AsiaSatellite (1135 HK) is a Hong Kong based provider of fixed satellite services over China and India.  They have three satellites and are one of only two licensed FSS satellite service providers in China.  The company is majority 74.4% owned by GE and CITIC, a division of the Chinese government.  The public minority stockholders own the remaining 25.6%. 

At the current price of HK$11 (note: HK$7.8 per USD $1), the company trades at about 90% of tangible book value and less than 3x EBITDA.  Excluding the excess HK$5.74 in net cash on the books, the stock trades for about 6x normalized earnings.  There are 391 million shares outstanding and HK2.2bn of net cash.  EBITDA is around HK$750 million per year.  In USD terms, the float is about $140 million.

GE Capital and CITIC attempted, about a year ago, to buy out minority shareholders for HK $18.30.  At the time, this looked like an unfair offer because GE Capital could readily finance the satellites at more than 5x EBITDA and strip out the excess cash.  Private market values were in the mid to high-20s.  The company says the transaction was rejected because the State Department wanted the company to remain public for US national security reasons.  Upon further discussion with the company, however, it seemed there were ways that GE & CITIC could take the company private (by allowing a 3^rd partner to participate, for example, or permitting State Department access to the operating statements).  In truth, I think the transaction was rejected by minority holders due to an insufficient price.  Unfortunately, however, the company botched their offer and the State Department ruled, and now the float requirement means the company cannot do stock repurchases.  Therefore, the value investor’s favorite method of value creation – stock buybacks – is not an option here.

However, all is not lost.  The business is valuable and generating cash flow.  Also, the company has recently signed a number of deals to DTH service providers in India and is well-positioned in Asia so there’s a fairly good chance EBITDA moves higher over the coming years.  The company has excess transponder capacity which it can lease up at a very low marginal cost.  Also, with the current net cash balance amounting to over HK$5 per share, there’s a chance management does a sensible acquisition.  They have a history for being prudent, and GE Capital is now actively involved so I doubt they do anything foolish. 

Ultimately, however, I think the catalyst is GE exiting by selling their shares in a secondary offering at a higher price.   I believe this is a very large position for the private equity segment of GE Capital and they will probably be looking to monetize it in the next few years.  

In terms of valuation, SES and Eutelsat which are two satellite service providers in Europe trade for about 9x EBITDA.  At a similar multiple, AsiaSat is worth about HK$22.50, assuming there’s no growth in EBITDA and that they do not do anything accretive with their cash.  If you add $3 of FCF generation between now and 2011, I come up with a HK$25.50 target for about a 30% IRR.  I believe there is limited downside at current prices.

I am interested in other orphaned companies trading at similar valuations, so if you know of any please post them here.