Target price at HK$31.45; upgrade to Buy
We turn more positive on the share price of TVB with 1) signs that HK retail isbottoming, 2) the easing of competition from new free-TV operators, 3) Chinaoperations having resumed double-digit growth on new licensing agreementswith online media companies, and 4) despite challenges from new media and aglobal decline in TV audience time, TV still has a sizeable audience reach,especially for dominant players, in our view. At the current share price with a10% yield (absolute DPS guidance of HK$0.60), we see considerable upsidepotential with our new DCF-based TP of HK$31.45 (implying a 2017PE of 16.6xand a yield of 8.3%). We thus upgrade our rating from Hold to Buy.
2H2016: TVB sees no further adex deterioration; we are 30% above consensus
Management has guided a 10% decline at HK operations for 2016, so thecompany does not expect further deterioration. With the recent recovery in theproperty market (residential), management hopes adex will recover over time.We expect a recovery in 2017. MyTV Super’s sign-up rate has beensatisfactory and we believe it is running ahead of management’s target. Thus,management believes losses in 2016 could fall shy of its HK$100m target.
1H16 NP at HK$302m, a decline of 74% yoy with a 3% decline in sales
Sales were 6% better than we had expected, while EBIT was 6% lower withhigher-than-expected G&A cost. MyTV Super has exceeded 610,000 userssince its launch in April, ahead of plan and maintaining its target at 1.4m byNovember 2017. HK broadcasting operations declined 11%. Revenue fromChina increased 33% with progress in new signings.
Strong balance sheet with 10% yield limits downside; upgrade to Buy; risks
We raise our target price by 19% to HK$31.45 on raising NP by37.3%/2.7%/7.7% for FY16E/17E/18E, to reflect a one-time exceptional gain in2016 and better HK and China operations on better margins in 2017/18. In2018, we expect ROE to recover to 15%. We base our DCF-derived target priceon a COE of 7.5% with a 2.7% RFR, 4.8% ERP, 1.1 beta and 0% TGR. Unlessoperations make huge losses in 2017-18, TVB should have the capability andsufficient reserves to pay HK$1.13bn in dividends for each year of 2016-18, inour view. Downside risks: competition from new FTV players returns and theChinese initiative fails to monetize.