Thanachart Ad Hoc Research Thanachart Ad Hoc Research 20 FEBRUARY 2013 BUY (Unchanged) TP: Bt 13.50 (From Bt 8.00) Change in Numbers Upside: 32.4% RS Public Co Ltd (RS TB) Best of both worlds We’ve liked RS as we’ve seen it as the best play on the satellite TV boom for two years, and we now view it as the best play on the upcoming digital TV story. In both stages of media platform development, we believe RS will enjoy continued ad rate hikes. We incorporate digital TV KALVALEE THONGSOMAUNG value and see RS’s TP at Bt13.50/share (from Bt8.00). Reiterate BUY. 662 – 617 4900 [email protected] Proven success in satellite TV business … We see 79% and 51% EPS growth for RS in 2013-14 driven by the success COMPANY VALUATION of its satellite TV business, as reflected by: 1) satellite and cable TV penetration rising from 50% in 2011 to 66% in 2012 and potentially 75-80% Y/E Dec (Bt m) 2011A 2012F 2013F 2014F in 2013, 2) an average ad rate hike of 42% effective early 2013 (or 100% for Sales 2,729 2,734 3,448 3,945 primetime), 3) utilization rate rising from 36% in 2011 to 61% in 2012 and our Net profit 209 259 465 703 forecast of 66% in 2013, and 4) RS’s channels’ (Sabaidee TV and Channel Consensus NP ⎯ 286 398 623 8) rankings climbing to the top two spots in Nielsen’s satellite TV rankings. Diff frm cons (%) ⎯ (9.4) 16.8 12.7 … and the best digital TV story play Norm profit 179 259 465 703 Prev. Norm profit ⎯ 258 380 622 We expect RS to move to the digital TV platform and see it as the best play among other potential players i.e. BEC World Pcl (BEC), Channel 7 Chg frm prev (%) ⎯ 0.7 22.3 13.0 (Unlisted), MCOT Pcl (MCOT), GMM Grammy Pcl (GRAMMY), Workpoint Norm EPS (Bt) 0.2 0.3 0.5 0.7 Pcl (WORK) and Nation Multimedia Group Pcl (NMG). With the must-carry Norm EPS grw (%) (48.2) 29.4 79.3 51.1 rule forcing all TV platforms to show digital channels, we expect ad rate Norm PE (x) 52.0 40.2 22.4 14.8 realignments (depending on content quality) with the gap narrowing between EV/EBITDA (x) 23.9 17.9 11.5 9.6 existing free-terrestrial and satellite TV programs. We see RS as most P/BV (x) 9.0 7.5 6.4 5.3 leveraged to this story with the largest upside from its highest exposure to Div yield (%) 1.5 1.7 2.7 4.0 low-rate base satellite TV. In contrast, we expect the main free TV players ROE (%) 17.6 20.3 30.8 39.0 BEC, Channel 7 and MCOT to see highest risk from potential stagnant or Net D/E (%) (23.2) (27.5) (13.7) (1.7) even declines in their high-base ad rates. GRAMMY and WORK are in between, in our view, as they have both free TV and satellite TV programs. PRICE PERFORMANCE Revisiting our ad rate hike potential work-out (Bt/shr) (%) RS Rel to SET Index Referring to our report “RS – Upside potential work-out,” (12 September 12 250 200 2012), we revisit the cost per rating calculation basis and work out potential 10 150 8 primetime ad rate hike upside potential for RS in the new digital TV era 100 6 (Exhibit 5). With the must-carry rule, we expect RS channel accessibility to 50 be the same as for bigger players. We forecast RS’s primetime ad rate to rise 4 0 100% in 2013 and 40% in 2014 still on the satellite platform and 46% in 2015 2 (50) Feb-12 Jun-12 Oct-12 Feb-13 and 25% in 2016 on digital. We see the digital TV platform leading to higher costs for RS in 2014-15 before more material revenue streams in later years. COMPANY INFORMATION Earnings and TP upped Price as of 19-Feb-13 (Bt) 10.20 We lift our earnings forecasts by 22%, 13%, and 13% in 2013-15 and 30% Market cap (US$ m) 284.7 from 2016 onward, and thus our TP from Bt8.00 to Bt13.50, to reflect our Listed shares (m shares) 874.1 assumptions of: 1) average ad rate hikes of 42%, 36% and 37% in 2013-15 Free float (%) 35.1 versus our old 40%, 31% and 25% forecasts, 2) Bt100m p.a. in additional Avg daily turnover (US$ m) 0.8 revenues from the variety sport “SUN channel” (or La Liga), 3) higher 12M price H/L (Bt) 10.3/2.9 contribution of tie-in ad and sponsorship revenues, and 4) breakeven of La Liga in 2013F and turning a profit in 2014F-15F versus previous estimates of Sector Media a Bt80m loss in 2013 and profits of Bt40m in 2014 and Bt20m in 2015. Major shareholder Chetchotisak Family 44% Sources: Bloomberg, Company data, Thanachart estimates This report is prepared by Thanachart Securities. Please contact our salesperson for authorisation. Please see the important notice on the back page. 20 FEBRUARY 2013 Thanachart Ad Hoc Research Best play on both satellite TV and digital TV stories We have been bullish on RS Pcl (RS) since February 2011 on our view of it being the Beyond the transition period best satellite TV story but we now think it’s time to look at RS as a play on the bigger and into something offering digital TV platform. As RS’s satellite TV growth is continuing and it’s the key driver for a far higher profile with hefty our EPS growth forecasts of 79% and 51% in 2013-14, we look at RS beyond its ad rate upside existing satellite TV platform to where it eventually moves to the digital TV platform. Although going digital TV will likely create cost pressures in the first one to two years when revenues may not yet have caught up, we take the view that RS moving to this platform will provide a long-term benefit (ad rate upside) which will far outweigh the costs and open up opportunities for RS to significantly raise its business profile. Exhibit 1 below shows our earnings growth forecasts where 2013F and 2014F are still mainly driven by the success of its existing satellite TV business before our assumption of the digital TV platform starting to make some contribution in 2015F and more significantly thereafter. RS is one of the strongest growth stocks in the Thai market. We reiterate our BUY call. Ex 1: One Of The Strongest Growth Stocks In Thailand (Bt m) (y-y %) Net profit (LHS) Grow th (RHS) 1,200 120 318.9% 100 1,000 80 800 60 40 600 20 400 0 (20) 200 (40) 0 (60) 2009 2010 2011 2012F 2013F 2014F 2015F 2016F 2017F 2018F Sources: Company data, Thanachart estimates Our big-picture assumptions for digital TV and why we believe RS will move to this Under our digital TV platform are laid out below. assumptions, we take the Despite the regulatory details which are still being worked out by the National view that RS will move to Broadcasting and Telecommunications Commission (NBTC) not being clear yet, this platform and that it will we assume that bidding for digital TV licenses will happen within this year, only be fully functioning potentially in 4Q13. after 2015 Given the need for network equipment change, adjustment and installation which would require time and money, we only expect a fully functioning digital TV platform after 2015. With the NBTC’s must-carry rule, we expect most terrestrial free TV incumbents and key satellite TV players to bid for digital TV licenses. The must-carry rule requires all TV broadcasting platforms to carry all digital TV channels. This in effect should secure the highest penetration rate and most eyeballs for the digital TV platform, whose viewer base would switch from the existing widest coverage under the antenna analog system, soon to be converted into digital. THANACHART SECURITIES 2 20 FEBRUARY 2013 Thanachart Ad Hoc Research The latest NBTC plan is for a total of 48 digital TV licenses. Of these, 12 would be public channels, 12 community channels and 24 commercial channels (these 24 would be put up for auction). Of the 24 commercial channels, the plan is for 14 variety or entertainment channels, five news and five children’s. Given as many as 14 variety channel TV licenses and only one company being allowed to bid for one channel in this category (they can also bid for other categories but the regulation is not yet finalized), there looks to be plenty of room for more than just the four entertainment-related free TV incumbents, i.e. Channel 3 of BEC World Pcl (BEC TB, BUY, current price Bt71.25), Channel 7 (Unlisted), Channel 9 of MCOT Pcl (MCOT TB, SELL, Bt47.75) and GMM GRAMMY (GRAMMY TB, SELL, Bt24.70) to win licenses. It therefore shouldn’t prove too difficult for RS to win one variety channel license, in our view. The digital TV platform will require investments and operating costs that will likely be more than for the current free TV and satellite TV platforms. Together with its eventual highest penetration rate and most eyeballs, we expect the players to be serious in content development and competition to capture as much as they can of the ad spending pool.