The company operates in a way purely to pay lower taxes. Offshore portion is in low tax jurisdiction. Two ways to read this: These guys are smart. These guys know their stuff. I shouts to me: Steer clear! What are these Taiwanese doing in Singapore if not to take advantage of the tax exemptions for foreign-sourced income?
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| extracted from IPO document |
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| Top 5 major shareholders based on SGX data at 4 Dec 2016 |
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| Shareholders based on IPO document |
- Asian Century Quest Capital LLC
- Capital Research and Management Company
- Eastspring Investments (Singapore) Limited
- Indus Capital Partners, LLC
- Lion Global Investors Limited
- Neuberger Berman LLC
- OZ Master Fund, Ltd., Goldman Sachs Profit Sharing Master Trust, Gordel Capital Limited,
- Ozea, L.P., OZ Equity Long-Short Master Fund, Ltd., OZ Asia Master Fund, Ltd., OZ Eureka
- Fund, L.P., OZ Global Special Investments Master Fund, L.P. and OZ ELS Master Fund
- Quantum Partners LP
- Signature Global Advisors
Chunghwa Telecom is the largest telecommunication service provider in Taiwan and one of the largest in Asia in terms of revenue. In terms of both revenue and customers, Chunghwa is Taiwan’s largest provider of fixed line services, mobile services, broadband access service, and Internet service. (source wikipedia) Chunghwa also operates the fibre broadband for businesses and homes. Think of it as Singtel, where they have the money to buy spectrum rights and dominate the mobile phone networks.
If you already have fibre broadband, it's probably a little hard to predict what technology might make fibre broadband obselete. If you have broadband and cable TV, you have no reason not to expect the next wave to be fibre broadband and digital TV, eventually. It will reach everyone eventually, then the cost goes down, so that was the main reason why I did not buy into the APTT IPO in 2013. However, with its price down 50% since IPO, I am willing to take a second look, hence this review.
APTT, understandably, will face decreasing customers for its broadband segment, which forms 41% of its revenue and 18% of its subscriber base. This means that if broadband customers switch to fibre, we have to factor in a future earning baseline that is just 60% of the current.
The saving grace is that the cable TV network is rather safe because the taiwanese TV producer -- TBC --broadcasts on the cable TV network it owns and monopolises. The government also restricted IP TV, probably because of political censorship. However, if there is a new producer that is more popular than TBC and starts streaming these content on youtube (like what the Koreans do), or netflix (like what the Americans do), then probably the business model will be disrupted.
Japan's cable TV resembles the Taiwan cable TV business model, closed, exclusive and sustainable solely by domestic consumption, but there are multiple competitors in Japan, so there is a continuous need to innovate to stay relevant. All the Japanese cable TV networks have satellite broadcasting networks to bridge the rural areas when there are earthquakes (and cables break), something which isn't seen in Taiwan yet, although Taiwan is also earthquake prone. In Japan, fibre broadband in homes for internet is also mainstream, unlike in Taiwan. Thus, it is plausible to believe that APTT could eventually branch into satellite broadcasting networks if TBC decides to. However, if TBC were to be capitalistic, they will probably spin off another trust in Taiwan instead of APTT for its satellite assets (if any, in future), so as not to be bogged down by the low yield cable assets of APTT, and let APTT die a natural death in Singapore (with its Singaporean investors).
Business wise, we can say that APTT isn't entirely at a dead end of the industry, but whatever happens to it largely depends on TBC, which Singaporeans have totally no control over.
Financial Report
I was turned off by the way the financials are being reported (quarter ended 30 Sep 2016). The entire presentation slides didn't mention anything about profit or debt, just EBITDA, which is Earnings Before Interest, Taxes, Depreciation and Amortization. Thankfully, there is a financial report that they need to produce to comply with MAS regulations for being a public-listed company. Even then, the heading says "Selected Financial Information". Why on earth do they do that? Do they have something to hide?
I had to flipped to the profit and loss statement on Page 18 to see the profit ($43.532M). The capital expenditure isn't in the profit and loss statement. -.-" I spent quite some time comparing the profit and loss statement with the "Selected Financial Information" and the numbers also didn't tally for the income tax and interest cost. They only reconciled the EBITDA to the Profit on Page 24!
Capex is funded by air?
Now, there is another sneaky bit. They have a table of capital expenditure (capex) forecast for next year. If you miss this out, you might just wonder why the debt keeps increasing. There is an additional capex of $20-$25M next year. The money will drop from the sky for that.
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| Capex forecast |
Dividend
Even without looking at the dividend, this company doesn't attract me at all. At 6.5 cents/year, at 48 cents, it translates to 13.5% yield. If the broadband business were to disappear, I will apply a 40% discount based on revenue share (since they are too sneaky not to report the profit by segment which most companies do), it's 8.1% yield based on the current price.
If I were to buy this company, I will want a margin of safety of at least 10% yield at a 40% discount, which translates to 39 cents, so I probably have to wait for the price to drop by another 9 cents before I reconsider this stock again.
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