HKBN Ltd. - Interim / Quarterly Report 2017

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

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HKBN Ltd. 香港寬頻有限公司

(Incorporated in the Cayman Islands with limited liability)

Stock Code: 1310

INTERIM RESULTS ANNOUNCEMENT FOR THE SIX MONTHS ENDED 28 FEBRUARY 2017

(All references to “$” are to the Hong Kong dollars)

The Board of Directors (the “Board”) of HKBN Ltd. (the “Company”) is pleased to announce the unaudited consolidated results of the Company and its subsidiaries (collectively, the “Group”) for the six months ended 28 February 2017. These results were based on the unaudited consolidated interim financial statements for the six months ended 28 February 2017, which were prepared in accordance with the Hong Kong Accounting Standard (“HKAS”) 34, Interim financial reporting , issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

Revenue and Adjusted Free Cash Flow continued to grow year-on-year at 25% and 3% respectively to $1,535 million and $191 million. EBITDA decreased by 6% to $481 million, due to the two-year contract flow over impact of lower residential ARPU from last year arising from our focus on subscriber growth and the start-up investments associated with our mobile entry in September 2016.
Since 1 September 2016, we have pivoted our residential focus from subscriber growth to revenue market focus. As such, we traded off a slow down on our net additions for broadband subscriptions at 21,000 (1H2016: 38,000) in return for an acquisition and renewal contract ARPU of $192/month for the month of February 2017, which is well above the historical full base residential ARPU of $166/month for the six months to 28 February 2017.
Enterprise business revenue more than doubled, reaching $569 million through the full six-month’s operation results following our acquisition of the New World Telecom business in March 2016 (“NWT business”).
The Board of Directors has recommended the payment of an interim dividend of 22 cents per share (1H2016: 20 cents per share).

CEO & COO LETTER

Dear Fellow Shareholders,

As we stand today, our biggest asset is no longer our comprehensive fibre network but rather our monthly billing relationship with over 870,000 broadband households, representing more than one-third of Hong Kong’s 2.51 million total households, and over 50,000 corporate accounts. The challenge for us now is to monetise and harvest these relationships via upselling more services.

Our residential business today is very much double-play centric on our core broadband and fixed voice but we see an exceptional opportunity to upsell our monthly billing relationship towards quad-play to include OTT (Over-The-Top) content and mobile. We are executing upon this opportunity with 627,000 OTT set-top boxes ordered after 16 months of service and 54,000 activated mobile customers after 6 months of service. Over time, we are seeing integrated single-bill quad-play service offerings as our LUCA (Legal Unfair Competitive Advantage), as our competitors are hesitant on embracing this due to fear of cannibalisation of their existing premium priced standalone services. Since the beginning of our 2017 financial year on 1 September 2016, we have pivoted our focus from subscriber growth to price increases, and have now reached an acquisition and renewal contract ARPU of $192/month for the month of February 2017, which is well above the historical full base residential ARPU of $166/month for the six months to 28 February 2017. If we can hold onto our price point and our subscriber base as our two-year contracts rollover, then the two ARPU metrics will converge with every $10 change in residential ARPU equating to around $100 million of revenue, of which the majority flows to Adjusted Free Cash Flow.

On Enterprise Solutions, we will continue to increase revenues within our small and medium-sized enterprises (SME) customer base by introducing more innovative and disruptive products and services. On the corporate side, we will aggressively grow our customer base by expanding our role as a supplementary carrier service provider, as well as introduce a range of new corporate mobile service offerings. Once we have broken into a corporate account, we are able to capture more of their telecom and IT spend. It has been a very exciting first half of FY2017, as we have made some significant headway and secured some very large and prestigious accounts, such as Telstra, the Joint Universities Computer Centre Ltd., COLT and Kowloon Bay International Trade & Exhibition Center, each a multi-million-dollar new account.

Whilst our focus on residential has matured to price increases, our focus for Enterprise Solutions remains on revenue growth as our ambition is to grow to a much bigger scale. In short, after 16 years of sowing our residential fibre seeds, our harvest period has commenced.

Sincerely yours,

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William YEUNG Chief Executive Officer and Co-Owner

NiQ LAI Chief Operating Officer and Co-Owner

KEY FINANCIAL AND OPERATIONAL SUMMARY

Table 1: Financial highlights

	For the six months ended Increase/ (Decrease) 28 February 29 February 2017 2016 YoY	For the six months ended Increase/ (Decrease) 28 February 29 February 2017 2016 YoY
Key financials ($’000) Revenue – Residential – Enterprise – Product Profit for the period Adjusted Net Profit1,2 EBITDA1,3 EBITDA margin1,4 Adjusted Free Cash Flow1,5	1,534,726 941,025 569,222 24,479 46,034 173,985 480,961 31.3% 190,855	1,225,539 +25% 898,951 +5% 269,381 >100% 57,207 -57% 135,252 -66% 209,634 -17% 511,266 -6% 41.7% -10.4pp 185,156 +3%
Reconciliation of Adjusted Net Profit1,2 Profit for the period Amortisation of intangible assets Deferred tax arising from amortisation of intangible assets Originating fee for banking facility expired Transaction costs in connection with business combination Adjusted Net Profit Reconciliation of EBITDA & Adjusted Free Cash Flow1,3,5 Profit for the period Finance costs Interest income Income tax Depreciation Amortisation of intangible assets Transaction costs in connection with business combination EBITDA Capital expenditure Net interest paid Other non-cash items Income tax paid Changes in working capital Adjusted Free Cash Flow	46,034 64,601 (10,047) 73,397 – 173,985 46,034 116,922 (89) 43,809 209,684 64,601 – 480,961 (196,616) (56,718) 4,066 (120,599) 79,761 190,855	135,252 -66% 56,557 +14% (9,089) +11% – +100% 26,914 -100% 209,634 -17% 135,252 -66% 66,336 +76% (647) -86% 48,200 -9% 178,654 +17% 56,557 +14% 26,914 -100% 511,266 -6% (177,931) +11% (51,356) +10% 131 >100% (104,094) +16% 7,140 >100% 185,156 +3%

KEY FINANCIAL AND OPERATIONAL SUMMARY (CONTINUED)

Table 2: Operational highlights

	For the	six months	ended	Increase/
	28 February	31 August	29 February	(decrease)
	2017	2016	2016	YoY
Residential business
Residential homes passed (’000)	2,225	2,202	2,162	+3%
Subscriptions (’000)
– Broadband	878	857	792	+11%
– Voice	524	520	485	+8%
Market share6
– Broadband	37.6%	37.2%	35.2%	+2.4pp
– Voice	22.2%	22.0%	20.6%	+1.6pp
Residential customers (’000)	928	898	852	+9%
Broadband churn rate7	0.7%	0.8%	0.8%	-0.1pp
Residential ARPU8	$166	$170	$178	-7%
Enterprise business
Commercial building coverage (’000)	2.3	2.3	2.1	+10%
Subscriptions (’000)
– Broadband	50	47	40	+25%
– Voice	127	120	102	+25%
Market share6
– Broadband	17.8%	17.8%	15.4%	+2.4pp
– Voice	6.8%	6.5%	5.5%	+1.3pp
Enterprise customers (’000)	51	50	43	+19%
Broadband churn rate9	1.3%	1.1%	0.9%	+0.4pp
Enterprise ARPU10	$1,467	$1,483	$1,017	+44%

Notes:

(1) EBITDA, EBITDA margin, Adjusted Free Cash Flow and Adjusted Net Profit are not measures of performance under Hong Kong Financial Reporting Standards (“HKFRSs”). These measures do not represent, and should not be used as substitutes for, net income or cash flow from operations as determined in accordance with HKFRSs. These measures are not necessarily an indication of whether cash flow will be sufficient to fund our cash requirements. In addition, our definitions of these measures may not be comparable to other similarly titled measures used by other companies.
(2) Adjusted Net Profit means profit for the period plus amortisation of intangible assets (net of deferred tax credit and direct cost incurred in corresponding period), non-recurring finance costs and other non-recurring items. Non-recurring finance costs, in the period under review, include originating fee for banking facility expired. Other non-recurring items, in the period under review, include transaction costs in connection with business combination.
(3) EBITDA means profit for the period plus finance costs, income tax expense, transaction costs in connection with business combination, depreciation and amortisation of intangible assets (net of direct cost incurred in corresponding period) and less interest income.
(4) EBITDA margin means EBITDA divided by revenue.
(5) Adjusted Free Cash Flow means EBITDA plus interest received and less capital expenditure, interest paid and tax paid, and adjusted by changes in working capital and other non-cash items. Working capital includes other non-current assets, inventories, trade receivables, other receivables, deposits and prepayments, trade payables, deposits received and deferred services revenue. Other non-cash items, in the period under review, include amortisation of obligations under granting of rights and Co-Ownership Plan II related non-cash items.
(6) Our market share in broadband or voice services in Hong Kong, for residential or enterprise business, is calculated by dividing the number of broadband or voice subscriptions we have at a given point in time by the total number of corresponding broadband or voice subscriptions recorded by the Office of the Communications Authority (“OFCA”) at the same point in time. Based on the latest disclosure from OFCA for December 2016 market data, total market figures from January 2016 to November 2016 were revised to reflect the adjustments filed by the Internet Service Provider(s).
(7) Calculated by dividing the sum of the monthly broadband churn rate for each month of the given financial period by the number of months in the financial period. Monthly broadband churn rate is calculated by the sum of the number of residential broadband subscription terminations in a month divided by the average number of residential broadband subscriptions during the respective month and multiplying the result by 100%.
(8) ARPU means average revenue per user per month. Calculated by dividing the revenue generated in the relevant period from services subscribed by residential broadband subscribers, which include broadband services and any bundled voice, IP-TV and/or other entertainment services, by the number of average residential broadband subscriptions and further dividing by the number of months in the relevant period. Average residential broadband subscriptions are calculated by dividing the sum of such subscriptions at the beginning of the period and the end of the period by two. Our use and computation of residential ARPU may differ from the industry definition of ARPU due to our tracking of revenue generated from all services subscribed by residential broadband subscribers. We believe this gives us a better tool for observing the performance of our business as we track our residential ARPU on a bundled rather than standalone basis.
(9) Calculated by dividing the sum of the monthly broadband churn rate for each month of the given financial period by the number of months in the period. Monthly broadband churn rate is calculated by the sum of the number of enterprise broadband subscription terminations in a month divided by the average number of enterprise broadband subscriptions during the respective month and multiplying the result by 100%.
(10) ARPU means average revenue per user per month. Calculated by dividing the revenue generated in the relevant period from the enterprise telecom business (excluding revenue from IDD services) by the average number of enterprise customers and further dividing by the number of months in the relevant period. Average number of enterprise customers is calculated by dividing the sum of enterprise customers at the beginning of the period and the end of the period by two. This metric may be distorted by the impact of certain particularly large contracts we have with enterprise customers.

BUSINESS REVIEW

During the six months ended 28 February 2017, the Group continued to deliver a solid set of operational and financial results, which was brought about by the completed integration of the NWT business, the enrichment of our product portfolio from OTT partners and the newly launched mobile services. As a result, our group revenue and Adjusted Free Cash Flow increased year-on-year by 25% and 3% to $1,535 million and $191 million respectively. EBITDA decreased year-on-year by 6% to $481 million due to the two-year contract flow over impact of lower residential ARPU from last year arising from our focus on subscriber growth and start-up investments associated with our mobile entry in September 2016.

Residential revenue grew by 5% year-on-year to $941 million as a result of the customer base expansion from last year. Since 1 September 2016, we have pivoted our residential focus from subscriber growth to revenue market focus. As such, we traded off a slow down on our net additions for broadband subscriptions at 21,000 (1H2016: 38,000) in return for an acquisition and renewal contract ARPU of $192/month for the month of February 2017 which is well above the historical full base residential ARPU of $166/month for the six months to 28 February 2017. Our market share by broadband subscriptions increased to 37.6% as of 31 December 2016 (based on the latest available OFCA statistics), up from 37.2% as of 31 August 2016.

Through working closely with our OTT partners, more than half of our residential broadband customers have ordered at least one OTT set-top box to fulfil their entertainment needs. Ever since launching our OTT entertainment offerings in October 2015, we have achieved a total of 627,000 set-top boxes ordered by residential broadband customers as of 28 February 2017. Leveraging our quality network transmission as well as hi-speed and stable network service, in conjunction with our OTT partners, we are delivering revolutionary entertainment experiences.

The launch of mobile services through partnering with two major mobile network operators (“MVNO partners”) constituted a new and important source of residential revenue for the Group. With progressive marketing campaigns and strong support from our MVNO partners, we achieved a solid customer base with 54,000 activated subscribers during the period. Up to mid-April, we have over 100,000 registered mobile subscribers.

Through overlaying OTT and mobile services to our broadband bundle packages, the Group will continue to leverage an integrated quad-play price strategy and deliver unprecedented household savings and service convenience to disrupt the legacy broadband, fixed-voice, content and mobile standalone segments.

Enterprise revenue, which comprised a full six-month’s operation results following our acquisition of NWT business, doubled to $569 million. This growth is indicative that the fully integrated business has increased both our presence and capabilities in the enterprise market, which has enabled us to provide a broader range of products and services at competitive value to different customer segments. During the period, we achieved net additions of 1,000 for a total of 51,000 enterprise customers while our enterprise ARPU maintained at $1,467/ month, as a result of integrating with the NWT business. Our market share by broadband subscriptions maintained at 17.8% as of 31 December 2016 (based on the latest available OFCA statistics).
Product revenue decreased by 57% year-on-year to $24 million, which was primarily due to a decline in LeEco packages bundled during the period.

Network costs and costs of sales doubled year-on-year to $304 million mainly due to the incremental network costs for the operation of NWT business.

Other operating expenses increased by 22% year-on-year from $847 million to $1,033 million mainly due to the incremental operating costs required to support the NWT business and upfront advertising and marketing expenses as well as Talent costs for the launch of mobile services in September 2016.

Finance costs increased by 76% year-on-year from $66 million to $117 million mainly due to the one-off finance costs of $73 million in relation to the unamortised transaction cost for the refinanced bank loan. The finance costs were paid in prior period and therefore the one-off write-off of finance costs did not have any impact on cash flow for the period under review. In refinancing, we took advantage of the low interest rate environment to refinance the previous $3,800 million bank facility with a new $3,900 million bank facility as to lower the cost of debt from HIBOR plus 1.85%-2.06% to HIBOR plus 1.35% and to extend the maturity from January 2020 to November 2021. The total net savings of the new 5-year bank facility more than covers the one-off write-off for originating fee for the previous five-year bank facility of $73 million. On a net basis, it is expected that this will provide long term benefit to us.

Income tax decreased slightly by 9% year-on-year from $48 million to $44 million. Our finance costs were not tax deductible. Income tax as a percentage of profit before taxation, finance costs and transaction costs in connection with business combination was approximately 21% and 17% for the six months ended 28 February 2017 and 29 February 2016. During the period, the effective tax rate was higher than the statutory income tax rate, as we had not recognised deferred tax assets of the acquired NWT business.

Amid the impact of one-off write-off of unamortised finance costs of $73 million related to refinancing, the profit for the period decreased by 66% year-on-year from $135 million to $46 million for the six months ended 28 February 2017 as compared to the corresponding period last year. Excluding the one-off impact resulted from the finance costs, the profit for the period decreased by 12% from $135 million to $119 million mainly due to the start-up investments associated with our mobile entry in September 2016.

Net additions to property, plant and equipment amounted to $173 million for the period ended 28 February 2017, as compared to $195 million for the corresponding period last year.

Adjusted Net Profit, excluding the impact of amortisation of intangible assets, non-recurring finance costs and non-recurring items, decreased by 17% year-on-year to $174 million.

As a result of the factors explained above, Adjusted Free Cash Flow continued to grow yearon-year at 3% to $191 million. EBITDA decreased by 6% to $481 million, due to the two-year contract flow over impact of lower residential ARPU from last year and the start-up investments associated with the mobile launch in September 2016.

OUTLOOK

We will focus on harvesting our substantially invested network and our monthly billing relationship by upselling more services through OTT and MVNO partnerships, as well as leverage our comprehensive suite of service offerings to drive sustainable growth in Revenue, EBITDA and Adjusted Free Cash Flow through the following initiatives:

Leverage our quad-play bundle plans to disrupt the legacy broadband, fixed-voice, multimedia content and mobile standalone services;
Further penetrate the enterprise market through our broad range of business-imperative services and more network capacity; and
Continue to cultivate our Talent-oriented Co-Ownership culture that aligns risks and rewards with shareholders by enlarging the base of Co-Owners via the Co-Ownership scheme to HKBN Talents.

LIQUIDITY AND CAPITAL RESOURCES

As at 28 February 2017, the Group had total cash and cash equivalents of $273 million (31 August 2016: $355 million) and gross debt (principal amount of outstanding borrowing) of $3,900 million (31 August 2016: $3,800 million), which led to a net debt position of $3,627 million (31 August 2016: $3,445 million).

The Group’s gearing ratio, which was expressed as a ratio of the gross debt over total equity, was 3.2x as at 28 February 2017 (31 August 2016: 2.8x).
The Group’s net debt to EBITDA ratio, which was expressed as a ratio of the gross debt net of cash and cash equivalents over EBITDA, was 3.7x as at 28 February 2017 (31 August 2016: 3.4x).

On 28 November 2016, the Group drew down a five-year bank loan of $3,900 million bearing interest rate at HIBOR plus margin, in order to finance the repayment of the remaining bank loan in full. Subsequent to the refinancing transaction completed, the Group’s debt maturity was extended by 1.8 years to November 2021. Since the bank loan was repayable in full upon final maturity on November 2021, the Group can either refinance or renew it on maturity or earlier through sources that it deems appropriate at that time. This has provided us with flexibility to plan for various sources of financing arrangements to support the expansion of our business.

Cash and cash equivalents consisted of cash at bank and in hand. There was no pledged bank deposit as at 28 February 2017 and 31 August 2016. As at 28 February 2017, the Group had an undrawn revolving credit facility of $200 million (31 August 2016: $200 million).

Under the liquidity and capital resources condition as at 28 February 2017, the Group can fund its capital expenditures and working capital requirements for the financial year ending 31 August 2017 with internal resources and the available banking facilities.

HEDGING

The Group’s policy is to partially hedge the interest rate risk arising from the variable interest rates of the debt instruments and facilities by entering into interest-rate swaps. The Chief Executive Officer and Chief Operating Officer are primarily responsible for overseeing the hedging activities. Under their guidance, the Group’s finance team is responsible for planning, executing and monitoring the hedging activities. The Group would not enter into hedging arrangements for speculative purposes.

In connection with the bank loan, the Group entered into an interest-rate swap arrangement in the principal amount of $2,635 million with an international financial institution for a term of 3.5 years from 23 February 2015 to 23 August 2018. Benefiting from the hedging arrangement, the Group fixed the HIBOR interest rate exposure at 1.453% per annum.

Subsequent to the refinancing transaction completed, the Group entered into an interest-rate swap arrangement in the principal amount of $2,635 million with an international financial institution for a term of 1.8 years from 31 August 2018 to 29 May 2020. Benefiting from the hedging arrangement, the Group fixed the HIBOR interest rate exposure at 2.26% per annum.

This interest-rate swap arrangement is recognised initially at fair value and remeasured at the end of each reporting period. The interest-rate swap does not qualify for hedge accounting under HKAS 39, Financial instruments: Recognition and measurement, and therefore, it is accounted for as held for trading and measured at fair value through profit or loss.

CHARGE ON GROUP ASSETS

As of 28 February 2017 and 31 August 2016, no assets of the Group were pledged to secure its loans and banking facilities.

CONTINGENT LIABILITIES

As at 28 February 2017, the Group had total contingent liabilities of $4 million (31 August 2016: $4 million) in respect of bank guarantees provided to suppliers and utility vendors in lieu of payment of utility deposits.

EXCHANGE RATES

All of the Group’s monetary assets and liabilities are primarily denominated in either Hong Kong dollars (“HKD”) or United States dollars (“USD”). Given the exchange rate of the HKD to the USD has remained close to the current pegged rate of HKD7.80 = USD1.00 since 1983, management does not expect significant foreign exchange gains or losses between the two currencies.

The Group is also exposed to a certain amount of foreign exchange risk based on fluctuations between the HKD and the Renminbi arising from its operations. In order to limit this foreign currency risk exposure, the Group ensures that the net exposure is kept to an acceptable level of buying or selling foreign currencies at spot rates where necessary to address short-term imbalances.

SIGNIFICANT INVESTMENTS, ACQUISITIONS AND DISPOSALS

The Group did not make any significant investments, acquisitions or disposals in relation to its subsidiaries and associated companies during the six months ended 28 February 2017.

TALENT REMUNERATION

As at 28 February 2017, the Group had 2,815 permanent full-time Talents (31 August 2016: 3,024 Talents). The Group provides remuneration package consisting of basic salary, bonus and other benefits. Bonus payments are discretionary and dependent on both the Group’s and individual performances. The Group also provides comprehensive medical insurance coverage, competitive retirement benefits schemes, and Talent training programs.

To attract, retain and motivate skilled and experienced Talents, the Company adopted a Co-Ownership Plan II (the “Plan”) on 21 February 2015. Co-Ownership is a powerful expression of the commitment and belief our Talents have in the Group. Unlike the more traditional approach of giving stock options to a very limited group of senior executives, the Company’s Co-Ownership is open to all supervisors and above level Talents, spanning the Group’s operations across Hong Kong and Guangzhou. Under “Co-Ownership Plan II”, we now have over 330 Co-Owners, representing a majority of our supervisors and above level Talents which constitutes over 11.9% of our entire workforce. On their own volition, they invested their personal savings in the amount of between two to twelve months of salary to acquire the Company’s shares at full market price. The shares are then matched with free shares at a certain ratio vested over three years.

Please refer to “Share Incentive Scheme” below for a summary of the Plan.

SHARE INCENTIVE SCHEME

Under the Plan, the Board may, in its absolute discretion, invite participants to purchase shares of the Company and agree to grant them a contingent right to receive shares (“RSU”) at the relevant matching ratio in respect of any shares purchased, subject to certain terms, conditions and undertakings. The total number of shares that may underlie the RSUs granted pursuant to the Plan shall be (i) 10% of the shares in issue on 12 March 2015 (the “Listing Date”), the date on which the Company was listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) or (ii) 10% or less of the shares in issue as at the date following the date of approval of the renewed limit (as the case may be). The Plan shall be valid and effective for the period commencing on the Listing Date and expiring on the tenth anniversary thereof or such earlier date as it is terminated in accordance with the terms of the Plan, after which period no further RSUs shall be offered or granted.

In order to enable the Plan trustee to release shares to participants upon vesting of each RSU, the Company allotted and issued, on the Listing Date, by way of capitalisation issue 5,666,666 shares to the Plan trustee. Such shares represented approximately 0.56% of the total issued share capital of the Company on the Listing Date. The Plan trustee will hold such shares on trust until their release to participants upon vesting of the RSUs.

Details of movements of the Plan during the six months ended 28 February 2017 are as follows:

Participants	Date of grant					Number of RSUs	Number of RSUs
		Granted	As at 1 September 2016	Granted during the period	Forfeited during the period	Vested during the period	As at 28 February 2017	To	be vested on 24 January/20 June/29 June/ 18 August/20 November (As at 28 February 2017)
								2016	2017	2018	2019	2020
Mr. William Chu Kwong YEUNG Mr. Ni Quiaque LAI Other Participants Other Participants Other Participants Mr. William Chu Kwong YEUNG Mr. Ni Quiaque LAI Other Participants Other Participants Total	29 June 2015 29 June 2015 29 June 2015 18 August 2015 20 November 2015 20 June 2016 20 June 2016 20 June 2016 24 January 2017	238,608 158,132 2,326,246 273,612 158,567 194,556 134,241 1,752,685 400,472 5,637,119	178,956 118,599 1,631,790 205,226 22,791 194,556 134,241 1,749,104 – 4,235,263	– – – – – – – – 400,472 400,472	– – 146,282 – 1,359 – – 190,258 10,201 348,100	– – – – 5,696 – – – – 5,696	178,956 118,599 1,485,508 205,226 15,736 194,556 134,241 1,558,846 390,271	– – – – – – – – – –	59,652 39,533 495,063 68,386 5,243 48,639 33,560 389,661 – 1,139,737	119,304 79,066 990,445 136,840 10,493 48,639 33,560 389,661 97,554 1,905,562	– – – – – 97,278 67,121 779,524 97,554 1,041,477	– – – – – – – – 195,163 195,163
							4,281,939

Director of the Company

INTERIM DIVIDEND

The Board has resolved to declare an interim dividend of 22 cents (29 February 2016: 20 cents) per share for the six months ended 28 February 2017 to the Shareholders whose names appear on the register of members of the Company on Wednesday, 10 May 2017. The interim dividend will be payable in cash on Monday, 15 May 2017.

The dividend policy of the Company is to pay dividends in an amount of not less than 90% of the Adjusted Free Cash Flow with an intention to pay 100% of the Adjusted Free Cash Flow in respect of the relevant year/period, after adjusting for potential debt repayment, if required. The Company has recommended to pay above this range at 116% of the Adjusted Free Cash Flow for this interim period due to timing difference of tax payment in 1H2017.

CLOSURE OF REGISTER OF MEMBERS

The register of members of the Company will be closed from Tuesday, 9 May 2017 to Wednesday, 10 May 2017, both days inclusive, during which period no transfer of shares will be effected. All transfers, accompanied by the relevant share certificates, must be lodged with the Company’s Hong Kong branch share registrar, Tricor Investor Services Limited at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong, no later than 4:30 p.m. on Monday, 8 May 2017 in order to establish the identity of the Shareholders who are entitled to qualify for the interim dividend.

PURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES

During the six months ended 28 February 2017, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the listed securities of the Company.

REVIEW OF INTERIM FINANCIAL INFORMATION

The Audit Committee has reviewed with the management and the external auditor the unaudited interim results of the Group for the six months ended 28 February 2017, the accounting principles and practices adopted by the Group, as well as discussion on auditing, internal control, risk management and financial reporting matters of the Group.

The unaudited interim financial report of the Group for the six months ended 28 February 2017 has been reviewed by the Company’s external auditor in accordance with Hong Kong Standard on Review Engagements 2410 “ Review of interim financial information performed by the independent auditor of the entity ” issued by the HKICPA and reviewed by the Audit Committee of the Company.

CORPORATE GOVERNANCE

The Company has complied with all the code provisions as set out in the “Corporate Governance Code and Corporate Governance Report” (the “CG Code”) contained in Appendix 14 to the Rules Governing the Listing of Securities (the “Listing Rules”) on the Stock Exchange throughout the six months ended 28 February 2017 except for the following deviation:

Code Provision A.5.1 of the CG Code provides that the Nomination Committee should be chaired by the Chairman of the Board or an Independent Non-executive Director. However, the Nomination Committee of the Company is chaired by Mr. William Chu Kwong YEUNG (“Mr. Yeung”), an Executive Director and Chief Executive Officer of the Company. By considering that each Independent Non-executive Director of the Company has been appointed as the Chairman of the Board, Audit Committee and Remuneration Committee respectively, the Board appointed Mr. Yeung as the Chairman of the Nomination Committee to make sure that each Director, especially the Independent Non-executive Directors could dedicate sufficient time to perform his role. Since Mr. Yeung is involved in the day-to-day management of the Company and can provide valuable insight on the suitability of a proposed Director, the Board considers that he is capable of assuming the responsibility of the Chairman of Nomination Committee by leading the process of identifying suitable candidates and making recommendations to the Board. As at the date of this Announcement, the Nomination Committee comprises a majority of Independent Non-executive Directors, which ensures a balance of power and representation of Independent Non-executive Directors.

MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS

The Company has adopted the “Model Code for Securities Transactions by Directors of Listed Issuers” (the “Model Code”) set out in Appendix 10 to the Listing Rules as its code of conduct for dealings in securities of the Company by Directors. Having made specific enquiries with all Directors, they confirm that they have complied with the Model Code throughout the six months ended 28 February 2017.

PUBLICATION OF INTERIM RESULTS ON THE WEBSITES OF THE STOCK EXCHANGE AND THE COMPANY

This announcement will be published on the websites of the Stock Exchange (www.hkexnews.hk) and the Company (www.hkbnltd.net). The interim report of the Company for the six months ended 28 February 2017 will be despatched to the shareholders of the Company and made available on the same websites in due course.

By order of the Board HKBN Ltd. Bradley Jay HORWITZ Chairman

Hong Kong, 20 April 2017

As at the date of this announcement, the Board comprises:

Executive Directors Mr. William Chu Kwong YEUNG Mr. Ni Quiaque LAI

Independent Non-executive Directors Mr. Bradley Jay HORWITZ (Chairman) Mr. Stanley CHOW Mr. Quinn Yee Kwan LAW, SBS, JP

Non-executive Director

Ms. Deborah Keiko ORIDA

“Where the English and the Chinese texts conflict, the English text prevails.”

UNAUDITED CONSOLIDATED INTERIM FINANCIAL INFORMATION CONSOLIDATED INCOME STATEMENT

FOR THE SIX MONTHS ENDED 28 FEBRUARY 2017

Note Revenue 4 Other net income 5(a) Network costs and costs of sales Other operating expenses Finance costs 5(c) Share of profits of associates Share of losses of joint ventures Profit before taxation 5 Income tax 6 Profit for the period attributable to equity shareholders of the Company Earnings per share Basic 7 Diluted 7	Six months ended 28 February 29 February 2017 2016 *$’000* $’000 (Unaudited) (Unaudited) 1,534,726 1,225,539 6,907 8,194 (303,857) (136,504) (1,032,577) (847,045) (116,922) (66,336) 2,027 – (461) (396) 89,843 183,452 (43,809) (48,200) 46,034 135,252 4.6 cents 13.5 cents 4.6 cents 13.5 cents

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED 28 FEBRUARY 2017

Profit for the period Other comprehensive income for the period Item that may be reclassified subsequently to profit or loss: Exchange differences on translation of financial statements of subsidiaries outside Hong Kong, with nil tax effect Total comprehensive income for the period attributable to equity shareholders of the Company	Six months ended 28 February 29 February 2017 2016 *$’000* $’000 (Unaudited) (Unaudited) 46,034 135,252 (2,934) (2,241) 43,100 133,011

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 2017

Note Non-current assets Goodwill Intangible assets Property, plant and equipment Interest in associates Interest in joint ventures Other non-current assets Current assets Inventories Trade receivables 8 Other receivables, deposits and prepayments Amount due from a joint venture Cash and cash equivalents Current liabilities Trade payables 9 Other payables and accrued charges – current portion Deposits received Deferred services revenue – current portion Obligations under granting of rights – current portion Amount due to an associate Amounts due to joint ventures Contingent consideration – current portion Tax payable Net current assets Total assets less current liabilities	At 28 February 2017 *$’000* (Unaudited) 1,771,969 1,691,908 2,380,287 9,500 9,248 25,512 5,888,424 35,681 168,391 244,201 6,984 273,437 728,694 158,882 338,638 54,989 56,186 9,024 1,426 10,000 20,562 73,859 723,566 5,128 5,893,552	At 31 August 2016 $’000 (Audited) 1,771,969 1,550,209 2,419,890 7,473 9,708 19,618
		5,778,867
		50,541 148,064 271,560 761 354,955
		825,881
		107,550 448,757 54,454 50,672 9,024 2,165 10,000 18,091 125,073
		825,786
		95
		5,778,962

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (CONTINUED) AS AT 28 FEBRUARY 2017

Non-current liabilities Other payables and accrued charges – long-term portion Deferred services revenue – long-term portion Obligations under granting of rights – long-term portion Deferred tax liabilities Contingent consideration – long-term portion Provision for reinstatement costs Bank loans 10 NET ASSETS CAPITAL AND RESERVES Share capital Reserves TOTAL EQUITY	At 28 February 2017 *$’000* (Unaudited) 293,055 62,534 38,355 425,405 18,583 15,932 3,827,111 4,680,975 1,212,577 101 1,212,476 1,212,577	At 31 August 2016 $’000 (Audited) 99,008 55,923 42,867 450,980 27,885 17,644 3,721,297
		4,415,604
		1,363,358

		101 1,363,257
		1,363,358

NOTES TO THE UNAUDITED CONSOLIDATED INTERIM FINANCIAL INFORMATION:

1 BASIS OF PREPARATION

The unaudited consolidated interim financial information set out in this announcement does not constitute the Group’s unaudited interim financial report for the six months ended 28 February 2017 but is extracted from that unaudited interim report which has been prepared in accordance with the Listing Rules, including compliance with HKAS 34, Interim financial reporting , issued by the HKICPA.

The Company was incorporated in the Cayman Islands on 26 November 2014 as an exempted company with limited liability under the Companies Law, Chapter 22 (2013 Revision) of the Cayman Islands.

The unaudited interim financial report has been prepared in accordance with the same accounting policies adopted in the annual financial statements of the Group for the year ended 31 August 2016, except for the accounting policy changes that are expected to be reflected in the 2017 annual financial statements. Details of any changes in accounting policies are set out in note 2.

The preparation of an unaudited interim financial report in conformity with HKAS 34 requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses on a year to date basis. Actual results may differ from these estimates.

The unaudited interim financial report contains condensed consolidated financial statements and selected explanatory notes. The notes include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the annual financial statements for the year ended 31 August 2016. The condensed consolidated interim financial statements and notes thereon do not include all of the information required for full set of financial statements prepared in accordance with HKFRSs.

The interim financial report is unaudited, but has been reviewed by KPMG in accordance with Hong Kong Standard on Review Engagements 2410, Review of interim financial information performed by the independent auditor of the entity , issued by the HKICPA.

The financial information relating to the financial year ended 31 August 2016 that is included in the unaudited interim financial report as comparative information does not constitute the Group’s financial statements for that financial year but is derived from those financial statements.

2 CHANGES IN ACCOUNTING POLICIES

The HKICPA has issued a number of amendments to HKFRSs that are first effective for the current accounting period of the group.

Annual Improvements to HKFRSs 2012-2014 Cycle
Amendments to HKAS 1 , Presentation of financial statements: Disclosure initiative

None of these developments have had a material effect on how the Group’s results and financial position for the current or prior periods have been prepared or presented. The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period.

3 SEGMENT REPORTING

Operating segments, and the amounts of each segment item reported in the financial statements, are identified from the financial information provided regularly to the Group’s most senior executive management for the purposes of allocating resources to, and assessing the performance of, the Group’s various lines of business and geographical locations.

Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the nature of products and services, the nature of production processes, the type or class of customers, the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments which are not individually material may be aggregated if they share a majority of these criteria.

The Group’s management assesses the performance and allocates the resources of the Group as a whole, as all of the Group’s activities are considered to be primarily the operation of fixed telecommunications network services. Therefore, management considers there is only one operating segment under the requirements of HKFRS 8, Operating Segments . In this regard, no segment information is presented.

No geographic information is shown as the revenue and profit from operations of the Group are primarily derived from its activities in Hong Kong.

4 REVENUE

The principal activities of the Group are provision of fixed telecommunications network services and international telecommunications services to residential and enterprise customers in Hong Kong and product sales.

Revenue represents revenue from fixed telecommunications network services and international telecommunications services to residential and enterprise customers in Hong Kong and product sales.

The amount of each significant category of revenue recognised during the period is as follows:

Residential revenue Enterprise revenue Product revenue	Six months ended 28 February 2017 29 February 2016 *$’000* $’000 (Unaudited) (Unaudited) 941,025 898,951 569,222 269,381 24,479 57,207 1,534,726 1,225,539	Six months ended 28 February 2017 29 February 2016 *$’000* $’000 (Unaudited) (Unaudited) 941,025 898,951 569,222 269,381 24,479 57,207 1,534,726 1,225,539
		1,225,539

The Group’s customer base is diversified and no individual customer with whom transactions have exceeded 10% of the Group’s revenue.

5 PROFIT BEFORE TAXATION

Profit before taxation is arrived at after charging/(crediting):

		Six months ended	Six months ended
		28 February	29 February
		2017	2016
		*$’000*	$’000
		(Unaudited)	(Unaudited)
(a)	Other net income
	Interest income	(89)	(647)
	Net foreign exchange gain	(1,813)	(1,802)
	Amortisation of obligations under granting of rights	(4,512)	(4,512)
	Change in fair value of contingent consideration	999	–
	Other income	(1,492)	(1,233)
		(6,907)	(8,194)

(b)	Talent costs
	Salaries, wages and other benefits	432,417	342,343
	Contributions to defined contribution retirement plan	28,361	24,304
	Equity-settled share-based payment expenses	7,252	4,354
	Cash-settled share-based payment expenses	328	289
		468,358	371,290
	Less: Talent costs capitalised as property, plant and equipment	(17,043)	(13,279)
	Talent costs included in advertising and marketing expenses	(205,251)	(134,942)
		246,064	223,069

	Talent costs include all compensation and benefits paid to and accrued for all individuals employed by the
	Group, including directors.
(c)	Finance costs
	Interest on bank loans	53,862	45,884
	Interest on interest-rate swap, net	10,769	13,959
	Fair value (gain)/loss on interest-rate swap	(21,106)	6,493
	Originating fee for banking facility expired (note 10)	73,397	–
		116,922	66,336

5 PROFIT BEFORE TAXATION (CONTINUED)

Profit before taxation is arrived at after charging/(crediting): (continued)

		Six months	ended
		28 February	29 February
		2017	2016
		*$’000*	$’000
		(Unaudited)	(Unaudited)
(d)	Other items
	Advertising and marketing expenses	294,938	222,367
	Depreciation	209,684	178,654
	Loss on disposal of property, plant and equipment, net	1,367	242
	Impairment losses on trade receivables	16,921	8,933
	Amortisation of intangible assets	78,601	56,557
	Operating lease charges in respect of land and buildings:
	minimum lease payments	23,595	17,340
	Operating lease charges in respect of telecommunications facilities
	and computer equipment: minimum lease payments	108,899	61,415
	Research and development costs	10,826	8,389
	Cost of inventories	20,567	40,007
	Transaction costs in connection with business combination	–	26,914

6 INCOME TAX

Current tax – Hong Kong Profits Tax Current tax – Outside Hong Kong Deferred tax	Six months ended 28 February 2017 29 February 2016 *$’000* $’000 (Unaudited) (Unaudited) 67,342 67,581 2,042 1,952 (25,575) (21,333) 43,809 48,200

The provision for Hong Kong Profits Tax is calculated by applying the estimated annual effective tax rate of 16.5% (six months ended 29 February 2016: 16.5%) to the six months ended 28 February 2017. Taxation for overseas subsidiaries is similarly calculated using the estimated annual effective rates of taxation that are expected to be applicable in the relevant countries.

7 EARNINGS PER SHARE

(a) Basic earnings per share

The calculation of basic earnings per share is based on the profit attributable to ordinary equity shareholders of the Company of $46,034,000 (six months ended 29 February 2016: $135,252,000) and the weighted average number of ordinary shares in issue less shares held for the Co-Ownership Plan II, of 1,000,689,000 ordinary shares (six months ended 29 February 2016: 1,000,000,000 ordinary shares).

(b) Diluted earnings per share

The calculation of diluted earnings per share is based on the profit attributable to ordinary equity shareholders of the Company of $46,034,000 (six months ended 29 February 2016: $135,252,000) and the weighted average number of ordinary shares in issue less shares held for the Co-Ownership Plan II after adjusting for the dilutive effect of the Company’s Co-Ownership Plan II, calculated as follows:

Weighted average number of ordinary shares less shares held for the Co-Ownership Plan II Effect of the Co-Ownership Plan II Weighted average number of ordinary shares (diluted)	Six months ended 28 February 2017 29 February 2016 *’000* ’000 (Unaudited) (Unaudited) 1,000,689 1,000,000 2,367 1,761 1,003,056 1,001,761	Six months ended 28 February 2017 29 February 2016 *’000* ’000 (Unaudited) (Unaudited) 1,000,689 1,000,000 2,367 1,761 1,003,056 1,001,761
		1,001,761

8 TRADE RECEIVABLES

As of the end of the reporting period, the ageing analysis of trade receivables, based on the invoice date and net of allowance for doubtful debts, is as follows:

Within 30 days 31 to 60 days 61 to 90 days Over 90 days	At 28 February 2017 *$’000* (Unaudited) 105,116 37,780 16,588 8,907 168,391	At 31 August 2016 $’000 (Audited) 103,144 26,825 10,419 7,676
		148,064

The majority of the Group’s trade receivables is due within 30 days from the date of billing. Subscribers with receivable that are more than 3 months overdue are requested to settle all outstanding balances before further credit is granted.

9 TRADE PAYABLES

As of the end of the reporting period, the ageing analysis of trade payables, based on the invoice date, is as follows:

Within 30 days 31 to 60 days 61 to 90 days Over 90 days	At 28 February 2017 *$’000* (Unaudited) 40,638 32,395 25,701 60,148 158,882	At 31 August 2016 $’000 (Audited) 30,306 14,019 17,472 45,753
		107,550

10 BANK LOANS

At 31 August 2016, the Group has term and revolving credit facilities agreement of $4,000,000,000 in aggregate with various international banks.

At 31 August 2016, the Group has bank loans with principal amount of $3,800,000,000 in total. The bank loans are interest-bearing at Hong Kong Inter-bank Offered Rate plus a margin of 1.85% – 2.06% per annum payable quarterly. The maturities of these loans were on 20 January 2020 and 31 March 2021.

At 28 November 2016, the Group has drawn a bank loan with principal amount of $3,900,000,000 (“New Bank Loan”) and repaid the bank loans with principal amount of $3,800,000,000. The New Bank Loan is interestbearing at Hong Kong Inter-bank Offered Rate plus a margin of 1.35% per annum payable quarterly.

Upon repayment, the bank loans with principal amount of $3,800,000,000 were extinguished and the unamortised transaction cost of $73,397,000 was recorded within the finance costs in the consolidated income statement (note 5(c)) for the period ended 28 February 2017.

The New Bank Loan is recognised initially at fair value less attributable transactions costs. Subsequent to initial recognition, the New Bank Loan is stated at amortised cost with any difference between the amount initially recognised and interest payable using the effective interest method.

The effective interest rate of the New Bank Loan as of 28 February 2017 is 2.75% (2016: 2.9% – 3.1%) and the amortised cost of the New Bank Loan is $3,827,111,000 (2016: $3,721,297,000).

The New Bank Loan is unsecured and covered by a cross guarantee arrangement issued by the Company, Metropolitan Light Company Limited, HKBN Group Limited and Hong Kong Broadband Network Limited, and repayable in full upon maturity on 28 November 2021.

11 DIVIDENDS

(a) Dividend payable to equity shareholders of the Company attributable to the period

	Six months	ended
	28 February	29 February
	2017	2016
	*$’000*	$’000
	(Unaudited)	(Unaudited)
Interim dividend declared after the interim period of
22 cents per ordinary share (six months ended
29 February 2016: 20 cents per ordinary share)	221,247	201,133

The interim dividend declared has not been recognised as a liability at the end of the reporting period.

(b) Dividends payable to equity shareholders of the Company attributable to the previous financial year, approved and paid during the interim period

	Six months	ended
	28 February	29 February
	2017		2016
	*$’000*		$’000
	(Unaudited)	(Unaudited)
Final dividend in respect of the previous financial year,
approved and paid during the following interim period,
of 20 cents per ordinary share(six months ended
29 February 2016: 20 cents per ordinary share)	201,133	201,133