1BestariNet and my flawed rationale

I am no telco expert. But I have enough of experience to know what makes sense, what don't. 1Bestarinet is a project awarded to YTL Communications for delivering fast enough internet experience to all 10,000 schools nationwide. It is claimed to have been an open tender and YTL came out top out of a total 19 companies which tendered.

Frankly, I have originally almost written off the YTL's telecommunication initiative until there are quite a number of postings which makes me wanting to rethink (thanks for the comment) - no disrespect to YTL, but I have discounted all the other telco players like Green Packet, Redtone, and even UMobile anyway. Hence, I am not putting YTL as the only one as a punching bag for my telco thoughts. Let me put it this way, among the tycoons, Ananda Krishnan has already won this war among the telcos - while the other two, Celcom and Digi are corporate owned today. Anyone wants to take a share out from Ananda, do something else. It was the same as when Vincent Tan attempted with Digi (did not go far) and now UMobile which will not go far as well - in my thoughts. In telecommunication, its either you have it or you don't. It is not like a power generation business where it is dependent on the areas served, grid etc.

Now 1BestariNet is a way for YTL to reduce its costs of deploying wireless data communication nationwide while using the government's money to help it to achieve its dreams. It is actually not wrong as schools will need to be digitally covered anyway. Anyone who can do it most cost efficiently should get the project. Now my thoughts are this - the one which probably can do it most costs efficient should be a combination of a strong wireless provider and a fiber provider. From there, where does YES stands?

A fiber provider should no doubt be Telekom Malaysia while for a wireless provider they should be any of the three telcos - Maxis, Celcom, Digi. For YTL to get this project, it must have very strong connections or may have priced them very low to beat the competition or even both. If YTL has the committed ambition to cover the entire country with YES network, then maybe it would have used this project to achieve its ambition. For Maxis, Celcom and Digi it is a given that they must cover the entire nation or at least the bigger cities and towns with 4G.

Now, why do I think it should be a combination of a strong fiber provider and wireless player. The cities - Klang Valley, Penang, Johor Bahru and ultimately to other cities as well. Ain't TM is currently laying the fiber already? If it is charging less than RM1,000 for a 20Mbps fiber internet or more ultimately, what else can beat that from among the wireless providers? Are we saying that every student will be provided a dongle for their notebooks? What the schools need to do is to cover the entire school with wifi. Isn't that a cheaper and longer term solution? Imagine every new student will be provided with a YES dongle...that does not make economic sense.

Say 50% of the schools are located in the cities or suburban areas, providing internet to these schools are hence not expensive. A one off costs of covering with wifi (should not be much) and just monthly internet bill of not more than RM1,000 to TM. Another 40% of schools in the smaller towns? (The real problem as usual is tackling the real rural areas which probably makes up the 10%) Well, they need wireless providers which is why the 4G LTE and WIMAX providers are for. Please tell me if I am wrong deploying WIMAX solution is initially supposed to be cheaper but with the need to pay for the CPE (Customer Premises Equipment) I would think 4G LTE will be ultimately used hence that's why all the telcos are getting some spectrum for the deployment of LTE.

Going back to 1BestariNet. If YTL is to deploy fully, it would be getting RM1.5 billion in 5 years - that's what the press statement says. What the press statement does not say is whether it includes costs of accessing internet. I would think so as it does not make sense to just cover and do not provide access for it. Again, I would think the government would not ask the students to pay for access, am I right? The project is RM1.5 billion in 5 years. That comes to

RM1.5 billion / 5 years / 10,000 schools / 12 months = RM2,500 per school per month

and we are still not getting the fiber speed which can be deployed to many of the urban schools as at now.

Every student is supposed to be provided with a dongle from YES or could it be a CPE in every classroom or something like that?

Now, comes YTL's grand plan...Its objectives of doing the 1BestariNet is to grab hold of the student's market - 5 million of them altogether. It is trying to get a market share out of it to achieve its initial target of 1 million subscribers that pay so that it can breakeven. To do that it has to achieve something like 15% from the student market assuming YES already has about 300,000 subscribers currently. Hence, the students will have to be provided with a dongle so that they can access the network from anywhere, anytime - either in school, home or any public area. In school, it is free but anywhere out of school it will not be free anymore.

HOWEVER, for those students whose houses are in the more urban areas, most of them would have access at home anyway - in fact many homes today and most in future will be wirelessly connected - either from 4G LTE, Unifi (fiber to the home) or Streamyx (old ADSL technology). They do not want to pay the extra.

As for the more rural students, chances are they do not want (or could not afford) to pay anyway and if they are, their homes may also be connected with Telekom's Streamyx. And if there are no Streamyx, chances are there's no YES access as well. Hence, how is the 1BestariNet going to turn YTL into a serious enough contender in Malaysian telecommunication sector?

Anyone care to comment as I think this speculation may not run too far although may sound simplistic...as I still could not get the rationale.


Note that these are my thoughts and it may be flawed.

Where will 4G carry the Malaysian telcos looking forward?

This article is a guest analysis on the current 4G state by a telco expert

The recent foray of 4G LTE launches in the country is much talked about. MAXIS started screaming 2 hours before the country counted down towards the new year of 2013, while CELCOM scrambled to meet the challenge a few days later albeit with much subdued fanfare. There is no sound from Digi yet, or from the other 4 winners of the 2.6GHz spectrum awards.

In my personal opinion, this hype could be nothing more than a marketing gimmick. See, MAXIS claimed they already have LTE services in “some” parts of Klang Valley like TTDI, Damansara Utama and Puchong, while CELCOM came up with a much lesser scale with “LTE Experience Zones” setup in Menara Celcom and BlueCube centre in Sunway Pyramid. For all we know, the latter could only be a couple of LTE base stations serving the areas mentioned. One would wonder if there is seamless connectivity or is the service meant to be stationary only? And here is the bigger catch – how many devices are actually being offered for the LTE service? A quick check on MAXIS website reveals one, i.e. the 75Mbps LTE USB Modem; and No Sir! No smartphones or tablets either. CELCOM has yet to announce any device offer on their website at the time of writing but it was purported that they will be launching their service in the coming month or 2.  Although MAXIS should be applauded for being the leader of the pack and having to come up with at least one device, RM400 mind you, this is at best just a soft launch.

That said, MAXIS remains a formidable force with the biggest chunk of bandwidth in Malaysia. After the 2.6GHz spectrum award, MAXIS has under its belt approximately 160MHz in total bandwidth, not accounting for the spectrum sharing deal inked with REDTONE. CELCOM follows closely behind with about 130MHz and DIGI, being a foreign entity, naturally owns the least bandwidth among the big 3 with 100MHz only. In the business of mobile communications, bandwidth is everything. The company that owns the most bandwidths would be able to biggest beneficiary as it would be able to rollout more services, and easily undercut its competitors.

Although 2.6GHz is the official spectrum to rollout LTE services in Malaysia, it is no secret that Malaysian operators are also eyeing to re-farm the 1.8GHz bands from GSM and 3G services to deploy LTE.  Bulk of the world is also looking at the 1.8GHz band to deploy the new technology - M1 Singapore, GLOBE Philippines and SMARTONE Hong Kong are among those that rollout LTE1800 and even Optus and Telstra Australia has announced their intention for the band.  However, this may not happen any time soon unless MCMC gears up to release the spectrum to new services which according to industry sources, is far from reality at the moment. When it does happen eventually, it would bear well for MAXIS because having the largest chunk of 60MHz worth of bandwidth in 2.1GHz, MAXIS can easily offload the 3G services from 1.8GHz to make way for the second LTE carrier. CELCOM, DIGI and UMOBILE each have only 30MHz of bandwidth in 2.1GHz. DIGI would fare the worst because unlike its competitors from the Top 3, it does not own much spectrum in the sub-1GHz region, which means that the yellow-man may find it very challenging to extend its LTE services into 1.8GHz band as currently, its 1.8GHz and 2.1GHz bands are already quite congested with 2G and 3G services, respectively.

Despite this development, I would still put my dollar on DIGI’s business, at least for the next 2, 3 years. Until the time MAXIS can finally pull its socks up with their newly announced CEO, a former DIGI CEO with no pun intended, who will take the reign in the second half of 2013, DIGI’s growth should still be robust enough to outpace its competitors. I have my reasons based on my own fundamental analysis but that will be a story for another day.

Why DIGI has not responded to the competition sparked by MAXIS and followed closely by CELCOM, is yet unknown. In this author’s opinion, the bigger and more impacting question is which of the telcos will be the first to launch the new Iphone5 that supports LTE. Now that, I say, would be the real BANG.

P78

The writer can be reached at phantom78@gmail.com

Always look out for good quality companies

It is good that my blog has some traction and in fact some have started to email me - which is good. I will try my best if I can to provide my opinion. When I started this blog, I wanted to sort of be different. My personal journey into stocks have brought me to like and trying to understand companies, financials as well as the intricacies of beautiful businesses.

Beautiful businesses can be very hard to find. Many have sort of asked opinions on all kinds of sectors. Sorry to say that I am no expert in many sectors in fact although I am learning by the day. No one can know all industries. All I can say is that my journey into world stocks especially US have provided me with a steeper and faster learning curve. It is actually tougher than Malaysia as we probably have the least volatile market.

Anyway, one should always be on a lookout for healthy fantastic businesses. They can be overpriced though - which we should avoid. One may ask, why good quality businesses and not just look for cheap ones which are undervalued? After all Benjamin Graham's principles have been to look for that moat, margin of safety. If a company we find after our valuation is worth RM1 billion for example, the margin of safety of 20% will cause us to buy at below RM800 million valuation.

Well, let me take out a company which I do not buy but it is a beautiful business nevertheless. I do not buy it because it is expensive and I think I can find better value elsewhere - Maxis.

Let's just pullout the latest balance sheet. See below - imagine yourself looking at the balance sheet without knowing the name of the company. If I do not show you the name of the company, you would probably be thinking that it is insolvent!!! Intangible assets at RM11.13 billion while equity at RM7.246 billion. If we are doing a debt / (equity - intangibles), what would your result be? The NTA is actually negative (RM7.246b - RM11.13b)

Asset and Liability portion

Look at the cash to borrowings. The borrowings is close to 6x its cash. Again, imagine if you do not know it is Maxis. But yet, people are valuing the company today at almost RM50 billion - i.e. one of the Top 10 largest company in Malaysia??? It is not that overvalued. Look at the borrowings, it is still growing. Which bank would lend to a company with this balance sheet. But yet it is borrowing more than RM6.7 billion with a negative NTA.

Equity portion

Still, I think the CFO has one of the easier job in Malaysia. He is probably only worried whether the dividend amount is sustainable but definitely not losing sleep over the debt number... Why?

Again cashflow and the predictability of the cash that it can bring in. The second part is more important - predictable cashflow. And bear in mind, Maxis is paying more than RM2.5 billion dividends a year. Only consistent cashflow and the predictability of it can pull that out. Imagine a business that generates free cashflow of RM2.5 billion in one year and another year it generates negative cashflow. What would a bank (or bond subscribers) do?

Now ever wonder why a quality company with good consistent cashflow is important. It does not need to keep the current portion of the cash in fact - and people still believe in the company.

Telco: The signs of times to come

After reading through SingTel's results, I have a feeling that our local telcos will face the same predicament. Revenue for SingTel from the more developed mature market such as Australia and Singapore continue to face growth pressure, while India remains very competitive. Telcos will find more opportunities from Indonesia.

Click to enlarge

As you can see above, among the big 3 mobile players in Malaysia, total revenue seems to be stagnating with a CQGR growing at 1.1% from 30 Sep 2009 to 30 June 2012. It also seems that the larger telcos are getting squeezed in terms of revenue as the product becomes more and more commoditized. It happens in Japan (with Softbank's ability to get a big chunk of revenue from especially NTT and KDDI). It happens in Malaysia with Digi.

In terms of stocks, both Maxis Mobile and Digi only have operations in Malaysia while Axiata has better exposure with more potential. I feel that with the exception of Axiata which is potentially still a stock with some decent growth, Digi and Maxis will just be a dividend stock.

Can Green Packet do a Sprint ... or at least a Clearwire?

Everyone know that Green Packet has tried very hard - almost everyone that is. But a Telco business is a non apologetic business - either you are there or you are not. Green Packet has raised a lot of funds to do what it has done in this business. But in a telco business, you can't just raise your funds, have a shopping complex type of business - after the completion, sit tight, do the right promotional activities and if you are good with the right tenant, people will frequent, if you are not good, it is almost impossible to turnaround. In the telco space, it is difficult to be a Low Yat Plaza vs KLCC and still do well with a strong niche.

Telco business especially wireless, you will need to continue to reinvest. It does not stop at 2G. 3G is already here, HSDPA, 4G LTE being deployed, Wimax etc. If Green Packet intends to invest half a billion ringgit, Maxis will (and has capacity to) invests RM2 - 3 billion. Digi will do the same, and so will Celcom. So, where is Green Packet's advantage? They can do it, you can't. Even at RM100 million it is a big choke to Packet One's cashflow.

This same predicament has been felt by a company called Clearwire in United States. In fact, Green Packet in Malaysia is what Clearwire is in US. Both originally run on the WIMAX. Now, Green Packet, if you notice is selling fibre broadband as well, taking the pipe from TM. Hence, it has now become a service provider rather than a network owner. Clearwire in US is choking as well, and recently, Softbank via Sprint has taken a controlling position.

Recently, Green Packet's share price had a run, with rumours that it may be selling its Packet One's business. So, the price shot up almost 50% from RM0.42 to RM0.62 within a few days. Traders have (still) a few field days, or could it be the owners? We don't know.

Green packet's one month chart ending 18 Oct 2012

At the same time in US - a real M&A was announced few days ago where Sprint was to be taken over by Softbank in a USD20 billion deal. Sprint, if I may put it is facing what Digi was facing more than 10 years ago. It is losing out in the mobile race where currently US is having a "duopoly" - AT&T and Verizon. Sprint and T-Mobile are distant third and fourth - and these are choking both companies balance sheets and cashflow to the extent that Sprint was in the brink of financial distress. But, the deal from Softbank may probably change the landscape a bit, I hope. The deal is good enough for Sprint to had a good run. And so is Clearwire's, which shares was acquired by Sprint for its control of the former's prized spectrum.

Sprint's last 2 months share price

Back to Malaysia, the old Digi was facing difficulties to expand even with Vincent Tan's billions - Until, the mobile company was taken over by Telenor. Celcom and Maxis, from there lost some market share to Digi, and there voila!, Digi is just right behind these 2 players currently. You see, the difference between Vincent Tan and Telenor are scale, ability, people and focus - not just the money.

Green Packet is probably hoping for the same in Packet One, and it needs a large telco from overseas, in the mould of NTT, SK Telekom etc. Even then, it will be a tough task for any of the acquirers. Additionally, the problem as I see it in Packet One is that it is not Digi or Sprint. Firstly, Packet One is not a mobile company. It was a mobile broadband company. Now, as I said, that line has blurred and it is going for fixed line broadband as well riding on other people's line. Packet One is going to get a LTE spectrum, but as in this business, if your road is quiet, it is going to be eerily quiet. The game is in promotion, deployment and marketing. This is the game where Packet One is going to lose without being deep pockets. In this, Green Packet desperately needs to sell.

Will anyone serious be interested? And to fill that puzzle, that acquirer needs billions of ringgit to start off with and one of the three or four (TM included) dominant telcos to make some mistakes along the way. Probably, a tough one to hope for...

Is Digi pricier than Maxis: A look at EBITDA

One of the most amazing stocks which I owned was Digi, although I have sold the stock much earlier. I remember Digi used to be 4 times smaller then Maxis in terms of market cap when I bought the company - of course it was a larger Maxis then. However, Digi continued to grow at a very fast pace - and now Digi is the 7th largest company in Bursa. The thing about stock is that - as proven in Digi's stock price movement - the more confident the stock provide to its investors the higher the PE becomes. There is no doubt that Digi is getting on the pricier side now but this article is to evaluate whether Digi is much more expensive in comparison to its competitor - Maxis. To find the answer, let's look at EBITDA.

Based on the table below, on the onset, looking at Net Profit numbers, it looks like Maxis is 2x more profitable than Digi. Add back the taxes, it shows Maxis's PBT is 193% larger than Digi's - hence the size of profitability for Maxis against Digi shrank. After adding interests, depreciation and amortisation, it shows that Maxis's EBITDA is only 158% larger than Digi.

As you can see, the percentage of EBITDA over Net Profit for Maxis is 173% while Digi's EBITDA to Net Profit is 220%. This shows that despite Digi has a whopping 33.84x PE Ratio based on historical 2011 numbers as against Maxis's 20.86x, EBITDA would have narrowed the perception over Digi is way more expensive.

The "Market Capitalisation to EBITDA" for Digi is 15.35x while Maxis's is 12.05x. This shows that Digi, when looked at EBITDA may not be that expensive against Maxis.

The question is now, would EBITDA be relevant here as the right measurement? Yes. Digi has depreciated and amortised more than Maxis and these are non-cashflow items. In fact, Digi's interest expense was way smaller than Maxis due to the latter's balance sheet is with higher debt whereas Digi's balance sheet is stronger.

And with Digi having the strongest growth over the last few years, it seems that Digi may not be that expensive after all.

Astro-Maxis tie up: Wake up guys!

So at last Maxis and Astro decide to do tie-up, although the nature of the tie-up is yet still blurr. What was not possible due to each party's "protecting the brand and turf's" mentality, is now made possible probably from the Number 1 in this case - Ananda?

What is the outcome in this?

Astro is way-way stronger in terms of content production and channels delivery to the masses in Malaysia. It is Number 1 by far. Who is Number 2? Media Prima - some may not even know the name ... err TV3, NTV7 ring the bell?

In my previous article, I have mentioned at length of Astro's dominance but yet its growth is to be curtailed in future not due to local competition but the nature of the content deliveries technologies (and content itself) moving forward. IPTV is to gain dominance and who has the best infrastructure in terms of IP delivery - TM. Astro's delivery infrastructure is old!

Maxis rents the HSBB (fiber) infrastructure from TM. And from there, Maxis offers its own fiber packages to the Malaysian masses. Sounds confusing? Well, let's put it in another way. TM build the roads with the help of the government. TM puts its own toll booth and Maxis does that as well renting the booths and toll roads from TM. Who provides the transport? Astro. But so far it only offers that to Maxis using the toll roads that Maxis rents from TM.

Do I see something missing? There is still the monopoly element here. Astro does not compete against TM. Neither does it competes against Maxis as Maxis is not into content. Not that I see it.

Where are the tie-ups between Astro and TM, Digi, Celcom, P1, YES?

Bring it on. And lose the monopolistics element in content deliveries! Drop the exclusivity(ies).

Maxis, Celcom, Digi: Who is grabbing whose market share?

At the stage where revenue from mobile business is growing at a snail pace, it is important for each of the big three telcos continue to chip away market share from its competitors. As such, a simple statistics - "revenue" is much important to have a view of what each mobile represents and has managed to build on.

Why as simple as "revenue" number is important
Much of mobile players investments are fixed investments i.e. the equipment investments and staffs costs (except for the subscriber's acquisition costs). As a result, it is very important for these guys to build on revenue. This is the stage where we are able to view on who is able to build on its brand better, and who potentially has lost market share via higher churn rate.

These mobile players (except for Axiata) have become largely a dividend stock with dividend per share just as high as earnings per share. Why Axiata is not a full dividend stock is due to its regional presence than just Malaysia.

As a result, it is important for investors to still have a view on who is growing faster.

"Click the picture for larger view" - basically it tells of Digi has better revenue growth compared to Celcom and Maxis which came in last.

As you can see above, the one that is able to produce bigger revenue growth is Digi with a 3-year Compounded Quarterly Growth Rate ("CQGR") of 2.05% against Celcom's 1.44% and Maxis' 0.23%. Among the three mobile players, CQGR over the last 3 years was a mere 1.10%.

Produce the market share on a pie chart, it looks like below.

"Click the picture for larger view"

Now, as you can see, Digi's market share among the 3 was about 24.79% 12 quarters ago and it has now grown to 27.73% in its latest quarter numbers. The increase in market share for Digi is at the expense of Maxis with Celcom registering growth from 32.06% to 33.37% revenue market share among the 3 mobile players.

In fact, the numbers that I took includes some revenue (although minimal) from fixed broadband for Maxis, as now Maxis is more actively into fiber broadband than Digi and Celcom. I have not heard of the two players dwelling into fixed broadband actually. Over the last 12 quarters, I can in fact go on to say that for the mobile business alone, Maxis may not achieve any revenue growth perhaps. If that is that case, things does not look good for Maxis in terms of its competitiveness as it is losing market share to its other 2 competitors.

Maxis Malaysia and the power of cashflow

I have written about the power of cashflow for company like AEON where they basically used suppliers financing to finance some part of their business. Of course business like AEON will need to do the investment first (such as capital expenditure on buildings, land, equipment etc) then only they will stuff suppliers goods in their outlet. Collections are in cash, payment to suppliers can be up to 90 days.

This time, I am going to introduce another company which on its balance sheet, it can seemingly be seen as insolvent as it is on negative tangible asset value but yet the company is valued at RM48 billion valuation.

Just look at above - as at 31 Dec 2011, Maxis has locked in a intangible assets of RM11.06 billion while cash holding was just RM838 million. Total equity at that period was RM8.088 billion hence the company's total NTA was negative RM2.971 billion. To add further, its total borrowings was RM5.873 billion as shown below. Is its balance sheet under duress? Hell NO.

Borrowings for Maxis Malaysia

Why?

Just look at the amount of cashflow it is generating yearly. Operating cashflow of over RM4.3 billion yearly. From these cashflow, how much are needed to invest into the maintenance or ungrading of equipment. Lets look at another table...

Operating Cashflow of Maxis Malaysia

Based on below, it is reinvesting somewhere between RM1 - 1.5 billion for equipment upgrades or enhancement.

Hence, the net free cashflow Maxis Malaysia is generating is in excess of RM3 billion yearly. This is why they can be more than RM5.8billion in debt, negative NTA and yet the market is valuing Maxis at RM48 billion. Of course, the company is generating Net Profit of more than RM3billion as well, yearly.

You may want to ask, if the company is generating so much cashflow, how come its balance sheet is in so bad shape?

Remember, the delisting and listing back in Bursa. Well the delisting is for some magic financial trick where all the major absorb-dable debts are park at Maxis Malaysia, the vehicle to issue dividend as well and at the same time it can still get good decent valuation. The one that needs much more funds and perhaps may not be generating such cashflow will be held private and not seen in the eyes of public. (When you do not have a beautiful wife why bring them out that often?)

After the financial cleansing are done, they then list Maxis Malaysia. Usually Ananda's stable would be showing (and listing) the nice companies with strong cashflow so that they can issue (and proven to) dividends, while the non-paying dividends companies will usually be held private. This is because Malaysian investors are quite a sucker for dividends (me inclusive), hence the valuation.

A better example of a Malaysian telco with full-fledged regional operations where one country's operations will provide the cashflow while some other countries will absorb / use up the cash generated - look at Axiata. You will get a bigger and better picture from there as not all telcos are purely cash generating alone.

Maxis-Redtone 4G deal: Is this how the telco players are moving forward?

MAXIS Bhd has signed an infrastructure sharing agreement with REDtone International Bhd, for both parties to offer better high speed wireless broadband services.

This will be done by combining their soon-to-be-awarded 4G spectrum.
 
Earlier, there are news that the Malaysian government is providing 9 licenses to telcos - in my opinion my order of companies strength - Maxis, Celcom, Digi, YTL Communications, UMobile, Green Packet, Redtone, Syed Mokhtar's linked telco, Asiaspace.

--------------------------------------------------------------------------------------------------
There is no doubt that this deal will be beneficial for both parties as it is mentioned it allows the companies to save costs while at the same time fast tracking their rollout. No other terms are revealed, for example the pricing terms for usage of each others network etc. Hence, we do not know.

My question is that since there are 3 mobile players which are head and shoulders above the rest, would this method be used by Celcom and Digi as well. They would definitely be needing much bigger network than the smaller players. The smaller players on the other hand needs money to even kick start their rollout.

I am sure MCMC's intention in awarding the 4G LTE's license is for the players to end up being operator rather than selling network. They can be operator allright but to make it big from being operator, I am not able to see it beyond Maxis, Celcom and Digi still.

This deal is still beneficial to Redtone though, although at the moment its share price is already quite full. The RM150 million value that the market provides to Redtone is largely on the license which it holds - absolutely bizarre. For a company like Redtone, to be a full fledged operator, I see them raising funds just like what Green Packet and UMobile did. Remember to be an operator, network is just one part of the solution. Devices, billing systems, distribution, customer service, marketing, advertising etc. - you will still need those especially in a retail network.

Let's see where it leads to.

Maxis selling India operations - a little note

Based on this headline, we have seen sometimes how difficult it is to expand overseas (beyond Malaysia). This is not the first time Ananda's stable had difficulties in moving beyond Malaysia for its telecommunication ventures. Astro had a tough time penetrating Indonesia as well few years ago.

However, when we read of some companies in exploring overseas ventures, we get excited with those stocks without thinking of the potential challenges. Imagine FGVH saying they are going to use the listing and money raised from IPO to go Africa. Try to think of this headline. Some see it positively, but if we are to do some critical thinking - I will say let's wait and see. Even IHH claiming that they are moving forward to open its first private hospital in Shanghai, China is a case to be deliberated. China is attractive for healthcare and so is India for telecommunication. IHH should go and explore China but this headline does not give me any excitement until they report back success.

One of the few Malaysian (born) tycoons which had made it overseas until the stage where his operations overseas dwarfed Malaysian operations is Robert Kuok. See Wilmar - if I am not mistaken, his total acreage of plantation land in Indonesia is bigger than Malaysia. I can foresee that it is not easy. And of course he has made it very well in selling edible oil in China. Shangri-La as well.

Another person potentially could have had success overseas - Tony Fernandez via Airasia. This is not necessarily because Tony is special, but Airasia is special. Many Asian countries want that kind of operations. Airasia is almost a franchise. I did write on Indonesia wants some help from Airasia if the officials from that country is level headed. Why? They have bad publicities for their airlines, and for a country such as Indonesia they want better connectivity. Not many privately owned airlines can expand so fast in such a short timeframe. Airasia can and have proven to have done it.

I am not saying that we should not invest into companies that have overseas operations, however sometimes it is good to evaluate how potentially successful it can be as treading unchartered waters for Malaysians may be a different ballgame. Some businessmen are very successful but some had different challenges.

It does not mean Ananda does not have success overseas before. His Bumi Armada's business does see some success.
---------------------------------------------------------------------------------------------------------
From ZD Net

Report: Maxis looks to exit India

Maxis Berhad is looking to sell its stake in Indian telco Aircel, with Russia's Sistema touted to be an interested party. This development comes amid regulatory uncertainty regarding the 2G spectrum auction slated for later this year and the ongoing probe into the sale of Aircel to Maxis, one report states. The Times of India reported on Tuesday that Maxis had held preliminary discussions with bankers representing Sistema, although talks have yet progressed to a "serious" stage of negotiations when the prospective buyer requests to conduct due diligence of Aircel's accounts.

Citing an executive close to Maxis with direct knowledge of the discussions, the Indian news agency stated: "Maxis sees itself as a long-term player in India, but will listen to offers in the wake of regulatory and policy uncertainty. Bankers have brought many potential permutations and combinations for mergers and strategic alliances, including that of Sistema, to the company."

The source said Maxis was upset with the way the Indian government's investigations into the sale of Aircel had dragged the Malaysian telco's founder Ananda Krishnan and other top officials into the probe.
The country's Central Bureau of Investigation (CBI) had alleged that "undue favors" were given following the sale, when then-telecommunications minister Dayanidhi Maran was said to receive 328 million ringgit (US$107 million) for getting Aircel's owner C. Sivasankaran to sell 74 percent stake in Aircel to Maxis.
A Sistema spokesperson, however, said the company was not in talks with Aircel. "Sistema Shyam Teleservices believes that the talk of engaging with other telecom service providers for a possible acquisition deal is motivated," the spokesperson stated in the report.

Despite exploring avenues for exit, the unnamed source added that Maxis will continue to invest in Aircel and recently lined up new leaders for the Indian telco. This is because given the uncertain regulatory landscape and depressed valuations for telcos, it would be difficult to strike a deal now. Times of India stated that Maxis Group CEO and Aircel Director Sandip Das declined to comment.

Analysts had stated earlier that the lack of urgency within India's government to resolve the allocation of 2G spectrum by fixing an auction date and reserve pricing is a blow to its credibility and will hamper the development of the local telecommunications industry.

Maxis vs Digi: Numbers your friendly analysts don't tell you

Mobile companies in Malaysia are at the stage where they already reached maturity. Based on MCMC's data, Malaysia has almost reached full mobile user penetration. As a result of that, you will see that revenue growth for these companies will either have very slow growth or maybe even negative growth despite the industry being an oligopoly - dominated by Maxis, Celcom and Digi.

Hence, to achieve these, telcos have to balance their expenditures against revenue. What are among the biggest expenditures for mobile companies? Equipment and staffs costs. As for revenue, of course telcos will try to increase its Average Revenue Per User, reducing churn rate while at current times increasing data revenue (mainly 3G).

As I am not able to get information from Celcom yet, let's look at how well the two top telcos managed their costs, how much they expensed their depreciation and amortisation as well as reported their PBT.

Staffs costs are direct costs. We however would like to see whether Digi or Maxis has better management of its staff costs vs revenue.

As for depreciation and amortisation (D&A), a higher D&A would lower down the PBT and Net Profit. Nevertheless, by expensing off the D&A at that reporting year, it would have reduced the total PP&E of the company further, allowing it to potentially report a reduced D&A in the subsequent years. D&A treatment is very much associated with how prudent the companies are. These are also important for us to project or measure the future profits of the company.

Now let's look at Maxis and Digi's numbers:

Maxis revenue is higher by 48.7%, however for 2011 it only managed a 0.78% increase in revenue while Digi's revenue improved at 10.43%. Remember that at this stage it is important to see who manages revenue growth better.

On managing staffs costs, Maxis staffs costs increased by a whopping 14% as against Digi which managed to reduced its costs by 6.45%. Hence from there, we are able to see that for FY2011 revenue earned per RM paid to staffs for Maxis is lower at RM20.13 against RM23.28 for Digi. We can say that Digi from here is able to squeeze more revenue from its staffs.

The notion from here is that, it may not be correct that by paying more we will get more from our staffs. Digi is showing that. It manages its staffs costs better as it has reduced while its revenue shows better improvement.

At the same time for the FY2011 financial year, Digi took an even more conservative accounting stand by depreciating and amortising its non-current assets at RM1.168 billion while Maxis, the bigger telco expending them at a lower total of RM1.149 billion.

Why is the Maxis CEO being paid more than RM10 million for then? He is not doing as well as Digi in terms of growing and managing the company last year. Shouldn't it be that larger and incumbent leader is able to squeeze more out of its staffs than its chasing pack. This is not the case with Maxis. Now, do you know why I am still being positive on Digi?

p.s. by posting this, I am sure not to get any position from Maxis - something that I want to as you can see they pay well.
Also to be fair, Maxis is spending some by moving into the broadband fixed line for homes while Digi has yet to do that.

There are others cheaper than Digi - So?

If you are an investor of Digi and probably may think of switching - Consider this. Ever since Telenor bought over Vincent Tan's ("VT") stake in Digi, investors who stayed with Digi until now has uncountable returns over a period of 10 years. In 2001, Telenor bought (from VT) and increased its stake in Digi to 61%. At that time the price went to as low as below RM4 sometime around 2003. Now less than 10 years after, after two rounds of capital repayment, huge dividends with yields of 4% to 8% every year, it is now priced at RM3.94 - and did I forget to say that this price is after a 10 for 1 split last year. All these things were in a short span of less than 10 good years. Hows that?

Hence, how can you fault a company that gave you such a return. Now, annually Digi is continuing to provide a dividend yield of 4% to 5%. You do not bite the hands that feed. But what if I tell you that there are better value stocks than Digi, and you do not need to look far. What if I tell you that Maxis and Axiata are even more attractive than Digi? Yes, its own competitors. Just look at the below table.

If you look at purely PE Ratio alone, it is fantastic that investors are valuing a third player higher than its peers. Normally, investors are more susceptible to providing a higher value to the leading player than its lower ranked competitors. This shows how much value creation the Telenor group has provided to its shares. Why? This I attribute to the way Digi under Telenor treats its shareholders. Besides providing value and good return, they have been by far the most consistent among the three. Ananda Krishnan is not AK if he does not list and delist and list back companies. This becomes his hobby! That action of inconsistencies, to the shareholders is not good. Although any investors who invested into his group of companies would have made good money from their holdings the action of pulling back a listed company and list them back does not augur well for people like me - pure investors.

Just look at the stats above for Maxis. Why is the NTA negative? Well, these I believe is what he does to his holdings. Prior to the original Maxis being delisted, it used to hold telco businesses in Malaysia, Indonesia and India. The Malaysian one is a cash cow whereas the Indonesian and Indian entities needed more cash injections. Very usual for any businesses. But AK was concerned. As it is not so nice for a listed firm to reveal too much to the public (due to the value deterioration it can appear to create), he delisted the group and list back the Malaysian entity alone. Along the way, CIMB is probably the only one makes good money! - How wasteful. And Maxis Malaysia was geared up to pay for his foreign foray. While it is not a matter of concern, what makes people peeved over the entire exercise is the shuffling of balance sheet in the individual companies.

Having said the above, currently, Maxis Malaysia is still a very investible concern and in fact it is more attractive, valuation wise compared to Digi.

What about Axiata? Well, Axiata's current position is what AK does not want investors to see. If you noticed, Axiata's market capitalization is about the same as Maxis Malaysia. How is that possible? Celcom's (which is in between Maxis and Digi) size is only slightly smaller than Maxis but yet by buying into Axiata, you are getting the Indonesian, Singapore, Thailand, India, Cambodia, Sri Lanka businesses etc. in one stock. I noticed that some analysts used to be concerned over Axiata's debt. Hello? With the telco's nice positive cashflow yearly, they are overly concerned.

Among the three telcos, Digi has the better balance sheet as its debt is lower as compared to Maxis and Axiata. In any case, as the companies are generating healthy cashflow, debts should not be a concern for all three. In fact, judging from the position they are in, I am not worried over the balance sheet position for any of them.

Well, from the above, if you continue to believe the good things that Digi will provide, stay with the stock. But if you venture out, probably Axiata and Maxis will provide better returns over time. In terms of what is going to happen to these three companies business wise, I believe they probably would stay at where they are - as it is! There probably won't be much happening except for all three waiting for LTE to deliver. Over the next 5 years, the biggest challenge for these telcos is growth as their numbers seem to stagnate more recently especially last 1 year.


(Under a non-scientific method) When comes to quality of service, most people would rank the three telcos in the following order - Maxis, Celcom (under Axiata) and Digi although one could not differentiate much between Digi and Celcom. 

Happy Investing!

How deep is Green Packet's problem? Quite!

Green Packet is a company that is bleeding cash. Just like some of the telecommunication companies (telcos), it is being thrown into the deep sea without much life savers. Once a while they get some life savers in the form of SK Telecom (the big one), IntelCap and Malaysia Debt Ventures. They just have to continue to swim. Why is it that the company and all the shareholders, continue to be able to battle through? Telco business has some uniqueness where there are some interests from foreign parties. In Malaysia, any foreign party is not allowed to own more than 49% of a telco. This is why Telenor is still required to reduce its stake in Digi from 61% to 49% despite several approved appeal.

This is also why SK Telekom did the absurd by injecting in close to RM400 million into Packet One and yet to see the light of the day. They probably feel that RM400 million for 26% of a telco is worth it. Why? That uniqueness in telcos, as most countries see telco assets as a sovereign right. Companies like SK Telecom, Singtel, Telenor have not much room to grow anymore in their own respective countries. Imagine SK Telecom having a net free cashflow of some USD1 billion a year and they do not know how to grow the business any further. Besides issuing dividends, companies like SK Telecom will always look for opportunities overseas. These opportunities however are few and far between. That is probably why the Green Packet deal was stumbled upon. What they probably are short in the right decision making is that Malaysia is already a matured market in terms of telco business growth. Yes, South Korea is much more matured but the competitors in Malaysia are ruthless and cash rich already as well. In fact, Malaysian telcos are also already looking for opportunities overseas. Look at Axiata, Maxis.

Now look at the table above. By converting all the preference shares Packet One will have some of the debts converted into equity. Good stuff for Green Packet who is the holding company. But now what - will SK Telekom be injecting more money into Packet One? They already own 26.07% (via preference) of the company which is valued at some RM350 million. Will SK Telecom be the grand daddy again and value Packet One much higher than the market as what they did in the past? These are questions that only SK Telecom can answer.

If SK ever decides to pump in more money for whatever it is, trying to help to keep Green Packet afloat for the LTE and fibre broadband initiatives, how much more can they do to add to that 26.07%? Another 20% for RM150 million. That I foresee is still not enough for Packet One.

Green Packet has looked overseas and the overseas solution is going to be maxed out. They have to look inward as a solution. Any local takers? You see, SK Telecom's injection has to be met by locals so that the % shareholdings are even out. Again probably tough, as all the other cash-rich players are already fully happy with what they have. LTE (4G) is coming and from that WIMAX is no advantage anymore. Why then would they want Packet One? No angels would want either as Green Packet's business is beyond angels appetite already.

Will the current shareholders of Green Packet be able to pump in more money. Let's look at the below table and you will see they themselves are maxed as well.

The CEO's, Puan Chan Cheong and gang shares in Green Packet are already pledged (same as MTouche case). You bet they can raise anymore funds themselves for their own injections? These pledged shares are due to a rights issue done sometime in 2009. They are just not able to raise from within themselves anymore.

Having said all the above, I am still amazed at the ability of Green Packet to raise funds externally. Will they be able to keep that up? As they will need that extraordinary ability again.

Telecommunications in Malaysia - a sector not to be missed

When I thought of how much monthly expenses are spent on communication, I thought I should not miss out this sector.

I spend around RM430 a month paying these companies. Some may pay much lower, some may even pay much higher, nevertheless it is already a necessity. We use their services from voice to data (3G or High Speed Broadband), whereas for video content, we use Astro's services.




Few thoughts about this sector:

1. voice has matured, with more spending on mobile rather than fixed. Fixed line usage will continue to deteriorate;
2. data is growing, but who will be the winner ultimately. Current seems to be TM. Will they continue to grow their market share?;
3. mobile has the Big 3 i.e. Maxis, Celcom (under Axiata) and Digi. The others such as UMobile, YTL, Redtone are just passers-by;
4. this is a high capex game. Remember telcos are technology adopters not so much of a technology innovative companies. AT&T used to have Bell Labs which churned out tonnes of new technologies during the earlier days. Now this is not so - I remember Bell Labs became Lucent and now it is Alcatel-Lucent. Look at where Alcatel-Lucent is right now - almost animosity. Telcos are more of adopters today. Look at how AT&T, Verizon, even Maxis and the Singapore telcos are so reliant on Apple, Blackberry and recently Google to help them to push their 3G packages;
5. since it is a high capex game, why the smaller players bother mind-boggles me;
6. anyway I believe they are looking at the post investment effect which is the amount of free cashflow received is very rewarding;
7. all the big boys (Axiata, Maxis, Digi and TM) are fighting over the data market share. Smaller players are also putting their effort in not allowing this to be just the big boys game;
8. Will any player be able to break Astro's dominance? Is yes, when and who can possibly be the player?

The industry is gamed for exciting times (has always been since mobile became something big).
Here are some of the market cap size of companies in this space:

As you can see, the telco sector consists of around 9% of the total market cap - very significant. Now who will be the winner? - as my blog is trying to identify the better play. I will have more of the industry and individual company analysis of this sector.
See ya!