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Asian Pay Television Trust (APTV) Summary

Core Content

Asian Pay Television Trust (APTV) is a business trust that provides cable pay-TV and broadband services in Taiwan. It operates in five franchise areas, with a total of 760,000 customers. APTV is the sole provider of cable TV and broadband in these locations, giving it a strong market position.

Main Points

Investment Highlights

• Dividend Yield: APTV offers a 13.3% dividend yield, paid quarterly.
• Dividend per Unit (DPU): Expected to be 6.5 cents for FY17, with stability in dividend payments.
• Valuation: APTV is valued at SGD 0.64 per unit, implying a 43% upside from the last traded price of SGD 0.490.
• Target Price: Based on EV/EBITDA of 10.7x, which is 8.5% discount to regional peers.

Investment Merits

• Stable Revenue Stream: APTV has a recurrent annuity-like revenue of SGD 220m annually, derived from 760,000 customers paying SGD 24 per month.
• High Barriers to Entry:
  • Cable Infrastructure: APTV has invested over 10 years to establish its last-mile access to 1.2m homes, which is hard to replicate.
  • Content Arrangements: APTV has a unique arrangement with local content providers, ensuring stable content costs at 23% of cable TV revenue.
• Affordable Product: Cable TV is the most popular and affordable way to watch TV in Taiwan, with 80% market share.
• Recurring Cash Flow: APTV generates minimal working capital requirements due to prepaid model.

Risks

• Regulatory Risk:
  • Subscription Fee Adjustments: Local governments can reduce fees, impacting dividend per unit (DPU).
  • Content Distribution: NCC might require APTV to air content on Chunghwa Telecom's IPTV, which could affect revenue streams.
  • "A la carte" Pricing: If introduced, it could force APTV to offer tiered pricing.
• Macro Risk:
  • Currency Volatility: APTV's revenue is in TWD, while dividends are in SGD. TWD has appreciated 8% against SGD over 5 years.
  • Interest Rate Risk: A 1% increase in interest rates would reduce net earnings by 15% and operating cash flows by 2%.

Key Financials

Company Background

• Structure: APTV is a listed business trust that owns economic interest in Taiwan Broadband Communications (TBC).
• Ownership: APTV has a 59.3% stake in TBC, which is the actual operating entity.
• Assets:
  • Fibre Optic Cable: 2135 km
  • Coaxial Cable: 13,928 km
  • Network Coverage: Over 1.2m homes in 5 franchise locations in Taiwan.
• Technology:
  • Cable: MPEG4, DOCSIS 3.1, 870MHz
  • Broadband: Up to 300MBps
• License:
  • Cable TV License: Issued by NCC, renewed every 9 years, extended to 2020/21 due to analogue shutdown.
  • Broadband License: Valid for 15 years.
• Ownership Restrictions:
  • Foreign Investment: Limited to 60% of total shares in a cable operator.
  • Prohibited Entities: Political parties, government agencies, and military cannot invest in domestic media.

Market Position

• Market Share: 14% in the Taiwan cable TV market, making it the third-largest operator.
• Competitors:
  • China Network Systems (CNS): 24% market share, 80% broadband market share.
  • Chunghwa Telecom: 80% broadband market share.
• Market Share by Service:
  • Cable TV: 80% of the pay-TV market.
  • IPTV: 19% of the pay-TV market.
  • DTH/Satellite: 1% of the pay-TV market.

What We Find Most Attractive

• Control of Last-Mile Access: APTV's cable infrastructure is a key competitive advantage.
• Pervasive Cable TV: It is the main mode of TV viewing in Taiwan.
• Recurrent Revenue: 85% of revenue is subscription-based, providing annuity-like cash flow.
• Good Cash Flow: APTV has stable operating cash flows of SGD 130m annually, with maintenance capex of SGD 25m.

What We Find Less Attractive

• Regulatory Review: Monthly cable fees are subject to annual review, which can affect dividend stability.
• Leverage: APTV has refinancing risk due to debt.
• Limited Growth: Growth is limited, with only premium cable TV as a potential avenue.

Distribution Policy

• Dividends: Paid quarterly in SGD, based on EBITDA minus maintenance capex, taxes, and debt repayment.
• Taxation: Corporate tax is 17%, and dividend upstream from TBC to APTV is taxed 0-20% depending on the nature of the payment.

Valuation

• DCF Valuation: SGD 0.64 per unit.
• EV/EBITDA: 10.7x, which is discounted compared to telecom peers.
• Yield: APTV has a higher dividend yield than its peers, with 13.3%.
• Margins: APTV has higher margins than its peers.
• ROE: Low ROE due to large intangibles on its balance sheet.

Growth Opportunities

• Limited Growth: APTV has limited growth potential, with premium cable TV as the only avenue.
• Smart Home Potential: With the rise of IoT and smart homes, APTV's infrastructure and customer base could be valuable in introducing new services.

Management and Ownership

• Trustee-Manager: Macquarie APTT Management, who sold APTV to Dynami Vision in 2016.
• Ownership: Lu Fang-Ming (Chairman of Asia Pacific Telecom and EVP of Hon Hai Technology Group) controls Dynami Vision.
• Shareholders:
  • Temasek Holdings: 7.93%
  • Morgan Stanley: 5.43%
  • Thornburg Investment: 4.98%

Price Performance

Market Capitalization

• O/S Units (MN): 1,437
• Market Cap (USD mn / SGD mn): 504 / 704
• 52-WK HI/LO (SGD): 0.62 / 0.37

Conclusion

APTV is a stable, high-yield business trust with a monopolistic position in cable TV and broadband in Taiwan. Despite recent share price corrections, the dividend yield, recurrent revenue, and high barriers to entry make it an attractive investment. The DCF valuation and EV/EBITDA indicate a discounted valuation relative to telecom peers, with a 43% upside and 13.3% dividend yield. However, regulatory and macro risks remain, which could affect revenue and dividend stability.