Description
Dumpster diving in Hong Kong
The probability of recession occurring over the next year in Hong Kong is currently 65% (vs. 35% for USA) and as you may have noticed there is unrest on the streets. I don’t know if it is time to buy yet but I screened for Hong Kong-listed companies trading at less than .8x book value with over a 5% dividend. I got a 142 companies to look at, of which Apstar(APT, SEHK:1045) is one.
APT is a USD $309 million (million with an m) market cap satellite company without debt that operates four geo-synchronous satellites. APT has never been written up on VIC but Viasat has been written up as both a long and short at various times. I point this out because Viasat is currently a $6.4 billion (billion with a b) EV company that also operates four geo-synchronous satellites – while the exact specs of the satellites are not available to compare, the available specs look similar.
APT trades on the Hong Kong stock exchange so from now on in this writeup I’m going to use only Hong Kong dollars (HKD:USD =7.83).
Why is APT cheap?
The company described 2018 market conditions as bleak, with no sign of reprieve coming in 2019. They wrote that for 2018, transponder market conditions regionally and globally were in a state of continuous decline. “The business growth for satellite broadcasting and satellite telecommunication had been weak and the market environment on oversupply of satellite transponder and the decline in the transponder lease price remained unchanged.” Their 6-month interim 2019 report showed a 9% drop in revenue and a 16% decrease in various levels of profitability. Over the last 5 years their revenues have been flat.
This is nothing new. Going back the last 5 years, every presentation the CEO gives the same outlook: conditions are bleak, competition is fierce, downward pressure on prices, oversupply in transponders, etc. It’s a broken record. Over the last 5 years there were several interim periods of revenue declines, though none as large as the most recent 6-month period.
Despite this 9% drop in revenue, APT still earned $.25/share over the 6-month period (for a $2.72/share stock!) and boosted the dividend. Shareholder equity increased 2.2% in this tough market even after paying dividend.
In 2018, which was a bleak year as described by the company, they produced HKD $328 million in freecashflow (13% FCF yield to current ev) and $.68/share in earnings - easily covering the $.11/share dividend they paid. They’ve already increased their dividend for 2019 to $.16/share (5.88% yield).
APT cumulative capex was HKD $6 billion over the last 10 years. That capex put 4 satellites into orbit (plus one on the launchpad getting ready to go). You’re getting the results of that $6 billion investment for the current price of just HKD $2.4 billion.
They funded all that $6 billion capex with cashflow and debt. The share count over the last 10 years has remained flat. They’ve now paid back all the debt. They run a positive cash balance with 1/5 the market cap in cash at end of 2018.
APT has a consistent dividend growth history (Bloomberg shows a 14% 5-year dividend growth rate). Unlike the other 141 cheap-o companies I looked at while dumpster diving in Hong Kong, with APT I see a contiguous investment and earnings history that seems to make sense: invest money, reap profits, pay dividend, rinse & repeat. I know they have tight relationships with Chinese government (that can be risky) but they also have partnerships with western companies. When I look at the ownership of their shares I am happy that I do NOT see one local private entity with 50-70% of the shares outstanding – I actually see a couple of value fund names.
Clearly, there is an overcapacity of satellite bandwidth. Prices are falling, as they have for the last 5 years. Aside from being a decent dumpster-diving candidate, in a distressed industry APT appears to be well-positioned with no real debt, a modern fleet of satellites and access to growing economy.
https://www.globenewswire.com/news-release/2019/03/11/1751335/0/en/NSR-Report-Finds-Satellite-Capacity-Pricing-Plunges-18-on-Average-from-2018-2019.html
March 11, 2019 11:55 ET | Source: NSR
CAMBRIDGE, Mass., March 11, 2019 (GLOBE NEWSWIRE) -- NSR’s Satellite Capacity Pricing Index, 5th Edition (2019), released today, finds accelerated pricing decline across operator segments, with a global average decline of 18% over the past 12 months. NSR’s Global Mean Price Index for video declined by 7.1%, mobility by 13%, with the data segments declining by as much as 24%. The key driver for such a large market correction is attributed to cheap and bulk supply of HTS capacity that has rendered legacy satellites increasingly obsolete. Increasing backhaul, cruise, and broadband deployments have given a boost to the capacity demand, albeit underscoring the topline through price elasticity.
NSR projects video will continue to decline at a faster rate of 11% in 2019-2020 on account of increased compression rates and high market saturation. Mobility is also expected to decline faster with developing country opportunity and increase of cruise bandwidth demand in the total maritime market share. “These drivers mark a key shift in satcom dynamics and represent not only a commoditized market but also a higher rate of capacity commoditization than anticipated in 2018. Operators have been slow in transitioning to service business lines, keeping hinged on legacy lean organizational structures, while service providers look to ramp up growth in aero-backhaul-consumer segments for a 4th straight year,” states Gagan Agrawal, NSR Senior Analyst and report author.
While prices are falling, regions of significant demand still exist across developing countries for backhaul and village Wi-Fi that may support marginal revenue increase via volume deals, whereas Aero and Gov/Mil segments will continue to grow in under-served regions and drive profitability – but only for the right asset match. Operators will need to strengthen tiered pricing and improve efficiency via inclined orbit, localised HTS payloads or Non-GEO assets. Focus on increasing demand through price elasticity remains paramount to growth, and enabling new sub-verticals in aero, broadband and Gov/Mil could give operators an upper hand to differentiate premium vs volume offerings.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Catalysts:
In-flight and maritime connectivity is a growth area. Agreements are being announced. https://asianaviation.com/gogo-partners-with-apt-mobile-satcom-for-chinese-airlines/
These agreements have been lucrative for western satellite companies. This segment is growing triple digits for APT.
Two of their 4 operating satellites were launched in 2018 and another, Apstar-6D is going to be launched soon. This increases capacity and length of cashflows. Newer satellites have a 15-year life and higher throughput.
Growth in demand of ultra-high definition broadcasts and IoT in emerging markets.