Highlights

Growth has been weak… Adex growth in the past 2 years has been exceptionally weak after a 5-year boom from CY07-11. Prior to the last two years, Adex growth has been outpacing GDP growth with a multiplier of >1.5x. For CY13, Adex spending grew by 2.8%, representing a GDP growth multiplier of 0.6x.

Expect another slow year… We believe that Adex growth will continue to be weak in CY14. The latest 4QCY13 CSI and BCI have dipped to 82.4 and 92-points respectively. The CSI has dropped to the lows last seen during the Global Financial Crisis.

Evidently, channel checks with industry sources have indicated that forward Adex spending commitment has remained unchanged at 3 months compared to the good times of 1-year forward commitment. Hence, we are expecting another slow year with Adex growth of 5% (1x GDP growth multiplier) for CY14.

We rather watch… The share of TV Adex has grown from <30% to 37-38% of the Adex industry. We believe that Adex ringgit will slowly continue its shift towards TV medium due to its more engaging and appealing factor, coupled with consumer’s preference of watching instead of reading.

World cup boost?... Although FTA TV Adex only inched up by 0.2% last year, we believe that 2014 will be a better year due to World Cup 2014 football competition. During the past three World Cup events in 2002, 2006, and 2010, the segment grew by 4.9%, 12.7% and 18.2% respectively.

Sticky Vernacular… Newspaper Adex rebounded by 6.2% in CY13 after contracting by 1.2% in the previous year. We believe that the outlook for the newsprint segment will continue to be challenging due to the online migration of traditional print advertisements. On the other hand, we are cautiously optimistic on the growth prospects of the Bahasa and Chinese-vernacular newspaper due to the stickiness with the community.

Muted newsprint prices… Despite the appreciation of the US$, newsprint cost has been largely muted. Hence, this should mitigate the impact of US$ appreciation. Star, Media Chinese and Media Prima has newsprint inventory of 12 months, 6 months and 3 months respectively

Risks

(1) Weaker than expected consumer/business confidence; (2) Threat of new players; and (3) Rising raw material prices and content costs.

Rating/ Valuation

NEUTRAL

With consumers tightening their belt and the lack of confidence within the business community to commit on Adex spending, we are maintaining our NEUTRAL view on the sector.

Top pick for sector exposure: Media Chinese (BUY; TP: RM1.16).

We also take the opportunity to reduce Star’s TP by 12.6% to RM2.15 from RM2.46 previously due to lower forecasted dividend of 14 sen instead of 16 sen. HOLD call maintained.

Maintain HOLD calls for both Astro (TP: RM3.02) and Media Prima (TP: RM2.58).

Source: Hong Leong Investment Bank Research - 5 Feb 2014