"HKT Limited reported a modest growth of 1.9% y-o-y in the top line sales. Not surprisingly, the mobile business continued to be the major growth engine, with the broadband network business also supporting the growth through its continuing rollout of the "Fiber To The Home" program," says Yoshio Takahashi, a Moody's Assistant Vice President.

"Profitability of HKT Limited remained healthy and consistent. Despite the higher cost of goods sold, its adjusted EBITDA margin was maintained at around 41% for the last twelve months (LTM) ended 30 June 2012, mainly due to the continued improvement in profit margins of the mobile business and improved operating efficiency. It achieved the latter by lowering operating expenses," adds Takahashi, also Moody's lead analyst for HKT.

With the dual outcome of an increasing mobile subscriber base (up 7% y-o-y) and rising mobile data usage driven by deepening smart-phone penetration, HKT Limited's mobile business continued its vigorous momentum and reported the strongest growth among all segments - with its revenue grew by 23% y-o-y to around HKD1.1 billion for 1H 2012.

"Blended post-paid average revenue per user (ARPU) further rose 15.6% y-o-y to HKD185, clearly contributing to improved EBITDA margins for the mobile segment - up to 30% for 1H 2012 from 24% for the same period last year," says Takahashi.

The performance of the telecommunications services (TSS) was somehow mixed. The overall 2% revenue growth in TSS y-o-y was mainly supported by the broadband network business that reported a 11% growth - highest among the segments of TSS. The growth in broadband network was strong enough to offset the steady performance of the traditional local telephone services and the continuing decline in IDD revenue.

At the PCCW level, the Media and Solutions businesses also showed y-o-y revenue growth of 6% and 3% respectively, a positive for HKT given the high degree of operational interdependency between the entities under the quad-play strategy.

"Despite achieving a moderate sales growth in PCCW's Media business, which was driven by the 7% y-o-y increase in the subscriber base of now TV and the 3% improvement in APRU, the Media segment reported a 2% decline in EBITDA margin compared to one year ago (or a 9% decline compared to 2011 year end). The weaker profitability was mainly attributable to the initial outlay for the free TV licence and investments in channels and overseas distribution initiatives ."

Overall, the financial profile of HKT remains consistent with the Baa2 rating. While HKT Limited's leverage remains relatively high with adjusted debt/EBITDA of about 3.3x as expected, adjusted EBITDA interest coverage improved to about 5.8x on an LTM basis from about 4.6x for 2011 due to lower interest costs. We also draw some comfort from ongoing growth in revenues and EBITDA from the mobile business which should facilitate some improvements in leverage metrics over the next two to three years.

Meanwhile, HKT Limited's liquidity remains excellent with approximately HKD2.0 billion of cash but no near-term refinancing needs. The next major debt maturity is the USD500 million bonds due in July 2013.

PCCW Limited (PCCW) currently owns a 63% stake in HKT Limited, which wholly owns HKT Group Holdings Limited (HKT Group), which in turn wholly owns HKT. HKT and HKT Group are the unconditional guarantors for bonds outstanding totaling USD1.5 billion. The results for HKT Limited can be taken as a proxy for HKT Group.

The principal methodology used in rating Hong Kong Telecommunications (HKT) Limited was the Global Telecommunications Industry Methodology published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

HKT, the ex-incumbent integrated telecommunications provider in Hong Kong, is wholly owned by the HKT Group, which is majority owned by PCCW. HKT Group currently consolidates PCCW's telecommunications-related assets (fixed line, broadband, and mobile services), however it will continue to be a core part of PCCW's wider quadruple-play strategy, given the high degree of operational inter-dependence between the fixed line assets and pay-TV. HKT is the principal operating subsidiary of HKT Limited and provides local telephony, international telecommunications, and local data and broadband services, as well as mobile services.

Yoshio TakahashiAsst Vice President - Analyst Corporate Finance Group Moody'sInvestors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Laura Acres Senior Vice President Corporate Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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