1HCY23 adex (-2.4% YoY) was below our expectations due to higher-than-expected adex contraction for newspapers. Nevertheless, the YTD decline was moderated (1QCY23: -5.7% YoY) by sequential pick-up in 2QCY23. We believe this was due to ad-friendly events such as: (i) UEFA Champions League and NBA finals, and (ii) Hari Raya Aidilfitri. Nevertheless, the YoY weakness in 1HCY23 adex reflects lingering weakness in consumer sentiment. In particular, lower adex was mainly attributed to the newspapers segment. On the bright side, higher adex for the cinema and digital segments partially cushioned the decline. In the near term, we expect subdued adex spend as macro-economic headwinds persist. As such, we calibrate our CY23 adex assumptions to 2.2% contraction (from 1.5% growth). Maintain NEUTRAL on the sector.

QoQ expansion moderated YTD decline. 1HCY23 adex of RM3.1b (-2.4% YoY) came in below our full-year adex growth assumption of 1.5% YoY. The disappointment was mainly due to higher-than-expected adex contraction at the newspapers segment. Nevertheless, YTD decline was moderated (1QCY23: -5.7% YoY) by sequential pick-up (+4.3% QoQ) across the board (except for cinema) in 2QCY23. We believe this was largely attributed to ad-friendly events in 2QCY23 such as: (i) final matches for UEFA Champions League and NBA, and (ii) Hari Raya Aidilfitri festivities. In comparison, there were no major sporting tournaments in 1QCY23, although Chinese New Year festivities provided a slight boost.

Sustained YoY weakness due to poor sentiment. The YoY contraction in 1HCY23 adex reflects lingering weakness in consumer sentiment. This is on the back of heightened inflation and a weak USD/MYR that erodes purchasing power. In particular, lower adex was mainly attributed to the newspapers segment (-17% YoY) that fell short of our full year assumption of a 1% contraction. This was following steep declines at Harian Metro (-42% YoY), New Straits Times (-20% YoY) and Star (-11% YoY). Additionally, to a smaller extent, 1HCY23 decline was exacerbated by contractions in the TV (-0.5%) and radio (-2%) segments - which also fell short of our CY23 growth assumption of 0.6% and 2%, respectively. This is consistent with current industry trends where advertisers sideline traditional media in favour of digital channels. Moreover, we believe FTA TV faces intense competition from OTT streaming services such as Netflix and Disney Hotstar.

On the bright side, higher 1HCY23 adex spend in the cinema (+23%) and digital (+2%) segments partially cushioned the YTD decline. Whilst actual adex for cinema exceeded our CY23 assumption of 2% growth, the converse is true for the digital segment that lagged our expectation of 6% growth. Nevertheless, the digital segment continued its market share expansion by snagging 21.5% share (1HCY22: 20.6%) at the expense of newspapers. On the back of this, the market share of newspapers has now shrunk to 13.7% in 1HCY23 versus 16.1% a year ago. This translates to almost half of its market share of 26.6% back in 1QCY20. We attribute this to advertisers’ concerns that newspaper circulation has dwindled following price increases. Recall that market leader, The Star, raised prices of its physical copies by 50% in April 2023. However, prices for Star’s digital newspaper remain status quo.

Adex outlook remains gloomy. Moving forward, we expect 3QCY23 adex to be seasonally softer due to the lack of major festivities and sports events. Moreover, advertisers will likely hold back as they gear up for the year-end holiday season. On the back of this, we calibrate our CY23 adex assumptions to 2.2% contraction (from 1.5% growth) believing that advertisers will remain cautious on marketing spend. This is given the lingering risk of recession due to a sluggish Chinese economy and stubbornly high US inflation. Furthermore, consumer spending has now normalized following revenge spending in CY21 caused by pent-up demand during the pandemic.

Maintain Neutral due to economic headwinds. In the immediate to medium term, we expect adex spend to remain subdued as macroeconomic headwinds persist. This is underpinned by: (i) sustained weak economic data from China, and (ii) the US Federal Reserve alluded two more interest rate hikes for the remainder of this year. Meanwhile, closer to home, sentiment and discretionary spending is dragged by the government’s ongoing subsidy rationalization measures and planned implementation of targeted fuel subsidies. Nevertheless, the silver lining lies in the digital segment’s robust growth trajectory. Hence, media players may leverage on this by accelerating efforts to digitalize their content.

Our sole OUTPERFORM call in the sector is STAR (OP; TP: RM0.555) given: (i) proactive plans to future proof its earnings via a 5-year transformation journey, (ii) strong balance sheet with valuable landbank for potential development, and (iii) traction in efforts to transition to digital media. Moreover, we believe the emergence of Tan Sri Tong Kooi Ong as a substantial shareholder will contribute significantly to the following catalysts: (i) enhanced corporate governance and best practices by management, and (ii) deployment of STAR’s sizeable war chest for accretive M&As, divestitures or ventures.

Source: Kenanga Research - 20 Jul 2023