Results Highlights - One million subscribers and a record half
Pay TV - Brunt of cost pressure due to competition has been taken
Internet & Multimedia - Record profit even as competitors are in search of their first breakeven
The unaudited Group profit attributable to Shareholders for the six months ended June 30, 2005 amounted to HK$155 million, as compared to HK$147 million for the corresponding period in 2004. Basic and diluted earnings per share were both 7.7 cents for 2005, as compared to both 7.3 cents last year.
The Board has declared an interim dividend in respect of the six-month period ended June 30, 2005 of 3.5 cents (2004: 3 cents) per share, payable on Friday, October 7, 2005 to Shareholders on record as at September 30, 2005.
CONSOLIDATED PROFIT AND LOSS ACCOUNT
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
* Included in the Group's revenue reserve is positive goodwill written off against reserves in prior years amounting to HK$197,785,000.
** The special capital reserve is non-distributable and it should be applied for the same purposes as the share premium account.
NOTES TO THE ACCOUNTS
* Amortisation of programming library is included within programming costs in the consolidated profit and loss account of the Group.
MANAGEMENT DISCUSSION AND ANALYSIS
Review of 2005 Interim Results
Consolidated turnover increased by 6% or HK$68 million to HK$1,223 million with a HK$47 million increase in Internet & Multimedia turnover and a HK$28 million increase in Pay TV turnover.
Operating costs before depreciation increased by 12% to HK$816 million as programming costs increased by 15% to HK$421 million due to increase acquisition costs for sports rights and other programme enhancements. Network and other operating costs increased by 5% to HK$197 million due mainly to transponder costs of a satellite service which commenced in September 2004 and an increase in customer fulfillment costs. Selling, general and administrative expenses increased by 12% to HK$198 million due primarily to increase in Pay TV marketing and sales spending to fend off competition.
Earnings before interest, tax, depreciation and amortization or EBITDA dropped slightly by 4% to HK$407 million.
Depreciation decreased by 8% to HK$251 million due to lower depreciation charges on analogue set-top boxes, cable modems and network assets resulting from expiry of their depreciation cycle.
Profit from operations rose by HK$6 million or 4% to HK$156 million.
Income tax charges for the period represented a HK$5 million additional provision for the potential tax liability from a leveraged leasing arrangement, as partly set off by the recognition of HK$3 million net deferred tax assets for the Group.
Net profit attributable to shareholders increased by 5% or HK$8 million to HK$155 million.
Basic earnings per share were 7.7 cents as compared to 7.3 cents in 2004.
Internet & Multimedia
Broadband subscribers grew by 37,000 or 14% to 301,000 year-on-year due mainly to successful service enhancement through network upgrade, bundling strategies and the continued introduction of value-added services. ARPU increased by HK$2 to HK$144. The VoIP conveyance service reported 69,000 lines in service as of the period end, as compared to 29,000 at the end of 2004. Turnover increased by 20% to HK$279 million. Operating costs after depreciation decreased by 4% to HK$248 million due primarily to savings achieved in depreciation and selling, general and administrative expenses. Operating profit reported a record high figure of HK$31 million as compared to an operating loss of HK$27 million incurred a year ago.
As of June 30, 2005, the Group had net cash of HK$147 million, as compared to net cash of HK$30 million a year ago.
The consolidated net asset value of the Group as at June 30, 2005 was HK$1,892 million, or HK$0.94 per share. The Group's assets were free from any charge.
The Group's assets, liabilities, revenues and expenses were mainly denominated in Hong Kong dollars or U.S. dollars and the exchange rate between these two currencies has remained pegged.
Capital expenditure during the period amounted to HK$125 million as compared to HK$235 million in the same period last year. Major items included further network upgrade and expansion, broadband and VoIP equipment, television production facilities as well as investment in information systems.
The Group is comfortable with its present financial and liquidity position. Further ongoing capital expenditure and new business development will be funded by cash to be generated from operations and, if needed, bank borrowings or other external sources of funds. The Group also had total short-term bank credit facilities of approximately HK$670 million which remained unutilized as of June 30, 2005.
At June 30, 2005, there were contingent liabilities in respect of guarantees, indemnities and letters of awareness given by the Company on behalf of subsidiaries relating to overdraft and guarantee facilities of banks up to HK$662 million, of which only HK$431 million have been utilised by the subsidiaries.
Subsequent to the end of the period under review, the Group has reached a settlement agreement with the Inland Revenue Department on a tax dispute concerning a leveraged leasing arrangement already expired in September 2003. Net of the amount indemnified by Wharf Communications Limited as tax liability pertaining to events occurring up to the Group's Initial Public Offering on November 1, 1999, the Group's HK$17 million share of the settlement payment has been fully provided up to the end of June 2005.
E. Human Resources
The Group had a total of 3,273 employees at the end of the first half
of 2005. Total salaries and related costs incurred during the corresponding
period amounted to HK$389 million (2004: HK$371 million). The Group has
a performance bonus scheme in place to motivate and reward employee performance
to fulfill the Group's business targets.
F. Operating Environment and Competition
In the first half of 2005, competition in both the Pay TV and broadband sectors was more intense than at any time since the Group began operation 12 years ago. Bundled "triple play" service of television, voice and data was the main battlefield.
The latest competitor to join that battlefield is TVB's Galaxy, rebranded SuperSUN TV after having secured new investors. Galaxy has concluded an agreement for its service to be distributed over Hutchison Global Communications' broadband network and to be bundled with the latter's voice and data services. NOW Broadband TV, meanwhile, continued to play aggression in marketing its services.
These developments caused the Group's Pay TV subscription growth to stutter and the Group rolled out mini packages, at a lower price point, with a higher profile marketing campaign to respond.
In the meantime, bundled packages continued to spur growth for our broadband subscription in a keenly contested operating environment. The Group's packages have proven to be competitive in sustaining the growth momentum which has been rebuilding since the middle of last year.
The Group will continue to monitor market developments closely and will adjust its marketing strategy accordingly. Swift action taken by the Group has so far managed to contain the impact of competition with some degree of success, albeit at the expense of margin erosion in some sectors. The outlook for the remainder of the year will remain harsh and the Group has to work very hard to stay on top of the game.
Through service enhancement and timely response to changes in market conditions, the Group managed to emerge relatively unscathed from a keen competitive market place in the first half of 2005, reporting growth in performance for its core businesses.
However, with other Pay Television players beginning to establish themselves in the market, competition will only become more severe in the remainder of the year. While our programming platform, now parading close to 100 channels, still leads the rest of the pack, we need to market our products more effectively and spend our resources more intelligently to stay on top. At the same time, we shall continue to look beyond the conventional market for new opportunities.
On the broadband service front, while we are encouraged by the business returning to a profitable growth track, we shall continue to enhance our service by improving our after sales service and the introduction of more value-added services. We shall continue to look out for new opportunities to expand our multimedia content provision service.
Competition poses challenges to us as well as to our competitors. But we believe we can prevail with our expertise in running Pay TV and broadband services and in producing multimedia contents; our experience in marketing our products and our established infrastructure in servicing customers.
During the financial period under review, the Company has complied with all those code provisions set out in the Code on Corporate Governance Practices contained in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited which became applicable to the Company in respect of the period under review, except for one code provision with respect to the roles of chairman and chief executive officer to be performed by different individuals.
PURCHASE, SALE OR REDEMPTION OF SHARES
Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any listed securities of the Company during the financial period under review.
The Register of Members will be closed from Monday, September 26, 2005 to Friday, September 30, 2005, both days inclusive, during which period no transfer of shares of the Company can be registered. In order to qualify for the abovementioned interim dividend, all transfers, accompanied by the relevant share certificates, must be lodged with the Company's Registrars, Tengis Limited, at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, not later than 4:30 p.m. on Friday, September 23, 2005.
Hong Kong, August 12, 2004As at the date of this announcement, the Board of Directors of the Company comprises Mr. Stephen T. H. Ng, Mr. Samuel S. F. Wong and Mr. Quinn Y. K. Law, and five independent non-executive Directors, namely, Mr. F. K. Hu, Mr. Victor C. W. Lo, Dr. Dennis T. L. Sun, Sir Gordon Y. S. Wu and Mr. Anthony K. K. Yeung.