We view that the local advertising space is undergoing a consolidation phase where advertisers are no longer relying on either digital or traditional media but will adopt an omni-channel approach to widen their reach as well as to mitigate regulatory and policy change risks. Furthermore, the gap in the ROI on ad spend between Facebook and Google vs traditional media is also narrowing which should drive more ad spend back to the traditional medias. We maintain OVERWEIGHT on the sector premised on the brightening outlook and the undemanding sector valuation.

Double whammy for Facebook. Share price of Facebook’s parent Meta plummeted more than 26% on 3 Feb 2022, a day after it announced its quarterly earnings. Among reasons for the decline were (i) Facebook witnessed its daily active users plateauing, the first stagnation in the company’s history due to stiff competition from other social media, particularly TikTok; and (ii) Apple’s privacy changes that require users to opt in to tracking for advertising purposes which led to less effective ad targeting. Facebook estimated that Apple’s privacy change could result in USD10bn lost sales in FY22 (c.8.5% of its FY21 sales). Based on these two factors, advertisers may find Facebook to be a less attractive platform to advertise due to the lower ad reach and higher cost arising from less effective ad targeting.

Privacy concerns impacting online ad targeting. Rampant data breaches and cyber-attacks that could compromise data of hundreds of millions of people at a time led to consumers’ lost in trust in the companies they once freely shared their personal data with. Apple’s privacy change in April 2021 as highlighted above was a response to the increasing demand for user privacy. Following the update, 62% of Apple users chose to opt-out of the tracking. While this privacy change has a large adverse impact on Facebook as its advertising is largely powered by targeted advertising, the privacy change impacted Google to a lesser extent. ‘Google Search’ (which made up c.57% of Google’s parent Alphabet’s total revenue) will not be impacted by this change as these ads do not rely on tracking a user’s online behaviour but are instead intent based, i.e. based on what the users search on the search engine. YouTube and Google Display Network on the other hand, which represent c.24% of Alphabet’s total revenue, will be impacted by this change.

Google phasing out third party cookies by 2023. Similar to Apple, Google is also responding to the increasing demand for user privacy by announcing that they will be phasing out third party cookies by 2023. Third party cookies allow advertisers to collect data on users’ online behaviours, including websites they often visit, purchases, and interests which help advertisers to create targeted ads to be served to their intended audience. Google is currently developing FLoC (Federal Learning of Cohorts), a solution to replace third party cookies which will hide individuals within large crowds of people with common interests to perform targeting and remarketing. While we still do not know how effective FLoC is as an alternative to third party cookies, tracking and remarketing in the way that we know it will cease to exist. As a result of the privacy concerns and policy change headwinds, advertisers whom previously were too reliant on targeted ads will now have to adapt and pivot their marketing strategies to consider alternative advertising solutions.

Nielsen 2021 adex. On the local front, based on Nielsen report (see Figure #1), total industry adex for 2021 was RM5.93bn (+18.4% YoY). If digital contribution was excluded, traditional media adex for 2021 was RM 4.9bn (+20.3% YoY). Newspaper (-15.4% YoY), magazines (-12.3% YoY) and cinema (-46.4% YoY) were understandably lower in 2021 as they were impacted by the longer period of lockdown in 2021. More notably, however, was that FTA TV (+38.5% YoY), radio (+10.2% YoY) and in-store media (+28.8% YoY) witnessed increase in adex, which could be early signs that local advertisers are returning to traditional media in advertising.

Disruption in the media space. The initial presences of Facebook and Google had disrupted the local advertising and media landscape as they took up an estimated 80% of digital adex in Malaysia which cannibalized some of the traditional medias’ shares. Advertisers preferred Google and Facebook due to low cost (an ad can be run at <RM10), ease of setting up an ad, targeted audience reach and superior customer analytics.

Levelling the playing field. Nonetheless, we believe that the gap in the ROI from ad spend on Facebook and Google vs traditional media is narrowing. The gap started to narrow when Malaysia introduced a 6% digital tax on foreign digital service providers since 1 Jan 2020. The digital tax would raise the cost of advertising on Facebook and Google by 6%. Furthermore as highlighted above, the potentially declining user base on Facebook and less effective ad targeting as a result of Apple privacy change are also factors that make Facebook a less attractive platform to advertise. The impending phasing out of third party cookies by Google and other potential policy change risks arising from increasing demand for better user privacy are headwinds to advertising platforms that utilize user data for ad targeting, including Facebook, YouTube and Google Display Network. As a result, advertisers are also pivoting and looking for alternative advertising solutions. On the other side of the equation, local media players are also improving the ROI for adex on their platforms. For example, Media Prima integrated all its media assets under one channel to offer advertisers an advertising solution that has a wider reach across its different media assets to targeted audience at a lower cost. Astro, on the other hand, launched addressable advertising in Dec 2021 that serves more targeted ads according to its customers’ profiles for video on demand on Astro GO, Ultra and Ulti boxes. In CY22, addressable advertising will be rolled out on linear TV, which enables Astro to air different advertisements to different household segments during the same time slot, providing more targeted reach to advertisers.

Local media space undergoing a consolidation phase. When social media was introduced, the rise of popularity for social media influencers threatened the career of traditional celebrities. Nonetheless, we have witnessed a consolidation phase where traditional celebrities started utilizing social media to engage with fans, while social media influencers also crossover to appear on TV screens and other traditional media channels, thus, effectively blurring the lines that distinguished influencers and celebrities. Similarly, when e-commerce was introduced, it was envisioned that e commerce would disrupt and bring about the demise of physical retail stores. In fact, what we have witnessed was that physical retail stores are increasing their online presence while e-commerce stores are also starting to venture into physical stores (see our report on the topic). We believe that the local media landscape is also similarly undergoing a consolidation phase as traditional and digital media are finding its balance to co-exist. Advertisers would find value in advertising across both channels to capitalize on the different demographic and reach offered by the platforms.

We reiterate our OVERWEIGHT rating on the sector premised on the improving outlook as well as the undemanding valuations for the sector. As noted in this report, advertisers are increasingly adopting an omni-channel approach, this will benefit the local media players. With inflationary pressure on raw material cost compressing the operating margin of sectors such as consumer and manufacturing, investors who look for inflation-resistant havens could find the media sector (especially Astro and Media Prima) to be appealing as their cost base (c ontent cost) are largely unaffected by inflationary pressure. Furthermore, the net cash positions of Media Prima and Star and the generous dividend yield from Astro also provide a decent buffer to the downside of share prices. Additionally, the sector has a relatively low ESG risk due to its low exposure to material ESG issues. As leading indicators such as the improving consumer and business sentiments, projected economic growth for Malaysia (HLIB estimate: +5.5% YoY for 2022) are pointing towards a brighter adex outlook, we believe investors should take this opportunity to nibble in the sector while valuations are still undemanding.

Source: Hong Leong Investment Bank Research - 15 Feb 2022