H115 EBIT from continued operations declined 40% YoY
H115 revenue declined by 11% YoY, due to a combination of weak market sentimentin Hong Kong and a lack of World Cup related revenue. An impairment loss ofHK$654m in relation to TVB Network Vision was recorded in H115. On a comparablebasis, continued operations generated EBIT of HK$460m, a 40% YoY decline fromH114. Interim dividend of HK$0.60 per share was declared (no change from 2014),suggesting cash flow generation and cash balance remain strong.
Anticipating weak trend in HK and tight censorship in China to continue
Hong Kong sales decline could narrow in H215, in our view. However, YTD decline(-4% YoY) in overnight visits of mainland travellers suggests weak retail sales trend willlikely extended into H215 and 2016. On the China side, China revenue fell 17% YoY,on the back of programming cutbacks by mainland satellite TV stations and strictercensorship imposed on imported content. Management is optimistic about Chinaoutlook once censorship becomes more relaxed, as TVB teams up with moredistribution platforms especially on the internet side. However, we have becomingincrementally more concerned that tighter control on imported content could be apermanent trend.
Cut 2015E-17E earnings by 15-26%
We reduce our revenue forecasts by 16%/19%/20% in 2015E/16E/17E to reflect adampened market condition. We also forecast 100-200bps EBIT margin contraction ineach year of 2015E-17E due to an operating deleverage effect (a high % of the TVB'scosts are fixed costs). As a results, our 2015E-17E earnings forecasts reduced by 15-26%. We also revise down our LT revenue growth by 280 bps and operating margin byc110bps on the same basis. Our current forecasts imply a flattish revenue growth from2016E and onwards.
Valuation: Downgrade to Neutral; Dividend remains a bright spot
We downgrade our rating from Buy to Neutral with new DCF/VCAM-based PT ofHK$40.00 (WACC: 5.9%) (prior PT HK$55.00). Our HK$40 PT implies a 16E PE of14.5x. When asked the conditions under which the board might consider reducingdividend, management shared such reduction is highly unlikely unless the companyexperiences very severe conditions.