20170421-辉立证券-13_yield_from_a_monopolistic_business_14页_1mb

APTV Summary

Core Content

Asian Pay Television Trust (APTV) is a business trust that operates cable pay-TV and broadband services in Taiwan. It is the third-largest cable operator with a 14% market share, serving 760,000 customers across 5 franchise areas. APTV has a unique business model with high barriers to entry and a strong cash flow.

Main Investment Points

1. Investment Merits

• Attractive Dividend Yield: APTV offers a 13.3% yield, paid quarterly.
• Stable Dividends: The company has guided for a DPU of 6.5 cents for FY17, with a stable dividend policy.
• High Recurrent Revenue: Approximately 85% of APTV's revenue is subscription-based, providing an annuity-like income stream.
• Monopolistic Position: APTV is the sole provider of cable TV and broadband in its 5 franchise areas, offering a competitive advantage.
• Valuation: The DCF valuation is SGD 0.64 per share, implying a 43% upside, and the EV/EBITDA is at 10.7x, which is still a 8.5% discount to regional peers.

2. Factors Affecting Share Price

• Dividend Cut: APTV's share price was affected by a dividend cut from 8.25 cents to 6.5 cents.
• Regulatory Changes: The re-zoning of franchise areas in 2012 introduced competition concerns, but no new entrants have materialized.
• Digitisation: The requirement to turn off analogue broadcasts in 2015 led to increased capital expenditure and a drop in EBITDA.
• Price Reduction: Monthly cable fees were reduced in 3 of APTV's franchise areas, impacting revenue.

Key Financials

Market Position

• Market Share: APTV holds 14% of the cable TV market in Taiwan, with 760,000 customers.
• Cable TV Dominance: Cable TV accounts for 80% of the pay-TV market in Taiwan.
• Broadband: Broadband accounts for 15% of APTV's revenue, with Chunghwa Telecom as the dominant player.

Unique Aspects of APTV

• Content Arrangement: APTV pays 20-25% of ARPU as a fixed fee to content providers and has a unique barter system for advertisements.
• Infrastructure: APTV owns the "last-mile" infrastructure, making it extremely difficult to replicate.
• Regulatory Environment: The company's license is renewed every 9 years, and there are regulatory restrictions on foreign investment in cable TV.

Risks

• Regulatory Risk: There is a risk that local governments may further reduce subscription fees.
• Content Risk: NCC may require all content to be available on Chunghwa Telecom's IPTV.
• Macroeconomic Risk: Weakness in the TWD and rising interest rates could impact APTV's performance.
• Refinancing Risk: APTV has refinancing in place until 2019, which could be a risk if the market conditions change.

Growth Opportunities

• Limited Growth: Growth is limited due to the saturated market.
• Premium Cable TV: The only avenue for growth is through premium cable TV packages, but take-up has been limited.

Distribution Policy

• Dividends: Dividends are paid in SGD and quarterly.
• Dividend Policy: Dividends are based on EBITDA less maintenance capex, less taxes, and less debt repayment.
• Corporate Tax: 17% corporate tax, with dividend upstreamed from TBC to APTV taxed at 0-20% depending on the nature of the payment.

Conclusion

APTV is a well-established business trust with a strong customer base, high barriers to entry, and a stable dividend policy. The company is currently undervalued, with a DCF valuation of SGD 0.64 per share and an EV/EBITDA of 10.7x, offering a 43% upside and a 13.3% yield. However, the company faces regulatory and macroeconomic risks that could impact its performance.