Monday, November 28, 2011

First Business Trust (HKT Trust - Stock Code IPO Stock Analysis

Hong Kong Telecom Trust (HKT Trust stock code:, a spin-off telecommunications asset from the core business of PCCW Ltd (stock codes: in Hong Kong and PCCWY in the U.S. as ADRs), is currently the leading integrated provider of fixed-line telephony network, IDD calling, data and retail broadband, mobile and wireless (2G, 3G., CDMA and Wi-Fi systems) telecommunications services in Hong Kong, based on the industry data affirmed by the local OFTA (Office of Telecommunications Authority). Hong Kong Telecom Limited (HKT) was acquired by the PCCW Ltd (Pacific Century CyberWorks Limited) in 2000, and they merged to become a media and telecommunications giant in Hong Kong as the merged group owns a leading telecommunications network infrastructure in various technology platforms.

Hong Kong Telecom Trust is now going to raise a maximum of HKD$ 10.7 billion by issuing up to 2.36 billion of share stapled units (SSU) under an IPO (Initial Public Offering), provided that the over-allotment option can be completely exercised. HKT Trust (HKT-SS stock code: will start trading on 29 Novermber 2011 on the Hong Kong Stock Exchange (HKEx stock code: and will become the first-ever fixed single investment trust (or called business trust) IPO listing in the city. Listing through the business trust, by definition, allows HKT Trust to pay dividends based on annual adjusted funds flow (AFF, or operating cash flow), to raise cash but need not to give away control of the HKT Limited and disallow HKT Trust to incur debt, through the issue of share stapled units (SSU). Each share stapled unit (SSU) consists of a unit of HKT Trust, a preference share in HKT Limited (which is stapled to the unit), and a beneficial interest in ordinary share of HKT Limited held by the trustee manager on behalf of the unit-holder (which is linked to the unit). Joint global sponsors of this IPO are China International Capital Corporation Ltd. (CICC), Goldman Sachs (Asia) LLC, and Deutsche Bank AG. Up to this moment, there is no participation of cornerstone investor(s) for this IPO.

After the spin-off IPO, HKT Trust (HKT-SS stock code: should be injected into the fixed-line telephony network, mobile and wireless network, data and retail broadband services, and all other local and international telecommunication assets of PCCW (stock codes: The total market capitalization of HKT Trust will reach HKD$ 30.46 billion (if the over-allotment option can be fully exercised) after the IPO listing, much higher than the original PCCW's own market capitalization of around HKD $22 billion prior to the listing. Richard Li Tzar-kai, the chairman of PCCW Ltd and also the younger son of Hong Kong business tycoon Li Ka-shing, did say that he would run for an IPO spin-off only if the market value of HKT Trust can reach at least HKD$ 28.6 billion.

It seems to be more than just a gain in market capitalization. After the IPO, PCCW will still hold 63% (or down to 59.9% if the over-allotment option can be fully exercised) of HKT Trust under the terms of consent of China United Network Communications Group Co. Ltd. (China Unicom stock code: 600050.SS), while the remaining 37% (or up to 40.1% if the over-allotment option can be fully exercised) will be held by the public investors. In addition, HKT Management Limited, the appointed trustee-manager of HKT Trust, will still be 100% owned by PCCW.

Below please find our detailed stock analysis of HKT Trust:

Attributable Profits (HKD$ million)Number of Share Stapled Units in issue (million)Earnings (in HKD$) per Share Stapled UnitPrice-to-Earnings (P/E) RatioAnnual Adjusted Funds Flow (AFF in HKD$ million)Dividend Yield (%)

(Source of HKT Trust IPO Prospectus: Hong Kong Stock Exchange - HKEx stock code:


(1) According to the IPO Prospectus, net profit attributable to HKT Trust unit-holders in 2011 and 2012 should be no less than HKD$ 934 million and HKD$ 1364 million respectively. We, however, reserve that HKT Trust may suffer from a profit reduction due to the rising sales costs, administrative expenses and finance costs as seen in the Accountant's Report of the IPO Prospectus. Attributable Profit of HKT Trust should also be under pressure owing to the downward trend of ARPUs (Average Revenue Per User per month) for its fixed-line and mobile (both 2G and 3G) telecommunications services.

Type of Telecommunications Services200820092010Overall Trend
Retail broadband245249266Up
Mobile: Blended post-paid151143141Down
Mobile: 3G post-paid206189175Down
Mobile: 2G post-paid1138976Down

Table of ARPUs (in HKD$) for fixed-line, retail broadband and mobile services

(2) The Stabilising Manager, Goldman Sachs (Asia) LLC, is allowed to exercise an over-allotment option (or called the greenshoe) on behalf of the international underwriters to issue up to an additional 308 million share stapled units during the initial 30-day stock price stabilisation period. If this over-allotment option is fully exercised, number of share stapled units in issue will be increased to 6724.7 million in 2011 (was 4363.4 million before IPO). PCCW, the trustee manager, Hong Kong underwriters, joint global sponsors and also joint coordinators have to undertake a lock-up period of their share stapled units (SSU) holdings for six months after the IPO.

(3) The calculated earnings of HKT Trust will be HKD$0.1389 per share stapled unit (basic and dilutive earnings should be identical) in 2011 and will be HKD$0.2028 in 2012. These valuations, of course, can be affected by a number of risk factors. HKT Trust is generally exposed to the potential risks of the novel share stapled units structure (in terms of investor protection, decline in distributions, change in regulations and tax treatment), business operating risks, risks of technology changes in the highly competitive IT environment, risks of credit rating downgrade etc. Credit rating agencies Moody's Investors Service (MIS) and Standard and Poor's (S&P's) currently assign Baa2 and BBB respectively to HKT, but both under review for a possible downgrade. Moody's, however, once expressed that a successful IPO listing of HKT Trust can help to reduce the debt securities of the HKT telecommunications business from USD$ 2.5 billion to USD$ 1.5 billion.

For your reference, HKT Trust has been granted certain waivers from compliance with the Hong Kong Stock Exchange (HKEx stock code: listing rules and SFC (Securities and Futures Commission of Hong Kong), in terms of PCCW connected transactions and allowing allocations of stapled share units (SSU) to qualifying PCCW shareholders or directors.

It should also be noted that the duration of HKT Trust has a fixed period of 80 years less one day. Upon the expiry, HKT Trust will terminate and all registered holders of share stapled units (SSU) will get ordinary shares which are linked to the units. HKT Limited should also redeem each preference share (which is stapled to the unit) at a redemption price equal to the par value of the preference share.

(4) Stock price of HKT Trust is taken as HKD$4.53 per share stapled unit (SSU), which is the lowest end of the proposed offer price range for this IPO listing. The 2011 and 2012 forward Price-to-Earnings (P/E) ratio of HKT Trust are calculated as 32.62 times and 22.33 times respectively.

(5)(6) HKT Trust does take advantage of its business trust listing to lure and attract yield-hungry investors, as this type of listing allows HKT Trust to pay more dividends based on annual adjusted funds flow (AFF). According to the IPO Prospectus, the expected AFFs should be HKD$ 2356 million in 2011 and HKD$ 2574 million in 2012 respectively. Its dividend yields are then calculated as 7.73% in 2011 and 8.45% in 2012 respectively, which are higher than the projected 7% yield of its major telecommunications competitor SmarTone (stock code:

General Distribution Policy:

According to the IPO Prospectus, the trust deed assumes HKT Trust to distribute 100% of its cash flows from dividends and any other distributions. Now the intention of HKT Trust is to declare and distribute 100% of its annual adjusted funds flow (AFF) to the unitholders.

Usage of this IPO-raised funds (proceeds):

(i) HKD $7.8K million will be used for debt repayment.
(ii) the remaining net proceeds will be used for payment to CAS Holding No. 1 Limited, a wholly-owned subsidiary of PCCW.

Our Stock Analysis Conclusion: we do not recommend a buy for this HKT Trust (HKT-SS stock code: IPO upon consideration of the above critical factors. Stock valuation of HKT Trust just looks expensive, with reference to its expected price-to-earnings ratio of 22.33 to 32.62 times. Its P/E is around a double to that of its local telecommunications competitors SmartTone (stock code: and Hutchison Telecommunications (stock code:, which are just around 13 times projected P/E multiple. In a longer-term, however, we consider HKT Trust as a safe and defensive play amidst the volatile global stock markets because of its strong and stable cash flows.

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