Global Value Investing

[throwerw]

Thai Market: ADVANC
Pink Sheets: AVIFY

Notes:

This company has 54% market share in the Thai mobile phone market. The mobile phone market in Thailand is dominated by private players; however, in the 90's they all signed concessions to transfer their networks over to the state-owned operators after operating them for a given period. ADVANC's deadline to hand over its 900MHz network, which generates over 90% of its revenue, is coming up in 2015. One way around this sudden drop-off is to get a new 2.1GHz license and start rolling out 3G service, but these licenses have not been handed out yet. This requires a change in policy at the national level. The last time this happened was in 2001; the government opened the door to private competition by allowing new licenses, but they upheld the existing BTO concessions. In the meantime, the Company is expanding their 3G services on their existing 900MHz network.
I would expect the Thai government to open the 2.1GHz network to private competition like it has done in the recent past. Competition brought prices down, and the one SOE joint venture that attempted to compete with the private companies proved inept at managing their business. The government is forming the National Telecommunications Commission (NTC) now; the company's best guess as to when a decision will be made is 2012.

ADVANC's EBITDA in 2010 was THB52 Billion, operating cashflow was THB45 Billion, versus a total debt of THB35 Billion. The debt yields 2.15-3.3%, and matures at various dates between 2011-14. A large chunk is coming up Q3-Q4 this year of about 14 Billion, the company recently opened a 20 Billion revolving credit line, and will most likely roll over the debt either using this or issuing new debentures in the retail bond market. Revenue in 2011 expected to increase at the rate of economic growth, 4%, and margins should stay in the same range as before. THB10 Billion capex in 2011. So FCF of THB35 Billion is a lot higher than their net income expectation of around THB20 Billion, the reason being they are not investing heavily in their network while still under the BOT concession terms. It looks like Amortization is scheduled so that existing fixed assets would be brought down close to zero by the time they have to transfer them.

In 2010 a lot of the excess cash on the balance sheet was paid out as a special dividend, the Company expects to return to their previous policy of paying out 100% of net income. It looks like the yield in 2011 will be a little under 8%. It looks like the FCF yield is higher for now until they start building out the 3G network. This company seems to be very well run.

Dividend Policy:

"“Company aims to pay dividend at least 100% of net profit. Historically, the company has been paying over 100% during the past four years. In the near future, the industry is going through some structural changes, which will be clearer once the 3G license and, if any, the change in status of the present contracts with TOT/CAT gain more visibility. In the meantime, the company intends to maintain flexibility to preserve long-term growth potential.
Company aims to pay dividend to shareholders twice a year. The first dividend payment shall be paid as an interim dividend, which will be distributed from the operating results of the first half period of the year, subjected to the Board of Directors resolution and shall be reported to the shareholders at the next shareholders meeting. The second dividend payment shall be paid as an annual dividend, which will be distributed from the operating results of the second half period of the year, subjected to shareholders approval."

http://lirneasia.net/wp-content/uploads/2009/07/TRE_Thailand_Final_2008Nov11.pdf

"The mobile phone market has three major service suppliers, all of which are
private concessionaires. They are Advanced Info Service PLC.(AIS), Total Access Communication PLC. (TAC or DTAC) and True Corporation (True Move). The fourth player that is trying to establish a foothold in the market is the state owned Thai Mobile, currently the only operator with a 3G license."

"The entry of the private sector into the Thai telecom landscape via BOT
concessions ushered in an era of remarkable expansion in the subscriber base of both the fixed and the cellular networks, as can be seen in Figure 1 below. The figure reveals a striking divergence in the growth paths of fixed versus mobile services. This was because the fixed line concessions specified the maximum number of lines that each private operator was allowed to install. Since no new concessions were granted during the later half of the nineties, the roll-out of the fixed line network stalled when the number of installed lines reached the ceiling.

The concession era came to an end with the promulgation of the
Telecommunications Act in 2001, which terminated statutory state monopolies by empowering the National Telecommunications Commission (NTC) to issue new telecom licenses. The law, however, also upholds the legal legitimacy of the BOT concessions, meaning that all terms and conditions stipulated in telecom concessions signed between the state telecom operators, TOT and CAT, and the private telecom operators in the past remained effective. "

http://investor.ais.co.th/FileUpload/Editor/DocumentUpload/WebContent/Factsheet/Factsheet%204Q10.pdf

"Subjected to the regulator of Thailand Telecommunication industry, AIS
is planning to acquire 2.1GHz license to operate 3G technology at
which will enable higher data speed as well as voice capacity.

This will become crucial for AIS growth as moving to 3G will not only
stimulate further data revenue growth and capture opportunities in
residential broadband, but will also ensure business continuity as the
current BOT contract on the existing 900MHz is due to end in 2015. AIS
has target to acquire 900MHz as well to strengthen our services
especially in rural areas.

During waiting for the 2.1GHz license, AIS deploys an interim solution to
maintain data service growth momentum by launching 3G services on
existing 900MHz in selective areas, providing WiFi services in density
areas, wireless broadband, and building Eco-System in data business
through device, content, enterprise solution, privileges and customer
assistance."

Most recent conference call: http://investor.ais.co.th/FileUpload/Editor/DocumentUpload/WebContent/Quarterly/2010/4Q10/FY%202010%20AIS%20Earnings%20Call.mp3

This is worth listening to. This management exudes a level of professionalism I've never heard in a Chinese RTO conference call. There is also an interesting bit at the end about a lawsuit just filed by the TOT(gov't) demanding a greater share of revenue from certain operating segments. They disagreed with the TOT and have entered into arbitration, which will probably take a couple of years. They said this is standard procedure and have gone through the process before. I can't imagine this ever happening this way in China. If the Chinese gov't wants something, they just take it. One advantage to investing in Thailand would be that you actually have rule of law and stronger corporate governance.

http://www.gmiratings.com/Images/GMI_Country_Rankings_as_of_10_27_2010.pdf