PP16832/01/2013 (031128) Malaysia Initiating Coverage 27 November 2012 Buy (new) Astro Malaysia Holdings To Infinity and B.yond Share price: MYR2.68 Target price: MYR3.70 (new) Initiate coverage with a BUY call and MYR3.70 TP. Astro Malaysia Holdings (Astro) is Malaysia’s largest Pay TV operator. We like Astro because (i) it is a proxy to Malaysian income and population growth (ii) Yin Shao Yang its HD take up rate and ARPU growth potential provides for stronger [email protected] earnings growth and (iii) its business is recession resistant. Our TP of (603) 2297 8916 MYR3.70 is based on end-FY14 DCF valuation methodology. With 38% upside potential, Astro is a BUY. Making a come back. Astro is Malaysia’s largest Pay TV operator with 3.2m residential subscribers and commands 99% market share. Astro houses Astro All Asia Networks’ (AAAN) local businesses but not its loss-making international businesses. AAAN had struggled to keep ARPU >MYR80 and churn <10%. The Astro of today’s 1HFY13 ARPU stood at MYR92 and its FY12 churn of 6.6% is the lowest in 11 years. Malaysia says, “I’ve got time! I’ve got time... and money!” Average household income is on the rise and rising fastest is that of the Malay household, who watch the most TV at 4.1 hours a day. With higher income comes subscriber and ARPU growth. To boot, Malaysia’s Pay Stock Information TV penetration rate of 50% is still below regional standards. As incomes Description: Pay TV and radio operator. Largest Pay TV grow, we believe that Pay TV penetration can only rise. operator in Malaysia and South East Asia. The future is in HD. We studied four other Pay TV operators and Ticker: ASTRO MK observed that all of them recorded higher ARPUs with higher HD take Shares Issued (m): 5,198.3 Market Cap (MYR m): 13,931.4 up rates. In less than three years since launch, Astro’s HD take up rate 3-mth Avg Daily Turnover (USD m): 30.77 is already 34% or higher than the four Pay TV operators’ take up rates KLCI: 1,607.88 Free float (%): 28.9 in their full third year! As a result, Astro’s ARPU grew from MYR82 in FY10 to MYR92 in 1HFY13; we believe that it will continue growing. Major Shareholders: % Astro Networks (Malaysia) 70.8 Good things come to those who wait. We estimate that Astro’s FY13 net profit will fall 30% YoY due to marketing and installation expenses incurred by migrating all its subscribers to Astro B.yond STBs by end- FY14, before rebounding to MYR675m by FY15. That said, we estimate Historical Chart that revenue and EBITDA will grow by a healthy 11% and 13% 3-year 3.1 ASTRO MK Equity CAGR on steady subscriber and ARPU growth. An alternative 3.0 EV/EBITDA valuation methodology based on 12x FY14 multiple returns 2.9 an equity value of MYR3.35/sh. 2.8 Source: Maybank KE 2.7 Astro Malaysia Holdings – Summary Earnings Table FYE Jan (MYR m) 2011A 2012A 2013F 2014F 2015F 2.6 Revenue 3,664.1 3,888.8 4,274.7 4,748.7 5,259.6 2.5 EBITDA 1,369.8 1,414.7 1,367.9 1,599.1 2,036.2 Recurring Net Profit 823.5 624.1 439.6 505.4 675.0 2.4 Recurring Basic EPS (cents) 15.8 12.0 8.4 9.7 12.9 Oct-12 Oct-12 Nov-12 Nov-12 Nov-12 EPS growth (%) 34.1 (24.2) (29.6) 15.0 33.6 DPS (cents) - - 6.3 7.3 9.7 PER 17.0 22.4 31.8 27.7 20.7 Performance: EV/EBITDA (x) 10.3 12.1 11.6 9.8 7.8 52-week High/Low MYR3.11/MYR2.59 Div Yield (%) - - 2.4 2.7 3.6 P/BV(x) 12.1 28.8 30.6 23.9 18.6 1-mth 3-mth 6-mth 1-yr YTD Net Gearing (%) 14.4 669.2 429.8 295.3 259.5 Absolute (%) (6.3) na na na na ROE (%) 84.0 76.4 93.7 97.4 101.3 ROA (%) 27.1 12.8 6.6 7.2 8.6 Relative (%) (2.5) na na na na Consensus Net Profit (MYR m) N/A N/A 509.1 556.4 635.1 SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Astro Malaysia Holdings Contents Page Making a come back 3 Malaysia’s media industry dynamics – Television 7 – Radio 10 KEY INVESTMENT MERITS Merit 1: Malaysia has got time and money for Astro 11 Merit 2: Plenty of headroom for subscriber growth 13 Merit 3: HD and Super Packs to boost ARPU 15 Merit 4: Plenty of headroom for adex growth too 20 Merit 5: Leading position virtually unassailable 22 Financials 25 Risk factors 29 Valuations 32 Financial statements 35 APPENDICES Appendix 1 – Astro’s businesses – Pay TV 36 – Radio 42 – Other businesses 43 Appendix 2 – Key management and Board of Directors 44 Appendix 3 – DTH broadcasting license 47 Appendix 4 – DTH Pay TV business process 48 Appendix 5 – Glossary of technical terms 49 27 November 2012 Page 2 of 53 Astro Malaysia Holdings Making a come back Malaysian media mogul. Astro Malaysia Holdings (Astro) is Malaysia’s leading integrated consumer media group, engaging in the creation, aggregation and distribution of content over multiple delivery platforms including Pay TV, radio, publications and digital media. It broadcasts 156 television (TV) channels as at 31 Jul 2012, of which 68 are Astro- created and branded. Rejuvenated. Substantially all of Astro’s businesses were part of Astro All Asia Networks PLC’s (AAAN) domestic businesses. AAAN was listed on 29 Oct 2003 on the then Main Board (now known as the Main Market) of the Malaysian bourse. In 2010, Astro Holdings Sdn Bhd undertook a conditional takeover offer to acquire all the voting shares in AAAN. AAAN was delisted from the Main Market on 14 Jun 2010. And without the loss-making operations. Astro does not house AAAN’s international businesses i.e. (i) library licensing and distribution via Celestial Pictures and (ii) a 20% stake in Indian DTH Pay TV operator, Sun Direct TV. Both were loss generating before AAAN was delisted. In FY10 (FYE Jan), AAAN reported that the library licensing and distribution business generated operating losses of MYR61.5m and its share of Sun Direct TV’s losses was MYR81m. New services have galvanised ARPU growth after a long struggle. Before AAAN was delisted, it struggled to maintain ARPU above MYR80 and keep churn rate below 10%. After Astro launched its plethora of valued added services such as Astro B.yond HD, PVR, IPTV and Super Packs beginning Dec 2009, its ARPU has begun to steadily grow to MYR89 in FY12 and MYR92 in 1HFY13. Its FY12 churn of 6.6% is also the lowest in 11 years. Chart 1: ARPU vs churn rate ARPU (MYR) (LHS) Churn (%) (RHS) 95 16.0 13.4 14.0 90 11.4 12.0 10.1 9.7 10.0 9.0 8.8 10.0 85 7.8 7.9 7.9 8.0 6.9 6.6 8.0 5.4 92 80 89 6.0 3.7 84 85 83 82 82 82 4.0 75 80 81 81 81 80 79 78 2.0 70 - FY99 FY01 FY03 FY05 FY07 FY09 FY11 1HFY13 Source: AAAN annual reports, Astro 27 November 2012 Page 3 of 53 Astro Malaysia Holdings Chart 2: Organisational chart Astro Malaysia Management TV & Radio Digital Media Shared Services Content Others 100% 100% 100% 100% 100% 100% 100% 100% Astro Group Astro M BNS M ultim edia MBNS Astro Productions Astro Brunei Astro Digital Services Entertainment Technologies Astro Shaw 48.9% 25% Advanced Wireless Kristal-Astro Technologies 100% UMTS (Malaysia) 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% Perfect *MEASAT Meastra MEASAT Radio Radio Tayangan Nusantara Nusantara Astro Radio Excellence Karya Anggun Digicast Broadcast Communications Lebuhraya Unggul Film s Edaran Filem Waves 100% 100% 100% 80% 100% 100% 50% *Maestro DVR Astro Astro Awani Endemol Astro Digital 5 Talent and Astro Arena Player.com Publications Network Malaysia Management Legend: Jointly-controlled entities and associated companies * Inactive Source: Astro 22 November 2012 Page 4 of 53 Astro Malaysia Holdings Overwhelmingly dominant in Pay TV. Astro distributes content to its subscribers via broadcast and on-demand programmes through Direct- To-Home (DTH), Internet Protocol (IP) and Over-The-Top (OTT) platforms (please refer to Appendix 5). As at end-1HFY13, it has 3.2m residential Pay TV subscribers, commanding 50% penetration rate of Malaysian TV households and 99% market share of residential Pay TV subscribers. Chart 3: Residential subscribers (‘000) 3,500 3,166 3,067 2,930 2,931 3,000 2,646 2,500 2,272 2,016 2,000 1,784 1,566 1,500 1,283 984 1,000 778 541 500 183 297 35 135 - FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 1HFY13 Source: AAAN annual reports, Astro Leads in radio as well. Astro’s radio business comprises nine FM and 11 direct-to-user radio stations and is available over FM, DTH TV, IPTV, mobile platform and the Internet. Its stable includes the highest rated radio stations in the Malay, Chinese, Indian and English languages in terms of listenership. As at Apr 2012, Astro has 13m weekly listeners capturing 52% listenership market share and commanding 53% radio adex share.