We expect resilient cash dividend despite earnings down cycle
TVB’s 1H15 EBIT was 37% below our estimate, due to overall weakness in itsmajor operating segments, especially the free TV (FTV) business. Slow retailsales in Hong Kong have led to disappointing adex and consequent operatingdeleverage. For 2H15, we expect continued YoY decline in TVB’s sales andEBIT, albeit moderating. We reduced 2015E core earnings by 38% but includedan exceptional gain of HKD689mn; we cut 2016/17E earnings by 14.5%/10.8%and cut our target price to HKD39.75. We continue to expect TVB to maintainthe absolute cash payout in 2015 of HKD2.6. Thus, a cash dividend yield of 7%should provide some support to the share price, in our view. Maintaining Hold.
1H15 core NP below expectation, but maintaining absolute DPS
While sales were 4ppt lower than our estimate of an 11% decline, we expectflattish NP for its core operation. The discrepancy was due to higher-thanexpectedoperating deleverage and weaker-than-expected overseas business.The company announced an interim dividend of HK$0.6 per share, which wasthe same as 1H14, given the strong cash flow. We expect the company tomaintain the absolute dividend amount paid in 2014 base dividend into 2015and 2016. We note that TVB has a strong track record of delivering sustainablecash DPS in the past years (Figure 4).
2H15 HK adex decline to be more moderate
Management expects the HK adex sales decline in 2H15 to be more moderatewhen compared to 1H15 due to a low base. While there have been concernson competition from new FTV players, we share management’s view that HKviewers have lots of choices already, especially the younger generation. In ourview, the competition is more with piracy content and other means ofentertainment. It will launch OTT boxes in HK in early 2016, replacing its payTV business and in response to piracy. In China, the deal with Alibaba is yet toconclude, and it is transitioning to a non-exclusive model for Internet licensing.Valuation and risks
We cut 2016/17E net profit by 14.5%/10.8% to reflect weaker top-linemomentum and operating deleverage. Our DCF-derived target price is basedon a COE of 7.5%, with 2.8% RFR, 4.9% ERP, 1.1 beta, and 0% TGR. Our targetprice of HKD39.75 translates into 10.8x and 12.3x FY15E and FY16E PE,respectively. Downside risks: potential new entrants in FTA TV in Hong Kong;China initiative’s failure to monetize. Upside risk: stronger-than-expectedgrowth in HK operation.