Emerging markets are clamouring for broadband – don’t miss out

Emerging markets are in desperate need of new high-speed internet connections. And this Indonesian broadband provider could be well-placed to profit, says Lars Henriksson.


Jakarta Link Net offers high-speed broadband and cable TV covering Indonesia's major cities

Sixty years ago, in April 1955, some of the world's most powerful leaders gathered in an unlikely setting Bandung, a city in Indonesia's West Java province.

The occasion was the first ever large scale Asian-African Conference, which became known as the Bandung Conference.

The event was set up by Indonesia, Burma (Myanmar), Ceylon (Sri Lanka), India and Pakistan.

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According to Encyclopaedia Britannica, the conference was a forum for these countries to discuss the most pressing issues of the day Western powers' failure to consult them on decisions affecting Asia; tension between China and the US; China's foreign policy; and opposition to colonialism.

As we all know, things didn't exactly turn out the way the delegates had hoped. Not only were emerging economies used as pawns during the ensuing Cold War and Vietnam War, but faced problems including prolonged colonialism.

Anyway, two weeks ago on the event's 60th anniversary they tried again. This time, China's president, Xi Jinping, and Japan's prime minister, Shizo Abe, were among the delegates, who hailed from 109 Asian and African countries.

The topic was "Strengthening South-South Cooperation to Promote World Peace and Prosperity".

In future, I think, this occasion will be seen by historians as a significant event.

Indonesian president, Joko Widodo (Jokowi'), proclaimed, "It is imperative that we build a new international economic order that is open to new emerging economic powers. We call upon therefore for a new global financial architecture in order to avoid the domination of certain groups of countries".

During the conference, Jokowi & XiJinping witnessed the signing of memorandum of understanding to build a high-speed railway line linking Jakarta with Bandung.

Estimated to cost about $6bn-$7bn, the 144km railway would be Indonesia's first new railway line built since the end of the Dutch colonial period 70 years ago. It would cut travel time by more than two thirds from around three hours to 44 minutes.

But emerging countries are not just calling for high-speed travel. They're also in need of improved lines of communication in particular, high-speed internet.

And that's one area brimming with opportunities for investment in growing broadband providers, such as Jakarta-based PT Link Net.

I believe many of them used the broadband supplied by PT Link Net.

Listed last year at the Jakarta Stock Exchange, Link Net offers high-speed next-generation broadband and cable TV covering the regions of Jakarta, Surabaya, Bandung and Bali.

Link Net has 7,000km of fibre optic backbone the principal data routes between interconnected computer networks and routers on the internet. This allows it to offer two distinct services: hybrid coaxial network (HFC), more often known as cable internet, to residential customers, and fibre optic (FTTP) services to business customers.

At the end of 2014, the company had 392,000 broadband and 362,000 cable-TV subscribers respectively.

The outlook for the Indonesian broadband market is tantalising. The penetration rate is about 5% equal to Singapore, slightly lower than India, and about a tenth of the penetration rate in China.

This wide gap with Indonesia's Asian peers is not sustainable. If delegates at the Bandung conference were really serious about "strengthening South-South Cooperation" which is a convoluted way of saying increased trade in goods and services between emerging economies Indonesia needs to boost its broadband penetration.

This is where Link Net claims to have an edge. It offers bandwidth above 3Mb/s, which is faster than the ADSL service (data transmission through copper wires) offered by Indonesia's leading telecommunications services company, Telkom.

The (relatively) speedy internet access has been a hit among the middle-to-higher income groups of Indonesia's three most populous and high-density cities. As of December 2014, Link Net claimed to have 1.4 million homes subscribed to its services up by 238,000 from the previous year.

And its potential doesn't end there. The company also sees opportunities stemming from the relatively young age of Indonesia's population (53% are under 30), urbanisation (cities contribute towards 74% of GDP), and bundling its services together with cable TV channels.

This company is set to grow significantly

But I think that should change, provided that the aforementioned excellent macro drivers are accompanied by strong earnings.

Link Net's outlook is promising. In the 2014 financial year, revenues were Rp2,136bn (+28%), with an adjusted Ebitda (earnings before interest, tax, depreciation and amortization) of Rp1,230.7bn (37%) and net profit Rp557.9bn (+54%).

And analysts believe earnings will jump by 113% over the next three years.

Fast-growth companies often carry a hefty price tag. And Link Net is no exception. The stock is trading on a PE (price/earnings ratio) of 22.7 times 2015 earnings, which is set to gradually fade to 14.1 times in 2017.

Is the steep valuation justifiable? It's hard to know, but we think investors are willing to pay a premium for hot themes.

For emerging countries calling for a new world, high speed is everything.

Lars is our resident emerging markets expert, with 17 years of 'on the ground' experience hunting down profit opportunities in Asia. Lars spent ten years living in Malaysia and Thailand, seeking out strategic opportunities, before moving to London to manage the Oracle Asia Absolute Fund. In short, Lars has real knowledge of where the opportunities in Asia are. Sign up to his free newsletter, The New World, here.