Asian Pay Television Trust (APTT)

[Nick]

I got this from DBSV Initiation Report pg 31 (dated 14 August 2013):

Debt amortisation will not be significant. The current amortisation profile is back-ended, and initially there is no loan amortisation required till 1Q14. Even in FY14-15, loan amortisation is less than 1% p.a. and we believe the Trust will refinance the credit facilities sometime in 2015 to further stretch out the amortisation profile.

Hi Nick,

IMHO, I think the discrepancy of what is described in the prospectus and what is said in the report in too large.

In the prosepctus,
"The outstanding amount under the Term Loan Facility will be amortised on a quarterly basis over a period of seven years in accordance with an agreed amortisation schedule with a final repayment of all outstanding principal on the final maturity date, which will equal 44.5% of the total loan amount drawn under the Term Loan Facility."

I take that to mean they will start repaying from the first quarter through the 7 years. Granted, they mentioned about a agreed scheduled, but with reference to the above clause, I thought the schedule, will talk about the amount to be ammortized and not the time. I can't find details of the schedule in the prospectus.

I have email the IR regarding this discrepancy, the funny thing is they send an reply asking for my phone number so that they could contact me, which I duly supplied, although I did ask why they could not give an email reply.

I have not heard of them yet, if they do reply, I willl post their reply here. If I don't, means they do not want to reply me.

side calculations,

If they ammortize they loans from the first quarter, such that 54.5% of loan is repay over 7 years, they need to fork out 18 SGD million every quarter.

If like what the report says, they only do it it 2014, then the sum will be even bigger. If they do only token amortization and then refinance the loan in 2015 as per stated in the report, then they are paying lipservice when they say they want to ammortize their loans, in would in fact be a refinancing when times come model very similar to reits...

I don't think the amortization profile consists of fixed quarterly payment throughout the remaining 6 years. It will probably resemble a ballooning amortization profile - just like MIIF previous investment in Hua Nan Expressway. If I recall correctly, TBC used to have a ballooning amortization as well - it didn't need to make repayment for 2011-2013 and start repaying in 2014 but MIMAL refinanced the loan structure with the recent IPO. Granted, it needed to do an equity injection at asset level to refinance its debt then. However, TBC is much more well capitalized asset now with the IPO and is a listed entity signalling lower capital risk profile. I don't see why they shouldn't refinance. Unlike infrastructure assets with fixed lifespan, this is theoretically a perpetual business with slightly growing EBITDA. If REITs with its 30 - 99 year lifespan can refinance, why not a 'perpetual' business ? Of course, this is another risk investor has to take note of - if they can't refinance, then it is likely distributions will be cut in the future to make payment or equity will be raised (just like any REIT/trust).

(Not Vested)

Hi nick,

U are right, their IR did call back. The amortization is like a balloon, starting in 2014 and paying little in 2014 and 2015. The bulk will be paid in 2016 onwards and they will try to refinance it before that.

He mentioned Taiwan debt structure doesn't have or does not commonly offer bullet loans, so this is currently the best structure. He admits it not ideal and hope Taiwan debt structure will mature, an they might look into bonds too.

So the amortization is just a wayang ...

Hi Greenrookie,

Thanks for the confirmation !

Personally, I am wondering whether the downturn in share price could be linked to any operational risks which we may have overlooked. It is just like HPHT - only now after a series of poor results, does the downtrend makes sense. So I wonder whether can APTT truly maintain the EBITDA > 200 million in light of the rezoning hmm. If it can, then at this price, it does seem fairly attractive.

(Not Vested)

[Greenrookie]

Hi Greenrookie,

Thanks for the confirmation !

Personally, I am wondering whether the downturn in share price could be linked to any operational risks which we may have overlooked. It is just like HPHT - only now after a series of poor results, does the downtrend makes sense. So I wonder whether can APTT truly maintain the EBITDA > 200 million in light of the rezoning hmm. If it can, then at this price, it does seem fairly attractive.

(Not Vested)

HI Nick,

I was wondering the selldown due to the news of regulation problem that forummers have shared? That they have chinese investors and they need to buy back from the investors.

I am more concerned about management and regulation risk than operation risks. The rezoning thus far might only affect TaiChung City, and it will be years before they competitors can do serious damage. Given the first mover advantage, and the already high penetration rate in the 5 franchase areas. Although compeition might cause prices to have downward pressure. Operation numbers are strong, and they do seem able to penetrade their market and cross-sell their products.

From what I read, I am wondering what the hell is macquarie doing in Taiwan?
First, they have unresolved tax issues with the tax bureau.
Then they have the possibility of having to merging Shin Ho and Chi Yuan due to fact they might run foul to the law of not having 2 affiliated companies in the same adminstrative zone.
Now, the have the never declared PRC shareholder problem...

I only have a small stake, I might call the IR again tomorrow to ask. BUt I guess I might just get some standard answers. I am wondering if the NCC will say enough is enough...

[Greenrookie]

hi guys ~~ this the latest news i got on APTT:

http://news.ifeng.com/taiwan/3/detai...068333_0.shtml

The authority in Taiwan is enforcing all PRC investors to be out of APTT within 21 days.

I am vested in this counter. Share prices been dropping. Wonders any advise on should I hold or cut losses?

By the way, has the NCC officially granted them the permit to expand into Greater Tai Chung area?

I think you read the article wrongly, it is APTT asking the 37 PRC shareholders to sell their stake within 21 days and if they do not comply they can forced a sale as stated in the trust deed

报告称，有37个个别信托单位疑似为中国大陆人民持有，占0.06%，APTT强制要求陆资21日内撤出。

APTT已依契约对持有人发出警告函，要求出脱信托凭证，如未在21天内卖出，基金管理人将强制出售；APTT也要求券商注意，不得接受陆资下单

You gave me a scare...

Also,

Yu said that cable service operator TBC would not be fined if the trust fund was found to have accepted Chinese investment.
“The trust deed clearly states what the manager would do if they found Chinese had invested in the trust fund,” Yu said. “The commission was aware of the deed, and that was why we approved of the TBC’s change of overseas investment last week. Nothing that has happened was a surprise to us.”

It seems that the NCC is rather reasonable on its side, just not sure if the legislative council will kick a big fuss.

0.06% is just about 860 lots, it could well be over on last thurs or friday...

Anyway, I did email the IR again, hope he is patient enough with me

[Nick]

The PRC news isn't new. This was reported back in August and the number of shares are small.

http://www.taipeitimes.com/News/taiwan/a...2003570396 [Dated: 23 August 2013]

So I don't think this is the cause for the selldown unless there are some new developments.

(Not Vested)

[Sylvan Beau]

By the way, does anyone knows? Has the NCC officially granted them the permit to expand into Greater Tai Chung area?

[Greenrookie]

Hi buddies, I blogged APTT yesterday. Below is the reproduce. I welcome comments and thoughts and anyone to point out any errors that might be made.
------------

APTT is a much disliked counter going by what forummers/ bloggers said about it during its IPO, but it has fallen 23% from its IPO price with a yield of above 10%. It is still a bargain now?

As with HPHT, the sustainability or the doubts of its sustainability of payout is the main reason for its under performance. Lets us look at APTT and the various threats and see if they are justifiable.

First, earning power.

[Image: aptt1.png?w=650]



If we go earlier, a similar picture emerges.

[Image: aptt2.png?w=650]

The good operating numbers correspond to the increasing basic TV RGUs and the increasing prenium TV customers.

Is such operating numbers sustainable? Competition within franchise area is currently non existence but with the rezoning of franchise areas, competition might increase, and “On 8 May 2013, the NCC approved preliminary permits for Vastar and TOP for franchise area extensions into Taichung City, which will allow them to begin the required construction according to the business plans they submitted to the NCC”, Taichung CIty has the highest per capital income, and that properly explained why the competitors are keen to move in. That TV penetration rate of approximately 67.8% across its franchise areas might mean untapped market. However, given thatThe NCC only issues licenses to applicants that have built and deployed 100% of their network, and that TBC own expansion in its own Taichung City (Greater Taichung) is reported to take years,the threat while real, is not imminent. The fact that the penetration is not high would mean that its doesn’t have to be a zero sum game. (Subscribers have to leave TBC). IMHO, competition is also mainly in the premium digital TV channels since there is no cap in the fees operators can charged customers and TBC has higher ARPU in the prenium digital market compared to CNS and Kbro, and the penetration rate for prenium digital TV is low. (Pie enough for everyone). I doubt the new competitors will want to compete in the price on the basic TV since the cap rate is already regulated by NCC.

As for competition by substitutes, such as IPTV. The biggest player CHT, has several disadvantages. 1st, is platform disadvantage. about 80% of the viewers in Taiwan use cable TV while broadband penetration is nowhere near, and since CHT has government stake, it cannot access certain local content such as news programme, such the competition is not a apple to apple type of competition.

The cap rate for basic TV can be lowered by the local government during poor economic times and it has been lowered by $10 in 2011 and $15 in 2013. But looking at the operational numbers,TBC is hardly affected by it, registering revenue growth in 2011. Cap rate can also be lowered as a “penality” for poor quality of service, or inability to meet digital penetration target of 50% in 2015. TBC respond to this by offering free digital boxes (capex risk, which will be explained later), and is expected to reach 50% in 2014. As for content, TBC do not make content but source for content from aggregator MCI, if there is a complaint from local government, I think they can always go for another content aggregator (There are 4 in Taiwan).

Hence basic TV cable are defensive, and make up of mostly local content, with the lack of killer content (think starhub and singtel for EPL), and that is one of the biggest generator of revenue, and a platform for bundling and cross selling.

So, barring a earthquake/typhoon knocking out infrastructure, I think we can establish the earning power is more or less “safe”, given that the broader industry is also sound. (from prospectus: MPA forecasts indicate that total premium digital cable TV RGUs will grow at a CAGR of 15.2% between 2012 and 2017. Premium digital cable TV ARPUs averaged NT$188 per month as of 31 December 2012, having grown 5.6% year-on-year. MPA expects that by 2017, premium digital cable TV ARPUs are expected to reach NT$229 at a CAGR of 4.0%.)

Next, capex and finance costs

Capex will affect distribution. To sustain distribution of 8.25 cents, they need to pay out 118 million from EBITDA of 200 million. So they have to keep to about 80 million of net costs (capex, financing costs, etc). They forecast capex of 49 million and 40 million for 2013 and 2014. This capex of 49 million include the completion of the upgrade of the HFC network to 870 MHZ and is inclusive of the free digital boxes given out.

Also, from the covenant of debt, they cannot exceed 120% of capex of a proposed year (excluding expansion into new franchise area), assume the projected year is 2013, so the ceiling (before including rollover of excess money in the preceeding year) is 60 million. The trust has incurred capex of 20 million thus far, but has not drawn down the revolving facility (only 10 million NT dollars) to fund capex.

Loans available for capex expansion = about 110 million

since out of 198 million of revolving facility, 50.2 million is earmarked for tax settlement, 56.5 million is earmarked for new zone expansion.

Assume they use 20 million from cash flow and another 20-40 million from loans to fund capex, we can assume it will take about 2.5 years to 5.5 years before they need new loans, and assume also 4% from revolving facility, there will be a further increase in Fiance cost of about 5 million

They have a all-in rate of 4% for their term loan. That works out to be 45.8 million a year, plus the additional 5 million interest for capex and 2 million interest for tax settlement, total foreseeable fiance cost for the next few years will be about 53 million.

Taken with 20 million capex, they willl be left with 7 million to pay taxes. But the forecast income tax to be paid is 20 and 16 million. So there is a shortfall of 9 to 13 million. so the more sustainable payout seem to be 7.5 cents instead, still above 10%

If interest cost increase by 1 %, payout become 6.5 cents, yield is still respectable at 8.8%.

So, in conclusion, high dividend seem unsustainable and the fall of 8.5 cents to 6.5 cents is more than 20%, which is what is happening to HPHT now.

But wait, HPHT did not have the 1% increase in interest cost factored into yet, and APTT 2014 distribution seem possible if you work the sums between loans and cash flow for capex.

But, there is another 2 more caveats.

1) They expect tax settlement to be 46 million and has set aside loans of 50.2 million for it. Although they claim negotiation is going on well, but the actual claim is 122.4 million, a wobbling 74 million shortfall.

So this is the biggest risk to distribution. If this tax issue don’t work out well, kiss your distribution goodbye.

2) Macquarie has rather a bad records running MIIF. Will they embarked on new zone expansion although it is highly capex intensive?

So is the above 10% yield worth it???? Is your call.

[Nick]

Thanks for the post Greenrookie.

To summarise your proforma distribution table"

FY 2014

EBITDA: 200 million
Trust Expense: (10 million)
Interest Expense: (50 million)
Capex: (40 million)
Debt: 20 million
Tax: (20 million)
Distributable Income: 100 million or 6.95 cents DPU

The upside to this estimate will be a decline in tax expense with higher interest expense and growth in EBITDA. For the latter, if APTT can deliver 2% growth in asset EBITDA, the distributable income will rise to 104 million or 7.2 cents DPU. It is very likely the debt will be refinanced in 2015 so I expect the amount of loans available to be drawn down in the new facility to increase if they can continue to grow the EBITDA. I still think 8 cents DPU is sustainable provided TBC is able to maintain its growth of 3-5% p.a. In any case, there are sufficient cash to buffer any decline in distributable income in FY 2014. What happens in 2015 is the key and if their EBITDA can exceed $210 million and they do refinance the debt, I think the dividends can be maintained. If not, your computations do show it will likely be cut.

(Not Vested)

[Greenrookie]

Hi nick,

If I read correctly, the asset EBITda used by aptt is already net of trust expense. Also, I think the biggest risk is the tax provision that will really throw the whole payout plan out of order.

Like u say, if there is growth, payout is sustainable, even I growth is zero, the cut is also manageable and the end yield still good.

The next risk is runaway interest costs, a prospect I deem low.

Lastly, is Macquarie track records, will they incurred high hedging losses again??

[Nick]

Consumers to be given a la carte cable TV choices

http://www.taipeitimes.com/News/taiwan/a...2003579216

Will this affect the ARPU in the future ?

(Not Vested)

[Greenrookie]

Consumers to be given a la carte cable TV choices

http://www.taipeitimes.com/News/taiwan/a...2003579216

Will this affect the ARPU in the future ?

(Not Vested)

The al carte proposal, according to the prospectus, is subjected to approval of the legislative, and APTT state from their experience it is highly likely that the final proposal with be different from what is initially proposed.

If it does get passed, will definitely impact top line if most chose plain packages. But I believe that tV operators will migate this by separating the popular channels into different packages