1QCY23 adex fell 5.7% YoY, marking a slow start to CY23. While the downtick was partially attributable to the strong 1QCY22 base effect, the sector was also hit by an early Chinese New Year which brought forward advertising campaigns to 4QCY22. The traditional/non-digital segment saw a 7.2% YoY decrease in adex, while digital adex though remained flat YoY unexpectedly grew 1% QoQ, bucking the usual seasonal downtick. Overall, we reduce our CY23 adex growth forecast to 1.5% from 2.8%, following the softer-than-expected 1QCY23. As we continue to expect CY23 to be challenging given the lack of catalysts, and further dampened by macroeconomic headwinds, we reiterate our NEUTRAL rating on the sector.

1QCY23 adex below expectations. 1QCY23 adex came in below our expectation, falling 5.7% YoY. The sector saw a larger than-expected drop in traditional media channels which contracted by 7.2%. Looking to the major non-digital channels by segments, free-to-air (FTA) TV, radio, and newspaper adex fell by 4.6%, 12.2% and 16.2%, respectively. Historically, 1Q adex is the weakest period of the year in terms of adex as companies recoup some of the heightened adspend incurred during the holiday season, with 1QCY22 being the sole exception. We believe the combination of easing pandemic restrictions and optimism surrounding the reopening of the economy resulted in a stronger-than-usual 1QCY22. Additionally, due to the much earlier Chinese New Year in 1QCY23, advertisers could have brought forward seasonal advertising campaigns to 4QCY22, resulting in even lower adex in 1QCY23. Nonetheless, the sluggish 1QCY23 traditional media adex marked a slow start to what we already expected to be a quiet year for the sector.

Digital segment remained flat. Digital adex remained relatively flat YoY. While the segment had historically seen resilient growth since its inclusion in the Nielsen’s adex reports, the segment only saw a minor increase in overall adex. We believe this is also partially due to the above-stated reasons which affected the entire sector. However, looking to the previous quarter, the digital segment may have entered a minor slump. Despite seasonality normally resulting in a QoQ drop across the board for adex, 1QCY23 digital adex actually grew QoQ by 1% but this followed a sharp YoY drop in digital adex during 4QCY22, the first decline the segment had suffered since its inclusion. We believe the renewed interest in the traditional segments as well as the softer economic outlook could result in digital growth normalising significantly. While we already expected digital to grow at a lower rate this year, 1QCY23 adex could indicate that the segment may see even softer growth than initially expected.

QoQ. Total adex fell by 15.7%, largely due to the seasonal factor following the end of the holiday season. FTA TV segment contracted 15.2% QoQ, broadly in-line with the drop seen during previous years. Radio and newspaper segments saw larger contractions with adex falling 28.9% and 28.1%, respectively. While this was also broadly in-line with historical performance, we believe the seasonal decline was skewed higher due to the early Chinese New Year as mentioned above. Digital segment was the only segment that did not contract QoQ, growing marginally and offsetting some of the contractions in the other segments.

1QCY23 market share breakdown. Digital clawed back some of the market share it lost during 4QCY22, gaining 3 ppts and growing to 21% of overall adex. Radio (6%) and newspaper (14%) both lost market share falling by 2 ppts and 1 ppt, respectively, following the drop in adex. FTA TV managed to capture some market share, growing marginally by 1 ppt to 56% of overall adex.

Lowering forecasts. We reduce our growth forecast for newspaper segment, projecting a minor contraction of 1% (vs. 1% growth previously). Similarly, we cut our digital segment growth forecast to 6% YoY compared to 10% previously. While we had expected adex to pick up seasonally, 1QCY23 was surprisingly slow start to the year. While this could be due to an unusually strong base in 1QCY22, nevertheless, we tempered our CY23 forecasts to reflect a more conservative outlook. Overall, we reduce our full-year adex growth estimate to 1.5% from 2.8% previously.

CY23 outlook. We continue to expect CY23 to be muted in terms of adex given a softer global economic outlook and the lack of major events (i.e. Olympics, World Cup). If 1QCY23 is any indication of things to come, the outlook for media players continues to be muted given the lack of major catalysts, and dampened further by market-wide headwinds. Nonetheless, we continue to see cost pressures easing throughout the year which is a minor bright spot.

We maintain NEUTRAL on the sector. Our sole sector pick is MEDIA (OP; TP: RM0.57) given its: (i) integrated approach to advertising which we believe offers better demographic targeting and scalability, (ii) strong cost optimisation following the consolidation of its advertising divisions into Omnia, and (iii) leading position in the FTA TV space in which it commands the largest market share. However, we remain wary as the group continues to struggle to address its loss-making segments.

Source: Kenanga Research - 19 Apr 2023