Asian Pay Television Trust - Phillip Securities 2017-04-21: 13% Yield From A Monopolistic Business

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ASIAN PAY TELEVISION TRUST S7OU.SI

Asian Pay Television Trust - 13% yield from a monopolistic business

• 13% dividend yield. Paid quarterly.
• Annuity type revenue with a cable infrastructure into 760,000 customer homes.
• APTV is the only cable service provider available in areas it operates.
• Initiate coverage with “BUY” rating and SGD0.64 target price, implying a 43% upside plus dividends.

Company Background 

• Asian Pay Television Trust (APTV) is a business trust that operates cable pay-tv and broadband services in Taiwan. It owns all the fibre and cable connections to customers’ homes. This “last-mile” access to homes is cost-prohibitive and extremely difficult to replicate. The company has a stable customer base of 760,000.

Investment Merits 

Stock price has corrected to attractive levels. 

• Share price is down more than 50% from its peak. There were three triggers to this: 
  1. accelerated S$100m capital expenditure required by the Taiwan authorities for APTV to introduce more digital set-top boxes. This raised gearing and interest expense; 
  2. cut in monthly cable-TV fees in 2016. This hurt EBITDA by about S$10m. We do not expect this to reoccur for at least the next 2-3 years. Both factors culminated in a cut in dividends; and 
  3. fears of new competition after the authorities opened up the sector in 2012. There has been much anticipation of new cable entrants, but none has appeared.

13.3% yield, paid quarterly. 

• APTV has guided for a 6.5-cent DPU for FY17. In our view, there is stability in these dividends. The S$103m dividend payable per annum is supported by operating cash flows of S$130m less maintenance capex of S$25m.

Revenue is recurrent with high barriers. 

• Cable TV is an entrenched form of viewing TV in Taiwan. Cable has an 80% share of the TV market. Internet TV has not gained any footing due to a lack of local content. 
• Revenue is recurrent for APTV. It collects an annuity like S$220m revenue p.a. from its 760,000 customers who are paying an S$24 subscription fee every month.

We initiate APTV with a BUY. 

• We value APTV at a DCF valuation of S$0.64. This implies is a 43% upside, including dividends. 
• Our target price pegs APTV at EV/EBITDA of 10.7x, still a 8.5% discount to regional peers.
• APTV enjoys higher margins and dividend yield than its peers. The low ROE is for APTV is due to a large S$2.3b intangibles (cable TV license cost) on its books.

What APTV does? 

• APTV* sells cable TV and broadband service** in 5 locations in Taiwan. Revenue comes from monthly subscription fee of NT$529 (S$24) for 105 TV channels and NT$478 (S$22) from broadband. Cable TV accounts for 85% of APTV total revenue, with broadband 15%. The largest operating cost are content and depreciation, both are 25% and 23% of total operating cost respectively.
• APTV was listed on SGX in May 2013.
• APTV is Taiwan’s 3rd largest cable operator with 14% market share. However, in the 5 locations (or called franchise areas) APTV operates, it is the sole provider of cable TV and broadband. An alternative to cable TV is internet TV (commonly called IPTV), owned by Chunghwa Telecom. On broadband, Chunghwa Telecom is the dominant 80% market share incumbent with its ADSL broadband service.

* APTV is a business trust that enjoy owns economic interest of Taiwan Broadband Communications (TBC), which is the actual operating entity that provides cable pay TV, and broadband services.
** For our Singapore based readers, APTV is similar to a Starhub cable TV and broadband service. StarHub has almost 500,000 cable TV customers that pays an ARPU of S$51 per month.

Unique content arrangement in Taiwan 

• Similar to all cable TV operators, content is King. In Taiwan, local content is King. Of the top 20 channels, 18 are local talk show and variety shows.
• We believe the cost of content for APTV would be higher if Taiwanese fell in love with English Premier League (EPL) like other Asian countries***.
• The commercial arrangement APTV has with its content providers is unique compared to other countries. APTV pays a fixed fee of around 20-25% of ARPU (Average Revenue Per User) to its content provider. From the permitted 15 minutes per hour of advertisement time, 14 minutes is bartered away by APTV to the content provider. The balance one minute is retained by APTV for public service events. This removes the volatility of advertisement revenue for APTV. That risk is borne by the content providers. A large part of APTV content is from content aggregators such as Metro Capital International. This arrangement has allowed APTV content cost to remain stable at 23% of cable TV revenue for the past several years.

*** Content cost is 23% of cable TV revenues for APTV. Starhub does not disclose pay-tv profitability separately or the content cost. For satellite pay-tv operator Astro Malaysia, content cost is 34% of revenue.

Industry breakdown 

• Watching TV is a major leisure activity in Taiwan. Cable TV dominates with 80% of the pay-tv market. Next is watching TV through IPTV. The service was launched in 2004 by Chunghwa Telecom (called Multimedia on Demand or MOD). MOD subscriber base is around 1.33m but revenue is only NT$2.36b (or S$107m). The low revenue is probably because the service is bundled out free together with broadband. There is also satellite TV in Taiwan operated by Direct to Home Satellite TV. However, it has a negligible market share in Taiwan. The issue with satellite is the high cloud cover and frequent typhoons in Taiwan.
• The largest operator of cable TV in Taiwan is China Network Systems (CNS) with ~ 1.25m customers. South Korean private equity firm MBK Partners owns it. CNS operates in Keelung, Taipei City, New Taipei City, Kaohsiung City, Tainan City and Taoyuan. There has been several prospective buyers for CNS, from Want Want owner Tsai Eng-Meng, Ting Hsin International to Far East Tone Telecommunications. However, every buyer has had difficulty securing approval from the Taiwan authorities.

What we find most attractive of APTV? 

1. Barriers to entry: We figure there are 2 major barriers of entry: 
   1. Cable access to the home. APTV has spent more than 10 years to build up cable access into 1.2m homes. It is too costly and time consuming for any other party to replicate this infrastructure. That “little plug” in the home for cable belongs to APTV and it is very valuable.
   2. Content arrangements with suite of local providers. Local content providers want viewership to attract advertisers. APTV large customer base makes them an attractive client for all content providers.
2. Affordable product: Watching TV through cable is the most popular format in Taiwan. The price of the package is affordable at S$24 per month for 105 channels.
3. Recurrent annuity like revenue. Around 85% of the revenue is subscription based. This provides a strong recurrent revenue stream. APTV customer base has been growing since inception, albeit at a slower pace.
4. Good cash-flow streams: There is minimal working capital required because to enjoy the service, it has to be prepaid.

Factors that hurt the share price recently 

• The sell-down in APTV was a result of a cut in dividend from 8.25 cents to 6.5 cents. We believe there were 3 reasons that triggered the de-rating and decline in APTV share price.
  1. Re-zoning: Prior to 2012, the regulator National Communications Commission of Taiwan (NCC) zoned cable services in Taiwan into 51 franchise areas which APTV essentially monopolies. In July 2012, in order to introduce competition, NCC rezoned the franchise areas to 22 (in line with Taiwan 22 administrative areas).
     1. There were always concerns APTV will face the threat of new entrants. A particular concern was the impact to Taichung city that account for ~40% of APTV revenue.
     2. There were two applicants – TOP and VeeTime – for cable TV in Taichung. To date, no service has been rolled out. To receive operational license, operators must have at least 30% network coverage of a franchise area. Worst hit so far from the new post re-zoning laws has been Taipei City. The initial five franchise areas were rolled into one, resulting in severe price competition.
  2. Digitisation scheme: – In December 2015, the authorities required APTV to turnoff all analogue broadcast. This resulted in APTV providing a second digital set-top box. The $100m deployment of set-top boxes planned over 5 to 7 years had to be squeezed into 2 years ending FY17.
  3. Price decline in cable fee: Basic cable TV subscription is regulated both by NCC and by local mayor in each administrative area. Due to change in government and weak economic conditions, three of the five franchise areas that APTV operated in, suffered a price cut of NT$10 per month (or S$0.45). 

RISK 

Biggest risk for us is regulatory 

1. Local government could always lower subscription fees further in their next annual review. However, with the recent jump in capital expenditure, we believe APTV has better grounds to stave off any request for a fee reduction.
2. NCC could require all content available on cable to also air on Chunghwa Telecom’s IPTV. While this can never be ruled out, it has been more than 10 years and nothing has materialised.
3. NCC may start implementing “a la carte” pricing for basic channels in 2017. If this occurs, APTV we believe could offer tiered-pricing and to watch all the popular content, the subscriber need to purchase all tiers.

Macro risk faced by APTV include weakness in Taiwan dollar and rising interest rates. 

• APTV revenues are in Taiwan dollar (TWD), any weakness in TWD is negative for the DPU, which is paid in SGD. The volatility of Taiwan dollar (TWD) against Singapore dollar (SGD) has not been large. 
• Over the past 5 years, TWD has appreciated ~8% against SGD. Regarding interest rate rise; a 1% point rise in our interest rate assumption will reduce our net earnings by 15% and operating cash flows by 2% (or ~S$10m).

THE LESS CLEAR 

• In January 2016, the Trustee-Manager of APTV, Macquarie APTT Management, has sold the business to Dynami Vision. Lu Fang-Ming controls this company. He is the chairman of Asia Pacific Telecom, a mobile operator in Taiwan and the EVP of Hon Hai Technology Group. The acquisition had to be in his personal capacity as the law prohibit government to invest in media. 
• Foxconn and Asia Pacific Telecom is partly owned by the government. No details have been announced by Dynami Vision about their plans. The official statement on APTV is “strategic partnerships in content creation, data processing and telecom services.” We can only guess that any mobile service offering will be enhanced by APTV broadband and cable TV service. 
• Large competitors such as Chunghwa are offering quad play of mobile, fixed line, broadband and pay-tv. 
• Looking ahead, as Internet of Things and smart homes products turn more pervasive, APTV infrastructure and customer base of 750,000 will be valuable in introducing such products and services. To remove a trustee-manager requires 75% vote by unit-holders.

Paul Chew Phillip Securities | http://www.poems.com.sg/ 2017-04-21

Phillip Securities SGX Stock Analyst Report BUY Initiate BUY 0.64 Same 0.64