City Telecom: A Green (Bamboo) Shoot

Jun. 1.09 | About: Hong Kong (HKTV)

I spent last week with my children in a tent in Suffolk, pretty much disconnected and oblivious to the news. The only green shoots I saw were dandelions. I kept in touch with the news enough to know that, unsurprisingly to me, most of it was bad. The recent reporting season in Europe has confirmed, at least for me, that the Accident & Emergency wards of European capitalism have taken significant pre-bookings for emergency reconstructive surgery on a number of bloated LBO monsters (I could point fingers to various corners of Europe, but will refrain), which should keep lawyers and advisors busy for months and years to come. Just to clarify, in many of these cases, I think that the assets are good or great, but the capital structures look insane with the benefit of hindsight. So, the hard work begins...

Yet, it seems that sanity prevails in at least one small pocket of the globe, far from Europe. If you're feeling jaded and need a bit of relief, consider my friends at City Telecom in Hong Kong (CTEL), or HKBN, as it is commonly known locally. Here is a company which has long pursued a singular vision of superior connectivity, has come from virtually nowhere to be number two in broadband, has grown both ARPU and EBITDA margin in the past six months, generates cash, pays a dividend, has leverage of only 0.3x and, for its small size, has an extraordinary attitude towards fostering the next generation of - wait for it - people (.pdf). I was privileged to visit the company on a recent trip to Hong Kong, and can testify that the culture is young, disruptive, frugal, and above all, proud of what it has achieved so far and ready for much more.

And in case you didn't know it, the punchline here is that this company is devoted almost entirely to fiber access. We can argue endlessly about the unique economics of Hong Kong housing density and terms of access for service providers, which are undeniably key to the KPIs behind the story, but if the economics are so compelling, why is this the only company starting from technical scratch and sticking to its guns throughout? Favorable economics may be meaningless in the absence of the vision and informed conviction necessary to seize upon them.

So, it made me smile last week when I saw the recent results, and once again thought, "Yes, Virginia, there is a business case for fiber."

Disclosure: No positions