All systems go for Asia Satellite

Sep 18, 2000

AsiaSat''s share price has yet to reflect analysts'' optimism, following an upturn in demand for satellite capacity.

Asia Satellite Telecommunications [1135] (AsiaSat) has benefited from a gradual recovery of the region’s economies and a cyclical upturn of new demand for satellite capacity. This trend was recently highlighted by the company’s encouraging interim results but has yet to be fully reflected in its share price. With earnings revisions headed upwards and further new developments on the corporate front, AsiaSat looks set for orbit.

AsiaSat last week announced a better-than-expected 74% rise in interim net profit to HK$286 million ($36.68 million) for the six months to June 30. The result was approximately 18% above consensus estimates of HK$243 million and was largely driven by higher utilization rates of the C-band transponder on AsiaSat 3S, firm C-band leasing rates and low operating costs.

AsiaSat 3S saw an overall utilization rate of 63% during the 1H of 2000 with C-band transponders almost at full capacity at 93% and at an average leasing rate of $2.4 million per annum, representing a YoY increase of 9.1%. However, demand for Ku-band transponders remained sluggish during the first half.

Overall, the market reacted positively to the results and the share price climbed 9.6% the next day. Peter Milliken, analyst at Lehman Brothers, increased his full year earnings forecast for the company by 6% to HK$554 million while Jardine Fleming raised its full year estimate by 8% following the announcement.

Both Jardine Fleming and Lehman’s Milliken cite Ku-band as the variable that can boost earnings going forward. At approximately $3 million per annum to rent a Ku-band transponder, there is potential for an additional HK$337 million in annual revenue to be gained if 90% of AsiaSat’s Ku-band capacity were leased.

While Jardine Fleming does not expect any additional revenue to come for the Ku-band this year, it believes that AsiaSat is in discussions with three satellite based pay TV operators – Pacific Digital Media (HK), Galaxy Satellite Broadcasting and Hong Kong DTV Co Ltd – to lease Ku-band transponder capacity on AsiaSat 3S. These three operators are expected to launch a total of 74 channels over the next 24 to 36 months and take up approximately nine to 10 Ku-band transponders.

Other options

AsiaSat is also looking at other options to boost Ku-band use. These include offering incentives to C-band customers to switch to Ku-band and providing dish owners with the $200 feedhorn that would allow dishes to pick up Ku as well as C-band. Milliken says AsiaSat is even considering giving this equipment away. He estimates that $1 million would buy approximately 5,000 units, which could upgrade all cable owners’ dishes in Asia and most buildings in Hong Kong. However, he expects no further revenue for AsiaSat from Ku-band in the current year but expresses that higher take up going forward would broaden the company’s earnings base.

Jardine Fleming has a DCF valuation of HK$32.70 per share for AsiaSat while Edmund Cheung at Core Pacific-Yamaichi International, ascribes a fair value of HK$28.25 to the stock, also on a DCF basis. Both would represent significant upside from current levels, as does Milliken’s price target of HK$30.00.

Another earnings driver currently not factored into valuation models is the possible spin-off of AsiaSat’s 37%-owned PheonixNet. The joint venture, whose shareholders include Tech System, Telecom Venture and Yahoo! [YHOO], will offer three services: broadband internet access, multimedia distribution and corporate broadcasting. The venture is in the early stage of operations and its potential is difficult to quantify. Few details were provided at the interim results announcement but a loss of HK$4 million in PhoenixNet was booked into AsiaSat’s 1H account. Management expects losses of a similar magnitude for the 2H.

The design of AsiaSat 4 has been finalised and will carry 28 C-band and 20 Ku-band transponders. Launch is planned for the 1H of 2002 and it will replace AsiaSat 1. Moreover, plans are in the works for the launch of AsiaSat 5 towards the end of 2002 to provide back-up transponders as well as additional capacity. Funding has been approved. Dao Heng Securities estimates the total cost of the project at $275 million.

On an earnings basis, AsiaSat is currently trading at 17.1 times current year consensus earnings and 13.9 times consensus 2001 earnings. However, consensus earnings estimates do not yet fully reflect post-interim revisions.