PYWMYMI (Pim-Wi-Mee) is the act of Putting Your Money Where Your Mouth Is. Individuals like Muhammad Ali used it to back up their talk – but very few organizations are willing or able to PYMWYMI in an effort to back up their products or services. Sure, I can think of a dozen commercials with beautiful spokespeople throwing canned responses at me “our customers come first” but can’t remember the last time they backed it up with their pocket book.
THE COMPANY – CITY TELECOM
City Telecom (CTEL:Nasdaq) is a company that practices PYMWYMI. Via it’s main operating entity – Hong Kong Broadband Network - CTEL now claims Hong Kong’s largest fibre network subscriber base and, amongst many other reasons, has accomplished this goal by providing customers with a bandwidth guarantee of 2x their money back.
This was one of the first hooks provided to me by John Marco at Elite IR, so I took a closer look. What I found is a Chinese small-cap company with business achievements and a corporate culture that make me want to become a long-term investor. Here are just some highlights, followed by an in-depth webcast interview with CFO, NiQ Lai, at the very end.
THE FACTS AND FIGURES
- $167 Million in revenues for 2008 and $93 Million in revenue in H1 2009
- A brand new fibre network that completely bypasses the incumbent’s inferior network
- Cost per Mbps that blows away the incumbent
- Peak CapEx is over
- Positive free cash flow and dividends
- Steadily increasing ARPU
- Valuations (P/E and EBIDTA) that are well below industry averages
WHY WALL STREET IS STARTING TO PAY ATTENTION
The company just completed a roadshow that criss-crossed the United States over the last 2 weeks. With the company’s share price up nicely, I have to conclude that fund managers liked what they heard. Here are 3 key points to consider:
1. Verizon FiOS at 1/5 the cost
Essentially, CTEL’s competitive advantage comes from having built a Verizon FiOS-like Fibre Network in Hong Kong. Due to Hong Kong’s extreme density of 16,000 people per square mile versus 890 for the US, CTEL’s cost per home pass of ~US$200 is about 1/5th of Verizon FiOS’s cost of ~US$1,100 (data according to CTEL).
2. US$385 million gross investment cost is almost 2x current Market Capitalization
It has taken CTEL 10 years to build its Fibre Network at a gross book cost of US$385 million, almost 2x current market capitalization of US$200 million. The replacement cost for the network would be much higher today, due to the congested in-building conduits and time value. With the company now delivering financial success, the strategic value of the network should be recognized by the market over time.
3. Valuation
The stock market has yet to reflect CTEL’s true valuation. Comp’s are trading at significantly higher multiples on EBITDA and P/E basis.
THE GREAT MARKETING
What you can’t see on the financial statements is simply how cool this company is. This isn’t relative to other Chinese small and mid caps, this is relative to all companies I have ever seen. For example, even if you can’t speak Chinese, you can clearly see the genius behind these three TV ads and how they almost have a Mac vs. PC feel to them by pointing out the incumbent’s weakness. Take 90 seconds out to watch them: Ad1 … Ad2 … Ad3
THE CORPORATE CULTURE
Finally, despite its’ small-cap status, CTEL has publicly announced its Big, Hairy, Audacious Goal (BHAG) To Become Hong Kong’s Largest IP Service Provider By 2016. More than just lip service, the company expects to achieve this goal by benchmarking itself against the best corporations in the world for many different categories. For example,Toyota Production System for back end process, Disney for outdoor customer service, HSBC Premier Premium Banking for Personal Account Serving, China Light & Power for service reliability and safety.
City Telecom also took 47 Senior Managers on a Japan study mission earlier this year to learn best practices from Panasonic and Toyota. Some of their most important takeaways?
- Continuous Change Is Essential – Species that adapt, survive
- It Is The Duty Of The Manager To “Worry” – A good manager thinks and plans faster than subordinates
- Raising The Number Of Charcoals – A charcoal is a manager that fuels growth. CTEL was founded with 2 – but needs 3,000+ to achieve its’ BHAG
THE INTERVIEW
I sat down with NiQ Lai to discuss my findings and the company even further. It’s an audio interview with 17 accompanying slides, so enjoy and good luck with whatever actions you decide to take with City Telecom.
Regards,
George
