CY23 adex (+1.7% YoY) surpassed our expectation due to the higher-than-expected sequential (+21% QoQ) surge from digital media in 4QCY23 (YoY: +45%). This was largely propelled by youtube.com as its adex receipts surged 30% QoQ. However, CY23 total adex (excluding digital media) contracted 1.2% YoY - mainly due to the newspaper segment (-17% YoY). We expect subdued adex in CY24 given: (i) the lack of major catalyst events (except for Thomas Cup and Winter Olympics), and (ii) looming implementation of new taxes that will weigh on consumer spending (i.e. luxury taxes and higher SST). As such, we maintain our assumption of a 0.3% YoY contraction in CY24 adex. However, in-line with digital media’s dominance and growth trajectory, we expect CY24 total adex (ex-digital) to contract by a greater 1.8% YoY. Maintain UNDERWEIGHT on the sector.

Higher-than-expected boost from digital media.CY23 adex of RM6.56b (+1.7% YoY) came in above our assumption of full-year adex contraction of 0.5% YoY. The deviation was mainly driven by the digital segment as adex soared by 21% QoQto RM443m (YoY: +45%). This was largely propelled by youtube.com as adex on this website surged 30% QoQ. As a result, digital adex growth in CY23 jumped by 13.3% YoY (CY22: +25%), which surpassed our more moderate assumption of 5% growth. To a smaller extent, actual CY23 adex growth of 3.5% for FTA TV also exceeded our assumption (+2.2% YoY) as 4QCY23 figures rose 7% YoY (QoQ: +13%). This was mainly due to higher demand for advertising slots at NTV7 (+52% YoY), and to a lesser extent, TV2, Sukan RTM, and Awesome TV.

However, CY23 total adex (excluding digital media) contracted 1.2% YoY, mainly due to the newspaper segment (-17% YoY). To a smaller extent, weakness in CY23 adex (ex-digital) was exacerbated by the radio segment (-5% YoY). Evidently, except for FTA TV, adex in radio and other traditional media segments have yet to recover to pre-pandemic levels.

Digital adex reaches greater heights. In 4QCY23, advertisers ramped up adex (+14% QoQ) to clear product inventories and to capitalize on higher consumer spend during year-end festivities (Christmas and New Year). Encouragingly, we note that the improved 8% YoY adex expansion may allude to improved sentiment for businesses moving forward. Hence, this may ease the downtrend in MIER’s Business Conditions Index, which slumped to 79.7 points in 3QCY23. This translates to its lowest level since 2QCY20 during the onset of the pandemic. Unfortunately, we believe that the bulk of adex spend growth will be captured by new media such as: (i) streaming apps or websites (eg. Youtube, Spotify, Apple Music), (ii) mobile apps (e.g. Waze, Grab, CamScanner), and (iii) social media platforms (e.g. celebrity influencers, Instagram, TikTok, Facebook, X).

Evidently, over the past 3 years, digital media’s market share of total adex (excluding pay TV) has progressively inched up from 15.7% in 4QCY20 to 23.5% in 4QCY23. This was largely at the expense of newspapers which saw its share decline from 18.4% to 12.3% during this period. On a brighter note, FTA TV’s market share decline was relatively milder based on its 54.8% share in 4QCY23 (4QCY20: 57.1%).

Legacy high cost base is a drag. Traditional media faces a myriad of challenges, including: (i) structural shift of interest to new digital platforms, (ii) its competitors on international streaming platforms apply effective artificial intelligence (AI) technology that curates personalized content and commercials for users, and (iii) high fixed costs base compared to digital content creators. In terms of fixed expenses, at this juncture, digital content creators have a relatively low cost base. This is given their nature as new start-ups with a lean staff force and limited investments in production equipment (ie. studios, cameras, lighting equipment, audio recording devices). In contrast, established traditional media companies grapple with a bloated staff force, expansive corporate headquarters,and costly advanced production equipment. Given the low barriers of entry,new digital content creators have proliferated in huge numbers to collectively erode market share from traditional media. In addition, their low cost structure enables them to be more nimble in responding to rapid changes in market trends.

Expect soft adex ahead. Moving forward, for CY24, we expect adex to be relatively subdued given the lack of major catalyst events. For 2024, except for the biennial Thomas Cup tournament and Winter Olympics, there are no major upcoming local elections or global sports events (such as the likes of Summer Olympics, World Cup). In comparison, FY23 was boosted by state elections as well as SEA Games and Asian Games. Furthermore, this is exacerbated by the looming implementation of new taxes in CY24 that will weigh on consumer discretionary spending. They consist of: (i) luxury taxes (5%-10% on yet to be detailed goods valued above RM10k), and (ii) higher sales and service tax (SST) rates (8% from 6% on qualified transactions). Against this backdrop, we maintain our assumption of a slight 0.3% YoY contraction in CY24 total adex. However, in-line with digital media’s dominance and unrelenting growth trajectory, we expect CY24 total adex (ex digital) to contract by a greater 1.8% YoY.

Stormy seas ahead. We maintain our UNDERWEIGHT sector recommendation as we are wary of multiple headwinds for traditional media as highlighted above. On a brighter note, we expect seasonally stronger adex in 1QCY24 on the back of Chinse New Year festivities. Our sole OUTPERFORM recommendation for the sector is STAR given its: (i) proactive plans to future proof its earnings via a 5-year transformation journey, (ii) strong balance sheet with sizeable war chest, and (iii) traction in efforts to transition to digital media.

Source: Kenanga Research - 19 Jan 2024