Q: The management buyout in May was intended to fund your parent company City Telecom (HK) Limited’s new multimedia venture. It consists of a HK$2.65 billion capital injection from CVC Capital Partners and a syndicated loan of HK$2.5 billion. How do these developments and managing this debt change your operation?
A: The transition we are going through now is that 63 of us are putting in HK$165 million to co-own the company. This is a very serious commitment since we are buying into an unlisted entity. There has to be a lot more discipline with the debt. As we manage our monthly budget…. Our whole mindset has changed now because we are owners of the company.
Rather than cash management, it’s more management of the debt side and we are looking to pay down the five-year loan quickly. We are looking for an exit in three to five years.
Q: How did you structure the syndicated loan?
A: It took a lot of effort. I think the banks like the fact that we are owner-managers, not agent-managers. If this company goes down, we lose a very substantial amount.
The HK$2.5 billion syndicated loan was led by J.P. Morgan and Standard Chartered. According to the lead syndicate, this is one of the very few examples where they had a 100% take up rate. They only invited 11 banks to their first round of presentation and all of them signed up.
The debt has some typical incentives—the interest rate is a functional leverage, so the quicker you pay down the leverage the interest rate goes down.
Q: How have your bank relationships evolved since the debt crisis?
A: We try to have a mix of banks, like what we did during the crisis. It would be a combination of a global bank, a Chinese bank… but they’re all tier-one banks. For the sake of diversification, you don’t want to have all three [of them as] US banks.
Now we have a pool of lenders from our syndicated loan—J.P. Morgan, Standard Chartered, UOB, DBS, Credit Agricole, Natixis, GE Commercial Finance, Chinatrust, Fubon, Sumitomo Mitsui Banking Corp., Mizuho Corporate Bank and ING.
Q: Why do you prefer equity over stock options?
A: Over my eight years with CTI, the vast majority [of my gains] have been non-salaried—from the dividends and capital gain of the CTI stocks I bought with my own money and other performance-based incentives.
I think there’s a direct misalignment for any corporate executives, say an investment banker, who is expected to make money from salary [and stock options]. It has to be long-term value creation, mutual value creation.
That’s the beauty of the CVC arrangement. We don’t have stock options with CVC. My personal experience with stock option is once they fall below the exercise price, or below a certain level, you give up because there’s no cost. But in this buyout we have equity, there’s real pain on the way down and there’s real gain on the way up. You are highly motivated.
Q: Would you venture outside Hong Kong?
A: Not in the foreseeable future. Hong Kong is a lucrative market. We are tiny compared to what the market potential is here. The misconception is that 85% of Hong Kong’s households already have a broadband connection…but only 35% of them have a fibre to their home connection, and we have about 60% of that market segment. So there’s a huge growth potential. We generate phenomenonal returns, with 90% gross margin in our business.
Q: How big is your treasury team?
A: Half a person, I guess. Our mindset is that we will make or break our company based on our operational performance, not on our yield enhancement. We manage risk by doing everything in plain vanilla fixed deposits and distribute them among different banks. We don’t do any principal-guaranteed products or anything funky.
When we did have cash [at CTI], we had reasonable working capital. We had a very large revolving credit facility, so liquidity is very transparent and this is a beautiful business because our customers are on two-year contracts and bad debt is consistently less than 1% of our revenue. Basically, I have full transparency for at least two years. That’s something we can manage well and there was not a lot of treasury function to do really.
Q: What is your hedging policy?
A: We hedge our interest rates [for the syndicated loan]. Basically we don’t take any financial exposures—we are a live or die operation, not through treasury. Our income is all in Hong Kong dollars, so there’s no need to hedge FX exposure.
Q: Accounting scandals of US-listed Chinese companies and high compliance costs have driven many of them back home. What are the benefits for CTI to be dually listed in Hong Kong and the NASDAQ?
A: If you go back to CTI’s history, two-third of investments into CTI’s network was funded by the capital markets. Ricky [Wong Wai-kay] founded the company with CAN$100,000 and the rest of it came from profits and the capital markets. You would have a dual listing if you can widen the depth of your investor base. Since 2008, with Sarbanes-Oxley and so forth, many dual-listed companies have started delisting from the US, but keeping their Hong Kong listings.
We actually went the other way around. We ended up with a much stronger US investor base than the Hong Kong one. We took advantage of the dual listings and we clearly would not be here today without that extra funding.
The benefits we received from the US market far exceeded the [compliance] cost. In April 2010, we tried to do a private placement in Hong Kong for HK$3.5 a share and failed. Three months later, we placed our shares at HK$5 a share in the US and it was four times oversubscribed.
Q: How does the US investor base differ from Hong Kong’s?
A: For some small [US] investors, their mandate maybe limited to NASDAQ-listed companies only and they could not buy us unless we are dually listed. As a corporate treasurer, it’s a matter of matching and putting in the [extra] miles. I made eight trips to the US [to engage investors there] before we did our fundraising there.
Q: What’s your greatest risk?
A: Complacency. Some of our people are paid extremely well because of past performances. But we need to ensure that we are constantly changing because clearly our competitors are copying our network and they have a lot more resources than we have. It’s always tempting to just harvest what you put in the past without reinvesting for the next ten years, especially when you are under tight key performance indicators set by yourself.
Q: Is there any operational risk?
A: I see very little. The networks are incredibly difficult to replicate and enter. When we started to invest in [optical] fibre that was straight after the TMT bubble and people were saying these guys are stupid. When we lost money for seven years, nobody copied us. Today, everybody is copying our network.
Q: What’s your response to skepticism over CTI chairman Ricky Wong’s new multimedia venture? Critics cited cutthroat competition for advertising in Hong Kong’s television market and the fact that he hasn’t obtained the license yet.
A: I worked with Ricky for over a decade and I have full confidence in him. I sold my home to buy equity in CTI eight years ago and I’m keeping my equity in CTI. I think he’s going to change the [TV] industry like how he changed the telecom industry.
There’s so much money to be made in television. It’s not advertising. Advertising is going to be a drop in the ocean. The Hong Kong market is tiny compared to the global market in Chinese content. The Internet has made the world boundary-less. If you make good leading edge content, you can sell it anywhere and there’s so many different ways of monetizing it.