We expect adex to decline in 2H18 without adex-friendly events. Apart from the soaring newsprint price, print will remain unfavourable as the sector has not seen any improvement on circulation rate and advertising growth. As internet services gets cheaper and faster, we opine that pay-TV will face some hurdles and OTT players will play a more prominent role. We maintain our UNDERWEIGHT view on the sector given the lack of near term catalyst couple with the rising industry competition and raw material prices.

2H18 lack adex-friendly events. 1Q18 advertising expenditure (adex) contracted by 7.6% YoY, with print adex continued being hit the hardest plunging by 20.7% YoY. We expect to see a slight adex improvement in the up-coming 2Q18 results in August, mainly driven by GE14, World Cup and Hari Raya. However, for 2H18, we do not expect adex uptrend to continue, as 2H18 will not be as eventful as 1H18.

Print expected to see margin pressure as newsprint price soar. Due to the recent paper shortages, newsprint price has risen by about 35% YoY. It is now hovering at around USD680-710 per metric tonne from USD500-550 per metric tonne (Figure #2). If the price continues to surge, we may witness margin compressions for Star, Media Prima, and MCIL. However, the financial impact from rising paper price will only be seen later as most print players pre-load their inventories 3 to 6 months forward. The higher cost coupled with shrinking advertising revenue and declining circulation rate (Figure #3) will hit the profitability of the print segment hard.

Victim of cheaper and faster internet services. Post GE14, the new government has promised to make broadband services more affordable with higher quality. With internet packages offering better online streaming experience, we believe that Astro’s subscription rate will sustainably face some downward pressures. Moving forward, OTT players will play more prominent roles. Nonetheless, we expect to see growths in Star’s Dim Sum and Media Prima’s Tonton.

Re-introduction of SST would be neutral to the sector. Pre-GST, media players were able to pass on SST to their customers. Astro used to charge 6% service tax to subscribers. On top of that, newspaper was a GST free item and so with the abolishment of GST cover prices will not be revised downwards. Hence, if the SST rate remains at 6%, we think that this will be a non-event to the sector.

Downward momentum to continue. We think that print will remain unfavourable and subscription rate for pay-TV will start to see a more disruptions. The road ahead will be tougher for the media players given the soft advertising market. It is crucial for the media players to evolve faster than ever and to differentiate from its peers.

Forecast. Maintain.

Maintain UNDERWEIGHT. As the shift from traditional to online media remains a hurdle, we prefer to remain cautious. Due to the lack of near term catalyst coupled with the rising industry competition and raw material price, we maintain our UNDERWEIGHT stance on the sector. We maintain our calls and TPs for Astro, Star, and MCIL. We downgrade Media Prima to SELL from HOLD with an unchanged TP of RM0.31 as share price spiked 39% since our last report without any material positive development, in our view.

Source: Hong Leong Investment Bank Research - 5 Jul 2018