August 2008.

The actual contribution level for the period subsequent to 30 June 2007 has not yet been confirmed by TA.

Profit before taxation

Profit before taxation is arrived at after charging and (crediting) the following:

Other operating expenses

 

Advertising and marketing expenses (note (i))

Amortisation of deferred expenditure

Auditors’ remuneration

Depreciation of owned fixed assets

Depreciation of fixed assets held under finance lease

Operating lease charges in respect of land and buildings

Operating lease charges in respect of equipment

Provision for doubtful debts (note (ii))

Loss on disposal of fixed assets

Staff costs (note 5(c))

Others

 

 

 

 

Included in the advertising and marketing expenses is expense in respect of equity settled share-based transaction of HK$90,000 (2007: HK$361,000).

The amount for the year ended 31 August 2007 included write-back of provision for mobile interconnection charges receivables of HK$9,404,000 (note 3(c)).

Finance costs

 

Interest element of finance leases

Interest on 10-year senior notes

Amortisation of incidental issuance costs

Other borrowing cost

 

 

 

 

Staff costs

 

Wages and salaries

Unutilised annual leave

Equity settled share-based transaction

Retirement benefit costs — defined contribution plans

Less: staff costs capitalised as fixed assets

 

 

 

 

Staff costs include directors’ emoluments and research and development cost of HK$9,593,000 (2007: HK$4,977,000) but exclude staff costs of HK$14,482,000 (2007: HK$14,478,000) recorded in network costs and HK$194,724,000 (2007: HK$138,728,000) recorded in advertising and marketing expenses.

Other items

 

Net exchange (gain)/loss

Realised and unrealised gain on other financial assets

Realised and unrealised loss on derivative financial instruments

Realised and unrealised gain on long-term bank deposit

Gain from extinguishment of senior notes

Cost of inventories

 

Taxation

Hong Kong profits tax has been provided at the rate of 16.5% (2007: 17.5%) on the estimated assessable profit for the year. Taxation on overseas profits has been calculated on the estimated assessable profit for the year at the income tax rates prevailing in the overseas countries in which the Group operates.

The amount of tax benefit/(expense) in the consolidated income statement represents:

 

Current taxation:

— Hong Kong profits tax

— Overseas taxation

— Under-provision of overseas taxation in prior years

Deferred taxation relating to the origination and reversal of temporary differences

 

 

Income tax benefit/(expense)

 

Dividends

Dividends payable to equity shareholders of the Company attributable to the year:

 

Interim dividend declared and paid of HK4 cents per ordinary share (2007: HK4 cents per ordinary share)

Final dividend proposed after the balance sheet date, of HK2 cents per ordinary share (2007: HK4 cents per ordinary share)

 

 

 

 

The final dividend proposed after the balance sheet date has not been recognised as a liability at the balance sheet date.

During the year ended 31 August 2008, a scrip dividend option was offered to all shareholders with registered addresses in Hong Kong that were entitled to the interim dividend in respect of the six-month period ended 29 February 2008. 8,838,938 shares were issued during the year ended 31 August 2008 to shareholders who had elected to receive all or part of their entitlement to dividends in the form of scrip.

Dividends attributable to the previous financial year, approved and paid during the year:

 

Final dividend in respect of the financial year ended 31 August 2007, approved and paid of HK4 cents per ordinary share (2007: Nil)

 

During the year ended 31 August 2008, a scrip dividend option was offered to all shareholders with registered addresses in Hong Kong that were entitled to the final dividend in respect of the financial year ended 31 August 2007. 11,227,213 shares were issued during the year ended 31 August 2008 to the shareholders who had elected to received all or part of their entitlement to dividends in the form of scrip.

Earnings per share

 

Profit attributable to shareholders

 

 

Issued ordinary shares at 1 September

Effect of scrip dividend issued

Effect of share options exercised

 

 

Weighted average number of ordinary shares at the end of the year (basic)

Incremental shares from assumed exercise of share options

 

 

Weighted average number of ordinary shares at the end of the year (diluted)

 

 

Basic earnings per share

 

 

Diluted earnings per share

 

Accounts receivable

The majority of the Group’s accounts receivable are due within 30 days from the date of billings. Subscribers with receivable that are more than 3 months overdue are requested to settle all outstanding balance before further credit is granted.

The aging analysis of the accounts receivable (net of allowance for doubtful debts) is as follows:

 

Current — 30 days

31 — 60 days

61 — 90 days

Over 90 days

 

 

 

 

The amounts over 90 days for the Group included receivable relating to mobile interconnection charges of HK$64,407,000 as at 31 August 2008 (31 August 2007: HK$92,383,000) (see note 3(c)).

Accounts payable

The aging analysis of the accounts payable is as follows:

 

Current — 30 days

31 — 60 days

61 — 90 days

Over 90 days

 

 

 

 

Capital and reserves

 

At 1 September 2007

Profit attributable to shareholders

Dividend paid in respect of previous year

Shares issued in respect of scrip dividend of previous year

Dividend paid in respect of current year

Shares issued in respect of scrip dividend of current year

Shares issued upon exercise of share option

Equity settled share-based transactions

Exchange adjustments on translation of the financial statements of subsidiaries

 

 

At 31 August 2008

 

 

At 1 September 2006

Profit attributable to shareholders

Dividend paid in respect of current year

Shares issued upon exercise of share option

Equity settled share-based transactions

Exchange adjustments on translation of the financial statements of subsidiaries

 

 

At 31 August 2007

 

 

Repayable within one year

Repayable in the second year

Repayable in the third to fifth year

Repayable after the fifth year

 

 

Total

 

 

Net Debt (note)

Net Assets

Gearing (times)

Net debt is total long term debt and other liabilities and obligations under finance leases less cash at bank and in hand and long term bank deposits but excluded pledged bank deposits

 

December 2007 (note (i))

January 2008 (note (ii))

February 2008 (note (ii))