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Friday 13 September 2013

SmarTone’s party fizzled and moved on

Two weeks ago SmarTone’s share price was trading at $10.64 but the day before results were announced it shot up as high as $12.70 to close at $12.50 for a 17.5% gain. 

The two weeks leading up to SmarTone’s annual results were filled with hope.  The hope fed the frenzy and now there must be some pretty disappointed punters.  So where is the source of that hope?  I can only surmise that it is the combination of the three events below.

The hope of the stargazers and their excel spreadsheets

On 6th Sep, Bank of America analyst acknowledged some weaknesses in the results, reduced its target price from $14.50 to $13.50 but maintained its buy rating. 

Then two days before the annual results on 9th Sep, stargazer extraordinaire Morgan Stanley made the biggest booboo of them all by raising the price from $11 to $15.  I could not even tell you what I am going to have for dinner tomorrow but MSs’ analysts were predicting a surge in EPS in 2014 and 2015 respectively of 18% and 50% based solely on the tiered pricing implemented by local operators in late September 2012.  The stock surged almost 10% on the news.

The hope of being an acquisition target

Vodafone’s announcement of its $130bn disposal of Verizon Wireless also helped kicked life into the stock given the company has been talked about as target.

The hope of Apple firing up handset sales

Finally it was the excitement generated from the release of Apple’s new budget iPhone 5C that was going to kick life into handset sales after a dry spell. 

The reality?

The reality is that things are probably more mundane that anyone had hoped for.  Reality came knocking a day after the annual results were issued and the stock crashed 14.9%.  The weaker results is not really surprising given the already weaker 1H.  Roaming revenues are down 16%.  No surprises. I expect it to fall further, when you have Skype, Whatsapp and WeChat why roam?  Management have acknowledge the big challenge of how to monetize increasing data usage.
While handset and accessories revenues were up HK$2.2bn, it earned only 3% gross margin. 
But the real kick in the teeth was what amounted to a profit warning for 2014.  Not only is management expecting cash to bleed gush due to rising costs and capex, but the u turn on the dividend policy from 100% to 60% payout is a tacit reckoning that things are not going to be easy going forwards.  
Yours truly purchased some stock today at $10.46, ouched, it closed $10.12 today.  I am expecting in the short-term things will get a lot more worse.  And I might buy a bit more when it falls further.  Management is a savvy bunch, they were quite smart to lock in a US$200m guaranteed note for an unusually long tenure of 10 years at 3.875%.  Additional interest is expected to be HK$60m per annum which is well covered. The company is also going after the previously untapped customer segments which will reduce margins but is likely to take market share from its rivals.  The monetizing of increasing data usage is a problem for all operators globally and is likely to result in higher prices for the consumer in the future so I am not terribly worried.

In my previous post I mentioned that Hutchison was probably the safer bet, I still maintain that stance and in fact acquired some Huchison stock on the same day when it fell in sympathy with SmarTone.  

My bet with SmarTone is that the disappointment created a buying opportunity.  I like cautious management and in the face of larger and better capitalized competitors I believe they will work harder to defend their market position.   

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