Asia Satellite Telecommunications Holdings' (AsiaSat) share price has been on a downward trajectory since its highly successful May flotation. Poor sentiment towards satellite operators and fears over its third launch have seen the share consistently lose altitude, falling from a high of $25.50 to yesterday's close of $19.85. Worries that the region's skies are getting crowded and the Chinese Long March rocket launch programme will see further delays have cast a pall over the sector. Combine this with technological progress allowing up to eight times more signal information to be carried through digital compression and you have the effective supply of satellite capacity increasing dramatically. Last week AsiaSat reported an eye-catching 98 per cent increase in attributable interim profit to $166.9 million. But around the world investors are losing interest in firms offering secondary television and telephone applications linked to delivering satellite signals. AsiaSat offers the uncertainty of its third satellite launch late next year which will account for up to 38 per cent of 1998 net present value (NPV) per share. In many ways the stock had become a play on a successful launch of AsiaSat-3, offering a 25 per cent upside if the uncertainty was factored out, Goldman Sachs analyst Cassindy Chao said. Investors are discounting future cash flows at an extremely high rate - causing the share to underperform - reflecting uneasiness over the launch of AsiaSat-3. Strangely, many investors did not realise that AsiaSat was signed up with the Russian Proton rocket launcher rather than China's delayed Long March service, Ms Chao said. All told, the downside of a failed AsiaSat-3 launch would cut 1997 NPV per share by 8 per cent as a replacement from the manufacturer Hughes should be ready within 16 months due to the planned launch of AsiaSat-4 in 1999, she said. AsiaSat chief executive Peter Jackson sees a future of increased demand for satellite services, lower-cost delivery and technological change allowing expanded signal distribution within the same frequency bandwidth. Pre-marketing of AsiaSat-3 has shown strong demand for the service, considered the 'hot bird' of the region due to a strategic east orbital slot where AsiaSat-1 commands 30 million viewers. During the first half of the year Australian and Pakistan television channels signed up as AsiaSat users. Recent weeks have seen two more television channels signed on. The company is tight-lipped on their identity, although they are understood to be Chinese provincial stations requiring a satellite transmission service. Satellite services are getting cheaper with the expanded capacity that digital compression brings. Many users of traditional analogue signal systems are beginning to switch across to digital transmission. Increased competition was arriving in the Indian and Chinese markets in particular, making for a harsher business environment, Mr Jackson said. All this adds up to increased transmission capacity which by normal reasoning should be bad for the market leader facing rivals playing catch-up. Not necessarily, argue fans of the stock, such as Carl Wong at HSBC James Capel. The market for television transmission was underdeveloped and extremely price elastic. Increased bandwidth due to digital compression was likely to produce a dramatic increase in the number of channels that television stations offered, Mr Wong said. The interest being shown in the company's third satellite indicated that demand would outstrip the expanded supply of transmission, he said. AsiaSat presents itself as a conservatively managed blue-chip operator, but it is the persistence of fundamental risks to its business that worries investors. The heavy dependence on Star TV had been one fear, although the contribution to earnings should reduce to 40 per cent this year compared with 50 per cent last year, Mr Jackson said. 'The last thing we want to offer investors is dramatic news, we are looking for a gradual progression in our business,' he said. What analysts like best about AsiaSat is the simplicity of its business. Employing a staff of 60, it is one of the lowest cost producers in the industry having avoided downstream satellite application services and focused purely on leasing transponder capacity. In this sense the company is a pure provider of satellite services making cash flow and profit forecasts reasonably transparent. About 70 per cent of company revenues come from television with the remainder accounted for by remote telephone services. Debate existed within the firm over which service would drive growth in the coming years, Mr Jackson said. With large amounts of low transmission cost fibre optic cable being laid around the region it looks like the company will see most of its growth from television. Much depends on the stalled deregulation of broadcasting within Asia. Governments' fear of satellite distribution means that a tight rein has been kept on the distribution of dishes in China and much of Southeast Asia. Malaysia recently launched its own satellite television station as a pre-emptive strike against international broadcasters beaming down to the peninsula. Similarly, regional cable stations in China are expected to receive programming from a satellite receiver before distributing the signal on a controlled basis through the fixed network. In many ways, AsiaSat presents an organic growth story with customers locked in to lengthy contracts at fixed prices. It is almost an inconvenience that it is dependent on a billion dollar satellite being sent into space. But that is the risk that investors must assess and potentially benefit from handsomely.