Shin Corporation

Shin Corporation Plc (INTUCH)

Investment thesis: Following the 2Q12 preview meeting, we remain bullish on INTUCH’s 2Q12 numbers—robust earnings for ADVANC and a better profit for THCOM. The holding company remains the cheapest play on the 3G theme; ADVANC’s valuation is now fully stretched. We expect INTUCH’s holding company discount to diminish further in the future with greater trading liquidity and anticipation of value creation from new businesses in FY13. Our BUY rating stands, premised on: 1) robust FY12 core profit growth, 2) 3G auctioning in mid Oct, 3) a good yield of 6% and 4) new businesses.
Solid 2Q12 earnings: We estimate a Bt3.41bn net profit for 2Q12, up by 28% YoY but down 4% QoQ. Core profit would be Bt3.5bn, up 26% YoY but down 3% QoQ. The expected YoY core earnings rise is led by 32% ADVANC core profit growth and a THCOM turnaround (a Bt150m 2Q12 core profit against a Bt16m 2Q11 core loss). ADVANC’s 2Q12 service revenue didn’t appear to be affected by seasonality.  THCOM will post its fourth consecutive quarter of black ink, underpinned by revenues from Thaicom 5 and IPSTAR and a significant reduction in OPEX.
Digital TV license issuance in Aug 2013: The NBTC plans to issue about 35 broadcasting service/channel provider licenses (TV broadcasting licenses) in August 2013. Initially, there will be 18 commercial standard channels and four high-definition (HDTV) channels. The expected starting price for a commercial digital TV license is Bt300-400m per standard TV channel and Bt1.2-1.6bn per HDTV channel. INTUCH plans to bid for 2-3 digital TV licenses.
Greater future trading liquidity: We think INTUCH’s holding company discount deserves to diminish with its recent inclusion in the SET50 Index and possible additional stock sales by Cedar Holdings Co Ltd.
YE12 target price upped 4% to Bt83: We have upgraded our INTUCH FY12 profit projection by 3% to Bt14.9bn to factor in the 3% upward revision to our ADVANC bottom-line forecast for this year. Since our ADVANC DCF-based YE12 target price rose from Bt205 to Bt212, we increased our INTUCH NAV-based target price by 4% to B83.
Outlook
Solid 2Q12 earnings: We estimate a Bt3.41bn net profit for 2Q12, up by 28% YoY but down 4% QoQ. Core profit would be Bt3.5bn, up 26% YoY but down 3% QoQ. The expected YoY core earnings rise is led by 32% ADVANC core profit growth and a THCOM turnaround (a Bt150m 2Q12 core profit against a Bt16m 2Q11 core loss). The QoQ core profit dip is attributable to core earnings slippage at ADVANC, due to higher OPEX.
We estimate that THCOM’s net earnings jumped by 160% QoQ and turned around from red ink in 2Q11 (core profit rose 112% QoQ), the fourth consecutive quarter of black ink on the bottom-line. The firm should post strong rises in revenues from Thaicom 5 and IPSTAR and a significant reduction in OPEX (it reported Bt90m in Chinese gateway operating costs in 1Q12). There won’t be an additional Mfone impairment in 2Q12. The firm gains another 10-20 channels for Thaicom 5 with the use of bandwidth compression technology. Two new Japanese clients, a gradual ramp-up in Indian utilization and recognition of the National Broadband Network (NBN) and MEASAT of Malaysia fed the top-line. Mfone should sustain the same net loss as in 1Q12, while Lao Telecom’s net profit will improve QoQ.  
Commercial digital license issuance in Aug 2013: Under its draft TV/broadcasting licensing regulations, the NBTC plans to issue four license categories: 1) network/transmission equipment provider, 2) facility/tower provider, 3) broadcasting service/channel provider and 4) application service/interactive/multimedia service provider. Channel provider licenses will be broken down into frequency-use and non-frequency-use types. The channel frequency-use licenses will be sub-categorized into public, community and commercial. The commission plans to issue 2-4 facility provider and network provider licenses in August 2012, 15 licenses for public service providers in Dec 2012, 35 commercial service provider licenses (or channel licenses for TV broadcasters) in August 2013 and for community service providers in Dec 2013. Initially, there will be 18 commercial standard TV channels, four HDTV channels and 14 public standard TV channels.
Starting spectrum auction price of Bt300-400m per channel: Col Natee Sukonrat, chairman of the broadcasting committee, said the expected starting prices for commercial licenses with bandwidth are Bt300-400m per standard TV channel and perhaps Bt1.2-1.6bn for an HDTV channel. The spectrum auction price may vary depending on the content aired on the channel. The auction price of channels airing programs for children, documentaries or other socially progressive programs might be lower than for openly commercial programs.
INTUCH to bid for 2-3 digital channels: Management plans to bid for 2-3 digital TV channel licenses. INTUCH will rent towers and transmission equipment from network equipment providers, such as MCOT, rather than building out its own network. Management wants one high-definition TV channel, one entertainment channel and a third channel aimed at teens. It currently plans to produce 10-20% of its programming in-house and outsourcing the remainder.
No concerns over the foreign dominance issue: INTUCH will set up a new subsidiary to bid for digital TV licenses in 2H13. The firm claims that it complies with the 1999 Foreign Business Act and is a Thai entity. The DSI earlier investigated Kularb Kaew Co Ltd, a major shareholder of Cedar Holdings Co Ltd (which owns 38% of INTUCH) following complaints that the company’s main shareholder, Surin Upatkoon was acting as a nominee for an offshore entity. The DSI appears to have lost interest in pursuing the investigation.
The definition of foreign ownership under the 1999 Foreign Business Act is limited to whether a company’s headline foreign shareholding exceeds 50%; it doesn’t count indirect grandfathered holdings in its determination of foreign ownership. As such, the NBTC will scrutinize only the first layer of a company’s shareholding structure; a 49% headline foreign shareholding would categorize a company as a Thai entity. Hence, we don’t see any problem with INTUCH bidding for digital TV licenses from the NBTC.
Greater future share liquidity: We think that INTUCH’s holding company discount gap between its net asset value (NAV) and its market price will diminish with its recent inclusion into the SET50 Index (and the SET100) and possible additional stock sales by Cedar Holdings Co Ltd (which owns 38% of INTUCH). Many big institutional investors have internal rules restricting the size of positions they may take in stocks that are not in the SET50 (or banning them from buying non-SET50 stocks altogether). Now those restrictions have been lifted, so we can expect even greater trading liquidity. We also expect Cedar Holdings to sell another 5-8% block of INTUCH shares in 2H12, which would make for greater liquidity.
Cedar Holdings made its first big-lot sale of INTUCH shares on Aug 18, 2011 when it sold 254m (7.9%) at Bt36 apiece, a 10% discount to the market price. The second big-lot sale was on Jan 19, 2012—199m share (6.2%) at Bt40.40 apiece, a 7% discount to the market price. Note that the holding company discount gap has narrowed from 22% in May 2012 to 17% during June-July 2012 in anticipation that Cedar Holdings will make a third big-lot sale. We expect the holding discount gap to narrow to below 10%.
Recommendation and valuation
INTUCH’s YE12 target price upgraded by 4%: We have upgraded our INTUCH FY12 profit projection by 3% to Bt14.9bn to factor in the 3% upward revision to our ADVANC bottom-line forecast for this year. Since our ADVANC DCF-based YE12 target price rose from Bt205 to Bt212, we upped our INTUCH NAV-based target price by 4% to B83. 
Alternative indirect 3G play: Following the 2Q12 preview meeting, we remain bullish on INTUCH’s 2Q12 numbers—robust earnings for ADVANC and a better profit for THCOM. The holding company remains the cheapest play on the 3G theme; ADVANC’s valuation is now fully stretched. We expect INTUCH’s holding company discount to diminish further in the future with greater trading liquidity and anticipation of value creation from new businesses in FY13. Our BUY rating stands, premised on: 1) robust FY12 core profit growth, 2) 3G auctioning in mid Oct, 3) a good yield of 6% and 4) new businesses.