Core free-TV operation potentially sees weaker retail sales affecting adex
Due to the slowdown in adex in HK (ex World Cup), delay in telecast licensing income from China, higher losses from its overseas pay-TV and HK pay-TV operations, NP for 1H14 reported a 9% yoy decline, which is 10% lower than our forecast. For 2H14, slowing retail sales in HK are a concern in terms of adex growth, while the group needs to fix the increase in losses in its overseas and domestic pay-TV operations. We thus lower our forecasts by -6.0/-7.7/-5.2% for FY14/15/16, with a new target price at HK$46.77; maintain Hold on valuation.
1H2014 NP 10% below our forecast
Net profit declined 9% yoy to HK$700m on a higher operation cost. Sales increased by 4% yoy to HK$2.7bn. Sales were in line (1% above) with our forecast, while net profit was 11% below our expectation on a higher-than-expected cost. It declared an interim dividend of HK$0.6 (HK$0.6 in 1H13), implying a payout ratio of 38% (34% in 1H13).
Slowing retail sales in HK a concern in terms of adex growth
TVB commented that slowing retail sales since April in HK are likely to have a negative impact on adex growth in general for 2H14, especially for luxury. It is proactively marketing its airtime to non-TV advertisers. As for other operations, it expects telecast licensing to resume its usual growth rate in China. However, the government’s new restrictions on content shown on OTT boxes pose a concern. Meanwhile, the company continues to change its business model for its overseas pay-TV model by offering OTT boxes, while in HK, it is trying to address the greater loss from the pay-TV operation.
New DCF-based target price of HK$46.77 (from HK$49.26); risks
We lower our forecasts by -6.0/-7.7/-5.2% for FY14/15/16. Our DCF-derived target price is based on a COE of 7.5 %, with 2.8% RFR, 4.9% ERP, 1.1 beta and 0% TGR. Our target price of HK$46.77 translates into 12.6x and 11.5x FY14E and FY15E P/E, respectively. Downside risks: potential new entrants in FTA TV in Hong Kong; China initiatives’ failure to monetize. Upside risk: stronger-than-expected ad growth in HK operations.