APT Satellite Holdings Limited

APT (‘Company’) is a Chinese state-owned enterprise controlled via China Aerospace Science and Technology Corporation, which holds 54.7% of the company’s shares. It is a leading regional satellite operator with five satellites in orbit, and provides transponder capacity and related services.

Its five satellites are Apstar 7, 9, 6C, 5C, and 6D. 6D was put into orbit in July 2020 and is a high throughput (HTS) satellite.

The company leases out its transponders to telecommunications and broadcasting customers. Its satellites span Asia, Australia, Middle East, and parts of Europe – covering 75% of the world’s population.

It also generates revenues from gateway services – acting as a hub to connect other HTS satellites, processing satellite traffic, and providing network and hosting services. Further, it generates revenues via satellite project consulting services for other satellite operators.

The business is suffering from an oversupply of transponder capacity and lower leasing rates and profit margins. Further, the company lost a major customer in 2019 due to the customer’s own business realignment plans. Moreover, Covid-19 resulted in lower demand for transponder services and reduced revenues further.

The company reported TTM revenues (to June 2020) of $954m (2019: $1,063m), ebitda of $745m (2019: $871m), and net profits of $207m (2019: $362m). It earned in excess of $500m/year in the years before that.

The balance sheet was strong with net cash of $935m and no borrowings. The current and liquidity ratios were strong.

The stock is currently selling for $1.7b, which is over 8x ttm earnings and under 5x 2019 earnings.

With the substantial additional capacity brought online via the 6D satellite (which had an outlay of $321m) and the augmenting of HTS facilities to the 5C satellite, we think at least 2019 earnings should be achievable with higher revenues despite the lower margins – particularly as most costs are fixed.

Moreover, management have committed $280m to launch another HTS satellite - 6E - into orbit by 2023. This caters to the existing demand for higher throughput capacity via HTS satellites.

Management have been fairly generous with dividends – averaging payouts of $155m in the last three years, which yields 9% at market. Furthermore, the company bought back stock a few months ago above the current price.

We think this stock is depressed relative to its earnings capacity, financial resources, and ongoing investments – and represents adequate value for money at the current price.