An impressive Goldman Sachs sales research template

UPSIDE 25% – HKT – Fibre revolution

HKT the story has materially changed from IPO. The new story: most of HK receives broadband through DSL, but PCCW has built a fibre network that covers 80% of HK homes. In August 2011 they had 72k fibre subs and 1.4m DSL subs. Surprisingly on January 1st PCCW stopped the “free” upgrade from DSL to fibre. They now charge HK$328 to convert and upped the monthly ARPU for fibre by $28/mths. This clearly demonstrates a leap in strategy. For me it is a sign that the customer understanding of the product/service proposition of download speeds of 4-5x faster than DSL allowing multi terminal WiFi access and video streaming on WiFi has clearly been accepted and that the subscriber base is running ahead of previous mgt expectations/guidances. This is about multiple iPads, laptops and TVs in the home. From an operational side this reminds me of Smartone in Q410 and from a multiple of Link REITs re-rating. Right now HKT yields 8.2% and trades on an EBITDA of 7x. The risk is now clearly to the upside in terms of earnings estimates and the multiple ascribed to those earnings.

 

· NEW NEWs

Higher $28/mth ARPU and ending of free DSL upgrade to fibre, GS assume flat ARPU in our model

· CATALYST

Results after the mkt on Monday, key focus is Q4 fibre subs and fwd pricing guidance of fibre service

· MKT MISSING

(1) flat ARPU, now rising, (2) has assumed conservative Fibre take up (3) not understood the op leverage, (4) or the falling interest burden 24% AFF

· RICHARD LI

For the 1st time shareholders and Richard’s interests are aligned, they BOTH want the cash

· POSITIONING

Locals and institutions did not really participate in this IPO, company been in blackout since post IPO research published

· ALEX ARENA

Will go on a global roadshow, he is impressive, and will articulate the story

· VALUATION

8.2% and rising DPS unlike many global telcos, global wall of money and local liquidity will compress yield

 

VIEW

HKT here reminds me of two precedents, (1) the customer gear shift reminds me of Smartone in Q410 and (2) the initial skeptism and then re-rating of Link and the REIT structure post IPO. Smartone had 40m of profits, then they got the exclusive contract on the iPhone and smartphone revolution took over, they now have profits of 900m. What happen back then was the customers service proposition changed and they were able to leverage on an existing network. HKT is the old HK Tel, they left content NOW TV at the parent. In the old structure of PCCW the gigantic cashflows got stuck and hidden underneath Richard Li’s media dreams. That has now been unlocked. For the first time Richard Li and investors interests are aliegned, he wants the cash as much as you do to fulfil his media ambitions. The cash machine of the sunk cost of the network is about to be brought into broad day light by the fibre optic revolution in HK that has been seen elsewhere in the world. The position in this stock though is extremely light. This IPO was met with a barrage of skeptism and was even downsized. People did not understand Richard Li’s motives or understand what multiple to pay for a company that pays out 2x eps in dividend. As with the Link REIT IPO, the mkt distrusts the structure. As the mkt educates itself on the “trust” and highly impressive Alex Arena educates the mkt on what he can do and what he can tweak, the wall of money being printed by global central banks will compress the yield. Note this company has essentially been in blackout since IPO and will embark on a global education of investors from Monday about the new value, growth and customer proprostion.

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