CTEL Hong Kong Television Network Ltd. (MM)

Net profit up 44.0% year-on-year to HK$167.6 million with basic earnings per share amounted to HK21.9 cents versus HK17.3 cents for same period last year

Declared an interim dividend of HK15 cents per ordinary share, up 131% from HK6.5 cents per ordinary share for same period last year

Core EBITDA ^(note) increased by 16.7% year-on-year to HK$301.6 million

Turnover grew by 5.1% year-on-year to HK$825.9 million driven by higher revenue contribution from our Fixed Telecommunications Network Service (FTNS) business of 7.6% year-on-year to HK$727.2 million

For six months to 28 February 2011, broadband subscription increased by 25,000 net additions to 551,000, dominating 68% of total estimated market growth of 37,000, despite large price increase implemented on 1 September 2010

Core EBITDA represents the EBITDA for any period plus any net loss from extinguishment of 10-year senior notes.

 

Turnover

 

Network costs

 

Other operating expenses

 

Other income/(losses), net

 

Finance costs, net

 

 

Profit before taxation

 

Income tax expense

 

 

Profit attributable to shareholders

 

 

Basic earnings per share

 

 

Diluted earnings per share

 

 

Non-current assets

 

Goodwill

Fixed assets

Long-term prepayment

Deferred expenditure

 

 

 

 

 

Current assets

 

Accounts receivable

Other receivables, deposits and prepayments

Deferred expenditure

Cash at bank and in hand

 

 

 

 

 

Current liabilities

 

Bank overdrafts — unsecured

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

Derivative financial instrument

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

This unaudited interim financial report has been prepared in accordance with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited; and comply with International Accounting Standard (“IAS”) 34, “Interim Financial Reporting”, issued by the International Accounting Standards Board (the “IASB”) and Hong Kong Accounting Standard (“HKAS”) 34, “Interim Financial Reporting” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”). It was authorised for issuance on 20 April 2011.

This unaudited interim financial report has been prepared in accordance with the same accounting policy adopted in the financial statements for the year ended 31 August 2010, except for the accounting policy changes that are expected to be reflected in the financial statements for the year ending 31 August 2011. Details of these changes in accounting policies are set out in note 2.

The preparation of an interim financial report in conformity with IAS 34 and HKAS 34 requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses on a year to date basis. Actual results may differ from these estimates.

This interim financial report contains condensed consolidated financial statements and selected explanatory notes. The notes include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the financial statements for the year ended 31 August 2010. The condensed consolidated interim financial statements and notes thereon do not include all of the information required for full set of financial statements prepared in accordance with International Financial Reporting Standards (“IFRSs”) issued by the IASB and Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the HKICPA.

The financial information relating to the financial year ended 31 August 2010 that is included in the condensed consolidated interim financial statements as being previously reported information does not constitute the Company’s statutory financial statements for that financial year but is derived from those financial statements. The statutory financial statements for the year ended 31 August 2010 are available at the Company’s registered office. The independent auditors have expressed an unqualified opinion on those financial statements in their report dated 9 November 2010.

SIGNIFICANT ACCOUNTING POLICIES

The IASB has issued a number of new or revised IFRSs, which term collectively includes IASs and Interpretations, that are first effective or available for early adoption for the current accounting period of the Group. The equivalent new or revised HKFRSs, which term collectively includes HKASs and Interpretations, consequently issued by the HKICPA as a result of these developments have the same effective date as those issued by the IASB and are in all material aspects identical to the pronouncements issued by the IASB. None of these changes in policies would have a material impact on the Group’s financial statements.

TURNOVER 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.

Segment information

The Group has two reportable segments, as described below, which are the Group’s strategic business units. The strategic business units offer different services, and are managed separately because they require different technology and marketing strategies. For each of the strategic business units, the chief operating decision-maker reviews internal management reports on a monthly basis. The following summary describes the operations in each of the Group’s reporting 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

 

 

Reportable segment turnover

 

 

Reportable segment profit (note 3(b))

 

 

Turnover

 

External sales

Inter-segment sales

 

 

Reportable segment turnover

 

 

Reportable segment profit (note 3(b))

 

 

Segment assets

 

As at 28 February 2011

 

 

As at 31 August 2010

 

Reconciliation of reporting segment profit or loss

 

Segment results

Other income/(losses), net

Finance costs, net

 

 

Profit before taxation

 

Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Company, is a Fixed Telecommunications Network Services (“FTNS”) licensee and 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 to be collected. In prior years, majority of the mobile operators rejected HKBN’s demand for payment of mobile interconnection charges. As a result of non-payment by certain mobile operators, in 2004, the Group requested the TA to make a determination (the “2004 Determination”) on the level of mobile interconnection charges payable by one of the mobile operators (“mobile operator under dispute”) to HKBN; and the effective date of the determined mobile interconnection charges.

In June 2007, the 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 and the mobile operator under dispute paid mobile interconnection charge for the relevant period accordingly.

Subsequent to June 2007, HKBN entered into contractual agreements with several mobile operators which agreed to pay mobile interconnection charges based on the 2004 Determination for the period from 1 April 2002 to 31 August 2004 and with respect to the period from 31 August 2004 at the interim rate stated in the contractual agreements. The interim rate was subject to adjustment based on final determination of the TA.

In February 2008, since certain mobile operators had still not yet settled their mobile interconnection charges for interconnection services provided by HKBN, HKBN requested TA to make a new determination on the rate of mobile interconnection charge and interest thereon with four mobile operators.

In September 2008, the TA accepted HKBN’s request for determination on the rate of mobile interconnection charges for the period from 1 April 2002 to 26 April 2009 payable by the mobile operators that have not reached contractual agreements with HKBN, and the rate for the period from 1 September 2004 to 26 April 2009 payable by those mobile operators that have reached contractual agreements with HKBN, and the interest rate thereon (the “2008 Determination”).

In May 2010, the TA issued its decision on the 2008 Determination which set out the rates of mobile interconnection charges payable by the mobile operators under dispute.

Included in the accounts receivable balance as at 28 February 2011 are receivables relating to mobile interconnection charges of HK$4,634,000 (31 August 2010: HK$39,763,000).

NETWORK COSTS

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

OTHER INCOME/(LOSSES), NET

 

Interest income

Other income

Net exchange gain/(loss)

Loss on extinguishment of 10-year senior notes

 

 

 

 

PROFIT BEFORE TAXATION

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

Finance costs, net

 

Interest element of finance leases

Interest on 10-year senior notes

Interest on bank borrowings and other borrowing costs

Change in fair value of derivative financial instrument

Amortisation of upfront costs on bank borrowings

 

 

 

 

Other items

 

Advertising and marketing expenses

Amortisation of deferred expenditure

Depreciation of owned fixed assets

Depreciation of fixed assets held under finance leases

Provision for doubtful debts

Gain on disposal of fixed assets

 

TALENT COSTS

 

Salaries, wages and other benefits

Equity settled share-based transactions

Retirement benefit costs — defined contribution plans

Less: Talent costs capitalised as fixed assets

 

 

 

 

Talent costs include all compensation and benefits paid to and accrued for all individuals employed by the Group, including directors of the Company.

Talent costs include directors’ emoluments and research and development cost of HK$5,658,000 (for the six months ended 28 February 2010: HK$5,493,000) but exclude Talent costs of HK$5,347,000 (for the six months ended 28 February 2010: HK$5,693,000) recorded in network costs and HK$105,586,000 (for the six months ended 28 February 2010: HK$113,495,000) recorded in advertising and marketing expenses.

INCOME TAX EXPENSE

The provision for Hong Kong Profits Tax is calculated by applying the estimated annual effective tax rate of 15.2% (six months ended 28 February 2010: 16.7%) to the assessable profit for the six months ended 28 February 2011. Taxation for overseas subsidiaries is similarly calculated using the estimated annual effective rates of taxation that are expected to be applicable in the relevant countries.

The amount of income tax expense in the consolidated income statement represents:

 

Current taxation

— Hong Kong profits tax

— over-provision in respect of prior years

— Overseas taxation

— provision for interim period

— Special tax credit received in respect of prior year

Deferred taxation relating to the origination and reversal of temporary differences

 

 

Income tax expense

 

DIVIDENDS

Dividends attributable to the interim period

 

Interim dividend declared and paid after the interim period end of HK15 cents per ordinary share (28 February 2010: HK6.5 cents per ordinary share)

 

At a board meeting held on 20 April 2011, the Directors of the Company have recommended to pay an interim dividend of HK15 cents per ordinary share in cash for the six months ended 28 February 2011 (for the six months ended 28 February 2010: HK6.5 cents per ordinary share). The interim dividend will be distributed on or about 31 May 2011 to shareholders whose names appear on the register of members of the Company as at the close of business on 18 May 2011.

The interim dividend has not been recognised as a liability at 28 February 2011.

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

 

Final dividend in respect of the financial year ended 31 August 2010, approved and paid during the following interim period, of HK13.5 cents per ordinary share (2010: HK16 cents per ordinary share)

 

EARNINGS PER SHARE

 

Profit attributable to shareholders

 

Weighted average number of ordinary shares

 

Issued ordinary shares at the beginning of the period

Effect of share options exercised

 

 

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

Incremental shares from assumed exercise of share options

 

 

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

 

 

Basic earnings per share

 

 

Diluted earnings per share

 

ACCOUNTS RECEIVABLE

The aging analysis of the accounts receivable is as follows:

 

Current–30 days

31–60 days

61–90 days

Over 90 days (note)

 

 

 

Less: Allowance for doubtful debts

 

 

 

 

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 amounts over 90 days for the Group included receivables relating to mobile interconnection charges of HK$4,634,000 as at 28 February 2011 (31 August 2010: HK$39,763,000).

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 2010

 

Total comprehensive income for the period

Dividend paid in respect of previous year

Shares issued upon exercise of share options

Equity settled share-based transactions

 

 

At 28 February 2011

 

 

At 1 September 2009

 

Total comprehensive income for the period

Dividend paid in respect of previous year

Shares issued upon exercise of share options

Equity settled share-based transactions

 

 

At 28 February 2010

 

The Group turnover increased by 5.1% year-on-year to HK$825.9 million. Revenue growth driven mainly by an increase in FTNS business’s turnover by 7.6% to HK$727.2 million, which more than offset the decline in International Telecommunications Service business (IDD) of 10.4% year-on-year to HK$98.7 million. In absolute terms, FTNS revenues increased by HK$51.4 million versus IDD revenues decline of HK$11.5 million. FTNS’s turnover contributed to 88.0% of the Group turnover in 1H FY2011 (86.0% in 1H FY2010).

Strong growth in core EBITDA and net profit. Monetising the critical mass we achieved in FY2010, our core EBITDA for 1H FY2011 increased by 16.7% year-on-year to HK$301.6 million, resulting in core EBITDA margin expansion to 36.5% versus 32.9% a year ago. During 1H FY2011, we also benefited from the full period net interest savings from repurchase and redemption of our senior notes during FY2010, and our profit attributable to shareholders increased by 44.0% year-on-year to HK$167.6 million in 1H FY2011 with basic earnings per share at HK21.9 cents (HK17.3 cents in 1H FY2010).

Continuous broadband subscription growth. Despite fierce competition and increasing our core symmetric 100Mbps broadband service from HK$99/month to HK$169/month on 1 September 2010, for the six months to 28 February 2011, we achieved 25,000 net additions to 551,000 broadband subscriptions, which represents a dominant 68% of total market growth estimated at 37,000. Our estimate of total market growth is based on the latest official statistics from The Office of the Telecommunications Authority (“OFTA”) (http://www.ofta.gov.hk/en/datastat/eng_cus_isp.pdf), for five months period of 2,139,282 as of 31 January 2011 less 2,108,417 as 31 August 2010 x 6/5. For clarification, we report subscriptions, which are consistent with the OFTA statistics.

131% increase in Dividend Per Share to HK15 cents. For the six months to 28 February 2011, we have declared an interim dividend of HK15 cents per ordinary share representing a payout of about 68% in profit attributable to shareholders. Whilst this is higher than same period last year, it is consistent with our dividend payout policy announced last year of between 60-90% of profit attributable to shareholders.

 

Repayable within one year

Repayable in the second year

Repayable in the third to fifth year

 

 

Total

 

Broadband subscriptions growth from 526,000 as of 31 August 2010 to exceed 580,000 as of 31 August 2011 (previously was 600,000 subscriptions)

EBITDA to exceed HK$580 million (unchanged)

Capital expenditure on core telecommunications business of approximately HK$350 million (unchanged)