Highlights - Record Turnover & Earnings
TV - Investment in Differentiation Pays
& Multimedia - Regaining Market Share Momentum
CONSOLIDATED PROFIT AND LOSS ACCOUNT
NOTES TO THE ACCOUNTS
(1) Segment information
(2) Profit before taxation
* included in programming costs
(3) Income tax
Earnings per share
MANAGEMENT DISCUSSION AND ANALYSIS
Review of 2004 Operating Results
Consolidated turnover increased by 11% or HK$229 million to HK$2,372 million reflecting an increase of HK$154 million in Pay TV turnover and a HK$72 million increase in Internet & Multimedia turnover.
Operating costs before depreciation increased by 14% to HK$1,544 million as programming cost increased by 22% to HK$791 million due primarily to the carriage of UEFA Euro 2004 and higher other programme acquisition costs. Network and other operating costs increased by 5% to HK$381 million due to an increase in network repair and maintenance costs and provision for obsolete inventories. Selling, general and administrative expenses increased by 9% to HK$373 million due primarily to higher marketing expenses and sales costs.
Earnings before interest, tax, depreciation and amortization or EBITDA rose by 5% to HK$828 million.
Depreciation decreased by 1% to HK$532 million due mainly to the expiration of depreciation cycles on network assets, partly offset by further capital investments.
Profit from operations rose by HK$45 million or 18% to HK$296 million.
Finance costs decreased by HK$15 million with a corresponding HK$8 million drop in interest income to deliver HK$7 million savings in net finance costs mainly due to the full redemption of HK$300 million of fixed rate convertible bonds in November 2003. An income tax provision of HK$12 million was made for the potential tax liability from a leveraged leasing transaction. Please refer to the Contingent Liabilities section for further details.
Net profit attributable to shareholders increased by 29% or HK$64 million to HK$284 million.
Basic earnings per share were 14.1 cents as compared to 10.9 cents in 2003.
C. Liquidity and Financial Resources
The consolidated net asset value of the Group as at December 31, 2004 was HK$1,828 million, or HK$0.91 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. To the extent that there was any exchange risk, the Group made use of financial instruments, where appropriate, to manage those risks.
Capital expenditure during the year amounted to HK$428 million as compared to HK$437 million in the preceding year. Major items included investments on digital set-top boxes, cable modems and related broadband equipment, television production facilities as well as further network upgrade and expansion. The digital conversion program on the Pay TV service has largely been completed.
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 is in discussion with the Inland Revenue Department ("IRD") regarding previous years' tax affairs of The Cable Leasing Partnership and The Network Leasing Partnership ("the Partnerships") under the Group, pursuant to a leveraged leasing arrangement the Group had entered into during 1993 to 1995 which expired in September 2003.
To preserve its right, the IRD has issued protective assessments up to HK$272 million against various Group entities for the period from 1995/96 to 2003/04. The Group has since objected to the assessments and the IRD has granted unconditional holdover for HK$247 million of the assessment amount, and conditional holdover for the remaining HK$25 million. For the latter, the Partnerships have purchased HK$18 million Tax Reserve Certificates before December 31, 2004 and HK$7 million after yearend, in satisfaction of the holdover condition.
The outcome of the discussions is uncertain. Based on the tax consultant's advice, however, management is of the view that the Group's tax exposure as at December 31, 2004 under the protective assessments would amount to HK$106 million, of which up to HK$64 million would be indemnified by Wharf Communications Limited as tax liability pertaining to events occurring up to the Group's Initial Public Offering on November 1, 1999, such that the contingent tax exposure for the Group is estimated at HK$42 million. After a provision of HK$12 million made in 2004, the maximum further tax liability is estimated at HK$30 million.
The Group is dedicated to attracting, developing and retaining the best people, and strives to offer its employees a challenging and yet harmonious working environment where teamwork and a responsible attitude towards the community are encouraged. The Group's performance management system of accountability for business performance and its pay for performance culture offer every staff member the opportunity to share in its success.
To honour its obligations as a good corporate citizen and further its involvement in building a more caring and cohesive community in Hong Kong, the Group has established a Corporate Volunteer Team since 2002 to encourage active and persistent participation in community services in terms of real engagement. The Group's commitment to the society also includes donations to the underserved communities through various non-profit organizations and social welfare agencies.
Operating Environment and Competition
While PCCW aggressively enhanced its television content with sports and local news programming to supplement its Broadband and voice offerings, other competitors have also lined up "triple-play" offerings. These developments heightened competition despite the fact that a number of Broadband service providers which relied on infrastructure leasing to provide service have pulled out as the Broadband market began to consolidate.
In the Pay TV market, the Government threw exTV, operated by Galaxy, a subsidiary of the dominant Free TV operator, TVB, another lifeline by granting a one-year grace period for the latter to find new investor for it to meet a divestiture obligation. NOW Broadband TV, operated by PCCW, continued to be aggressive in content acquisition in order to match the Group's comprehensive galore of programming.
Nonetheless, the Group's Pay TV programming still enjoyed a clear edge over the competition, albeit at an escalating cost which in turn exerted pressure on operating margin. Exclusive carriage of the popular UEFA EURO 04 football tournament and top European football leagues has enabled Pay TV subscription to grow at a rate commensurate with previous years.
Responding to the change in the competition landscape, the Group launched a Broadband package bundling with a mini-Pay TV package in the middle of the year. The timely introduction of the Group's own triple-play offers, following the launch of Wharf T&T's VoIP service during the last quarter of the year, further enhanced our competitiveness.
The market has responded positively to the bundled packages. Not only has the growth momentum of Broadband subscription resumed in the second half, the yield from subscribers has also risen.
The competition landscape for the year to come will continue to be difficult with competitors going all out to chip away the Group's leadership position in both the Pay TV and Broadband service markets. The Group will not only focus on enhancing its market penetration in the conventional market but will also strive to expand its service to new markets to enhance its reach as well as income.
In the conventional market, the Group will continue to enhance its programming and service quality to not only maintain, but expand, its position in the market for both services. At the same time, the Group will build on efforts over the past few years to expand its services beyond Hong Kong.
During the year, not only had the Group expanded the reach of its satellite channel - Horizon - in China, the channel has now reached the Americas and will soon land in countries in Southeast Asia, such as Malaysia.
Not content with serving only the conventional television market, the Group has taken active steps during the year to expand its content service beyond residential homes and commercial places such as bars and karaoke.
The year also saw the realisation of the Group's "triple play" strategy with the launch of a voice service on the Group's IP telecommunications network. This has not only provided an additional income source but also enhanced the flexibility of the Group's marketing capability.
In 2005, the Group will embark on a film production project as a logical and significant step in advancing i-CABLE's ongoing strategy, starting with the launch of the Cable Entertainment News and Horizon channels, to further invest in the entertainment content business to enhance its growth.
The project will be taken up by a subsidiary company to produce up to 20 full length feature films in the next two years in collaboration with local film production houses. A distribution partner, EDKO Films Ltd, which has produced and distributed the highly acclaimed movie "Crouching Tiger Hidden Dragon," has been found.
The new venture will be managed as professionally and prudently as we do for our existing businesses and investment in films will be carefully evaluated on a project by project basis and closely monitored in terms of both quality and budget control.
Early investments on network, content production, marketing and customer service infrastructure have made these new services possible with little incremental cost and enabled the Group to prevail over competition as well as to reap returns as the economy turns around. The Group is confident that it will grow as the overall economy continues to improve.
OF FURTHER INFORMATION ON THE STOCK EXCHANGE'S WEBSITE
Hong Kong, March 03, 2005