Dumb and decent

Asian telco IPOs show investors still yield-hungry

The hunt for yield is still on. The expectation that US interest rates will remain lower for longer may prompt investors to snap up shares in the initial public offering of Hong Kong's second-largest broadband provider, Hong Kong Broadband Network (HKBN). Similar considerations drove demand for the $1.13-billion listing earlier this month of similar assets by Thai telco Jasmine International.

In a capital market dominated by large and often complex offerings from mainland China, HKBN - which could raise up to $750 million - is refreshingly simple. The company's self-described "Big Fat Dumb Pipe" provides customers with a high-speed internet connection without the distraction of trying to create its own content.

Early capital-intensive investment in its own fibre network means HKBN has competitive pricing power. Aggressive expansion under its private equity owners led by CVC has given the company a 34 per cent share of the residential market. The next step is to tackle the enterprise market, where its share is around 12 per cent.

HKBN has pledged to pay out at least 90 per cent of its future adjusted free cash flow in dividends. That gives investors the prospect of a steady return as well as growth potential. Depending on the final pricing, the shares will yield between 4.8 per cent and 5.4 per cent based on this year's expected payout. Though that's much lower than the 9 per cent yield Jasmine offered investors to put money into politically fraught Thailand, it's attractive for Hong Kong.

Larger local rival HKT Trust, backed by tycoon Richard Li, offers a 5.3 per cent yield but is growing more slowly, excluding acquisitions, and is less profitable. Utility HK Electric Investments, also backed by the Li family, yields 7.2 per cent but operates in an industry where prices are subject to regulation.

The Hong Kong listing has already attracted a $200-million commitment from a Canadian pension fund, according to a person familiar with the situation. The prospect of a steady payout has allowed international investors to shrug off worries that HKBN may face a price war or an unexpected uptick in capital expenditure. As long as money remains cheap, a yield-paying big fat dumb pipe may prove just the call.