We reiterated our UNDERWEIGHT call on the media sector in view of the on-going subsidy rationalization plan which will continue to weigh on consumer sentiment, although the current FIFA World Cup and Visit Malaysia Year could somehow provide some cheers and help to cushion the negative impact. Despite the YTD-May gross adex recording a strong growth of +13.6% YoY (or +7.7% after stripping-off the Pay-TV segment), we believe the growth rate was somehow exaggerated due to different gross adex computation, especially in the Newspaper segment. Meanwhile, the upcoming DTTB rollout is not expected to pose an immediate threat to MEDIA’s TV segment given that the latter is currently sitting on massive local contents which management believes will be the key to success in the local FTA TV playing field. We leave our CY14 total gross adex growth forecast unchanged at 6.8% YoY (or 2.9% after stripping off the Pay-TV segment contribution). We reiterate our MARKET PERFORM calls on Media Chinese Intl’ (MEDIAC, TP: RM0.92) while keeping our UNDERPERFORM ratings on Star Publications (STAR, TP: RM2.37) and ASTRO (TP: RM3.10). We have raised our Media Prima (MEDIA) target price to RM2.75 (from RM2.68 previously) after rolling-over the valuation base year to FY15 with a targeted PER of 15x, with an unchanged MARKET PERFORM rating.

May’s gross adex advanced by 10.0% MoM (vs. 2.3% MoM in April) to RM1.2b and 13.6% YoY on YTD basis. The higher growth in May’s gross adex on a MoM basis was not a surprise after the lower base effect in the prior month that was mainly dented by the spill-over effect of MH 370 tragedy. The better gross adex growth in May was mainly led by higher contribution from all media types, except the Magazine segment which was lower marginally by 1.0% to RM10.7m. Noteworthy, the newspaper segment, which was the worst-hit segment by the MH 370 tragedy (-8.7% MoM in April), managed to resume its upward trend and grew by 8.0% MoM. On YTD-May basis, the total gross adex climbed by 13.6% YoY to RM5.4b, thanks to the continuous strong Pay-TV (25.0%), Newspaper (9.3%) and FTA (6.8%) segments. Stripping off the Pay-TV segment contribution, the YTD-May gross adex merely improved by 7.7% YoY. Moving forward, we believe the gross Adex growth, especially the TV segment, may experience some uplifts in June and July, thanks to FIFA World Cup event.

The DTTB rollout is not expected to pose an immediate threat to MEDIA’s TV segment. While more FTA players may emerge following the rollout of the Digital Terrestrial TV Broadcasting (DTTB) project, MEDIA believes that rich local contents are still the key to success in the local FTA TV segment playing field. With 75k hours local contents stored in its library, the group intend to become the most preferred content provider going forward. MEDIA has already spent approximately RM70m since June 2010 to convert all its TV stations to be digital ready. As for the transmission cost front, management indicated that additional costs would only be incurred when there is a new station/new coverage being introduced from its platforms.

Newsprint price is expected to remain firm. Newsprint price, the biggest cost component for print media, has been hovering at the USD580-USD620/MT range since the beginning of the year. Going forward, all the print players are expecting newsprint prices to maintain at the current level in view of the steady global demand supply balance which inhibits further increases. Meanwhile, the discussion of newsprint anti-dumping policy (from Canada, Indonesia, South Korea, the Philippines and the U.S.) between the authorities has yet to be concluded. Should there be any reduction or termination of the abovementioned anti-dumping policy, some downward pressures to the domestic newsprint price benefiting the incumbents can be expected.

Muted view on the sector remains unchanged. Although we believe the FIFA World Cup, and Visit Malaysia 2014 may provide some positive lift to consumer sentiment, these feel-good factors could potentially be offset by: (i) the escalating cost of living (spurred mainly by the on-going subsidies' rationalisation plan) and (ii) potential slower property projects launches, and hence lower ads spend as a result of various stringent lending policies. As a result, overall tepid consumer sentiment will cause the business sector to tighten the adex purse.

1QCY14 results snapshot. The sector incumbents' 1QCY14 results were generally below expectation, except Media Prima (MEDIA, MP, TP: RM2.68), which result was mainly supported by its TV segment albeit lower performance from its Print segment. Similar to MEDIA's print segment, both STAR (UP, TP: RM2.37) as well as Media Chinese (MEDIAC, MP, TP: RM0.92) recorded lower-than-expected 1Q14 results, no thanks to the lower advertising revenue; higher operating cost as well as seasonality factor. The on-going government subsidies rationalisation plan coupled with the MH370 incident that occurred early of March have generally dented the country's overall adex sentiment in 1QCY14, especially to the print segment. Astro, on the other hand, saw its 1Q15 result coming below expectation due mainly to its higher-than-expected depreciation costs in its set-top-box and amortisation of software.

Updates on DTTB. Recent media reports quoted that MyTV Broadcasting, a special-purpose vehicle set up by Puncak Semangat (which is a wholly-owned company of the Al Bukhary Group that controlled by Tan Sri Syed Mokhtar), is planning to spend RM2b over the next 15-year concession period to develop and operate digital terrestrial television (DTTB) services. We understand that MyTV Broadcasting will not be responsible for any content generation but will offer five pillars of service, with the first two being TV and radio to be accessible via DTT broadcast. The remaining three pillars are connected services, tcommerce and soft services, which will be accessible via broadband or 4G LTE.

The group targets to roll out the service starting January 2015 with an aim to complete Phase 1 within two years to benefit some six million households in the country. Key focus areas under the Phase 1 will be on Kelantan, Terengganu, and Pahang, according to news reported. Meanwhile, Sabah and Sarawak will be the limelight under the Phase 2 of DTTB project, these followed by Phase 3 in Perlis, Kedah, Penang, Negeri Sembilan, Malacca and Johor while the final phase will be implemented in Selangor, Klang valley, Putrajaya and remaining parts of the country. To kick-start the project, we understand that MyTV plans to subsidise two million set-top boxes to eligible recipients. Viewers of FTA TV will be able to enjoy digital watching experience under the DTTB project. As for the operators, they would be able to offer value-added services such as real-time programme listing and etc. To further strengthen its market share in the TV segment, we understand that MEDIA has initiated discussions with other FTA players to imitate Australia’s Freeview campaign to expedite digital rollout and promote FTA broadcasters as one brand. All in all, MEDIA foresees there is no immediate threat from the DTTB project. Note that, Freeview is the brand given to the Digital terrestrial television platform in Australia. It is intended to bring all the FTA broadcasters on the consistent marketing platform to compete against subscription television and coincides with the expansion to 3 digital channels for each FTA network.

DTTB in brief. According to the Wikipedia, digital TV (DTV) is the transmission of audio and video by digitally processed and multiplexed signal, in contrast to the totally analogue and channel separated signals used by analogue television. In analogue, channel uses a dedicated frequency to broadcast given the large amount of required bandwidth for analogue signal. The signal, however, will be compressed under the digital and thus allowing more channels to be broadcast in the same bandwidth as one current analogue channel.

What are the benefits for TV viewers? DTT is generally capable to offer viewers more than 6x-8x terrestrial television channels than the current system. Meanwhile, the digital format could also able to enhance the video as well as sound quality of broadcast programs thus providing viewers access to other value-added services as well as interactive applications (i.e. real-time voting for reality shows and etc.). On top of that, DTT also provides portability and mobility functions for viewers. For instance, while a station is broadcasting in analogue on channel 10 is only able to offer one program, a station broadcasting in digital on channel 10 could offer viewers one digital program on channel 10-1, a second digital program on channel 10-2, a third digital program on channel 10-3, and so on. The additional channels that are being created under the digital can be used to provide interactive video and data services that are impossible with the current analogue technology.

Newspaper incumbents offer a higher discount rate to spur advertising revenue. The discount rate between Nielsen Media Research’s (NMR) gross advertising revenue and the actual net advertising revenue received by the newspaper incumbents appear widening since 1QCY13. Based on our observation, STAR’s newspaper discount rate has climbed ahead of the industry to 47.4% in 1QCY14 as compared to 28.1% a year ago, suggested that the group has adopted an aggressive advertising strategy to lure advertisers. NSTP’s discounted rate, meanwhile, increased to 76.3% in 1QCY14 from 64.7% in the same period last year while MEDIAC’s discount rate has experienced the least growth among its peers (1QCY14: 29.4% vs 1QCY13: 27.4%). Despite the strong jump in the discount rate (MNR’s gross adex vs. actual net adex revenue), we understand that the actual discount rate of the newspaper incumbents may not be so extensive due to the different adex revenue computation. Note that, Nielsen Media Research is using advertisement rate cards to compute the gross adex revenue for each player while newspaper incumbents are using the actual advertisement sales. All in all, despite the discount rate computed by NMR’s gross adex appears somehow exaggerated, we believe the number still indicate a meaningful path in terms of market direction moving forward.

Higher gross adex growth may not translate into higher net revenue. In view of the different gross adex computation, the correlation between NMR’s gross adex and the net advertising revenue recorded by the industry incumbents appear less compelling. Based on our observation, STAR for instance (figure 1), its 4QCY13 gross adex has advanced 6.3% QoQ (based on NMR’s computation) but its net advertising revenue has merely grown 2.4% QoQ. Similarly, the group’s gross adex recorded -14.7% QoQ in 1QCY14 but its net advertising revenue slumped more to -16.3% QoQ.

Newsprint price is expected to remain firm. Newsprint price, the biggest cost component for print media, has been hovering at the USD580-USD620/MT range since the beginning of the year. Going forward, all the print players are expecting newsprint prices to maintain at the current level in view of the steady global demand supply balance which inhibits further increases. Meanwhile for the newsprint inventory, STAR continued to hold the highest newsprint inventory with c.11 months of supply (vs. >12 months in 4Q13) at an average price of c. USD610/MT. Meanwhile, MEDIAC’s newsprint inventory remained unchanged at 6 months with an estimated average cost of below c.USD650/MT. On the other hand, MEDIA’s newsprint inventory is now higher at 5-6 moths (vs. 3-5 months in 4Q13) with an unchanged average price of c.USD600/MT.

RISI, the leading provider of information for the global pulp and paper industry, is expecting the newsprint price to stay firm in 3QCY14 as no major shifts in capacity was announced. The research house, however, expects newsprint prices in Asia to have a small increase in the 4Q, with further sporadic gains in 2015, mainly driven by an improving economic picture. Overall, RISI expects the 45gsm newsprint prices in Hong Kong to record an average USD584/MT in 2014 and USD609/MT in 2015.

Source: Kenanga