Sunday 17 June 2018

Understanding the Safeguards of Astrea IV 4.35% Bonds

Astrea IV 4.35% bonds are unusual retail bonds as they are backed by Private Equity (PE). There are 5 safeguards put in place by the issuer to ensure that cashflows from PE investments are adequate to meet the obligations of the bond. These are:
  • Reserves Accounts
  • Sponsor Sharing
  • Maximum Loan-to-Value (LTV) Ratio
  • Liquidity Facilities
  • Capital Call Facilities

To understand why these safeguards are important and necessary, let us consider a hypothetical scenario in which I wish to issue Boring Investor bonds to retail investors to raise capital to invest in public equities listed on the SGX. Cashflows for the bonds would come from sale of equity investments and dividends from investee companies. 

Generally, the Straits Times Index (STI) generates annualised returns of 7% in capital appreciation and 3% in dividends on average. To entice investors to my Boring Investor bonds, I would probably have to pay interest rate of 5% on the bonds. The first question that comes to mind is how do I ensure that I could meet the 5% interest obligations on the Boring Investor bonds on a sustainable basis when I could only receive 3% dividends from the equity investments? There are several things I can do, as described below. 

Maximum Loan-to-Value (LTV) Ratio

Supposed I intend to invest $1M in the SGX equities. At a dividend rate of 3%, the maximum dividends I could get from the equities annually is only $30K. Based on the bond interest rate of 5%, the maximum amount of Boring Investor bonds I could issue is $30K / 5%, or $600K. The maximum Loan-to-Value (LTV) ratio that can be supported by dividends on a sustainable basis is only 60%. Thus, by setting a maximum cap on the LTV ratio, I can better ensure that bond holders are paid on time.

Liquidity Facilities

There will be times when the economy is not doing well and the investee companies have to cut dividends. When this happens, I might not get sufficient dividends from the equity investments to pay interest to bond holders. I will need to borrow money temporarily from the banks to pay the bond interest.

Capital Call Facilities

There will also be times when some companies need to issue rights issues to raise money. Given that most the funds raised from the Boring Investor bonds have been invested in the SGX equities, I might not have sufficient funds to subscribe to the rights issues and buy additional shares in the companies at a bargain. To guard against this, I can set up a credit line with the banks to temporarily borrow money to subscribe to the rights issues.

Reserves Accounts

Given the unpredictable nature of the cashflows from dividends and sale of equity investments, it is prudent to set up a sinking fund to save some excess cashflows after paying the bond interest and other necessary expenses. The amount to be set aside for the sinking fund each year is a pre-determined amount, but it is only set aside if excess cashflows are available. The sinking fund will be topped up until there are sufficient funds to redeem the Boring Investor bonds in full. This would increase the likelihood that the bonds could be redeemed in full when they mature.

Sponsor Sharing

Generally, after meeting all the obligations mentioned above, any remaining cashflows would belong to the sponsor shareholder. However, as an additional gesture of goodwill, I can share the remaining cashflows 50:50 with bond holders if certain performance threshold is met by a certain date. The cashflows shared with bond holders would be used to top up the sinking fund mentioned above, if it is not full yet. 


As you can see above, cashflows from equity investments (more so for PE investments and PE funds) are unpredictable, irregular and discretionary whereas interest and principal repayment obligations of bonds are fixed and mandatory. There is a need for some of the above-mentioned safeguards (known as credit enhancements) to ensure that bond obligations can be met when they fall due. If there were no credit enhancements, and the fixed and mandatory bond obligations were solely funded by the irregular and discretionary cashflows from equity investments, defaults on the bonds would likely happen at some point in time. 

Thus, the Astrea IV 4.35% bonds are safe mainly because of the safeguards put in place. It is not a bond, but a structured bond. The credit ratings for Astrea IV 4.35% bonds are expected to be "A(sf)", with "sf" denoting structured finance. To avoid confusion with traditional bonds, it is best to refer to the Astrea IV 4.35% bonds as structured bonds, just like we differentiate structured deposits from fixed deposits. 

Did I invest in Astrea IV 4.35% bonds? No, I did not. I prefer to invest in traditional bonds in which the underlying cashflows are sufficient to meet the bond obligations without any credit enhancements. 

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Monday 11 June 2018

Would I Invest in Astrea IV 4.35% Bonds?

Recently, Temasek launched a Private Equity (PE) bond for retail investors known as Astrea IV 4.35% bond. It is the first PE bond open to retail investors. Would I invest my money in this bond?

First of all, let us understand what this bond is all about. This bond is issued by Astrea IV Pte Ltd, an indirect wholly owned subsidiary of Temasek, to hold a portfolio of PE investments. The investments are managed by 27 General Partners in 36 PE funds and invested in 596 companies. 86.1% of these funds are invested in buyouts, with 12.3% in growth equity and 1.6% in private debt. 

Buyout funds are funds that privatise publicly listed companies, cut the excesses in the companies and streamline their operations to make them more efficient, and seek to exit the companies by selling them or listing them again. An example is Amtek Engineering, which was delisted from SGX in 2007 after being bought out by a PE fund, and was relisted as Interplex Holdings in 2010. And the story did not end there. Interplex Holdings itself was delisted in 2016 after being bought out by another PE fund.

The issuer, Astrea IV, has 3 classes of bonds, as follow:
  • Class A-1 - SGD242M 4.35% senior bonds that are open to retail investors and which are the subject of this post.
  • Class A-2 - USD210M senior bonds open only to Institutional and/or Accredited Investors. Class A-2 bonds have the same seniority as Class A-1 bonds.
  • Class B - USD110M bonds junior bonds open only to Institutional and/or Accredited Investors. 

The structure of the bonds is such that Class A bonds have priority to interest payments and bond redemption. In addition, it can borrow money from banks to make interest payments in the event that there are insufficient cashflows to do so. Moreover, its Loan-to-Value (LTV) ratio is capped at 50% of the portfolio value. If this threshold is crossed, it will have to cut debt levels. Furthermore, Class A bonds are senior to Class B bonds and shareholder equity. For Class A bonds to lose money, the portfolio that Astrea IV invests in must lose at least 64.4% of its value. So, it is quite safe, isn't it? 

First of all, you need to recognise that Astrea IV, the company that you are investing into by buying the retail bond, is essentially a fund of funds. Although its LTV is capped at 50%, this is only at the Astrea IV level. The funds that Astrea IV invests into could have their own borrowings and these are not counted in the 50% LTV cap. After accounting for these borrowings at the lower levels (i.e. look-through basis), the leverage could be much higher. As a hypothetical example, Company A could have shareholder equity of $50M and bonds of $50M. Using this $100M, Company A invests into Company B. Company B borrows another $100M. Company B invests the $200M into a property. How much of the investment in the property is funded by equity and borrowings? The answer is $50M in equity and $150M in borrowings. Thus, even though the LTV at Company A's level is only 50%, on a look-through basis, the LTV is 75%! Does LTV on a look-through basis matter? For Company A's equity to be wiped out completely and its bonds to start losing money, the property's value only need to fall by 25% ($50M equity out of $200M asset value). So, LTV on a look-through basis does matter!

Secondly, most of the money are invested in buyout funds. Buyouts are usually highly leveraged operations. In the process of buying out companies, they take on large debts and usually pay a premium to acquire a 100% stake in the companies. After successfully acquiring the companies (which are usually cashflow-rich companies), they extract most of the cash from the companies to pay down their own debts. They also streamline the operations of the companies and load them with debts, such that the companies become more conscious about cutting costs and direct most of their cashflows to paring down the debts loaded onto them. Thus, the high returns of buyout funds are partly due to making the companies more efficient and partly due to the leverage employed. As an example, when 3G Capital teamed up with Berkshire Hathaway to buy Heinz for USD23.3B in 2013, they only forked out USD4.4B in capital each. The remaining was borrowed. (Note: Berkshire Hathaway also bought USD8B of preferred stocks paying 9% interest. I will leave it to readers to decide whether to classify this USD8B as equity or debt.)

Thus, in conclusion, Astrea IV is essentially a fund of leveraged buyout funds. I will not be investing in these bonds, even if its 4.35% coupon looks attractive.

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Sunday 27 May 2018

Possibly The Worst Time to Invest – 4 Years On

This once-a-year post probably sounds like a broken record, but 4 years after I thought it was a bad time to invest (due to record high Dow Jones Industrial Average and record low interest rates then), the DJIA has not crashed yet, despite a series of corrections along the way, with the most recent one in Feb. I have 2 passive portfolios invested in index funds and adopting the portfolio rebalancing strategy. The plain vanilla portfolio has 70% in global equities and 30% in global bonds since Dec 2013, while the spicy portfolio has 70% in US equities and 30% in Asian bonds progressively built up over 2015. 

To-date, the plain vanilla portfolio is up by 31.4% while the spicy portfolio is up by 24.2% since they were started approximately 4.5 years and 2.5 years ago. Needlessly to say, had I worried about the high stock prices and low interest rates back then and not started the 2 portfolios, I would not be sitting on such paper gains. 

I am tempted to allocate more money from my active investments to the 2 passive portfolios, considering that all it takes is to monitor occasionally whether the relative allocation between the equities and bonds has moved significantly away from the initial allocation of 70% stocks and 30% bonds and rebalance them when it happens. In contrast, active investment requires a lot of hard work. I need to read the financial statements and annual reports, attend Annual General Meetings, understand pricing strategy and competitors' activities, etc. to understand how well the business is doing. Just take a look at M1, a stock that I blogged about recently. I spent no less than 6 posts (and another 3 posts on its competitors) to describe the various aspects of M1. Even then, there are probably still a lot of areas about M1 that I do not understand. Furthermore, the size of my M1 position is only 1/3 that of the 2 passive portfolios!

So, would I be worried if I were to invest more into the 2 passive portfolios and the crash finally happens? Obviously, I would be quite upset if it were to happen, but I would attribute it more to bad timing. One way to mitigate this risk is to spread out the investment, similar to what I did when I initiated the spicy portfolio. The plain vanilla portfolio was a lump-sum investment in Dec 2013, but the spicy portfolio was built up over 12 months in 2015. Furthermore, the rebalancing strategy will ensure that if stocks were to crash significantly, the bonds would be sold to buy more of the now cheaper stocks. There is inherent defence mechanism in the portfolio rebalancing strategy.

This time next year, I am not sure if I will be happy or upset over my 2 passive portfolios (which depends on whether the crash happens or not), but likely, it will be business as usual.

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Monday 21 May 2018

Who Moved Starhub's Cheese?

Starhub has been facing declining profitability in the last few years. It even had to cut its 20-cent annual dividend last year, a dividend which it had held steady for 7 years. Why did Starhub face declining profitability and who moved Starhub's cheese? To discuss these questions, we need to first understand what were Starhub's competitive advantages in the past and how have they changed.

Starhub's Moats

Traditionally, compared to its 2 rivals, Starhub has the advantage of using its cable network infrastructure to deliver both cable TV and cable broadband services, thus enabling it to spread out the cost of operating the infrastructure over a larger number of customers.

In addition, compared to M1, which until recent years only offered mobile services, Starhub (and also Singtel) has the hubbing strategy which offers customers discounts if they sign up for 3 services, namely, mobile line, home broadband and Pay TV. The discounts range from 5% to 30% for different services. Thus, if a customer needs mobile lines, home broadband and Pay TV, he would find it attractive to sign up all services with Starhub (or Singtel) and enjoy the hubbing discounts. This hubbing strategy has allowed Starhub and Singtel to gain market share relative to M1 in the post-paid mobile services market. See Fig. 1 below for the changes in market share of the 3 telcos and the percentage of households who are members of Starhub's Hub Club.

Fig. 1: Post-Paid Mobile Service Market Share

Hence, for a long time, Starhub had been enjoying a moat which seemed impregnable. 

Cable Broadband

The first crack in Starhub's hitherto impregnable moat is cable broadband. In 2010, the Next Generation Nationwide Broadband Network (NGNBN) started operations. Instead of only Starhub and Singtel being able to offer home broadband via their cable and ADSL networks respectively, the market was suddenly opened up to many other companies, including M1, MyRepublic, ViewQwest, etc. With more competitors, prices of home broadband dropped. In addition, as more customers switch from cable broadband to fibre broadband, there are less customers to spread the cost of operating the cable network infrastructure. See Fig. 2 below for the declining number of cable broadband customers. 

Fig. 2: Proportion of Cable and Fibre Broadband Customers

Although Starhub's cable broadband market share declined, its hubbing strategy is still intact. Customers who need mobile lines, Pay TV and home broadband, regardless whether it is cable or fibre broadband, would still find it attractive to sign up with Starhub to enjoy the discounts. Nevertheless, it should be noted that M1 is now able to offer a hubbing strategy for customers to sign up mobile lines and fibre broadband. Customers who do not need Pay TV would enjoy hubbing discounts with M1 but not Starhub and Singtel.

Pay TV

With faster and more reliable broadband speed comes the ability to watch videos online. Furthermore, online viewers are not restricted to watching video on the TV; they could watch it anywhere and on the move. This has resulted in cord-cutting by Pay TV subscribers, and this trend is not limited to Singapore alone. 

In Jan 2016, Netflix entered the Singapore market, offering not only a cheaper way of watching movies but also bringing in popular exclusive original content. See Is Pay TV Still A Reliable Cash Cow? for more information. Since then, the decline in the number of Pay TV subscribers at both Starhub and Singtel has accelerated, despite the retention power of their hubbing strategies. See Fig. 3 below for the number of Pay TV subscribers. 

Fig. 3: No. of Pay TV Subscribers at Starhub and Singtel

With the decline in Pay TV subscribers, there is further reduction in the number of customers to spread the cost of operating the cable network infrastructure. The traditional competitive advantage that Starhub has in the cable TV network infrastructure is irreversibly gone.

Furthermore, the proportion of households on Starhub's Hub Club has also declined. See Fig. 1 above. Thus, with the onslaught of streaming video on demand, even Starhub's hubbing strategy is no longer as impregnable. If anything, the hubbing advantage has tilted towards M1 which requires only 2 services instead of 3 services for Starhub and Singtel.

Mobile Services

Mobile Services is the largest segment of all 3 telcos. In the last few years, it has faced many headwinds. The traditional money generator for telcos, Short Message Service (SMS), has now been superseded by messaging apps like WhatsApp, WeChat, etc. Likewise, voice is also seeing a decline as it is being replaced by WhatsApp calls, Skype, etc. Only data is seeing increasing demand. But even in this area, competition has increased. In 2016, M1 launched data upsize plans that allow subscribers to increase their data bundles with a slight increase in monthly fees. This has the effect of reducing the excess data charges that subscribers pay when they exceed their data bundles. See Impact of Data Upsize Plans on Telcos for more information.

Also in 2016 and again in recent months, new virtual telcos known as Mobile Virtual Network Operators (MVNOs) have sprung up. These MVNOs buy network capacity from traditional telcos and resell to retail customers. They cater to niche customer segments and usually dangle attractive offers, such as Circles.Life's $20-for-20GB of data, ZeroMobile's Unlimited Everything and Zero1's unlimited data for $29.99. See Will MVNOs Cannibalise Telcos' Business?

In addition, there have been other disruptions to the telco industry, such as the SIM-only plans, which attract customers who do not need to change their phones every 2 years. These plans reduce the revenue but are value accretive at the EBITDA level. See Will SIM-Only Plans Cannibalise Regular Telco Plans? for more information. Finally, there is also the fourth telco which is scheduled to start operations in Jan next year. See Where Art Thou, TPG?


In conclusion, Starhub is facing headwinds in many business segments. The party that is moving Starhub's cheese is not a single actor. Many actors have been moving Starhub's cheese. 

P.S. I am vested in M1, Netlink Trust and Singtel.

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Monday 14 May 2018

A Satisfied M1 Investor

I started investing in M1 in Jan last year. At that time, it was to take advantage of the crash in telco stocks due to fear of the fourth telco. Since then, I have added to my positions several times. My current position is now 5 times the initial one. This is because despite all the headwinds that telcos face, from SIM-only plans, data upsize plans, Mobile Virtual Network Operators (MVNOs) to the fourth telco, M1 has performed admirably. Below is a summary of what I like about M1.

SIM-Only Plans

When M1 launched SIM-only plans in Jul 2015, I had not invested in telco stocks yet. But my initial thoughts were that SIM-only plans would lead to a drop in revenue and a smaller drop in profitability, as SIM-only plans would lead to some subscribers downgrading from the more expensive regular telco plans with handphone subsidies to the SIM-only plans. See Impact of SIM-Only Plans on Telcos. As it turns out, although SIM-only plans indeed led to a drop in revenue, they are value-accretive at the EBITDA level, as they attract new customers in addition to existing subscribers who downgrade. An analogy would be the regular telco plans are like full-service airlines while SIM-only plans are like budget airlines. Although SIM-only plans cannibalise regular telco plans, they also create new demand of their own. See Will SIM-Only Plans Cannibalise Regular Telco Plans? for more information. The popularity of SIM-only plans (together with Circles.Life) has led to strong growth in M1's post-paid customer base. See Fig. 1 below for the growth rate (note: M1's post-paid customer base includes that of Circles.Life, the MVNO that works with it).

Fig. 1: Changes in M1's Post-Paid Customers

In this aspect, I have to acknowledge that M1 knows what it is doing and is doing better than I thought.

Data Upsize Plans

This is another initiative that M1 started in Mar 2016 before I became a shareholder. Again, I believed that this would lead to lower profitability, as subscribers who used to exceed their data bundles and pay excess data charges of as high as $10.70/GB now need to pay only $5.90 per month to upsize their data bundles. See Impact of Data Upsize Plans on Telcos

This time, I am not wrong about the impact on revenue and profitability, but M1 has bigger plans. Instead of stopping at 3 levels of upsize, M1 launched big data plans in Aug 2017, including an unlimited data plan. The big data plans are clearly ahead of competition, which is quite unusual since all telcos will try to match each other. See No Competition for M1's Big Data Plans for more information. M1's prices are comparatively lower than that of the other 2 telcos, so much so that I feel that M1 did not maximise profits by pricing them closer to the competition (but also see the section on Narrowband Internet of Things).

Mobile Virtual Network Operators (MVNOs)

Long before the recent spate of MVNOs like Zero Mobile, Zero1 and MyRepublic, M1 had already worked with a MVNO called Circles.Life in May 2016 to roll out mobile services to niche segments of customers that M1 did not cater for. Since MVNOs have to buy network capacity from traditional telcos, they will never be able to offer a better deal than traditional telcos on a sustainable basis. So, MVNOs are a way of getting some extra revenue from niche market segments without taking the risks.

I would like to say that the collaboration with Circles.Life has been a successful one. Customer numbers have been increasing as shown in Fig. 1 above. Furthermore, Singtel and Starhub have recently been copying M1 in working with MVNOs as TPG's timeline for setting up operations in Singapore by Dec 2018 approaches. As they say, imitation is the best form of flattery. 

I might be wrong in this aspect, but I somehow suspect that M1 learnt something useful from Circles.Life's operations. Customers of Circles.Life use an app known as CirclesCare to manage their plans, including activating additional services on-demand. See CirclesCare features. M1's app has similar features, which saves customers' time from not having to call the customer service line and reduces the no. of staff they need to service customers. 

Narrowband Internet of Things (NB-IoT)

NB-IoT is a new 4.5G network designed for machine-to-machine communications to facilitate Internet-of-Things (IoT). Like most other new services, M1 is the first telco to roll out this new service in Aug 2017. There are some advantages in being the first mover and the lowest cost provider in big data, but it is still a fairly new service and not many companies are ready to launch IoT devices, so it is worth watching whether this new service will bring in good revenue for M1.

In an earlier section on data upsize plans, I mentioned that although M1 has a cost advantage in big data, it has not taken advantage of it to maximise profits. This might be because M1 is trying to attract more companies to use its NB-IoT services. Once on board, M1 could upsell to customers its data analytics services to derive better value. Furthermore, compared to traditional 4G services that cater to individuals, NB-IoT has higher switching costs and hence, customers are less likely to switch to a different telco. See NB-IoT – The Next Frontier for Telcos for more information. Thus, I am willing to accept that M1 has priced its big data plans lower than necessary to capture this new market segment.


M1 is the smallest telco in Singapore. Perhaps cognisant of its small size, it has always been willing to try out new things. It is the first telco to launch 3G mobile services in Feb 2005, mobile broadband in Dec 2006, fibre broadband in Sep 2010, 4G mobile services in Sep 2012, 4.5G mobile services in Dec 2014, etc. Nevertheless, despite being the first to deliver, it has always come in last in terms of market share. Yet, it knows that if it is not the first to deliver, it will not only come in last, but also become irrelevant, given that it had no Pay TV, cable/DSL broadband and analogue/digital voice businesses (before the Next Generation Nationwide Broadband Network came on board and disrupted the playing field). To stay relevant and survive, M1 has to constantly innovate. Innovations are in M1's DNA.

The innovations mentioned in earlier sections represent a desire to disrupt itself and competitors to stay ahead of the competition. Contrary to conventional wisdom, the disruptions in the telco industry in recent years did not come from the fourth telco; they came from M1 (and Singtel to a smaller extent). All these disruptions have also made the fourth telco fairly irrelevant, even if TPG were to start operations in Dec 2018 as scheduled. M1 has established a clear lead in big data (for now) and a toehold in NB-IoT. Perhaps this time round, it would not come in last among the 3 telcos.

On my investment in M1, despite averaging down 4 times, I am still sitting on a small paper loss. Nevertheless, the actions that M1 took make me confident that it is a matter of time before the market recognises M1 is a technology disruptor rather than the disrupted and the share price recovers to my cost price. I am satisfied with my investment in M1.

P.S. I am vested in M1, Netlink Trust and Singtel.

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Monday 7 May 2018

NB-IoT – The Next Frontier for Telcos

NB-IoT sounds like the name of a robot, but it stands for Narrowband Internet of Things. You probably have heard of Internet of Things (IoT), in which every device is collecting data and connected to the internet. As an example of the benefits of IoT, an IoT fridge can keep track of the groceries stored inside. If any grocery were to run low, it can place an order for fresh groceries to be delivered to your home automatically. You do not need to worry about groceries running low any more. It is an exciting future, isn't it? For the IoT fridge to be able to place orders online, it needs to be connected to the internet, either through WiFi at home or the telco network. Herein comes the NB-IoT. It is a 4.5G telco network that caters for machines instead of humans. NB-IoT is not the only telco network that machines can get connected to the internet, neither will it be the final telco network, but for now, it is a feasible network that enables IoT to take off.

M1 is the first telco to launch NB-IoT in Aug 2017. This is followed by Singtel in Feb 2018. Starhub's roll-out is still in progress, together with its enhancement of the 4G peak speed from 400Mbps to 1Gbps. How is the NB-IoT network going to play out for telcos?

Unlike the 4G networks that cater for human-to-human communications, there is an inherent advantage that incumbent telcos have in NB-IoT networks, which is switching cost. It is easy for 5 million people in Singapore to replace the SIM cards of their 8 million handphones to that of a different telco, but it is not easy for, say, an utility company to replace the SIM cards of the smart power meters in 1 million homes. To do so, they have to incur much manpower and transport costs to visit these smart power meters. Thus, if the differences in monthly subscription costs from other telcos are not too much, customers are unlikely to switch to a different telco. First-movers will have some advantages. Having said that, NB-IoT is still fairly new and not many companies are ready to launch NB-IoT devices now.

In the area of data costs, M1 seems to have an edge for now. If you read last week's post on No Competition for M1's Big Data Plans, it appears that M1 has a cost advantage over the other 2 telcos on big data.

Although NB-IoT holds promises with millions of devices to be connected up, I am still not particularly excited over telcos' prospects. The key question I have is that is the NB-IoT service that telcos provide a dumb pipe or a smart pipe? If it is a dumb pipe, any telcos could have provided the connectivity and price competition would be present. However, if it is a smart pipe, telcos would be able to hold off the competition and derive better value from NB-IoT.

Let us consider M1's collaboration with Otto Waste Systems and SmartCity Solutions to implement an intelligent waste management system based on NB-IoT. The sensors used to determine whether the bins are full is provided by Otto Waste Systems, while the centralised management system to monitor which bins need to be cleaned is provided by SmartCity Solutions. M1 provides the NB-IoT connectivity and the data analytics to determine the distribution of bins and the frequency of collection. Based on this description, M1's pipe is a half-dumb pipe. They could derive some additional value from the provision of data analytics, but M1 is not the only telco that has such data analytics capabilities. Otto Waste Systems and SmartCity Solutions could have worked with any other telcos and still not suffer a drop in the quality of service.

In conclusion, NB-IoT is the next frontier for telcos. Unlike 4G networks, telcos can better hold on to their customers because of high switching costs. They probably also can derive more value from the provision of data analytics to their customers, but some levels of price competition among telcos will still be around. 

P.S. I am vested in M1, Netlink Trust and Singtel.

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Sunday 29 April 2018

No Competition for M1's Big Data Plans

Usually, the 3 local telcos are very competitive. Whenever 1 launches a new service, the other 2 will follow quickly. However, for the new big data plans that M1 launched in Aug 2017, the follow-ups have been fairly feeble. Starhub launched its unlimited weekend data plans immediately, but that came with additional monthly subscription fees of $5.10. Only Singtel came up with something close, offering a Data X Infinity add-on for unlimited data for additional $39.99 per month 2 weeks later. However, that add-on only applies to higher mobile plans. Let us look at the offerings from each telco.

Do note that M1's big data plans do not come with much talktime and SMS. All the big data plans (except for the most expensive one) have only 100 mins of talktime and 100 SMS. For extra talktime, there are add-ons that range from $5 (for extra 200 mins) to $15 (for unlimited talktime). These big data plans do not replace M1's more traditional mobile plans that have a balance of talktime, SMS and data. For Singtel and Starhub, there are no new mobile plans that are equivalent to M1's big data plans. They are just enhancing their existing mobile plans to add more data. Thus, the comparison below is not a like-for-like comparison. However, for users who use a lot of data, this comparison is relevant.

M1 Plans
mySIM 40 mySIM 70 mySIM 90 mySIM 118
Monthly Cost
$40.00 $70.00 $90.00 $118.00
Data (GB)
5 15 30 Unlimited

Singtel Plans Combo 1 Combo 2 Combo 3 Combo 6 Combo 12
Monthly Cost $27.90 $42.90 $68.90 $95.90 $239.90
Data (GB) 0.1 2 3 6 12
Data X2 Cost - $48.80 $74.80 $101.80 $245.80
Data X2 (GB) - 4 6 12 24
Data X3 Cost - $52.80 $78.80 $105.80 $249.80
Data X3 (GB) - 6 9 18 36
X Infinity Cost - - $108.80 $135.80 $279.80
X Infinity Data - - Unlimited Unlimited Unlimited

Starhub Plans XS S M L XL
Monthly Cost $48.00 $68.00 $88.00 $108.00 $238.00
Data (GB) 3 4 5 8 12
Plus 3 Cost $54.00 $74.00 $94.00 $114.00 $244.00
Plus 3 Data (GB) 6 7 8 11 15
DataJump Cost - $78.00 $98.00 $118.00 $248.00
DataJump Data (GB) - 9 15 23 32

At the low end of the spectrum, M1's plan for 5GB costs only $40 per month. Singtel's Combo 2 Plan with Data X2 add-on costs $48.80 (for 4GB) while Starhub's XS plan with Plus 3 add-on costs $54 (for 6GB). There is simply no competition at this end of the spectrum.

At the middle of the spectrum, M1's plan for 15GB costs $70. Singtel's Combo 6 plan with Data X2 add-on costs $101.80 (for 12GB) while Starhub's M plan with DataJump add-on costs $98 (for 15GB). Again, no competition.

At the high end with unlimited data, M1's plan costs $118. Singtel's Combo 3 plan with Data X Infinity add-on costs $108.80. Starhub has no credible response here. Although Starhub's plans offer unlimited data during weekends, they are not comparable to M1's and Singtel's unlimited data plans that are unlimited any time of the week. Thus, at this end of the spectrum, only Singtel is able to beat M1.

The figure below shows that subscribers are consuming more and more data. The average usage for M1 subscribers has risen from 3.2GB in 1Q2015 to 4.5GB in 1Q2018. The no. of subscribers who exceed their primary data bundle is also on the rise, from 20% in 1Q2015 to 29% in 1Q2018.  If this trend continues, and if the other 2 telcos do not start offering similar big data plans in the near term, M1 might grab a bigger share of the mobile services market.

Fig. 1: M1's data usage trend

P.S. I am vested in M1, Netlink Trust and Singtel.

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Monday 23 April 2018

Do M1's Acquisitions Make Sense?

It is a well known fact that competition among telcos has been heating up in the last couple of years. All 3 telcos have been finding new sources of revenue outside their traditional telco businesses. They have been busy acquiring companies, such as Singtel's acquisition of Turn for USD310M in Feb 2017 and Starhub's acquisition of D'Crypt for up to SGD122M in Dec 2017. In comparison, M1's acquisitions have been very small. So far, their acquisitions are as follow:
  • Aug 2016 - SGD3.0M for a 30% stake in Octopus Retail Management, which provides Point-of-Sales (POS) solutions for retailers and Food & Beverages (F&B) outlets.
  • Oct 2017 - SGD2.45M additional investment in Kliq, which provides digital mobile remittance service.
  • Apr 2018 - SGD3.0M for a 25% stake in Trakomatic, which provides Business-to-Business video analytics solutions to retailers.

Do these acquisitions have synergy with M1's existing businesses? Let us look at them one by one.

Octopus - Point-of-Sales

The POS solution is provided by Octopus Retail Management. This is an independently run business and not marketed together with M1's other services. As such, there is no synergy with M1's existing businesses. In fact, M1 has another mobile POS solution that is developed independently! To be fair, M1's in-house mPOS solution only facilitates payment transactions whereas Octopus' POS solution covers inventory tracking and customer loyalty programmes.

It is a bit difficult to see how this acquisition ties in with M1's overall business strategy. For FY2017, this associate lost $0.29M for M1.

Kliq - Digital Mobile Remittance Service

Though Kliq, M1 provides remittance service to 9 Asian countries such as Bangladesh, India, Philippines, etc. Users have to M1 customers. Payment for the remittance is made through AXS machines (which accept ATM, credit and debit cards), m-AXS mobile app (which accepts internet banking, credit and debit cards) and at M1 shops at IMM and Paragon  (which accept cash).

Although users have to be M1 customers, there is no integration with other M1 services. Users cannot pay for their remittance through their M1 monthly bills or their pre-paid stored value accounts. Furthermore, M1's share of the telco market is only 24.0%; by limiting the service to only M1 customers, they are effectively reaching out only to a small group of potential users.

I cannot see how this business ties in with M1's overall business strategy. Perhaps, someone from the remittance industry can see how it makes sense. In Oct 2017, M1 announced that it jointly invested an additional $5.02M in Kliq with Merchantrade Asia Sdn Bhd, thereby diluting its stake from 100% to 51%. Merchantrade is 20% owned by Axiata, one of M1's controlling shareholders.

Trakomatic - Video Analytics Solution

Trakomatic provides video analytics solutions to businesses to understand the movement and profiles of customers in their stores. The solutions can leverage on existing cameras and sensors that stores already have. This can complement M1's own data analytics solution, which analyses and provides similar information from the telco data of its customers. Trakomatic can provide information of customers within the store while M1 can provide information of potential customers in the vicinity of the store. Taken together, the data analytics created by M1 and Trakomatic will be more comprehensive and more valuable to businesses.


So far, M1 has acquired small stakes in 3 companies for a total of less than $10M. Among these 3 companies, 2 of them do not seem to complement its existing telco businesses very well. The more exciting acquisition is Trakomatic, which complements its data analytics business. M1 should be very careful about acquisitions, as its debts have been steadily climbing from $250M in Dec 2013 to $450M in Dec 2017.

P.S. I am vested in M1.

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Sunday 15 April 2018

Where Art Thou, TPG?

Just when I thought TPG was very quiet in its plans to roll out its 4G network, it suddenly announced on 19 Mar that it would provide the elderly with a free mobile plan for 2 years that includes unlimited calls and 3GB of data. That sounds really good on paper, but is TPG's 4G network ready?

According to the terms of the spectrum auction, TPG has to achieve the following network coverage by certain dates following the commencement of its spectrum rights on 1 Jul 2017:

Coverage Quality of Service Duration Date
Street Level 95% coverage 18 months 01 Jan 2019
In-Building 85% coverage 30 months 01 Jan 2020
MRT Underground Stations & Lines 99% coverage 54 months 01 Jan 2022
Thus, if TPG's roll-out schedule follows the above milestones, its network coverage is good only at the street level when it launches next year. Within buildings, the coverage will be sporadic. What is the use of having free mobile plans if they cannot be used to make or receive calls within buildings? 

Between street level and in-building coverage, TPG only has 1 year to roll out to all buildings. Given that there are so many buildings in Singapore, I do not think TPG can achieve the required Quality of Service (QoS) imposed by IMDA. Thus, if my guess is correct, it will be several years before TPG's 4G network is capable of matching those of the existing telcos. 

On the capex to build the nation-wide network, TPG has quoted a figure of $200M to $300M. If you compare to M1's fixed asset costs for "network and related application systems" of $517M as at end Dec 2017, TPG's proposed capex of $200M to $300M is on the low side. No doubt, M1's fixed asset costs include the 3G, 4G and Narrow-Band Internet-of-Things (NB-IoT) networks, but to build a nation-wide 4G network capable of meeting all the QoS standards at $200M to $300M still looks low.

Perhaps, what TPG is thinking of is to leverage on the 700MHz frequencies, which require less base stations than the traditional 900MHz and 1800/1900MHz frequencies. However, the 700MHz frequencies are dependent on the population switching out of analogue TV into digital TV, which is expected to be completed only by end Dec 2018.

In an interview by Zaobao on 27 Mar, M1 also had doubts on whether TPG could complete their network by the end of the year, noting that to set up a network, a telco has to purchase land, build base stations, connect the base stations to the core network and configure them. The largest obstacles are in buying the land and building base stations. M1 has around 2,500 macro base stations, and that does not include smaller base stations which are 2 to 3 times that number. Based on their observations, TPG does not seem to have started building the base stations.

In its results presentation for 1H2018 on 20 Mar, TPG reported actual capex of only AUD29.7M (or approximately SGD30.3M) for the Singapore mobile network. This is only 10% of the estimated total capex of $300M, providing further evidence that TPG has been slow in rolling out its network.

It is not easy to set up a telco network from scratch. Based on the experience of U Mobile, the fourth telco in Malaysia, it had to leverage on Celcom's network (i.e. act as a Mobile Virtual Network Operator, MVNO) while it rolled out its own nation-wide network concurrently. But for the case of Singapore, it is highly unlikely any of the existing telcos would allow TPG to come on board as a MVNO, since once TPG's network is completed, it would pose a threat to the existing telcos' business. 

Thus, I do not see TPG as posing a serious threat to the existing telcos any time soon. TPG, I am waiting for you.

Sunday 8 April 2018

How Long Can (The) Boring Investor Blog Continue?

This is post no. 260, which represents the 5th birthday for this weekly blog. In past years, this would have been a joyous occasion, as it means that I have blogged for another 52 continuous weeks. This year, however, there is a tinge of sadness, as there is a realisation that all things will eventually come to an end, including this blog.

Regular readers of this blog would know that I like to string all posts with the same theme together, such as the telco theme of recent weeks. However, to have something useful to blog about, I need to carry out research. And research takes time. Despite this being a weekly blog, the amount of time needed to search, analyse and write useful stuffs is sometimes quite overwhelming. For example, the 4 posts on Hyflux last year were spread out over 7 weeks, simply because the research could not keep up with the blogging. 

Besides the lag in blogging, a lot of personal stuffs are also piling up. There are 400 over unread emails in my mailbox; I have not calculated my Profit & Loss for 2H2017; my database of 260 stocks is only updated up till 2016, etc.

What contributed to the lag in blogging since last year? Starting from last year, I have been analysing stocks as business investments rather than financial investments. This means having to understand the operations of a business and know what factors would affect its profitability, rather than just looking at its income statements, balance sheets and cashflow statements and conclude whether the stock should be bought or sold. A case in point is the telco theme that I have been blogging recently. To have an informed analysis about whether telcos' profitability is going up or down, I need to understand Will SIM-Only Plans Cannibalise Regular Telco Plans?, Impact of Data Upsize Plans on Telcos, Will MVNOs Cannibalise Telcos' Business?, Is Pay TV Still A Reliable Cash Cow?, Do Telco Investors Need to Fear the Fourth Telco? etc., before I can reasonably conclude Is Starhub's Dividend of 16 Cents Sustainable? Looking at the various aspects of the operations of the business is similar to the scuttlebutt approach mentioned in Philip Fisher's book "Common Stocks and Uncommon Profits".

Although very time-consuming, this change in blogging approach has benefited my investments as well. Global Logistic Properties (GLP) was the largest winner in the 20 years I have been investing with my own money. As for M1, although I am sitting on paper losses currently, I am confident the stock price will turn around. Likewise, I am confident that my analysis for the likes of Keppel Corp/ SembCorp Marine, Hyflux, Starhub will turn out to be correct. There is no going back to the days of just analysing the financial statements and buying/ selling the stock. Similarly, I also believe readers would want to know how the business aspects of the company are doing rather than just the financial aspects. 

Thus, as much as I like to continue blogging once every week, there will come a time when this trend will be broken. After having blogged 52 times every year for the past 4 years, I will be quite sad when this day comes. In the meanwhile, let us relish for every week that this blog can continue.

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Sunday 1 April 2018

Will MVNOs Cannibalise Telcos' Business?

How many telcos are there in Singapore currently? If you answered 3, that is incorrect. There are currently 6 telcos -- 3 traditional telcos that operate their own telco networks, namely, Singtel, Starhub and M1, and 3 Mobile Virtual Network Operators (MVNOs) that buy network capacity from the traditional telcos and resell to retail customers. Ever since the first MVNO, Circles.Life, set up shop in May 2016, things have accelerated in the MVNO space. In a short span of 3 months, we have had another 2 MVNOs springing up, namely, Zero Mobile and Zero1. You probably have heard of their promotions, like Circles.Life's 20GB of data for $20, Zero Mobile's Unlimited calls, SMS and data plan, or Zero1's unlimited data plan for $29.99. Since MVNOs compete for the same group of retail customers as the traditional telcos, will MVNOs cannibalise telcos' business? Let us look at each one of them.

Circles.Life vs M1

Circles.Life leases network capacity from M1. Its most well-known promotion is its 20GB-for-$20  plan. Although it sounds exciting, you need to sign up for the base plan first before you can sign up for the 20GB-for-$20 add-on. The table below compares Circles.Life's base and add-on plans and the corresponding M1's SIM-only plans. Note that I am using M1's SIM-only plans that come with 12-month contract, whereas MVNOs do not require any contracts. M1 has no-contract SIM-only plans, but these plans provide less data and I believe most customers would not mind signing up for a 12-month contract for better value.

Circles M1 Circles M1
Plan Base mySIM20 Promo mySIM50
Price  $   28.00  $   20.00  $   48.00  $   50.00
Talktime (mins) 100 100 100 100
SMS 0 100 0 100
Data (GB) 6 5 26 30
Caller ID Yes No Yes No
Equivalent Price  $   30.00  $   25.35  $   50.00  $   55.35

As you can see, Circles.Life's base plan is more expensive than M1's corresponding plan. There are a few add-ons to make both plans more comparable. Circles.Life's plan does not come with free incoming calls. To have this feature, you need to add another $2, making it effectively $30 per month. M1's plan does not come with caller ID, which costs another $5.35. Hence, the equivalent cost is $25.35 per month. In terms of the base plans, Circles.Life is generally more expensive than M1, although Circles.Life has 1GB of data more.

It is only when you add on the 20GB-for-$20 option that Circles.Life becomes cheaper than M1's corresponding plan. After accounting for the necessary add-ons mentioned above, Circles.Life's plan costs $50 whereas M1's mySIM50 plan costs $55.35, but with 4GB of data more.

According to M1, the average data usage for Dec 2017 is 4.3GB per month. Thus, customers who need the 20GB-for-$20 add-on really belong to the minority. Circles.Life is unlikely to threaten M1's telco business.

Zero Mobile, Zero1 vs SingTel

Both Zero Mobile and Zero1 lease network capacity from Singtel. Zero Mobile has 2 plans while Zero1 has 1 plan. The table below compares the plans for Zero Mobile, Zero1 and Singtel's SIM-only plans (with 12-month contract). The corresponding Singtel's SIM-only plans are 10GB for Zero Mobile and 5GB for Zero1, for reasons discussed later.

Zero Singtel Zero Singtel Zero1 Singtel
Plan Zero X 10GB Zero 40 10GB 5GB
Price  $   65.00  $   36.05  $   40.00  $   36.05  $   29.99  $   20.00
Talktime (mins) Unlimited 150 Unlimited 150 200 150
SMS Unlimited 500 0 500 200 500
Data (GB) Unlimited 10 9 10 Unlimited 5
Caller ID Yes No Yes No Yes No
Equivalent Price  $   65.00  $   84.20  $   40.00  $   57.45  $   29.99  $   52.10

Again, for the base plans, MVNO's plans are more expensive than Singtel's corresponding plans. To make Singtel's SIM-only plans more comparable to that of MVNOs, I added unlimited talktime for $16.05, 25GB of data for $26.75 and caller ID for $5.35, where applicable. Unlimited SMS for $16.05 is ignored, since most subscribers nowadays do not send many SMS.

After accounting for all the corresponding add-ons, Singtel's plans are more expensive than all the MVNO's plans. There are important caveats, however. Firstly, "unlimited" does not really mean unlimited usage. For both Zero Mobile and Zero1, "unlimited" means a cap of 5,000 mins of talktime and 5,000 SMS per month. Secondly, Zero X's unlimited data plan does not allow you to share the data with other devices, either by using your phone as a WiFi hotspot, or using the SIM on another device. For Zero1's unlimited data plan, only the first 3GB of data will be at 4G speeds (This is the reason why Zero1's plan is compared against Singtel's 5GB plan and not the 10GB plan). All data after that will be throttled according to the network capacity and performance. Thirdly, for Zero Mobile, any excessive, unreasonable, fraudulent or unapproved usage might be charged at the commercial rates mentioned below.

Monthly Subscription Cost  $   10.00
Mobile Data usage (per GB)
 $   10.00
Incoming Calls (per minute)
 $     0.10
Outgoing Calls (per minute)
 $     0.10
Incoming SMS (per SMS)
 $     0.05
Outgoing SMS (per SMS)
 $     0.05

In the final analysis, most people would not need unlimited talktime, SMS or data. The base plans from Singtel (150 mins of talktime and 5/10GB of data) are sufficient, with a caller ID add-on at $5.35. From this perspective, MVNOs' plans are generally still more expensive than Singtel's plans. Customers who need a lot of data and are attracted to MVNO's plans belong to the minority.


Although MVNOs have exciting promotions, in reality, they are hampered by the fact that they need to buy network capacity from the traditional telcos, and telcos will not offer them such low prices that the MVNOs can undercut them. The relationship between MVNOs and traditional telcos is similar to that between a landlord and tenant; because the tenant has to pay rent to the landlord, he will never be able to offer lower prices than the landlord on a sustainable basis. Thus, MVNOs will not cannibalise traditional telcos' existing business.

P.S. I am vested in M1, Netlink Trust and Singtel.

Monday 26 March 2018

Is Starhub's Dividend of 16 Cents Sustainable?

A few bloggers have written about whether Starhub's dividend of 16 cents per year is sustainable when Starhub released its results in Feb. This time last year, I reviewed the prospects of its various business segments and concluded that challenging times were ahead for Starhub's dividends. See Challenging Times Ahead for Starhub's Dividends for more info. In today's blog post, I will update the review and discuss whether Starhub's dividend of 16 cents is sustainable. Although mobile services is the largest business segment, I will discuss it last, for reasons explained later.

Pay TV

If you read Is Pay TV Still A Reliable Cash Cow?, you would know that the traditional advantage of Starhub over the other telcos is its cable TV network infrastructure, which is used to provide not only Pay TV but also cable broadband services. The cost structure for Pay TV is fixed capital cost for the network infrastructure, and mostly variable cost for the TV content. The network infrastructure has been in operations for many years and would have been mostly depreciated. Thus, the more subscribers Starhub can get on its Pay TV services, the more profits it can generate. Unfortunately, Pay TV has been on a decline in recent years due to competition from over-the-top service providers like Netflix and online privacy. Fig. 1 below shows the no. of Pay TV subscribers Starhub has since 2015.

Fig. 1: No. of Starhub Pay TV Subscribers

Although Starhub has been rationalising TV content to cut costs and investing into media companies like mm2 Asia to generate exclusive media content, it is difficult to see such measures being able to counter the decline in no. of subscribers. Furthermore, investments into media companies take away cashflows that could be paid out to shareholders. Thus, pay TV is no longer the cash cow it used to be.

Wired Broadband

The same story is repeated for the wired broadband business segment. Wired broadband can be categorised into cable broadband and fibre broadband. Although the total no. of broadband subscribers has remained steady, a breakdown of the no. of subscribers shows that the no. of cable broadband subscribers has continued to decline, in favour of fibre broadband. See Fig. 2 below for the no. of cable and fibre broadband subscribers.

Fig. 2: No. of Starhub Wired Broadband Subscribers

As mentioned above, cable broadband is served though the Pay TV network infrastructure, which is fixed capital cost and mostly depreciated. Thus, the less no. of cable broadband subscribers, the less profits Starhub can generate. On the other hand, fibre broadband is served though the Next Generation Nationwide Broadband Network run by Netlink Trust. Starhub has to pay Netlink a pre-determined amount of money for each subscriber. Thus, the profit margin for fibre broadband is lower than that for cable broadband.

Recently, Starhub has been running a promotion to get more customers on board its cable broadband services, but it is difficult to see Starhub being able to reverse the decline in the no. of cable broadband subscribers. Again, wired broadband is unlikely to become the cash cow it used to be.

Enterprise Fixed Network

This business segment is the rising star of Starhub, with increasing revenue annually. However, part of the revenue growth is from acquisition of companies. Exactly how much profits are generated from the revenue is unclear. Furthermore, as Starhub continues its acquisition path, this business segment will soak up more cashflow than it can generate. Last year, it spent $22.6M acquiring companies. This year, it has already spent $57.5M in doing so. So, do not expect this business segment to generate good cashflows to sustain its dividends.

Mobile Services

We have come to the most important business segment, which is the mobile services. Mobile services is under pressure from different sources, such as the SIM-only plans, data upsize plans, Mobile Virtual Network Operators (MVNOs) like Circles.Life, Zero Mobile and Zero1, plus TPG, the fourth telco. You can read more about the impact of SIM-only plans, data upsize plans and MVNOs at Will SIM-Only Plans Cannibalise Regular Telco Plans?Impact of Data Upsize Plans on Telcos and Will MVNOs Cannibalise Telcos' Business? respectively.

Thus, it looks like even mobile services is facing declining cashflows. However, Starhub recently did something that no other telcos did -- it silently raised the prices of its mobile services plans. It ditched the original regular plans which go by the names of 4G 3/ 4/ 5/ 6/ 12 (representing GB of data) and replaced them with plans which go by the names of XS/ S/ M/ L/ XL. These new plans come with unlimited data during weekends but also higher monthly fees. Generally, the fees are increased  across the board by $5.10 per month. As at end Dec 2017, Starhub has 1.37M post-paid subscribers. Assuming the higher fees do not drive them away, Starhub can expect to collect $83.8M (1.37M x $5.10 x 12 months) more in revenue and profits annually.

However, this $83.8M increase in revenue and profits will only materialise 2 years later, when all the existing 2-year telco contracts have expired and migrated to the new plans. For 2018, assuming the contract expiry dates are uniformly distributed, the expected increase in revenue and profits is about 25% of $83.8M or $21.0M.

Needless to say, the major caveat is Starhub's existing subscribers do not desert it in droves, considering that Singtel has mostly maintained prices (it raised price on its Combo 3 plan but dropped price on Combo 6 plan) while M1 has introduced big data plans, including an unlimited data plan at $118 per month. In the long run, this is likely to lead to subscribers switching to other telcos as they question the need to pay an extra $5.10 per month in exchange for unlimited data during weekends. But in the short run, there will be increased cashflow from the increase in prices.


Overall, we will see declining cashflows from Pay TV and wired broadband but increasing cashflows from mobile services. The Enterprise Fixed Network segment will continue to soak up cashflows through acquisitions. Thus, free cashflow will continue to decline in 2018. In 2017, free cashflow (based on Cashflow from Operations minus Cashflow from Investing) is only $190.1M. Dividing by 1,729.1M shares, free cashflow per share is only 11 cents. So, my conclusion is Starhub's dividend of 16 cents per share is not sustainable.

P.S. I am vested in M1, Netlink Trust and Singtel.

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