8Telecom International Holdings - NRA Capital Research 2017-02-21: Potential Telco Of Tomorrow

8Telecom International Holdings - NRA Capital Research 2017-02-21: Potential Telco Of Tomorrow 8TELECOM INTL HOLDINGS CO LTD SGX: AZG

8Telecom International Holdings - Potential Telco Of Tomorrow

This is a growth story

  • 8Telecom underwent a transformation during 2015/2016. It sold off its businesses, paid out a special dividend and is currently the 51% owner of Arete M Pte. Ltd since 1 August 2016. As of 30 September 2016, 8Telecom has negligible revenue and assets.
  • The interesting part of 8Telecom is that Arete M has been granted a license by the Infocomm Media Development Authority (IMDA) to use the 1.79 to 1.80 GHz radio frequency spectrum for the provision of communication solutions.

Globally, private LTE networks are gaining traction

  • With the spectrum, Arete M intends to offer dedicated private LTE networks to industrial users and public safety/emergency services. Currently, these users usually rely on radio networks for voice and complementary networks e.g. Wi-Fi for data. A private LTE network will aggregate these services and not compromise on reliability and availability, whereas public LTE networks being shared with consumers and commercial users may not be able to offer the same level of service quality always.
  • Emerging applications in other countries include LTE networks for rail/offshore communication and maritime navigation.

Tight spectrum supply provides first mover advantage

  • Whereas the existing telcos pay more than S$1m per year of 10MHz of spectrum, Arete M has secured its spectrum for about S$80k per year as it has proved that it can operate within the “guard” spectrum put in place to separate the spectrums used by the telcos. 
  • The 10MHz of spectrum that Arete M obtained was originally not available to the telcos, thus explaining for the lower cost.

True potential as enabling technology of drones

  • The advantage of a dedicated LTE network is that it can serve large amounts of data to multiple users over a wide range of up to 10km with low interference and latency, due to the fewer number of users as compared to a public LTE network. Other communication protocols such as Wi-Fi, microwave transmission or Sigfox are less versatile and are subject to limitations such as short range and/or low data transmission rates.
  • The advantages of the dedicated LTE network make it suitable for communication that demand for high reliability, especially for safety reasons, such as within fleets of unmanned vehicles which are currently on trial by various agencies.

Indicative valuation of S$135m to S$387m

  • 8Telecom currently has a market cap of S$12.9m backed by negative equity of S$0.3m and tangible assets of S$0.5m as of end 3Q16. Nonetheless, more advanced IoT companies have been valued at up to US$600m.
  • For illustrative purposes, we have provided a rough valuation of S$135m to S$387m (S$0.181 to S$0.298 per 8Telecom share, after discount and dilution).
  • The risk is that telcos may enter this space once spectrum freed up after the deployment of 5G networks in e.g. 2020. Therefore, fast execution is imperative.

Liu Jinshu NRA Capital Research | http://www.nracapital.com/ 2017-02-21
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