We maintain our UNDERWEIGHT recommendation on the media sector due to: (i) sustained adex market share erosion for traditional media, (ii) prevailing cord cutting trends, and (iii) generative AI will likely widen digital media’s competitive edge. Furthermore, we are concerned that consumer sentiment and discretionary spending will be weighed by the looming luxury taxes and higher sales and service tax rate of 8% (from 6%). We do not have any stock picks for the sector.

Sluggish adex after a solid CY23. We maintain our CY24 adex forecast of 0.3% contraction (CY23: 1.7% growth) as we expect consumer discretionary spending will be weighed by implementation of new taxes in CY24. They consist of: (i) luxury taxes (5%-10% on certain goods valued above RM10k), and (ii) higher sales and service tax (SST) rate of 8% (from 6%) on qualified transactions. However, in line with digital media’s dominance and growth traction, we expect CY24 total adex (ex digital) to contract by a greater 1.8% YoY and digital adex to grow by 5% YoY.

Sentiment remains stubbornly weak. On the bright side, there are emerging signs that signal the potential recovery of sentiment in the medium term. This is evident from the recovery in the Malaysian Institute of Economic Research’s (MIER) Business Conditions Index (BCI) to 89 points in 4QCY23. This translates to a sequential rebound of 9.3 points, after its descent to 79.7 points in 3QCY23, which signified its lowest level since 2QCY20, during the pandemic’s onset. Although the BCI remains below the 100-point optimism threshold, there is a possibility that it may have reached its inflexion point in 4QCY23. According to MIER, in 4QCY23, companies expressed confidence in their outlook for the next three months, particularly in the beverage and textile sectors. Meanwhile, according to the Department of Statistics Malaysia (DoSM), Malaysia’s inflation rate remained stable at 1.5% in December 2023 (CY23: 2.5%). Hence, this corroborates with the possibility that consumer sentiment may potentially be on the cusp of recovery, especially if there is muted impact from higher SST and luxury taxes.

Digital media’s market gains will likely prevail. We believe it is unlikely that traditional media (i.e. TV, radio and newspapers) will be able to recover adex share lost to digital media. This is due to the structural trend where interest is shifting into: (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 three years, digital media’s adex share has progressively inched up from 15.7% in 4QCY20 to 23.5% in 4QCY23. Whilst this had led to topline weakness for traditional media players, the corresponding reduction to their fixed cost base has been relatively lower. As such, the lag in cost adjustment has resulted in a steeper decline to bottomline.

Generative AI revolution is on digital media’s side. Moreover, digital media continues to improve and evolve rapidly given the current revolution in generative artificial intelligence (AI) technology. As such, the economic moat between digital and traditional media continues to widen due to: (i) proliferation of digital content creators given low barriers of entry, (ii) structural shift in interest to short video formats and livestream sales on digital platforms, and (iii) application of AI in digital media that curates personalized content and commercials. Therefore, for local media companies, their market niche will likely be limited to audiences that seek high quality local vernacular content.

Underweight as digital continues to dominate. We maintain our UNDERWEIGHT recommendation on the sector as we believe that the outlook for traditional media appears dire, unless they are able to swiftly reinvent themselves or slash costs to the point that they are comfortably profitable in spite of a revenue contraction. We do not have any stock picks for the sector.

Source: Kenanga Research - 1 Apr 2024