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TELECOM & INTERNET | Staff Reporter, Hong Kong

Is Hong Kong's broadband market conducive to HKBN's business?

In line with ongoing growth efforts.

Hong Kong's broadband market appears uniquely placed to sustain value accretion.

According to a research note from Barclays, because of this, HKBN's still-growing business model and concomitant scale benefits should only help to further accentuate its investment case.

Further, it highlights the greater market focus on the broadband market consequent to HKBN's listing as a positive for broadband market leader HKT.

Here's more from Barclays:

Sound growth and yield mix. We estimate CAGRs for EBITDA of 10.5% for FY14-17E (year-end August) and adjusted profit of 31.5%. This underpins our estimate for a CAGR for adjusted free cash flow of 21.9% for the same period. We expect 100% of adjusted FCF will be paid out to shareholders as the company's payout policy is 90-100%; this implies dividend yields of 5.2% for FY16 and 6.0% for FY17.

Hong Kong broadband market supportive for value accretion: The top two companies, HKT and HKBN, are getting bigger (combined share has risen to 90% at end-2014 from 84% at end-2010) and are focused on cash flows and value accretion rather than just market share – we do not expect these trends to change. The migration of subscribers to higher speeds is driving up ARPUs but with only c10%/16% of HKT/HKBN's subscriber base on faster-than-100Mbps services currently, plenty of room is left for further growth.

Employee and shareholder interests appear aligned. Employees (inclusive of the CEO and CFO) hold a c10% stake in the company, which we view as a material positive given the obvious incentive and focus to create value to drive the stock price higher.

Valuation case rich but warranted. Our DCF-based PT of HK$10.70 implies a P/E of 21.9x on our estimate for FY16 and EV/EBITDA of 12.2x. We believe this is warranted as 1) the Hong Kong marketplace is unique, which we think sustains benign characteristics; 2) HKBN's rising scale (better than peers) driving growth and yields; and 3) HKBN has one of the highest dividend yields relative to local risk-free rates in the region.

Key risks: 1) Any escalation in competitive intensity, 2) regulatory initiatives to foster competition which negatively affect existing operators.

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