Media news recently highlighted that Media Chinese Intl’ (MEDIAC) is poised to undergo drastic structural changes. The yet-to-be finalised plan aims to cut costs by repositioning its Chinese dailies to address falling revenue due to the shrinking print advertising market, according to the news. While management is reluctant to comment on the news at this juncture, we believe, the plan, if materialised, could be a double edged sword; neutral-to-negative over the short-term but positive over the long-term. There is no change to our FY15-FY16 earnings forecasts for now, pending management’s further clarification. We reiterate our MEDIAC’s target price at RM0.68, based on targeted FY15E PER of 7.7x, representing a -1.0 std. deviation below its 5-year mean, due to the sluggish adex outlook. Its stock rating, however, is raised to MARKET PERFORM (from UNDERPERFORM previously) in view of the limited downside from here.

A drastic consolidation plan in the making? Media news recently highlighted that MEDIAC is poised to undergo a major consolidation on its four publications – Sin Chew Daily, China Press, Guang Ming Daily and Nanyang Siang Pau (Nanyang) to address falling revenue as a result of the shrinking print advertising market. According to the press, instead of having four national daily newspapers, MEDIAC is likely to transform China Press into an evening paper; Nanyang into a full-blown thrice-weekly financial newspaper; and Guang Ming into the regional newspaper with focus on the northern region market. Its flagship newspaper, Sin Chew, will continue to remains as the main national daily while its evening editions will cease publication in five states (Perak, Malacca, Pahang, Kelantan & Terengganu) together with Guang Ming early this year.

Circulations remain weak. The latest Jan-Jun 2014 newspaper circulation statistic published by ABC (Audit Bureau of Circulations Malaysia) highlighted that MEDIAC’s newspaper circulations in West Malaysia still remain feeble since June-13, where its average aggregate (China Press, Sin Chew & Guang Ming) daily net circulations slid 4.4% YoY to 623,399 copies/publishing day. Its aggregate night editions, meanwhile, also slipped 13.8% YoY (to 93,367 copies/publishing day) over the same period. We believe, the drop, to a certain extent, was mainly caused by some contents' disparity since the last general election which dampened circulation. Note that, its Malaysian operation contributed c.56% to the group’s total turnover in 1HFY15, of which the circulation revenue accounted for c.38% (for Malaysia operations).

A double-edged sword impact. While the management is reluctant to comment on the above-mentioned news (given that discussion has yet to be finalised), we reckon that it could be a double-edged sword to MEDIAC, if materialised; neutral-to-negative in the short-term but likely to benefit over the long-run. The repositioning of its daily newspapers will no doubt lower its circulation revenue (by c.RM23m or 8% of the total circulation revenue in Malaysia, based on 1H14 annualised circulation numbers); it could, however, provide some savings operationally (i.e. newsprint, administrative expenses, selling & distribution expenses). Its adex revenue, meanwhile, is expected to benefit over the long-term due to lesser competition among the group’s newspaper. Labour-cost-wise, we understand that management does not have an intention to launch any retrenchment scheme thus far, and expects to reallocate excess resources to its newly launched e-commerce division (Logon) or transfer them to other subsidiaries that are controlled by its major shareholder.

January-15 adex remains slow. Management indicated that it has yet to see any meaningful surge in adex spending thus far despite the GST implementation date is just around the corner. We are not overly surprise due to the seasonal factor (given that advertisers tend to conserve their A&P budget in the first two months of a new year to renegotiate new advert rates) as well as the ‘last minute’ attitude adopted by Malaysia's public in general. Moving forward, we concur with the management’s view that the country’s adex may likely pick up within the next two months, especially from durable and luxury items, but expect to remain challenging thereafter due to higher cost of living. We expect the total gross adex annual growth rate to record 5.1% YoY in CY15 vs. 6.8% a year ago.

Source: Kenanga