Thai Internet stocks : Noddy guide ----------------------------------- Three facts about Thai Internet industry: 1) There are no pure Internet plays listed on the Thai market; 2) Internet penetration is about 0.3%. 3) There is no well developed portal or e-commerce in Thailand to date. Below we overview Thailand's Internet plays via two groupings: 1. Internet Service Providers Loxinfo CS Communications Samart Infonet Asia Infonet KSC Internet 2. Cable Operators United Info. Highway Asia Multi-Media Thai Telephone and Telecommunications Three points to make about Internet Service Providers ---------------------------------------------------- 1) Strong subscriber growth for a handful of ISPs (Loxifno, CS Communications and Samart Infonet) 2) Portal talk: (Loxinfo says it will have developed a comprehensive portal by February FY00, CSC by March while Samart and TA by the end of 1H00). 3) All ISPs are regulated : CAT must have a 35% stake. ISPs must also pay a half-link fee to CAT and then another to an International carrier -- this is different from ISPs in the US, Europe and some parts of Asia where ISPs need only pay one half-link fee to an International carrier (cost details are in the Datawave). Top picks: Internet Service Providers in Thailand ------------------------------------------------- 1. Loxinfo (related listed company is Loxley Plc -- Loxl.bk) ------------------------------------------------------------ Ownership: Loxinfo is 44% owned by Loxley Plc. Valuation: Loxinfo adds Bt16 per share to Loxley Plc based on our valuation method (Loxley Plc has 52m shares outstanding). Loxley's book-value was a negative Bt21 per share at the end of 3Q99 (about 40% of Loxley's investment cost is in TT&T while other investments include Castrol Oil, a controversial on-line lottery system and BHP Steel). Growth: Loxinfo has approx. 30,000 Subscribers compared to about 18,000 at the end of last year (67% YoY growth). About 40% of revenue is from corporates which are expected to be the most profitable segment in Thailand for several years to come. We expect Loxinfo to develop a "business man's" portal. Loxinfo is also likely to offer a high speed data service at some point as the major market for this will be the corporate sector. Recommendation for Loxley Plc : Our coverage of Loxley is limited (this stock is actually listed under Commerce). However, its difficult to justify a positive recommendation at Bt59 per share, based on fundamentals. 2.CS Communications (related listed company is Shin Satellite - Satt.bk) ------------------------------------------------------------------------ Ownership: CSC is 51% held by Shin Sat which in turn is 56% owned by Shin Corp. The remainder of CSC's the shares are held by CAT. Usually CAT only holds 35% but this is a unique case. As CAT actually paid for these shares, they got a larger than normal stake, however, there doesn't appear to be any special benefits from the additional CAT ownership at this stage although future liberalisation of the telecom industry may be beneficial, especially given Shin Sat's potential power as an international carrier (Shin Sat could overstep CAT). Valuation: CSC provides Bt2.5 per share to the shares of Shin Satellite. This increases Shin Sat's DCF valuation from Bt32 per share to Bt34.5 per share. Growth :CSC has approximately 30,000 subscribers compared to about 13,000 at the end of last year (130% growth YoY). About 10% are corporate subscribers with the remainder being private households and students. CSC says it will develop a portal in 1Q00. At some point, CSC may benefit from Shin Corp's collection of web-sites, however, this isn't certain and Shin Corp may invest in another ISP and leave CSC to operate within the framework of Shin Sat. CSC is also launching a higher speed product (see recent report). Recommendation for Shin Satellite: We recommend a "Buy" for Shin Satellite in accordance with latest report (09th Dec). 3. Samart Infonet (related listed company is Samart Corp -- Sama.bk) ------------------------------------------------------------------- Ownership : Samart Infonet is 65% owned by Samart Corporation. Valuation : We calculate that the company adds about Bt15.7 to the value of each Samart share. Samart's book-value was slightly negative at the end of 3Q99. Growth : Samart is expected to have approximately 30,000 subscribers by the end of the year compared to about 17,000 at the end of last year (76% YoY growth). About 95% of these are private households or students. Samart Infonet popular for its budget deals. Hopes to develop portal by end of 1Q00. Samart has split its ISP into five divisions, including potential e-commerce business, portal development, subscriber growth and technical advice. Recommendation for Samart: We maintain a "Buy" on Samart based on its exposure to DPC, possible merger target for Shin Corp and Internet business. However, management has been unresponsive to 3Q99 results and we intend to review this stock shortly with a view to downgrade. 4. Asia Infonet (related listed company is Telecom Asia -- TA.bk) ------------------------------------------------------------------ Ownership: Asia Infonet is 65% held by Telecom Asia (TA). Possible upside from bundling of services with fixed line although there's been no action yet. Valuation: ISP adds about Bt0.3 to the value of TA's shares using our evaluation method. Our NAV for TA is approximately Bt15 per share. Growth : Asia Infonet has about 11,000 subscribers compared to about 8,000 at the end of last year (38%, YoY growth). The ISP seems to be the least prepared to offer an attractive portal or content. Recommendation for TA : We maintain a "Sell" on this stock. Besides being one of only 3-4 telecom stocks with an appealing market cap, we have yet to hear of a convincing reason to buy TA at levels significantly above NAV. 5. KSC Internet (related listed company is Jasmine -- Jasm.bk) ----------------------------------------------------------- Ownership : Jasmine holds a 25% stake in KSC, while 40% is held by Assumption University (ABAC) and 35% by CAT. Valuation : The 25% stake adds Bt1.0 per share to the value of each Jasmine share (the figure may seem low because Jasmine has 666m shares outstanding -- compared to, for example, Loxley Plc, which only has only 52m shares outstanding). Jasmine has a book-value of Bt4.8 per share, however, FY99 EV/EBITDA is just 4.7x. This falls to almost 4.6x if we take account of the ISP. Growth : KSC is the largest ISP in Thailand with 65,000 subscribers. The company had about 50,000 subscribers at the end of last year (23% YoY growth). Although we've used the same method to evaluate KSC as other ISPs, KSC's customer base is at least 90% students of ABAC university which may not have as much spending power as corporates.This is an important consideration given that what we're trying to judge is future spending power for e-commerce. However, KCS claims to have a lot more "floating" users (up to another 60,000) which although aren't paying subscribers, they do have access. Jasmine has also recently acquired a 65% of another ISP, however, its subscriber base has yet to get started in any meaningful way. Recommendation for Jasmine : We maintain a "Hold" for Jasmine (recently downgraded from "Trading Buy") for reasons unrelated to the Internet (see latest corporate news). Note that the exercise price for warrants is Bt5 per share and the conversion date is set for 15th December. Besides, fundamentals, selling of newly converted shares could cause some temporary downside for this stock. Three points to make about cable operators ------------------------------------------ 1. There will soon be seven cable operators in Thailand (eight by end FY00) 2. Besides state-owned TOT and CAT, most cables are relatively new and have no more than 5km copper content for any one stretch. 3) Domestic Internet data uses about 25MB of bandwidth. Cable Operators --------------- 1. United Information Highway (related listed company is United Communications Industry- UCOM.BK) -------------------------------------------------------------- Ownership : UCOM holds 75% of UIH and, as far as we know, the remainder is held by the CAT. Valuation: Based on 70% compound annual revenue growth over the next five years (revenue for this year is expected to about Bt80m), we estimate that UIH adds Bt1.7 to the value of each UCOM shares (502m outstanding). UCOM is a large holding company with net debt of about Bt71bn . By far the major composition of its NAV is the 65% stake in Total Access Communications but is worth about Bt31bn or less than half of its net debt causing a negative NAV. Book-value at the end of 3Q99 was Bt5.6 per share. Details besides revenue are limited, however, investments are undertaken by TAC. Growth : Only private operator providing single network to 75/77 provinces. Also supplies high speed leased circuits. Utilises TAC's and CAT's existing fibre optic back bone resulting in quick cash flow generation. Seems to be the most popular fibre-optic network in Thailand supplying state enterprise, banks, supermarkets, ISPs and utility companies. Recommendation for UCOM : We don't have full coverage of this stock mainly because of its poor financial condition. However, the cable network provides an attractive and somewhat of a surprise story for some (there are actually seven cable operators in Thailand). No doubt story will lift share price, however, no fundamental justification. 2. Asia Multi-Media (related listed company is Telecom Asia -TA.bk) ------------------------------------------------------------------- Ownership : Asia Multi-Media is 90% owned by TA with the remaining shares held by the Telephone Org. of Thailand. The TOT does own the assets, although this is apparent at first appearance. Valuation: AMM adds about Bt5.7 per share to TA based on 70% compound annual revenue growth over the next five years (TA will have 2,925m shares outstanding after its debt restructuring is complete). However, we don't know AMM's debt level. Our NAV of Bt14 per share assumed a value of Bt4.3 per share for AMM or double its replacement value. Details are limited besides revenue. Growth : Although not the most popular of cable networks, TA may be able to successfully launch multi-media products in conjunction with United Broadcasting Corp. Currently UBC is its major customer accounting for the majority of revenue. AMM will launch a high speed cable modem next year targetting 10,000 subscribers. Margins are likely to be squeezed if this product is offered to UBC subscribers as a part of a multi-media product as its planned that the cost of the modem alone will be more than double the subscription of UBC. Recommendation : See ISP above. 3. Thai Telephone and Telecommunications (listed as itself -- TTT.bk) --------------------------------------------------------------------- Ownership : TT&T operates a coaxial fibre optic cable in the provinces for its 1.5m fixed line concession. The cable network does not form a subsidiary by itself but is integral to its core operation. Valuation : NPV is negative because of the company's high debt (Bt49bn). Should TT&T reach a similar revenues stream to UIH, then the additional value per share would be Bt0.8. The value of TT&T is more likely driven by its chances of merging with another telco or being assisted in the liberalisation policy under a new government rather than its ability as an Internet player. Growth : Currently only a negligible amount of revenue is earned from data transmission with the company yet to start promoting this aspect to its business. However, there are plans to do so next year. Also, incomes are also lower in the provinces than Bangkok which doesn't bode well for future e-commerce revenue. Notes: Valuation assumptions for ISPs ------------------------------ 1. Compound annual subscriber growth rate of 70%; 2. Market cap per sub of US$250m (less than 25% of the market cap of a Hong Kong ISP on the basis that consumption per capita in Hong kong is 4x more than in Bangkok) 3. Value of subscibers in five years time and discount it back by the cost of equity (we don't known how much debt they have) which is 13.7% for Thailand. 4. Translate this value into the holding by the related company. Gor example multiply by 0.65 in the case of Samart Corp which holds a 65% stake in Samart Infonet. 5. Divide the amount by the number of shares outstanding for the value per share. Limitations of valuation : Five years is possibly too short a time-span. Data wave report ---------------- JF Datawave published in October includes a full report on the Internet industry in Thailand (page 150-153) which covers much of the conceptual information on ISPs and cable operators mentioned above. At the front of the report, Jake Lynch has also explained a great many of the technical terms. Best regards, Jim Fraser. 231 3777 #2402.