-  We maintain our BUY recommendation on Media Chinese International (MCIL) with an unchanged fair value of RM1.20/share, based on our DCF valuation.

- At the analysts briefing yesterday, Media Chinese International (MCIL) highlighted that it has set up a printing plant in Kota Kinabalu, Sabah and is expected to commence operations in 1QCY14.

- Presently, MCIL’s market presence in Sabah is minimal due to high logistic costs. According to a report by the Audit Bureau of Circulation for the period of July to December 2012, MCIL’s average circulation copies per day only make up 573 of the total 77,089 copies for the Chinese segment in Sabah.

- We understand that MCIL has incurred minimal capex for this plant. As part of a restructuring exercise earlier, MCIL has in the past reduced its printing plants from 12 to 9 in Peninsula Malaysia. Hence, the unutilised machineries can be used in the Sabah plant. In total, MCIL estimates that RM20mil has been incurred for the setting up of the plant.

- Management is confident that it can boost its circulation to 20,000 copies in the near term, effectively gaining a 20% market share in the Chinese segment in Sabah. We view this positively as this can potentially contribute to its adex growth.

- Going forward, MCIL is also placing more emphasis on the digital space and mobile device segment to capture and retain a larger share of readership. It has recently launched its first e-paper for Nanyang Siang Pau, and will be a subscription-based service.

- In the Hong Kong segment, management indicates that the adverse condition for adex due to the slow property sector appears to be normalising and is beginning to see a pickup in advertisements for property launches. The overall tough operating environment in Hong Kong has also resulted in the closure of one of its free newspaper competitors.

- Inventory level remains at a comfortable level of around 6-8 months. MCIL continues to benefit from the low spot price for newsprint (currently trades at USD586/MT), which has helped to keep its operating expenses low.

- All said, we expect 2HFY14 to deliver better results as advertising activities pick up towards the end of the year due to festivities. At the current level, MCIL trades at a FY15F PE of 10x, with a dividend yield of 6%-7%.

Source: AmeSecurities