Jasmine Intl Public Co (JAS TB)

We are recommending a long position in Jasmine – a fixed broadband provider in Thailand.

Jasmine overview:

Jasmine provides broadband internet service to homes and businesses in Thailand primarily through ADSL. The company owns its own broadband network from the last mile to the service nodes and backhaul network. Its coverage and subscriber base are primarily in the “upcountry” region of Thailand (outside the Bangkok area) although it has started to build coverage and service into the Bangkok suburban area (24% of its subscriber base) over the last few years. The company has ~1.4mm broadband subs on ADSL paying a monthly ARPU of ~Bt 600 (~$20). It has also recently launched fiber to the home (FTTH) BB service in the second half of 2013 at a price point of ~Bt 1200 (~$40/month). JAS also has a few other legacy businesses (telecom network aimed at other service providers and a systems integration business) which are largely irrelevant to its profitability (BB internet 86% of 2013 revenues and 96% of gross profits). The company is 25% owned by CEO Pete Bodharamik for whom JAS is the primary source of his net worth therefore has plenty of skin in the game.

Thailand BB market overview:

Thailand has a population of ~67mm people living in ~20mm households of which ~3mm are in the Bangkok area. There are ~5mm BB homes equating to a penetration rate of ~23%. There are 3 main players in the market:

1. JAS – 1.4mm subs (29% mkt share and 39% of BB net adds in 2013). Coverage strength is primarily in regions outside Bangkok as only 24% of its subs are Bangkok area.
2. TOT – 1.6mm subs (33% mkt share and 16% of 2013 net adds). Coverage is national but TOT as a government run enterprise suffers from meaningfully lower network quality (network has not been upgraded in years) and service levels. Due to its older network with longer loop lengths, TOT’s service speeds are inferior to both JAS and TRUE.
3. TRUE – 1.8mm subs (38% mkt share and 46% of 2013 net adds). TRUE is a triple-play cable company servicing primarily the Bangkok area and provides BB services over Coax cable (vs. ADSL for the competition). TRUE also owns the #3 wireless operator in the country. TRUE’s BB services contribute the largest portion of its EBITDA (~62%), followed by wireless (30%) and pay-tv (8%).

Competition in the Thai BB mkt has historically been quite benign, with the two private operators – JAS and TRUE – competing largely with the government owned TOT in their service areas.  As a result, ARPU’s for both have been quite stable, with competition based mainly on connection speeds and customer service rather than on price (rate cards across the operators are very similar, with the base connection speeds being upgraded every couple of years at the same price points). Given the benign competitive environment, JAS enjoys very healthy ROIC on its BB business in the range of 20+% (~600 ARPU at 50-60% EBITDA mgn and capex per add at ~10,000).

JAS growth potential and upside:

At only ~23% BB penetration, Thailand is very underpenetrated relative to most of its Asian counterparts and has room to more than double its penetration in the next 5 years. JAS has been adding 200-250k subs every year for the last 4 years and we think at the very least can keep its rate of net adds flat for the next 4.  Realizing the underpenetrated market opportunity upcountry, JAS has meaningfully increased its rate of coverage rollout to ~500 new nodes/month from ~100/month  in the 1H of 2013 (JAS has ~18,000 coverage nodes in total, so at the current rate is increasing sub coverage by ~33% this year). It is also rolling out FTTH service in the more affluent areas of coverage which come at 2x the monthly ARPU. In a reasonably conservative case of ~200K ADSL adds per year and 25k FTTH adds in 2014 increasing to ~50K FTTH adds in 2015-17, we think the JAS can grow its BB business at a mid-high teens rate and operating profits ~20% per year with inherent operating leverage. Management has stated a goal of 20%+ profit growth in its business as a reasonable estimate. In a slightly more bullish scenario of 250K ADSL adds and 50K FTTH adds in ‘14-15 increasing to 100K in ’16-17, we think profits can grow in the mid-twenties %. Notably, management thinks they have the potential to do 300K ADSL adds and 100K FTTH adds per year with their added pace of service rollout though we are not counting on it. We therefore think JAS should be a company that can grow EPS 20-25% per year for the next 3-4 years. Trading at 9-10.5x 2016 EPS in our bull-base case, we think JAS has the potential to double in the next 2 years as it can trade in a 15-20x range. A 15-20x multiple for a 20%+ EPS grower seems reasonable given most Asian telcos trade for 15-20x for meaningfully lower growth (single digits – low double digits). With a higher growth rate, better returns on capital, more benign competitive environment and a significantly underpenetrated market opportunity, we think JAS is deserving of a high-teens to 20x multiple. 

Why the opportunity exists:

1. Thai political situation has caused a meaningful correction in the stock market
2. A recent ruling by the Thai Supreme Court reversed a 2003 bankruptcy court decision that resulted in 80.5% haircut to foreign creditors in JAS’s restructuring post the Asian financial crisis. The company has estimated the total maximum liability at Bt 1.34bn (0.19/share) but there is market uncertainty over the total amount owed. In the 2003 restructuring, JAS had total debts of Bt11.8bn of which 70% were written off (Bt8.3bn) leaving only Bt3.5bn which was repaid in cash and share swaps over a 10 yr period. However, creditors representing 41% of the face value dissented and filed claims. These creditor claims were recently upheld by the Aug ’13 Supreme Court ruling. We estimate the total liability in a worst case scenario is the full unpaid face value of these dissenting creditors + accumulated interest at 7.5% which is ~Bt 8bn (1.11/share). In reality, the total proceeds to be repaid will have to be contested through the Bankruptcy Court in a lengthy process and so far no creditors have even presented their claims post the ruling.
3. JAS is an under-covered name with only local broker coverage until the end of 2013. It is only in Jan 2014 that DB and CSFB have picked up coverage. We think additional brokers will pick up coverage of the name in the next few months as they contest for underwriting business from the company’s proposed launch of an infrastructure fund for its broadband network (would effectively lower its cost of capital if successful).

Risks:

1. Additional competition in the market. Given the rather benign competitive environment and underpenetrated market opportunity, the market is likely to see additional entrants over the next few years. The leading contenders are the two other wireless players – AIS and DTAC – as well as Cable Thai Holdings (CTH) – representing a collection of smaller cable operators throughout the country. We expect AIS/DTAC to launch service mainly in the Bangkok area if/when they do launch and as such provide minimal overlap with JAS. We also look at multiple BB market structures in UK, France, Spain etc as examples of where the market has reasonably sustained competition from 3-4 well funded competitors and allowed reasonably healthy returns for all competitors. We do not expect the outcome in Thailand to be very different given the relatively meaningless impact even a meaningful launch for these operators would imply for their overall EBITDA (AIS would impact EBITDA <3% at 500K subs). We don’t think the addition of 1-2 more competitors would destroy the economics for JAS and should result in some meaningful price elasticity for BB subs if there is competition. Lastly, CTH is years away from being able to offer BB services without a meaningful capex spend for its operators and is already well behind their goals for Pay-TV subscribers. However, the emergence and development of competition from these players does bear watching.