Wednesday, November 20, 2013

APTT 10.7% yield- too good to be true?

A disclaimer, I am really attracted by the yield but as I read deep into the prospectus my thoughts keep running, I am writing mainly to crystallize my thoughts and not doing any advertisements. I am not vested and have not make up my mind whether to invest in this.

What are some key risks and my thoughts.

1) Competitions

Taichung city will see 2 competitors soon, they are now building up the network and I believed licences will be granted to them. I however think loss of subscribers to them will be minimum and as content are generally the same, most importantly,it will be another 2-3 years before they can compete agressively since it is only in May 2013 that the 2 competitors began constructions.

Similarly, I think TBC will have problem encroaching others area of franchises, although that is one of the growth strategy.

Taiwan rules against any cable TV operator having more than 1/3 of the nation subscribers, so the competition is mainly with the smaller players.

2) Suppliers

There is only 1 supplier for  APT for basic TV content, but there are 4 such suppliers in Taiwan, and APTT holds 15% market share, so bargaining forces should be neutal, and not so much of worry.

As for premium contents, they have multiple suppliers, but the issue here is costs. Some content might be demand inelastic.

3) Loans.

They have ready loans to drawn down but there are a few problems that will increase loans substantially. Although post IPO, loans has already fallen, a few factors will cause loans to jump again.

i) Tax provision. They have made tax provision for 46 million and is confident to reach a resolution with Taiwan Tax Authorities, but the actual tax demanded by the authorities is  actually 122.4 million, almost twice their provision.They have earmarked $197 million to fund future ongoing growth capital expenditure and the tax settlement, if the tax provision is not settled properly, there will not be much left for expansion.

ii) Capex due to expansion into other area of franchise. Since they need to build out the network before they can even get the license, it will be capex without yield until years later. In prospectus,they did not give a gauge of how big the capex will be, saying it depends on negotiation with NCC. So that is a big wild card.

iii) When the 197 million loan is drawn down at 4% interest about another 8 million will be added to Finance costs, putting in doubt the sustainability of distribution beyond 2014.

In my opinion, the best strategy would be to grow organically. That would keep capex and loans under control.

4) Substitution

Personally, I do not quite understand why people still pay for cable TV, at least for the residential consumers. They are so many substitution. I am not quite sure if the pie will grow. The pie is not growing and NCC is encouraging competition, doesn't seem too business friendly here...

So... worth a buy???

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