Pacific Century Regional Developments (SGX:P15) – The Peculiar Case of PCRD

PCRD (SGX:P15) is an investment holding company with interests in telecommunication, media, IT solutions, logistics and property development and investments. You know it is just a holding company when they only have the corporate information and investors’ relations in their website, nothing more.

Business Overview

Its crown jewel is its 22.72% stake in PCCW (SEHK:0008). PCCW Limited is a holding company listed in HKEX and its largest asset is a 52% stake in HKT Trust and HKT Limited (SEHK:6823), Hong Kong’s largest telecom operator. PCRD also have a direct 1.92% stake in HKT.

PCRD’s revenue is mainly from dividends received from HKT. They also receive dividends from PCCW Limited. Although there is no formal dividend policy, PCRD started to issue dividends in 2018 after clearing most of their debt.

PCRD has a 49% stake in KSH Distriparks in India. It provides ICD (including bonding) infrastructure, transportation, warehousing and national third party logistics services to blue chip international industrial clients.

PCCW

PCCW’s other assets are its Media business, IT Solutions and a 74.5% stake in Pacific Century Premium Developments (PCPD) (SEHK:0432).

Its Media business consist of free TV, exclusive pay-TV and OTT(over the top) TV. They have secured broadcast rights of several football league games and other sporting events. PCCW also has a video streaming platform Viu, which offers popular Asian content and Viu originals. Current subscriber base is around 30mil in 16 markets such as SE Asia, Middle East and India. ( For reference, Netflix has around 160mil subscribers.)

Their IT solutions arm is HK’s number one IT services provider. They are also expanding their presence in the SE Asian markets and is currently working with Singapore in the enterprise digital transformation space.

PCPD is currently developing a ski resort in Hokkaido and is managing several other properties like its premium office space in Jakarta, Indonesia called Pacific Century Place.

HKT Trust and HKT Limited

Revenue Contribution Breakdown for HKT

As you can see, their main business is in telecommunications which is providing stable cash flow. They are also able to cross sell PCCW’s entertainment products, which gives them an competitive advantage.

HKT also has an Enterprise Solutions segment which is riding on HK’s rapid digital transformation. Their current contracts on hand is worth about HKD$2B (S$350mil). Examples of such contracts are like managing HK International Airport’s LTE network and to deploy 12,000 parking meters which can be tracked by mobile apps.

This year, HKT, PCCW, Standard Charted and CTrip formed a virtual banking joint venture called SC Digital. While it is difficult to estimate the potential of the JV, I see huge opportunities in this space and they are able to leverage on their existing telecommunication services and large customer database.

Management

The Chairman of PCRD is none other than Superboy, Richard Li Tzar Kai, the son of Superman Li Ka-Shing. He owns 89.32% of the company, which gives him full control and a little bit more to achieve the 90% shareholding which will allow him to proceed with privatization.

Although it is good for management to have skin in the game, too much of it might not benefit the minority shareholders and we may be forced to swallow a lowball offer if he attempts a privatization takeover.

Special Dividend in FY18

Last FY, they took everyone by surprise when they announced a large special dividend of 6.3 cts per share on top of a final dividend of 2.4 cts giving 8.7 cts in total, or about 22% yield. This was paid using a combination of debt and its free cash flow. Hang on, taking on debt to reward shareholders?! Their actions, although pleasant to shareholders like me, also made me scratch my head. Let’s proceed to look at their latest financials first.

Financials

There isn’t much to look at for their Income Statement as revenue is from HKT’s distributions and the rest are just profits from associates.

Moving to the balance sheet, Cash is about $0.006 per share. Total investments of S$1.4B is worth about $0.544 per share. As you can see below, their borrowings increased mainly due to payment of dividends.

PCRD Q219 Balance Sheet

For FY18, total dividends received were about S$106mil, which is way more than what was paid out (S$230mil). Hence, I’m not expecting a similar high dividend to be paid out this FY. If we look at its final dividend of S$0.024, it is still sustainable as the total amount paid would be about S$63mil, with room for increase.

Taken from PCRD annual report 2018
PCRD Cashflow Statement for Q219

I also looked at PCCW and HKT’s dividend history and found out that they have been increasing for 4 years and both of their interim reports showed that they had also raised this year’s interim dividend amount (see below). All in all, although I do not expect another 20% dividend payout, there is a slight chance that management would increase this year’s final dividend.

PCCW Limited Dividend History
HKT’s Dividend History

Large Discount to Valuation

Another thing that intrigues me is the large valuation gap between HKT, PCCW & PCRD.

  1. PCCW’s stake in HKT alone is worth 37% more than the company.
  2. PCRD’s stake in PCCW is worth 60% more than the company.
  3. PRCD also has a 1.92% stake in HKT, which is worth about S$310mil.

If we just base our valuation on this, PCRD’s indirect and direct interest in HKT should be worth about S$0.845 per share, representing approximately 150% upside from its current share price of S$0.34.

I’m guessing that the large valuation gap is partly due to its low liquidity as majority of the shares are held by Richard Li. Perhaps he is keeping price low so that he could acquire some more?

The Case for PCRD

The most important reason for investing in PCRD at current prices is to gain exposure to its stake in HKT Trust at a heavily discounted valuation, not the dividend. If we wanted a dividend play, I would rather go straight for HKT in the HKEX which is giving a solid 5-6% dividend.

However, the fact that Mr Richard Li hold such a large stake would deter me from making a large investment in this company. There is a risk that he could give a lowball offer to privatize the company and that would not benefit the minority shareholders.

Again, I am trying to figure out Mr Richard Li’s plans for this company. Initially, my thesis is a simple dividend play on an undervalued company. However, the recent special dividend made me wonder what his next move will be. Being a successful businessman, I’m not sure whether he will act in the best interest of all shareholders or treat this as a vehicle to move his investments and money around (eg cash out PCCW’s stake in HKT at a discount). Furthermore, rumours of privatisation were around since 2015 but nothing new has emerged since.

With that being said, I am still willing to invest a small sum in PCRD as I felt that it is rare that we can invest in a telecoms company at a huge discount. This is a rather peculiar company and I’ve yet to find out why it is trading at such a steep discount and how could PCRD’s share price appreciate in the future. While searching for answers, we can get to enjoy dividends along the way(7% yield if PCRD maintains their final dividend of S$0.024).

Cheers

Note: The Moss Piglet is vested at an average price of $0.355

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