Hong Kong's Kick-Ass Telco

HKBN likes to do it different. The employee-owned outfit, which recently completed an IPO, has become Hong Kong's biggest fiber provider by tearing up the playbook.

Most operators fret about being sidelined by OTT players, but Hong Kong Broadband Network Ltd. (HKBN) embraces being a bit-pipe. Others are trying to acquire mobile licenses or expand abroad, but HKBN is strictly fixed-line and focused on its home market. Some telcos have CSR programs; HKBN declares its prime purpose is to "make our Hong Kong a better place" and indexes its prices to the median wage.

It doesn't even talk like other operators. "At HKBN, we believe in focusing on what we are KickAss good at doing, which is to provide the best Big Fat Dumb Pipe for our customers to access the world," the company wrote in a letter this week to "potential disruptive partners."

Founded by entrepreneur Ricky Wong in 1992, the company has a market cap of $1.3 billion following its IPO. When the market deregulated in 2000, Wong figured out that a metro Ethernet architecture could deliver affordable services even to the lowest-income households. He built the world's largest metro Ethernet network, passing 2.1 million households.

When Wong decided to exit to pursue his TV interests in 2012, the company invited private equity firm CVC Capital Partners to become the major shareholder (See Media Shift Triggers City Telecom Sale.)

CVC offered a stock deal for six top executives at a 7:1 ratio; that is, 7 times CVC stock at a future IPO. But the execs instead asked to broaden the offer to 87 senior employees, who between them forked out $23 million to take a 14% stake. That meant diluting their deal to 1.5:1, but it created a long-term alignment between employees and company.

CFO NiQ Lai, who also carries the title "head of talent engagement," says: "If you look around at Hong Kong's big companies, middle management might work there for a couple of decades and after 20 years remain poor. We said: 'we want you to be well above average, as long as the company performs above the average.'"

HKBN's results are certainly above average. With a 39.7% EBITDA margin, it was the most profitable Hong Kong telco of any kind last year as well as the fastest-growing. It has 54% of the fiber market and 35% of the broadband market.

The February IPO was purely to enable CVC to exit, Lai points out. None of those funds will go to HKBN. The business is "highly cash-generative and is paying a lot of dividends."

The firm will open up share ownership to another 420 senior staff later this year. Typically, each will tip in the equivalent of two years' salary. That's a lot of money, even in a society with a high level of savings, but it underlines the commitment people are willing to make. The company doesn't issue stock options."We believe ownership has to be earned, not given," Lai said.

Next page: Tough love

Tough love
HKBN invests heavily in the development of staff, which it calls "talents." The number of top execs with postgraduate degrees has increased from 15% in 2006 to 75%, with the company covering up to 100% of the cost of each course. More imaginatively, its graduate management program includes a two-day outward bound course and requires trainees to run a half-marathon and read and digest a dozen business books.

Instead of work-life balance, HKBN stresses work-life "priorities." Email on the weekend is banned, unless it's urgent and customer-related. Staff are offered flexible working hours and can also take unpaid leave at their own discretion. Lai says the rules "force team leaders to have succession planning. If your team can't manage without you then you're a really bad manager."

But there's tough love involved. The company applies the rule, popularized by Jack Welch, that you need to weed out the bottom-performing 5% of staff. The departing staff are not necessarily replaced; the savings may go to remunerating the remaining 95%.

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The Hong Kong telecom market might seem saturated, but HKBN claims just HK$2 billion ($260 million) in revenues out of an overall market total of HK$30 billion ($3.87 billion) in revenues annually. The company is now going after the small business segment, offering cloud PBX and enterprise WiFi.

"Imagine everything HSBC would have. We could do those services at a price a small company can afford," Lai said.

The operator is also looking to upsell its 600,000 broadband customers, most of whom are on its baseline 100Mbit/s service. As part of the company's social mission, the price of that service is capped at no more than 1% of the median Hong Kong salary, which is around HK$23,000 ($2,960) a month.

"We believe broadband should be a universal right," says Lai.

He believes others will follow HKBN's approach, but only if it is "successful and profitable. People are not going to follow us because were treat people well."

—Robert Clark, contributing editor, special to Light Reading