We expect adex to remain muted in 2H19 in absence of adex-friendly events and declining consumer sentiment. Media companies are on cost cutting mode s to help offset flattish/declining revenue. We expect media companies to embark on more content partnership, especially on the vernacular segment. The conversion to digital TV transmission in September 2019 will allow consumer to enjoy better audio and picture qualities. We maintain UNDERWEIGHT view on the sector given prolonged adex weakness while the growth in digital segment has been unable to offset this.

Muted adex in 2H19. In the absence of significant adex-boosting events in 2H19, we reckon that traditional adex will remain muted. However, we expect to see healthy growth for digital adex, mainly coming from mobile and video advertisings. High internet and smartphone penetration rates of 86% and 82% will continue to drive digital adex, which in turn will be a bane for traditional adex due to cannibalization as the former commands better flexibility and offer targeted advertising capability.

Curbing more cost. Acknowledging the sector headwinds, media companies have embarked on cost cutting measures which include VSS and cost optimisation. For example, (i) Astro bottom line grew 0.5% YoY on the back of lower broadband costs and marketing cost; (ii) Star also saw savings in direct cost by 14.8% YoY; and (iii) Media Prima’s direct cost was lower by 4% YoY thanks to lower content and marketing costs. These cost cutting strategies are crucial for media companies given their flattish/declining top line.

Pay-TV woes. Pay-TV subscription is expected to deteriorate further in view of threats from OTT players, rapid sale of Android boxes and smart TVs. The rapid sale of illegal Android box in the market is partly to blame for the decreasing customer base as it offers free content. It is estimated that this will result in RM1bn in national revenue loss and potentially up to RM150m in taxes being withheld from the Government

Heating OTT space. The domestic OTT space is ready to enter new phase as both Star and Astro have stepped up their games. Astro announced their tie up with IQIYI recently, a leading online video platform based in China with more than 87.4m active users monthly. While for Star, management is planning to form a strategic partnership for Dimsum, and this potentially includes telco player to expand its presence beyond the current market.

Working on content. Moving forward, we expect media companies to embark on more content partnership, especially on the vernacular segment. Vernacular content is a proven strategy to attract more viewership and subscriber base. In addition, the lower cost for vernacular content vs. Hollywood will be another factor for media companies to pursue this route.

Digital TV era. The era of analogue TV will come to an end in Sept 2019 pursuant to the commencement of full digital TV broadcast. Currently, 15 TV channels and six radio channels are already available on the myFreeview platform and more new broadcasters are expected to join the service in the near future. We believe myFreeview would provide competition to Astro’s Njoi, and we view this positively to Media Prima, fuelled by optimism on lower transmission fee and improved viewership.

Maintain UNDERWEIGHT. As the shift from traditional to online media remains a hurdle, digital contribution has yet to offset the falling traditional revenue, we prefer to remain cautious. Due to the lack of near term catalyst coupled with the rising industry competition, we maintain our UNDERWEIGHT stance on the sector. We maintain our calls and TPs for Astro (BUY; TP: RM1.67), Star (HOLD; TP RM0.68), and Media Prima (SELL; TP: RM0.34). At this juncture, we like Astro for its resilient ARPU thanks to its higher consumption from VOD and OTT platforms. Its attractive dividend yield at 7.6% is another plus point.

Source: Hong Leong Investment Bank Research - 8 Jul 2019