City Telecom is the little telco that can. Operating in the highly competitive Hong Kong market, the long distance and broadband provider has taken on giant PCCW on its home turf and plans to become the city's largest internet protocol (IP) provider by 2016 under the appropriately named 'Big Hairy Audacious Goal'.
"Treasury is a means to this end," said NiQ Lai, chief financial officer and head of talent engagement at City Telecom. "As we take on the industry giants, be it in the telecom industry now or later in the free TV industry, we need to have an ultra-strong and ultra-conservative balance sheet to stand on when we go into war."
Asked how he would characterise the company's treasury, Lai described it in two words, "ultra-conservative".
City Telecom had HK$221.1 million ($28.5 million) in cash at the end of its 2009 fiscal year which ended on August 31. While this is a little more than half the amount of cash it had a year earlier, the company also spent HK$286.7 million connecting another 140,000 residences to its growing local area network and reduced its total outstanding debt by 76% year-on-year to HK$163.3 million.
"We are not looking for the extra hundred basis points returns," said Lai on the firm's treasury funds. "We're here to build a business for 2016. That's when we intend to be the largest IP service provider in Hong Kong." This 10-year goal, the big hairy audacious one, requires the company to attract 75,000 new subscribers annually (they have already signed up 110,000 since September 1, 2009) and make significant capital investments. During its first 10-years of existence over $400 million was invested in telecommunications and IP infrastructure.
Lai joined City Telecom in 2004 as director of corporate development from Credit Suisse First Boston. At the financial institution he was head of telecommunications research for more than a decade and City Telecom was one of his top recommendations over his career there. Today he oversees a team of 48 finance staff in the company's New Territories headquarters.
To fund the necessary multi-million dollar investment in infrastructure, Lai and his predecessors used the capital markets. City Telecom launched two initial public offerings, in Hong Kong (1997) and on the Nasdaq (1999), issued a $125 million high-yield bond in 2005 and launched a tender to buy back its outstanding US dollar bonds in February 2009.
"Our partnership with capital markets is essential," said Lai. "We're not funded by rich shareholders. We're funded by capital markets."
"We're a classic capital markets-funding example," he concluded.
The company dates back to 1992 when two cousins, Ricky Wong and Paul Cheung, founded City Telecom to provide a low-cost international calling alternative to Hong Kong Telecommunications' (now PCCW) monopoly. The company has successfully grown to be one of the largest long-distance providers in Hong Kong, a feat it has achieved by building its own infrastructure and, at least according to Lai, providing better service than the competition.
"Most other new [IP] entrants have not invested in their own last mile -- the in-building block wiring -- they just lease from the incumbent," he said. "In many cases, when you consider an alternative carrier, the bulk of their business is reselling the incumbent's last mile, so by definition they cannot be better than the incumbent. We're different. We built the entire end-to-end network." The other difference is that the incumbents use telephone infrastructure to provide internet services to individual homes, while City Telecom builds dedicated fibre-based broadband lines.
Despite its high level of capital investment, the company is known in Hong Kong for offering cheap and fast internet connections. It recently advertised a one gigabit residential broadband connection for only HK$199 per month; local behemoth PCCW by comparison offers a similar connection for HK$2,188 according to their website.
"We use typical off-the-shelf Cisco routers but have deployed them on a massive residential scale," said Lai, gesturing to a thin, foot-long box with 24 ethernet ports along one side. "They can serve 24 customers. If you have more, you just put another router on top. It's very scalable, delivers far superior service and drives the costs per customer down below legacy telecom networks."
"Imagine our network as Morgan Stanley with 1.66 million cubicles in Hong Kong. It's just one massive corporate local area network. That's what we've been building in Hong Kong for the past 10 years."
Six-years out from its big hairy audacious deadline, Lai is confident that City Telecom will succeed. And, as far as he's concerned, while low-costs, an attractive product and competitive price points are important to achieving that goal, treasury is and will remain the "lifeblood" of the company.
