Can we Talk about ChinaSat’s Market Capitalization?

Can we Talk about ChinaSat’s Market Capitalization?

China Satellite Communications Company Limited (ChinaSat) is the leading satellite operator in China, with a fleet of more than 10 satellites in geostationary orbit. The company has for decades broadcast central and provincial government TV channels, as well as some foreign channels, across China and broader APAC on a fleet of Chinese-built satellites. This business model is a well-established one, with a variety of other satellite operators around the world choosing a business of buying satellites for a lot of upfront capital expenditure (CAPEX), trying to sell around half or more of the capacity on a long-term lease to a video client, and then have very good cash flows every year for 15 years.

ChinaSat also conducted an IPO last year, floating around 9% of the company’s share capital on the Shanghai Stock Exchange. This was a big deal in China, with ChinaSat being one of the rare examples of a well-established space company offering shares for public trading. In the ~11 months since, though, we have found that apparently it was a much, much bigger deal than originally expected. How so, you ask?

ChinaSat’s Share Price since IPO

ChinaSat conducted its IPO at a share price of just under RMB 3 per share, with the IPO occurring in late June 2019. At the IPO price, ChinaSat’s market capitalization was roughly RMB 11B, or around US$1.5B, which itself may seem a fairly rich valuation (~4x revenues) for a company that is in a relatively mature industry (by comparison, SES and Eutelsat, two of the more financially healthy satellite operators, trade at around 1.5x revenues)

Since then, however, ChinaSat’s share price has rocketed upwards faster than a Long March rocket. How fast, and how high, one might ask? A 6x increase from the IPO price, with ChinaSat’s share price now sitting at RMB 17. This brings the company’s market capitalization to RMB 68.8 billion as of market close on 26 May 2020, or put another way, 25x revenues, or a P/E ratio of more than 160. By itself, this may sound absurd, however when taken in comparison with other satellite operators, the level of absurdity only increases. In what way?

The rest of the industry

ChinaSat’s share price skyrocketing has occurred at a time when the rest of the industry is facing share price pressures. For example, when looking at the 1-year return for SES, Eutelsat, and ChinaSat, we see that SES has dropped 53%, Eutelsat has dropped 42%, and ChinaSat has increased….532%. Even ChinaSat partial subsidiary APT Satellite—a company traded in Hong Kong but largely owned by ChinaSat—has seen its share price fall by around 15% this year, with its market cap of HK$2B representing the normal ~1.5ish years of revenue.

One might reasonably ask, therefore….what the heck gives? We have a situation where ChinaSat, a satellite operator with annual revenues of ~$400M, is worth ~$10B, and two satellite operators with combined revenues of ~$3.5 billion are worth a combined $6B. And, unlike operator Intelsat, which recently filed or Chapter 11 Bankruptcy due to an unsustainable debt load, neither SES nor Eutelsat are particularly indebted, with both companies’ Net Debt to EBITDA ratios hovering around their desired 3.3 level. We also have a ChinaSat subsidiary with revenues of ~30-40% that of ChinaSat, that is worth around 3% of the company. Indeed, what the heck gives?  

What the heck does give?

So, we have several things happening here that have contributed to ChinaSat’s massive stock price increase and huge valuation. With the qualifier that I am not a financial analyst, nor do I pretend to be one on TV, I believe these factors include:

• From an investment perspective, many in China prefer to invest in state-owned enterprises (SOEs). SOEs especially prefer to invest in other SOEs. Most major financial institutions are SOEs. As such, when there is an IPO of any SOE, there is a certain degree of pressure, desirability, etc., for your Bank of China or your Industrial and Commercial Bank of China (ICBC) to invest. This helps the share price.
• Related to the above, in addition to a general preference for SOEs, banks are right to buy SOE shares, because often, SOEs enjoy monopolies in their industries. Investors the world over, from Warren Buffett to Benjamin Graham, have talked about the importance of finding companies with stable cash flows, few competitors, and large “moats” to protect their businesses. As luck would have it, working in an industry like satcom in China, there is a very large moat, and indeed, few competitors and stable cash flows. As it turns out, ChinaSat might be a value investment play—who knew?! (that was a joke, it is not a value investment play)
• Space is hot in China today. Space has been a huge area of investment over the past few years in China, with the government encouraging certain private investment into the sector. This being the case, the IPO of a state-owned space company with fairly consistent revenue flows and with the aura of “space” surrounding them makes for a compelling stock offering.
• Small float. As mentioned above, only around 9% of ChinaSat’s shares were made available during the IPO, which means that despite a market capitalization of RMB 70B, there are only around RMB 7B of freely traded shares (the rest remain owned by CASC, CAST, CALT, and others).

• Finally, and perhaps most unexpectedly given that they are a space company, terrestrial real estate. In short, ChinaSat owns a large piece of land in a very central part of Beijing. On this land, the company built an office block, completed in 2015, and appropriately named the China Satcom Tower (卫通大厦). With a total of 96,000 square meters of build area, including 68,588 square meters of above-ground rental space covering 28 floors, it’s a large building. The China Satcom Tower is located in a part of Beijing where commercial real estate rents for around RMB 10-13 ($1.5-2) per square meter, per day, and where ~20 year-old buildings sell for approx. RMB 40,000 ($6,000) per square meter. The China Satcom Tower is very much a “Grade A” office building, and in addition to housing China Satcom’s headquarters, the building also rents several floors to ByteDance (maker of Tik-Tok), considered by some to be the most valuable startup in the world (depending on one’s definition of “startup”), at a valuation of ~$100B. All this being considered, and given general rental yields on real estate in China, we can assume that the China Satcom Tower contributes around RMB 3.5-4.5 billion, possibly more, to the company’s value. While this is a relatively small number compared to total market cap (~5-7%), it is a very large number compared to, say, Eutelsat’s market cap (~30% thereof), or APT Satellite’s market cap (~2x). That is to say, strangely enough, China Satcom’s valuation is, at least in part, supported by terrestrial real estate.

What Does this All Mean?

So ChinaSat’s market cap is bigger than the next 3 biggest operators combined, even though the company represents <5% of global satcom revenues—so what? The most apparent impact is that in theory, the ~90% of ChinaSat that is still owned by CASC + subsidiaries is worth vastly more than it was just 1 year ago. If the company so chose, they could attempt to sell more shares on the open market at the significantly higher price of today (though this would also potentially bring down the price due to increasing the size of the float). They could also attempt to acquire other companies partly using ChinaSat stock as payment, with the stock again worth much more than just a year ago.

Separately, a key takeaway is the extent to which space in China is hot. As mentioned above, this has helped to buoy ChinaSat’s share price, but more generally speaking, the level of investor interest and general excitement towards space in China is reaching all-time highs. Several other space-related companies have pursued IPOs over the last couple of years, with some success, including EO/location-based-services company PIEsat listing on China’s 科创板 in 2019. Moving forward, as Chinese private space companies start to mature, continued support for space-related share prices could mean that IPO is an attractive exit strategy, which could help to create a much-needed way for investors in the Chinese space industry to exit their investments.