We are bullish on the business model of high industry barriers, strong cash and clear future revenue for Asia-Pacific satellites. We expect that new contracts, revenue from new satellite projects and growing satellite demand will drive the company's earnings growth beyond 2016. We believe that APT's high valuation discount to its peers provides an attractive entry point for risk and return. First buy rating with a target price of HK $8.70
If you lose something, you will gain.
2015 was a mixed year for Asia-Pacific satellites. The company began fiscal year 15 with lower rental prices and transponder utilization, and some contracts were terminated in the first half of the year, but ended in the second half with the successful launch of a new satellite APAC-9 and the announcement of two new satellite launch plans. We expect more breakthroughs in 2016, mainly due to a. The full-year profit contribution brought by the newly launched Asia-Pacific 9, b. The new contracts with the Middle East and China will improve the existing utilization of Asia Pacific 5-7 and c. The long-term growing demand for satellite communications in the Asia-Pacific region will absorb the increase in supply in 2014.
A structural growth story
We have observed continued growth in revenue and net profit over the past few years, expanding market share and rapidly narrowing the gap with its main competitor AsiaSat (1135 HK, unrated). The business model of high industry barriers and strong cash flow continues to bring broad development prospects for commercial satellite operators, including Asia-Pacific Satellite. We believe that in the next few years, the on-board Internet and maritime communications will jointly become the growth point of regional satellite communication demand. It is expected that the gradual rebound in satellite utilization and the profit contribution of Asia-Pacific 9 will drive the company to achieve a compound earnings per share growth rate of 13% in fiscal year 15-18.
Excessive valuation discounts provide attractive risk returns
Asia-Pacific Satellite now has an EV/EBITDA valuation ratio of 4 times for fiscal year 16, which is about 40-50 per cent lower than its US and European counterparts. We believe that the discount does not take into account the company's higher earnings growth, healthier balance sheet and better return on assets than its peers. We believe that AsiaSat's transponder leasing business is stable and aperiodic in nature and therefore has limited relevance to China's macro-economy. Given the company's smaller size and lower dividend payout, our target price is based on an EV/EBITDA ratio of 7 times in fiscal year 16, with a 20% discount to the global peer average.
Risks include long-term rental pressures and the failure of two new satellite launches in 2018. The catalysts include the higher-than-expected profit contribution of Asia-Pacific No. 9 and the better-than-expected utilization of transponders in 2016.