Thailand Media Sector

Transcription

1 THAILAND SECTOR NOTE 9 FEBRUARY 211 Thailand Media Sector New competitive landscape Thanachart Securities The competitive landscape in the media sector is changing rapidly with more and more players entering the market. While this new playing field will provide room for newcomers such as content providers to earn higher revenues, incumbent free TV operators could be worse off as they will likely see their bargaining power in hiking ad rates fall and operating costs increase due to license fees and program improvements. RS is the most leveraged play on the new environment and thus our top sector BUY, followed by GRAMMY. BEC is not a sector top pick but we still prefer it to MCOT, which we downgrade to HOLD. PHATIPAK NAVAWATANA phatipak.nav@thanachartsec.co.th This report is prepared by Thanachart Securities. Please contact our salesperson for authorisation. Please see the important notice on the back

2 THAILAND Sector Note 9 FEBRUARY 211 Sector Outlook Sector Weighting Overweight Media Sector New competitive landscape Sector Valuation Norm EPS growth Norm PE EV/EBITDA Div yield BBG TP 11F 12F 11F 12F 11F 12F 11F 12F Company code Rec. (Bt) (%) (%) (x) (x) (x) (x) (%) (%) Thanachart Securities BEC World BEC TB BUY GMM Grammy GRAMMY TB BUY MCOT MCOT TB HOLD RS RS TB BUY Source: Thanachart estimates The competitive landscape in the media sector is changing and a de-rating of valuations has already got under way. While BEC looks to be in a better position than MCOT, the newcomers that we prefer and assign BUY ratings to are RS and GRAMMY. Competitive landscape changing The new competitive landscape in the media sector which will emerge after the liberalization of the market in the next couple of years will result in a number of changes. First, there will be an increase in operating costs for terrestrial free-to-air (FTA) operators. Second, there will be more terrestrial FTA channels due to digitalization (apart from the six existing operators). Third, satellite TV, in particular, will become a cheaper choice for operators due to lower operating costs but it will still take time for the penetration rate to match that of terrestrial free TV. All in all, there will be more new players in the market. Incumbents worse off in new playing field Net-net, incumbent FTA operators (BEC and MCOT) will be worse off while small content providers like GRAMMY and RS will benefit under the new landscape. BEC and MCOT will take running satellite TV more seriously but the aim will be to protect their viewership rather than to create additional income. Both will see bargaining power in raising ad rates fall while their operating costs will rise from the need to create even better programs to compete with the new players. In contrast, GRAMMY and RS are now being aggressive in operating satellite/cable TV services. They will be less reliant on FTA operators to run TV services and have more chance of creating new sources of revenue in the future. Clear impact in the medium to long term We expect full market liberalization to kick start in 1H13 at the earliest with the NBTC s establishment still under way this year. Clearly, the satellite/cable TV operators still pose an insignificant threat to free TV operators because: i) satellite/cable TV doesn t have strong content to attract viewers from incumbent free TV operators; ii) they still don t have reliable ratings from ad agencies so it difficult to convince advertisers to invest money in their channels; and iii) the majority of Thai viewers still tend to watch the soap operas produced by free TV operators. PHATIPAK NAVAWATANA phatipak.nav@thanachartsec.co.th Households To Get Satellite Soon (%) Penetration rate 15 % change F 211F Source: AC Nielsen Media Research 212F Room For Satellite Ad Rate Hikes 213F (Bt/minute) (Bt/minute) 6, 4, 4, 2, 2, Ad spend/min onad spend/min on on Satellite on FTA FTA Sources: BEC, GRAMMY TV Share Of Incumbents To Fall (%) MCOT* Ch 7 6 Ch 5 BEC's Ch 3 4 RS is our top sector pick; prefer BEC to MCOT We ve already seen a valuation de-rating with the incumbent operators (both BEC and MCOT) ahead of the stiffer competition. As BEC is in a better position to deal with the changing environment than MCOT, we prefer BEC to MCOT. RS in our top pick in the sector as it is the prime beneficiary of booming satellite TV. GRAMMY is also on our BUY list. 2 Jan-8 Oct-8 Jul-9 Apr Source: Nielsen Media Research Note: *MCOT's Modernine TV This report is prepared by Thanachart Securities. Please contact our salesperson for authorisation. Please see the important notice on the back page.

3 CONTENT PHATIPAK NAVAWATANA Content Page New competitive landscape...2 Rise in operating costs for terrestrial FTA TV operators... 2 More FTA terrestrial TV channels owing to the implementation of digitalization... 4 Satellite TV will become a cheaper choice for content providers/operators... 5 Many more players are expected and the market will be much more fragmented... 5 Satellite TV is more popular than cable TV... 6 Incumbents will be worse off in the new era...8 Life will be better for smaller content providers... 8 Increased competition, loss of pricing power and rising cost for incumbents... 9 Both FTA terrestrial TV and smaller content providers are joining the new platform... 9 Clearer impact will be in medium to long term...12 Satellite/cable TV isn t a short-term threat to the incumbents RS is our top pick; we prefer BEC to MCOT...14 RS: Small but beautiful GRAMMY: New business model BEC: Coasting on ad hikes MCOT: Bumpy road ahead Sector Valuation Comparison...18 Appendix Company notes... BEC World Pcl (BEC TB) Coasting on ad hikes... 2 GMM Grammy Pcl (GRAMMY TB) New business model MCOT Pcl. (MCOT TB) ) Bumpy road ahead RS Pcl. (KTB TB) Best satellite wave play THANACHART SECURITIES 2

4 MEDIA SECTOR PHATIPAK NAVAWATANA New competitive landscape There will be some changes following market liberalization The competitive landscape in the media sector has been changing over the past two years in the sense that more and more newcomers have been entering the market. These include fast-growing satellite/cable TV services. The competition will become even fiercer following the establishment of the National Broadcasting and Telecommunications Commission (NBTC). After the start-up of the NBTC, licenses will be awarded to existing and new satellite/cable TV operators and digitalization implemented in terrestrial free-to-air (FTA) TV, which will lead to more new channels under this platform (from six channels now). That s when full liberalization of the sector will begin. We lay out the potential structural changes in the competitive landscape in the media sector following full liberalization which we expect to take place in 213 at the earliest (see the discussion in the third section of this report). 1) There will be a rise in operating costs for terrestrial FTA TV operators. 2) More terrestrial FTA TV channels could start up due to digitalization. 3) Satellite TV, in particular, will become the cheaper choice for operators due to lower operating costs but the penetration rate will still take time to match terrestrial FTA TV s. 4) There will be more new players as a whole and the industry will become more fragmented. Rise in operating costs for terrestrial FTA TV operators Spectrum will have to be returned under the new broadcasting law Spectrum under concessions and for specific use (not commercial) is free from this requirement According to the new broadcasting law, all of the spectrum that has been used and owned by terrestrial FTV operators must be returned to the NBTC for re-auctioning once the NBTC is established. The aim of this regulation is to create a new level playing field and promote fair competition among all the existing and new players in the broadcasting business in Thailand. To be eligible to operate terrestrial FTA TV, operators will have to bid for operating licenses. The license winners will bear two main costs: the spectrum price (no specific figure available) and the annual license fee. The two exceptions where FTA operators will be allowed to keep spectrum and not need to join in the bidding process are as follows: 1) Spectrum use under concession contracts. Examples in this case are the concession contracts between MCOT and BEC and between MCOT and TrueVisions. 2) Spectrum use for specific but not for commercial purposes. The specific purposes include spectrum use for national security, education, etc. An example in this case is Channel 5, which belongs to the Thai army. The station will ask for the NBTC s permission to keep the spectrum for security reasons. The adverse impacts of spectrum-returning will be felt more at MCOT than at BEC: MCOT will be hurt most since it needs to return some of its spectrum and bear extra costs: spectrum price and license fee MCOT is the real victim of this requirement. First, the firm will have to pay for the bidding price of the spectrum, and we don t know how expensive this will be. MCOT s management confirmed that the objective of running Modernine TV for MCOT is for commercial purposes. So the firm is ready to return the spectrum to the NBTC and join in the bidding process for the spectrum use. Second, following receipt of its operating license, MCOT is also supposed to pay an annual license fee (2% of sales) and the Universal Service Obligation fee (2% of sales). THANACHART SECURITIES 2

5 MEDIA SECTOR PHATIPAK NAVAWATANA The only bright side of the new law for MCOT is that it will continue to keep concession revenues from its concessionaires, including BEC and TrueVisions, until these concessions expire. Note that BEC pays a fixed annual concession fee to MCOT and its concession will expire in 22 while TrueVisions shares 6% of its revenue with MCOT based on its annual service revenue and its concession will end in 219. Ex 1: Spectrum Under MCOT s Ownership Spectrum Used for Potential spectrum return Concession ends 1. VHF Modernine channels Yes 2. Radio 62 stations nationwide na na 3. MMDS Pay-TV with CAT (pending) na na 4. VHF BEC's concession No VHF TrueVisions' concession No 219 BEC does not have to return spectrum as it operates under a concession contract. So it s free from extra costs BEC, on the other hand, doesn t have this extra expense during its concession with MCOT as it implicitly pays for the operating license for the use of its spectrum through its annual concession fee to MCOT. However, when its concession contract expires, the firm will need to bid for the spectrum and pay the license fee like MCOT (only in the event that it wants to continue appearing in the FTA network). Besides no extra expenses in the short term, BEC will receive an industry windfall from the frequency-returning requirement less competition from state-owned channels. As we highlighted in the section above, the frequency owners, especially Channel 5, are likely to retain their spectrum but will be required to reduce entertainment content to only 3% of airtime from 7% currently (note that under the 28 broadcasting law, the mix of content on non-commercial channels will be 3% entertainment and 7% nonentertainment, while the mix on commercial channels will be the reverse of the noncommercial ones). Therefore, BEC looks set to gain more market share at the expense of Channel 5. Ex 2: Current Status Of FTA Terrestrial TV FTA terrestrial channel Operator Major shareholder Status Contract type Concession life Potential spectrum return Ch 3 BEC Maleenont Group Private network Concession with MCOT Ch 5 Royal Thai Army Royal Thai Army State-owned Frequency owner Ch 7 Bangkok Broadcasting & Television network Ratanaruk Group Private network Royal Thai Army na Modernine TV MCOT Ministry of Finance State-owned Frequency owner Yes network NBT Television of Government public State-owned Frequency owner Thailand relations network TPBS Television of Government public State-owned Frequency owner Thailand Sources: MCOT, Thanachart Compilation relations network THANACHART SECURITIES 3

6 MEDIA SECTOR PHATIPAK NAVAWATANA More FTA terrestrial TV channels owing to the implementation of digitalization More FTA channels are expected to implement digitalization There will be more FTA terrestrial TV channels in Thailand after industry liberalization. Besides bringing up operating costs for the sector, the arrival of the National Broadcasting & Telecommunications Commission (NBTC) will also bring about new ways of broadcasting terrestrial FTA TV channels in the Thai market. The NBTC will implement the digital system to replace old-fashioned analog. According to the new law, digitalization is supposed to be implemented in 215. But the implementation timeline is likely to be held up from the original schedule due to the delay in the NBTC s establishment. Having said that, digitalization in Thailand will bring about better utilization of spectrum. Improved utilization of spectrum will include allowing new channels to be transmitted in the guard bands (channels 4, 6, 8, etc) and more channels to be transmitted under the same bandwidth. For example, there will be Channel 3/1 and Channel 3/2 or Channel 9/1 and Channel 9/2, etc, following implementation of digitalization. But the success of digitalization in terrestrial FTA broadcasting in Thailand, we believe, will depend upon the following: 1) How much the government will support this technology, especially for the poor. To be able to receive digital signals from operators, viewers will need two new electrical devices: a digital TV set and a set-top box (to convert the input analog voltage into a digital number proportional to the voltage magnitude). The price of a digital TV set has come down over the past two years due to fierce competition in the TV market, and it is now becoming more affordable for almost all viewers. The problem lies with the set-top box (signal converter), the pricing of which we don t yet know. If it is too expensive and the government doesn t support the set-top box financially, operators will definitely be reluctant to change the broadcasting technology. Thus, digitalization could fail. 2) What price the NBTC will set for the spectrum in the bidding. As we discussed in the previous paragraph, the use of spectrum under the NBTC s supervision is no longer costless, so any new or even existing terrestrial FTA TV operators will have to bid for it This implies that terrestrial FTA TV operators under the NBTC s supervision will have to not only pay the license fee but also bear the additional spectrum cost. For this reason, we believe only existing terrestrial free TV operators will bid for it. This is because they re not only financially strong but they also have expertise in content and in customer needs as opposed to new players. So the spectrum bidding price will deter the entry of newcomers to the terrestrial free TV business. In the worse-case scenario, no players, existing terrestrial free TV operators included, will bid for spectrum, and it will be used for other purposes like in the telecom business. THANACHART SECURITIES 4

7 MEDIA SECTOR PHATIPAK NAVAWATANA Ex 3: More Channels Are Expected Under Digitalization In the analog (BEC) Ch. 3 Ch. 5 Ch. 7 MCOT NBT PBS guard band guard band guard band guard band guard band guard band guard band In the digital (BEC) Ch. 3 Ch. 5 Ch. 7 MCOT NBT PBS Source: Thanachart estimates Ch. 3/1 Ch. 5/1 Ch. 7/1 MCOT/1 NBT/1 PBS/1 Satellite TV will become a cheaper choice for content providers/operators With no spectrum bidding and low transponder rents, satellite TV will be a cheaper choice for providers to broadcast their content We expect satellite TV to become the first choice for both existing TV operators and content providers to broadcast their content in the newly liberalized market. This is because the FTA terrestrial operators are required not only to pay a license fee (about 2% of total TV service revenue) to the NBTC, but also bid for spectrum. So operating FTA terrestrial TV following the set-up of the NBTC will be very costly. Currently, a satellite operator pays a rental fee to use the Thaicom transponder at only Bt8m-9m per channel per year for two bands (Ku band, C band). In addition, NBTC is likely to charge the satellite operators either a very low license fee or nothing. This is because if the NBTC charges them a high license fee, they might decide to rent transponders from neighboring countries where regulators charge no license fee but allow Thai content to be broadcast back into Thailand. Many more players are expected and the market will be much more fragmented More and more players will come into the industry Satellite/cable TV is a fastgrowing service with 5% penetration Apart from the existing six FTA terrestrial TV operators, there will be many more satellite/cable TV players and potentially FTA terrestrial TV ones due to the implementation of digitalization. But given the uncertainty over digitalization, the fast-growing demand in satellite and cable TV services is worth discussion. Satellite/cable TV has grown substantially over the past three years. According to AGB Nielsen Media Research, the penetration rate of satellite/cable TV was 5% as of end-21 with a growth rate of 35% pa. If this momentum can continue, it implies the penetration rate will be 1% in three years (or in 213). We believe the major reasons for the fast-growing popularity of the satellite/cable TV are as follows: THANACHART SECURITIES 5

8 MEDIA SECTOR PHATIPAK NAVAWATANA 1) Satellite/cable TV operators have been more confident about the business outlook since the broadcasting law in 28 allowed advertising at six minutes per hour on satellite/cable TV (versus 12 minutes for FTA terrestrial TV), starting in March 28. Thus, a number of cable and satellite operators have launched more channels on their platforms, including the big players like GRAMMY, RS, Media of Medias and MCOT. 2) Since the political turmoil began in 1H8 beginning with the yellow-shirt protests followed by the red-shirt rally in 1H1, satellite and cable TV have become the preferred medium for people to tune in and monitor the news. Installation of satellite/cable TV has therefore been increasing since then. Ex 4: Penetration Rate For Satellite/cable Will Be 1% In Three Years (%) Penetration rate % change F 211F 212F 213F Sources: AC Nielsen Media Research, Nation Multimedia Satellite TV is more popular than cable TV No subscription fee and low satellite dish prices make satellite TV more popular than cable Although cable has enjoyed strong growth over the past two years, its recent growth rate (during August 29-August 21) was far below that of satellite free-to-air TV (about 73% for satellite versus 33% for cable). With this growth rate momentum, we expect around 45-48% of households to have installed satellite TV dishes by the end of 211. We simplify below how the satellite FTA TV service works. There are three parties in this business: satellite dish suppliers (PSI, DTV and IPM etc), satellite operators (THCOM) and content providers (GRAMMY, RS, etc) (see Exhibit 5 for details). Satellite FTA TV operators are actually the content providers who make money from selling advertising airtime, not from subscription fees. The major drivers for the boom in satellite TV are: 1) The price of a satellite dish has dropped tremendously over the past three years. Local viewers can now buy satellite TV equipment (satellite dish and set-top box receivers) for as low as US$1 (or Bt3,). The price of setting up satellite TV is close to that for a traditional TV antenna but it offers a clearer picture. 2) Viewers can enjoy 4-8 channels, which is similar to the number of channels from TrueVisions, other pay-tv operators and cable TV. But the big difference is that satellite viewers don t need to pay the monthly subscription fee as with TrueVisions and other pay-tv operators. The major source of revenue for satellite TV channels is from selling advertising airtime. THANACHART SECURITIES 6

9 MEDIA SECTOR PHATIPAK NAVAWATANA Ex 5: This Is How Satellite TV Works Source: Satellite Magazine Ex 6: Sharp Decline In Satellite Dish Prices Has Driven Up The Penetration Rate (Bt) 8, 7, 6, 5, 4, 3, 2, 1, Estimated price of satellite dish (LHS) Penetration rate (RHS) F 211F (%) Source: Thanachart estimates Ex 7: Market Share Of Satellite/cable In August 21 Was Close To That Of Free TV TRUE 7.4% Aug-1 Ex 8: But Satellite/cable Market Share To Surpass FTA In 211F Free TV 34.% Local cable 12.2% Free TV 56.1% All satellite 24.3% Sources: AC Nielsen Media Research, Thanachart estimates TRUE 7.6% Local cable 1.4% Sources: AC Nielsen Media Research, Thanachart estimates All satellite 48.% THANACHART SECURITIES 7

10 MEDIA SECTOR PHATIPAK NAVAWATANA Incumbents will be worse off in the new era BEC and MCOT will be worse off and GRAMMY and RS better off under the new environment We expect the competition from newcomers, especially from satellite/cable TV, to be a threat to the incumbent FTA terrestrial TV operators but the impact is likely to be felt in the medium to long term rather than over the short term. Net-net, incumbent FTA terrestrial TV operators, including BEC and MCOT, will be worse off while small content providers like GRAMMY and RS will gain under the changing environment. Life will be better for smaller content providers We believe small but strong content providers like GRAMMY and RS will be better off under the changing competitive landscape for two reasons: GRAMMY and RS will have their own platforms; so less reliant on FTA terrestrial TV There will be significant room for ad hikes with satellite TV compared with FTA terrestrial First, they will be less reliant on FTA terrestrial TV. The major problem for smaller content providers in the past has been that they haven t had their own TV platforms to broadcast their own content. This is because only one TV platform has been available in Thailand, FTA terrestrial TV. The channels have also been restricted to only six under the FTA terrestrial platform for all content providers to broadcast their programs. Unfortunately, these six channels have been owned by the big players such as BEC, MCOT, Channel 5, Channel 7, etc. So the appearance of smaller content providers like GRAMMY and RS has relied heavily upon the mercy of the FTA terrestrial owners. With the emergence of satellite TV, they ll be able to own their platforms and all of their quality programs will be able to be broadcast under these. If their programs get higher ratings, they will reap all the benefits from their efforts. Second, ad spending on satellite/cable TV is still very low compared to that on FTV terrestrial TV. According to AGB Nielsen, total ad spending on cable and satellite accounts for only 6% of total ad spending on terrestrial TV (or about Bt3.5bn) and it expects this to double in 211. There will be significant room for growth in the future. Advertisers view satellite/cable as a cheaper media to promote their products compared with FTA terrestrial. The ad rate for advertising on satellite is about Bt5,/minute versus Bt33,-45, for FTA terrestrial TV. Ex 9: Small Portion Of Ad Spending From Satellite/cable Ex 1: Big Difference In Ad Rates For Satellite/cable Satellite/cable 6.% Free TV 94.% (Bt/minute) 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, Ad spend/min on Satellite Ad spend/min on FTA (Bt/minute) 4, 35, 3, 25, 2, 15, 1, 5, Sources: AC Nielsen Media Research, Thanachart estimates Sources: AC Nielsen Media Research, Thanachart estimates THANACHART SECURITIES 8

11 MEDIA SECTOR PHATIPAK NAVAWATANA Increased competition, loss of pricing power and rising cost for incumbents More competition means low bargaining power to raise ad rate for FTA operators For incumbent FTA terrestrial TV operators, including BEC and MCOT, they ll be worse off under the changing competitive landscape. The popularity of satellite/cable TV means more competitors and fewer viewers for their stations. With less viewership, this will translate into a loss in bargaining power with their customers to raise ad rates in the future. To protect their viewership and market share, the incumbents also need to participate in satellite/cable. Operating satellite/cable will definitely come with additional costs but the extra revenue from satellite/cable TV might just make up for the loss of revenue from FTA terrestrial TV. So netnet, incumbents will end up losing something. Note that ad spending for TV has the largest market share, which accounts for 6% of total ad spending in Thailand. Ex 11: TV Ad Spending Still Dominates The Ad Market Ex 12: Incumbents Audience Share To Fall In Future (%) TV Radio New spapers Magazines Cinema Outdoor Transit In-store (%) MCOT's Modernine TV Ch 7 6 Ch 5 BEC's Ch Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul Sources: AC Nielsen Media Research, Thanachart estimates Sources: AC Nielsen Media Research, Thanachart estimates Both FTA terrestrial TV and smaller content providers are joining the new platform FTA terrestrial operators have sent their fighting channels to the satellite network to protect their viewership Three channels in satellite TV from Channel 7 One channel from Channel 5 Although the revenue contribution from satellite TV is still minimal compared to their terrestrial operations, most of the incumbents have sent their so called fighting channels to participate in the satellite network, starting with the leader Channel 7, Modernine TV (MCOT) and Channel 5. Only BEC has still been reluctant to join the new platform. Thus, we highlight the market positions for TV operators in dealing with the changing environment. For the leader in the market (Channel 7), the firm has assigned one of its subsidiaries, called Media Studio (or Media of Media) to run satellite TV. Now, Media Studio has three channels in the satellite network, ranging from news and rerun soap operas from Channel 7. We believe Channel 7 will become one of major players in satellite TV when the penetration rate of satellite TV rises to 1% or the ratings on satellite TV become more reliable. For Channel 5, the firm has also launched one channel in the satellite network. And the content is all about news on the army and its activities. There is no further guidance from the company as to whether it will launch more channels this year. But with its inexperience in soap operas or game shows, we believe if the station plans more channels, the programs will be only news and army stuff, making it uncompetitive in the market. THANACHART SECURITIES 9

12 MEDIA SECTOR PHATIPAK NAVAWATANA Six channels from MCOT but no high-rating content BEC is well equipped for the satellite business but hasn t got in yet For MCOT, it has already started in the satellite business with six channels in total. Most of its programs are co-produced with other independent operators like the Nation Group and Kantana Group and they are focused on news and knowledge-based programs like agriculture. However, none of the programs is pure entertainment. We believe the firm is in an awkward position for running pure commercial programs. First, it doesn t produce any soap operas or game shows but rather focuses on news and knowledge-based programs. Normally, news or knowledge-based programs have high TV ratings versus news or knowledge-based programs. Given the nature of these kinds of programs, we see it as being very hard for MCOT to be competitive under the changing environment. Thus, we believe MCOT won t be a key player in this new playing field. For BEC, while the firm has yet to start satellite TV operations, it doesn t mean it won t enter the business. BEC believes it will be tough to make money in the satellite business at this stage given the 5% penetration rate and no reliable TV ratings. So the company is waiting for the right moment to participate. Having said that we believe BEC is preparing itself for this business and it is in a relatively better position to successfully run satellite TV operations than MCOT. This is because: 1) BEC reclaimed all its airtime from independent operators in 21 and now almost all the programs broadcast in the network belong to BEC. We consider this move as strategic in that BEC won t face a potential risk of not having quality programs to broadcast on its network if independent producers decide to leave BEC s network to run their own channels in the satellite network in the future. 2) BEC has a vast amount of content in its library. The firm can easily open up satellite channels by using its own content to rerun it on the network. This would allow it to earn additional revenues without incurring huge costs. 3) BEC is best equipped and well prepared to enter the satellite TV business having secured contracts with a number of soap opera and news commentator stars over the past two years. So this will ensure that the firm will have all the resources available whenever it needs it to launch satellite/cable TV services. GRAMMY and RS are very aggressive in satellite TV For smaller players like GRAMMY and RS, they are considered to be content providers and they ve produced a number of programs FTA terrestrial TV for quite a long time now. Just a few years ago, they decided to open their own channels in the satellite network. The main reason for smaller players having their own channels is that they are trying to reduce revenue exposure from FTA terrestrial TV since FTA terrestrial TV operators focus heavily on TV ratings. If their programs don t have high enough ratings to attract advertisers, the owners of FTA terrestrial TV channels might decide to remove their programs from the network, causing business disruption for them. For GRAMMY, the company now has six channels broadcasting in the satellite network and it plans to open at least five to 1 more in 211. For RS, three channels are being broadcast in the satellite network. THANACHART SECURITIES 1

13 MEDIA SECTOR PHATIPAK NAVAWATANA Ex 13: Number Of Satellite Channels Run By Existing Operators (Number of channels) BEC Ch 5 Ch 7 RS MCOT GRAMMY Source: Thanachart estimates THANACHART SECURITIES 11

14 MEDIA SECTOR PHATIPAK NAVAWATANA Clearer impact will be in medium to long term NBTC will take at least one year to be formed We believe the impact of the new competitive landscape on the incumbents (BEC and MCOT) will be felt in the medium to long term rather than over the short term. Apart from the low penetration rate of satellite/cable TV, we also expect full market liberalization to kick start in 1H13 (or about three years from now) after the National Broadcasting and Telecommunications Commission (NBTC), the new regulator of the telecom and broadcasting sectors, is ready to issue operating licenses to broadcasting operators. This includes licenses for cable, satellite TV and terrestrial free TV, etc. Before the NBTC is ready to issue the licenses, a number of things need to be done. The Frequency Allocation Act (FAA) has already been published in the Royal Gazette and became law in December 21. According to this law, the NBTC has to be set up within 18 days after the FAA became law (or about July 211). After that, there will be the drafting process of three master plans; the frequency allocation plan, the telecom sector plan and the broadcasting sector plan. Completion of this process should take about one year (or about July 212). The NBTC will need another six months to review the details, including the license fee and USO fee, as well as the details of digitalization. So we believe 1H13 would the earliest the sector will become fully liberalized, a year s delay from our expectation. The major duties of the NBTC are as follows: 1) Allocate all television and radio frequencies. 2) Decide the potential structure of the broadcasting industry, especially the type, purpose, and content of the networks. 3) Determine policy, propose a broadcasting master plan, and recommend and advise the Council of State to enact the Broadcasting Act in compliance with the constitution, and come up with a radio frequency plan. 4) License and regulate television and radio frequencies. 5) License and regulate television and radio business operations of all broadcasters. 6) Set the licensing fee. Ex 14: NBTC Expected To Grant Licenses To Broadcasters In 1H13 Broadcasting master plan New FAA to be enacted 1H12 Draft FAA approved by parliament March 21 December days The formation of the NBTC 1H13 Licensing process November 21 Draft FAA to be approved by Senate Source: Thanachart estimates THANACHART SECURITIES 12

15 MEDIA SECTOR PHATIPAK NAVAWATANA Satellite/cable TV isn t a short-term threat to the incumbents Satellite TV is the main threat to FTA terrestrial but the real impact will be in the medium to long term due to 1) a lack of strong content compared with FTA TV 2) relatively unreliable audience share ratings for satellite/cable 3) a relatively low penetration rate While the delay in establishing the NBTC will ensure that there won t be new players from terrestrial free TV due to implementation of digitalization, we also don t expect satellite/cable TV operators to pose a real threat to existing terrestrial free TV, especially over the short term. This is because: 1) Satellite/cable TV lacks strong content to compete with free-to-air, especially in prime time. According to the managements of BEC, MCOT and National Multimedia along with our own personal experience, the majority of viewers are still sticking with free-toair TV during prime time, especially in watching soap operas (from 6.pm-1.3pm). The viewers, however, tend to watch satellite/cable TV only during non-prime time periods (late night and in the afternoon). We believe the major cause of this behavior is due to a shortage of fighting programs from satellite/cable TV. Most of the programs on satellite/cable are music, cartoons, re-run movies and news, etc, which we believe tends to target more of a niche market than the mass market (see Exhibit 15). 2) Most of the satellite/cable TV programs don t have reliable audience share information. Audience share and TV rating are crucial for any TV operator to attract advertising spending from advertisers. While AGB Nielsen conducts an audience survey for satellite/cable TV, the sample size is still small at only around 1 households and thus there are still doubts over its accuracy (increasing the sample size would be costly and so far the industry has failed to mobilize the funds to do so). There have been initiatives from PSI and DTV, two leaders in satellite TV, to insert software in the set-top box to measure program ratings from the viewers. But the ad agencies still seem to be ignoring these ratings because of a perceived lack of reliability. 3) Their penetration rates are still far below terrestrial free TV s despite their increasing popularity. At the end of 21, we expect the penetration rate of satellite/cable to have reached 5% versus 1% for FTA terrestrial TV. Ex 15: No Strong Content In Satellite TV Other 1% Variety 19% New s 18% Music 12% Sports 12% Sources: Satellite Magazine, Thanachart estimates Movies 13% Documentaries 16% THANACHART SECURITIES 13

16 MEDIA SECTOR PHATIPAK NAVAWATANA RS is our top pick; we prefer BEC to MCOT RS is our top pick in the sector due to more leverage to fast-growing satellite TV Our most preferred stock in the changing competitive landscape is RS, followed by GRAMMY and BEC. For MCOT, we downgrade our recommendation to HOLD from Buy. The selection criteria of our picks are based on: 1) High leverage to fast-growing satellite TV. 2) Undemanding valuations. 3) Earnings are accelerating. 4) Strong content. 5) High dividend yield. Ex 16: RS Fits All Of Our Investment Criteria Investment criterion RS GRAMMY BEC MCOT High leverage to satellite TV Undemanding valuations Earning accelerating Strong content High dividend yield Source: Thanachart estimates RS: Small but beautiful Ex 17: RS s Valuation Y/E Dec (Bt m) 29A 21F 211F 212F Sales 2,174 2,9 3,1 3,381 Net profit Norm profit Norm EPS (Bt) Norm EPS gr (%) (119.1) Norm PE (x) EV/EBITDA (x) P/BV (x) Div. yield (%) ROE (%) Net D/E (%) (24.1) (4.7) Ex 18: Cheapest PE With Highest Earnings Growth (x) PE (LHS) RS GRAMMY MCOT BEC 3-year EPS grow th (RHS) (%) We initiate coverage on RS with a BUY. The counter is our top sector pick due to: 1) It is the most leveraged play to the boom in satellite TV with revenue exposure rising from 2% in 21F to 4% in 214F. We have seen robust ad spending flows into satellite channels starting from last year. RS has seen the same trend with its satellite business. In 4Q1 alone, RS saw a big jump in revenue from satellite TV from only Bt2m in 9M1 to Bt5m. With the rising penetration rate of satellite TV coupled with THANACHART SECURITIES 14

17 MEDIA SECTOR PHATIPAK NAVAWATANA RS s quality programs, we expect satellite revenue to surpass that from the music business in ) Its earnings are accelerating. We expect the firm to post 8.2% y-y earnings growth in 211 and for this to speed up to 3% y-y in 212. After that, earnings growth should stay at a high level of 29% in ) The valuations of this under-covered stock still don t reflect its strong growth prospects. It trades on a low 211F PE of 1.8x (fully diluted in-the-money warrants) and falling. Its PE is only half of BEC and MCOT s with much stronger earnings growth. GRAMMY: New business model Ex 19: GRAMMY s Valuation Y/E Dec (Bt m) 29A 21F 211F 212F Sales 7,878 8,58 9,54 9,781 Net profit Norm profit Norm EPS (Bt) Norm EPS gr (%) (27.6) Norm PE (x) EV/EBITDA (x) P/BV (x) Div. yield (%) ROE (%) Net D/E (%) Ex 2: Earnings Are On An Upturn (Bt m) 1,2 2% CAGR 1, F 211F 212F 213F 214F We initiate coverage on GRAMMY with a BUY rating for these reasons: 1) GRAMMY s earnings are leveraged to fast-growing satellite TV. GRAMMY has a solid foothold in FTA terrestrial TV, producing about 33 programs. They range from soap operas and music to variety and game shows. With such strong content, this business became the company s No.1 revenue contributor in 29. The firm is leveraging more on its content by moving into fast-growing satellite TV where it now has six satellite TV channels and will open five more this year. GRAMMY expects revenue from this business to double to Bt65m in 211 and enjoy a 5-1% growth rate over the next four years with revenue contribution of 2% in 214, up sharply from 4% in 21. 2) GRAMMY is restructuring its music business. First it has a policy to outsource production and lower the inventory of physical music assets like CDs and VCDs. Second, the firm is trying to develop more digital download software, making it easier for the customer to access its large music library. These strategies will allow GRAMMY to reduce most of its fixed costs in its music business and increase its cash cycle. THANACHART SECURITIES 15

18 MEDIA SECTOR PHATIPAK NAVAWATANA 3) 4Q1F earnings will act as the first catalyst for GRAMMY s share price. We expect the firm to post earnings of Bt185m, up 79% q-q and 36% y-y. This is 43% better than the market s expectation. The key earnings drivers are the TV business, both FTA terrestrial and satellite TV. The strong earnings momentum should continue into 211. We project 2% y-y earnings in 211, accelerating to 22% in Hence, we expect massive earnings upgrades by the Street following the release of its results. 4) Trading on 12.2x 211F PE and falling, 2% ROE and with a 7.4% dividend yield, GRAMMY is cheap at the current price. BEC: Coasting on ad hikes Ex 21: BEC s Valuation Ex 22: Valuation Gap Between BEC And MCOT Is Now Narrow Despite BEC s More Exciting EPS Growth Y/E Dec (Bt m) 29A 21F 211F 212F (x) Sales 8,949 11,719 12,896 13, Net profit 2,635 3,311 3,997 4, Norm profit 2,635 3,311 3,997 4,479 Norm EPS (Bt) STD = 2.3x Norm EPS gr (%) (9.2) STD = 1.9x Norm PE (x) EV/EBITDA (x) Average = 1.4x P/BV (x) STD = 1.x Div. yield (%) STD =.5x.5 ROE (%) Net D/E (%) (59.4) (67.9) (7.9) (73.6). Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 We still prefer BEC to MCOT and maintain our BUY on the counter for following reasons: 1) BEC won t see a major impact from the new industry platform over the next two years (see the discussion in the third section of this report). This, together with its strong market position will still allow an ad rate hike in 211 of 1% and a further 6% in ) BEC offers strong earnings growth due not only to ad rate hikes but also the high operational leverage effect via high fixed costs. We still call for 21% y-y earnings growth in 211 and 12% in 212 (versus 11% for MCOT). The key earnings driver will turn to ad rate hikes from raising its utilization rate as almost 1% of airtime was utilized in 21. 3) Unlike MCOT and Channel 7, BEC has yet to launch satellite/cable TV services. We see the main reasons for this as being satellite/cable s relatively low penetration rate and the unreliable audience share figures. Having said that, BEC is best equipped and well prepared to enter the satellite TV business having secured contracts with a number of soap opera and news commentator stars over the past two years. So this will ensure that the firm will have all the resources available whenever it needs to start up satellite/cable TV services. THANACHART SECURITIES 16

19 MEDIA SECTOR PHATIPAK NAVAWATANA 4) With the intensifying competition, a valuation de-rating is expected for the incumbents, including BEC. But we ve already seen this for BEC for quite some time ahead of stiffer rivalry. At the current price, the stock is now trading at a low and undemanding valuation of 15.x 211F PE. Even our TP implies 21x 211F PE, which is still well below the peak of 3x. MCOT: Bumpy road ahead Ex 23: MCOT s Valuation Y/E Dec (Bt m) 29A 21F 211F 212F Sales 4,797 5,227 5,562 5,839 Net profit 1,389 1,41 1,559 1,644 Norm profit 1,389 1,41 1,559 1,644 Norm EPS (Bt) Norm EPS gr (%) Norm PE (x) EV/EBITDA (x) P/BV (x) Div. yield (%) ROE (%) Net D/E (%) (28.2) (27.8) (31.) (3.4) Ex 24: Earnings Less Exciting On High Regulatory Risk (Bt m) 2, 1,5 1, F 211F 212F 213F 214F We downgrade MCOT to HOLD from Buy rating for reasons below: 1) MCOT s earnings prospects remain uninspiring, especially following the NBTC s establishment. According to the frequency return requirement, MCOT is required to return at least one spectrum used to broadcast Modernine TV. MCOT revealed that it is likely to join the bidding process to get back this spectrum. 2) Its EPS growth looks set to stay pretty mundane at 11% in 211 and another 5% in 212. The major reasons are that earnings are less leveraged to the TV business and the operational leverage from high fixed costs is less than with BEC. This is because MCOT does business mostly via time sharing and airtime rental. So its fixed costs aren t as high compared with BEC. However, we recommend HOLD because MCOT trades on an undemanding valuation at a 13.3x 211F PE multiple with dividend yield of 6.8% (with upside from Bt45m in extra revenue from BEC). THANACHART SECURITIES 17

20 MEDIA SECTOR PHATIPAK NAVAWATANA Ex 25: Sector Valuation Comparison BEC GRAMMY MCOT RS Average Rating BUY BUY HOLD BUY Target price (Bt) Thanachart Consensus Consensus rec. BUY HOLD SELL 1 1 Norm profits (Bt m) 29 2, , ,61 21F 3, , , F 3, , , F 4, , ,314 Norm EPS (Bt) F F F Norm EPS growth (%) 29 (9.2) (27.6) 13.1 (119.1) (35.7) 21F F F P/BV (x) F F F Norm PE (x) F F F EV/EBITDA (x) F F F Dividend yield (%) F F F ROE (%) F F F Net D/E (%) 29 (59.4) 12.2 (28.2) 61.1 (3.6) 21F (67.9) 16. (27.8) 3.3 (19.1) 211F (7.9) 9. (31.) (24.1) (29.3) 212F (73.6).6 (3.4) (4.7) (36.) Sources: Bloomberg, Company data, Thanachart estimates THANACHART SECURITIES 18

21 APPENDIX PHATIPAK NAVAWATANA STOCK PERFORMANCE Absolute (%) Rel SET (%) 1M 3M 12M YTD 1M 3M 12M YTD SET Index (5.1) (6.3) 42.9 (4.8) Media Index (5.2) (3.9) 29.9 (3.1) (.1) 2.4 (13.) 1.7 BEC TB (9.8) (9.8) 32.7 (5.5) (4.7) (3.5) (1.2) (.7) GRAMMY TB (9.5) (1.4) 7.5 (5.9) (4.4) 4.9 (35.4) (1.2) MCOT TB (1.3) 8.2 RS TB Sources: Thanachart estimates, Consensus SECTOR - SWOT ANALYSIS S Strength The balance sheets of all operators are very strong with net cash positions. TV advertising will be dominant for quite some time in Thailand. W Weakness Low barriers to entry. Relatively high regulatory risk. O Opportunity Consolidation in the sector. 1% penetration rate in satellite TV. T Threat Frequency-returning requirement. High bidding price for new FTA licenses. REGIONAL COMPARISON EPS growth PE P/BV EV/EBITDA Div. yield Name 11F 12F 11F 12F 11F 12F 11F 12F 11F 12F (%) (%) (x) (x) (x) (x) (x) (x) (%) (%) Media sector China Hong Kong India (75.4) Indonesia Malaysia Philippines (9.3) (21.) South Korea Thailand Average (12.3) Media stocks BEC World GMM Grammy MCOT RS Average Sources: Thanachart estimates, Bloomberg Consensus THANACHART SECURITIES 19

22 BUY (Unchanged) TP: Bt43. (Unchanged) 9 FEBRUARY 211 New Information Upside: 43.3% BEC World Pcl (BEC TB) Coasting on ad hikes Thanachart Securities We reiterate our view that BEC is entering a cycle where it can hike ad rates every year for at least the next two. The next round is expected in October 211. Fast-growing satellite/cable TV is a threat but the impact on BEC s earnings will only likely be felt in the medium to long term. So at.7x PEG, BEC is a BUY. Little threat from satellite TV in short term Despite the recent share price pullback, we reiterate our BUY call on BEC. Admittedly, fast-growing satellite/cable TV is a threat to BEC s profitability but we believe the impact will be felt in the medium to long term rather than over the short run. The drawbacks of satellite/cable TV near term are: i) they lack strong content as most programs are re-run movies or music videos; ii) penetration rates are still far below terrestrial free TV s despite their increasing popularity (5% versus 1% for terrestrial free TV); iii) most satellite/cable TV programs don t have reliable audience share information. With negligible risk from satellite/cable TV, especially in the short term, we believe BEC will successfully be able to lift ad rates in October and that its earnings growth momentum will continue this year. So, at 15.x 211F PE (or.7x PEG) and falling, BEC is a BUY. Bargaining power to hike ad rates intact We still call for 21% y-y earnings growth in 211 and 12% in 212 (versus 11% for MCOT). The key earnings driver in will turn to ad rate hikes from raising its utilization rate as the firm utilized almost 1% of airtime in 21. In our earnings forecast, we expect BEC to be able to boost ad rates by 1% in 211 and 6% in 212. The recent 6-2% ad hikes for non-primetime programs from January this year and 7-9% for prime-time programs on Ch 7 are both leading indicators confirming our view that BEC will be able to lift ad rates 1% by October. We expect the upward ad rate momentum to continue into 212 as the domestic economy is still growing strongly while satellite/cable competition isn t fierce. Well prepared to fight to protect viewership Unlike MCOT and Ch 7, BEC has yet to launch satellite/cable TV services. We see the main reasons as being its relatively low penetration rate and the unreliable audience share figures from satellite/cable TV. Having said that, BEC is well prepared to protect its viewership from satellite/cable TV given that it has signed contracts with a number of soap opera and news commentator stars over the past two years. So this will ensure that the firm will have all the resources available whenever it needs to start up satellite/cable TV services. Prefer BEC to MCOT for a big-cap stock We still prefer BEC to MCOT as a big-cap media stock as: i) it has stronger bargaining power with its customers to raise ad rates due to higher TV ratings; ii) it offers better earnings growth as it has more fixed costs; and iii) it has higher bargaining power with its independent producers than MCOT as it produces 1% of its airtime (versus 2% for MCOT). COMPANY VALUATION PHATIPAK NAVAWATANA phatipak.nav@thanachartsec.co.th Y/E Dec (Bt m) 29 21F 211F 212F Sales 8,949 11,719 12,896 13,673 Net profit 2,635 3,311 3,997 4,479 Consensus NP 3,223 3,746 4,28 Diff from cons (%) Norm profit 2,635 3,311 3,997 4,479 Prev norm NP Chg from prev (%) Norm EPS (Bt) Norm EPS gr (%) (9.2) Norm PE (x) EV/EBITDA (x) P/BV (x) Div. yield (%) ROE (%) Net D/E (%) (59.4) (67.9) (7.9) (73.6) PRICE PERFORMANCE (Bt/shr) BEC World (%) 45 Rel to SET Index (1) 15 (2) Feb - 1 M ay- 1 Aug - 1 Nov- 1 Feb - 11 COMPANY INFORMATION Price as of 8 Feb 11 (Bt) 3. Market cap (US$ m) 1,953 Listed shares (m shares) 2, Free float (%) 44 Avg daily turnover (US$ m) M price H/L (Bt) 4.5/21.4 Sector Entertainment Major shareholder Maleenont family 56.6% 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.

23 COMPANY NOTE BEC TB PHATIPAK NAVAWATANA Ex 1: Wide Ad Share Gap Between BEC and Ch 7... Ex 2: But Ad Spend Gap Is Narrowing (%) MCOT's Modernine TV Ch 7 6 Ch 5 BEC's Ch (%) MCOT's Modernine TV Ch 7 Ch 5 BEC's Ch 3 1 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb-1 Jul-1 Dec-1 Source: AC Nielsen Media Research Source: AC Nielsen Media Research Ex 3: Ad Revenue On the Rise Given The Higher Base Ex 4: Earnings Will Grow Even Faster Than Revenue (Bt m) 16, 14, 12, 1, 8, 6, 4, 2, F 211F 212F (Bt m) 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, F 211F 212F Ex 5: Penetration Rate Of Satellite/Cable TV Is Still Low Ex 6: BEC s PE Is Unjustifiably Low Given Little Impact From Satellite/Cable TV (%) Penetration rate % change 14 (x) STD = 15.x +2 STD = 34.1x +1 STD = 27.7x Average = 21.4x STD = 8.6x F 211F 212F 213F 5 Jan-1 Jul-3 Jan-6 Jul-8 Jan-11 Sources: AC Nielsen Media Research, Thanachart estimates Sources: Bloomberg, Thanachart estimates THANACHART SECURITIES 21

24 COMPANY NOTE BEC TB PHATIPAK NAVAWATANA Ex 7: Earning Growth Of BEC Will Outpace MCOT s (%) BEC MCOT F 212F Ex 8: But BEC s PE vs MCOT s Is Below The Average Trading Gap (x) STD = 2.3x +1 STD = 1.9x Average = 1.4x -1 STD = 1.x -2 STD =.5x. Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Sources: Bloomberg, Thanachart estimates THANACHART SECURITIES 22

25 COMPANY NOTE BEC TB PHATIPAK NAVAWATANA Valuation Comparison Ex 9: Valuation Comparison With Regional Peers EPS growth PE P/BV EV/EBITDA Div yield Name BBG code Country 11F 12F 11F 12F 11F 12F 11F 12F 11F 12F (%) (%) (x) (x) (x) (x) (x) (x) (%) (%) Beijing Gehua 637 CH China Phoenix Satellite 28 HK Hong Kong Television Broad 511 HK Hong Kong Vodone Ltd 82 HK Hong Kong Entertainment Ne ENIL IN India (22.9) Ibn18 Broadcast IBN18 IN India (134.5) na na Sun TV Network SUNTV IN India Television 18 TLEI IN India (98.6) na na na na TV Today Network TVTN IN India (74.6) Zee Entertainment Z IN India na na Zee News Ltd ZEEN IN India (74.3) na na Surya Citra Media SCMA IJ Indonesia Media Prima Bhd MPR MK Malaysia ABC-CBN Corp ABS PM Philippines (14.4) (33.2) Gma Network Inc GMA7 PM Philippines (4.1) (8.8) On*Media Corp 4571 KS S. Korea BEC World * BEC TB Thailand GMM Grammy * GRAMMY TB Thailand MCOT * MCOT TB Thailand RS * RS TB Thailand Average (12.3) Source: Bloomberg Note: * Thanachart estimates using normalized EPS growth THANACHART SECURITIES 23

26 APPENDIX BEC TB PHATIPAK NAVAWATANA COMPANY DESCRIPTION BEC World Pcl (BEC) is a diversified media holding company. The firm is involved in the broadcasting and media businesses, including television and radio broadcasting and news media, program sourcing, production and distribution. COMPANY RATING Financial Manage 2 Risk 1 ment Manage ment Rating Scale Very Strong 5 Strong 4 Good 3 Fair 2 Liquidity *Corp. Governance Weak 1 None Source: Thanachart Sources: Thanachart, *CG Awards THANACHART S SWOT ANALYSIS S Strength BEC has a very strong balance sheet with a net cash position. Audience share is in second place behind Channel 7. BEC mostly makes its own programs so its earnings are less reliant on independent producers. O Opportunity Because BEC makes its own programs, it will be able to generate additional returns following liberalization in 213. BEC could launch new channels and create more revenue in the wake of liberalization. W Weakness Earnings growth now depends on only ad hikes due to full utilization rates, especially of prime time programs. As investment opportunities are few and far between, BEC is still under-geared. T Threat Liberalization will bring more competitors to the market and will erode future profitability. Satellite and cable TV s increasing market share will offer more choices to advertisers and could pose a threat to BEC s ad rate hikes going forward. CONSENSUS COMPARISON Consensus Thanachart Diff Target price (Bt) % Net profit 11F (Bt m) 3,746 3,997 7% Net profit 12F (Bt m) 4,28 4,479 6% Consensus REC BUY: 15 HOLD: 3 SELL: RISKS TO OUR INVESTMENT CASE If the cost of producing its own programs is higher than we currently estimate. Higher-than-expected additional expense for its concession extension with MCOT. HOW ARE WE DIFFERENT FROM THE STREET? Our earnings forecast for 211 is about 7% above the Street s as we are ahead of other brokers in upgrading our ad revenue assumption. Accordingly, our TP is 12% above our peers. Sources: Bloomberg consensus, Thanachart estimates Source: Thanachart THANACHART SECURITIES 24

27 FINANCIAL SUMMARY BEC TB PHATIPAK NAVAWATANA INCOME STATEMENT FY ending Dec (Bt m) 28A 29A 21F 211F 212F Earnings are on an upward trend, starting this year Sales 8,798 8,949 11,719 12,896 13,673 Cost of sales 3,277 3,619 5,488 5,712 5,72 Gross profit 5,521 5,33 6,232 7,184 7,953 % gross margin 62.8% 59.6% 53.2% 55.7% 58.2% Selling & administration expenses 1,447 1,55 1,547 1,531 1,613 Operating profit 4,74 3,78 4,685 5,653 6,339 % operating margin 46.3% 42.2% 4.% 43.8% 46.4% Depreciation & amortization 1,53 1,737 1,86 1,869 1,931 EBITDA 5,577 5,517 6,491 7,522 8,27 % EBITDA margin 63.4% 61.6% 55.4% 58.3% 6.5% Non-operating income Non-operating expenses Interest expense () () (7) () () Pre-tax profit 4,237 3,889 4,889 5,885 6,585 Income tax 1,251 1,169 1,467 1,766 1,976 After-tax profit 2,986 2,72 3,422 4,12 4,61 % net margin 33.9% 3.4% 29.2% 31.9% 33.7% Shares in affiliates' Earnings (2) Minority interests (63) (85) (112) (123) (13) Extraordinary items (27) NET PROFIT 2,875 2,635 3,311 3,997 4,479 Normalized profit 2,92 2,635 3,311 3,997 4,479 EPS (Bt) Normalized EPS (Bt) BALANCE SHEET FY ending Dec (Bt m) 28A 29A 21F 211F 212F Balance sheet is very strong with a net cash position ASSETS: Current assets: 5,339 5,542 7,48 7,359 8,386 Cash & cash equivalent 3,328 4,368 5,576 5,739 6,689 Account receivables ,124 1,272 1,349 Inventories Others 1, Investments & loans Net fixed assets 1,693 1,611 1,559 1,493 1,416 Other assets 1,485 1,56 1,692 1,692 1,692 Total assets 8,675 8,791 1,431 1,677 11,626 LIABILITIES: Current liabilities: 1,467 1,436 2,551 2,273 2,85 Account payables Bank overdraft & ST loans (224) 231 Current LT debt Others current liabilities 1,291 1,249 1,678 1,823 1,945 Total LT debt Others LT liabilities Total liabilities 1,468 1,436 2,551 2,273 2,85 Minority interest Preferreds shares Paid-up capital 2, 2, 2, 2, 2, Share premium 1,167 1,167 1,167 1,167 1,167 Warrants Surplus (6) (24) (24) (24) (24) Retained earnings 3,912 4,46 4,46 4,861 5,12 Shareholders' equity 7,73 7,189 7,62 8,3 8,245 THANACHART SECURITIES 25

28 FINANCIAL SUMMARY BEC TB PHATIPAK NAVAWATANA CASH FLOW STATEMENT FY ending Dec (Bt m) 28A 29A 21F 211F 212F With less capex, most of its FCF is paid as dividend Earnings before tax 4,237 3,889 4,889 5,885 6,585 Tax paid (1,89) (1,385) (1,186) (1,776) (1,89) Depreciation & amortization 1,53 1,737 1,86 1,869 1,931 Chg In working capital (183) (31) 97 (122) (76) Chg In other CA & CL / minorities (13) (15) Cash flow from operations 4,338 4,195 5,82 6,12 6,587 Capex (155) (152) (2) (2) (2) ST loans & investments (499) 1,17 LT loans & investments Adj for asset revaluation Chg In other assets & liabilities (1,323) (1,524) (1,741) (1,63) (1,653) Cash flow from investments (1,912) (633) (1,941) (1,83) (1,853) Debt financing 3 (3) 226 (45) 454 Capital increase Dividends paid (2,3) (2,5) (2,897) (3,596) (4,238) Warrants & other surplus (2) (18) Cash flow from financing (2,3) (2,521) (2,671) (4,46) (3,784) Free cash flow 4,183 4,42 5,62 5,812 6,387 VALUATION FY ending Dec 28A 29A 21F 211F 212F Trading at discount PE and EV/EBITDA multiples to historical peaks Normalized PE (x) Normalized PE - at target price (x) PE (x) PE - at target price (x) EV/EBITDA (x) EV/EBITDA - at target price (x) P/BV (x) P/BV - at target price (x) P/CFO (x) Price/sales (x) Dividend yield (%) FCF Yield (%) (Bt) Normalized EPS EPS DPS BV/share CFO/share FCF/share THANACHART SECURITIES 26

29 FINANCIAL SUMMARY BEC TB PHATIPAK NAVAWATANA FINANCIAL RATIOS FY ending Dec 28A 29A 21F 211F 212F Growth Rate Net profit (%) 27.7 (8.4) EPS (%) 27.7 (8.4) Normalized profit (%) 3.4 (9.2) Normalized EPS (%) 3.4 (9.2) Dividend payout ratio (%) Operating performance Gross margin (%) Operating margin (%) EBITDA margin (%) Net margin (%) D/E (incl. minor) (x)... (.). Net D/E (incl. minor) (x) (.5) (.6) (.7) (.7) (.7) Interest coverage - EBIT (x) 26, , , ,672.8 Interest coverage - EBITDA (x) 36, , , ,319.6 ROA - using norm profit (%) ROE - using norm profit (%) DuPont ROE - using after tax profit (%) asset turnover (x) operating margin (%) leverage (x) interest burden (%) tax burden (%) WACC (%) ROIC (%) NOPAT (Bt m) 2,871 2,644 3,279 3,957 4,438 THANACHART SECURITIES 27

30 BUY TP: Bt19. 9 FEBRUARY 211 Initiation Note Upside: 32.9% GMM Grammy Pcl. (GRAMMY TB) New business model Thanachart Securities GRAMMY is a play on burgeoning satellite TV with revenue exposure rising from 4% in 21F to 2% in 214F. Earnings growth is also speeding up but is less exciting than RS s. We like it more for its outsourcing strategy and high 7.4% dividend yield. Initiate with a BUY; strong growth, high yield We initiate coverage on GRAMMY with a BUY rating for three reasons. 1) The stock is set to reap the benefits of fastgrowing satellite TV with revenue exposure rising to 2% in 214F from 4% in 21F. 2) Earnings are accelerating with a four-year CAGR of 2%. The key drivers will come from satellite TV and several cost-cutting initiatives. 3) Trading on 12.2x 211F PE and falling, at 2% ROE and with a 7.4% dividend yield, GRAMMY is cheap at the current price. Being more aggressive in satellite Satellite TV will become a major source of revenue growth for GRAMMY with an expected revenue contribution of 2% in 214 from 4% in 21. Its content is considered strong as the firm supplies 33 programs to free-to-air (FTA) channels such as music, variety and game shows with soap operas and sitcoms the highlights. Its strong content allows the firm to obtain new sources of income by re-running its own programs on satellite TV. There will also be significant room to raise its ad rates on satellite TV because its ad rate this year is only at about 17.5% of that on FTA channels in the non-prime time period. Given its strong content and the potential ad rate hikes for satellite TV, GRAMMY plans to add at least five to 1 more channels in 211 from the six it has now. Lighter business model = falling costs GRAMMY will focus more on digital rather than the physical music business this year. Its first strategy is to outsource production and lower inventory of physical music assets like CDs and VCDs, allowing it to reduce fixed costs including personnel costs and COGS and to increase its cash cycle by having low inventory. Second, it is trying to develop more digital download software, making it easier for customers to access its large music library. In October 21, GRAMMY also hiked the subscription fee for unlimited downloads from Bt2 to Bt26/month/subscriber. These moves should boost its margin. 4Q1F EPS to surge 36% y-y; positive surprise 4Q1F earnings should act as the first catalyst for GRAMMY s share price. We expect the firm to post earnings of Bt185m, up 79% q-q and 36% y-y. This is 43% better than the market s expectation. The key earnings drivers are the TV business, both FTA terrestrial and satellite, and the momentum should continue into 211. We project 2% y-y earnings growth in 211, accelerating to 23% in Therefore, we are expecting massive earnings upgrades by the Street after results are released. COMPANY VALUATION PHATIPAK NAVAWATANA phatipak.nav@thanachartsec.co.th Y/E Dec (Bt m) 29 21F 211F 212F Sales 7,878 8,58 9,54 9,781 Net profit Consensus NP Diff from cons (%) (5.9) Norm profit Prev norm NP Chg from prev (%) Norm EPS (Bt) Norm EPS gr (%) (27.6) Norm PE (x) EV/EBITDA (x) P/BV (x) Div. yield (%) ROE (%) Net D/E (%) PRICE PERFORMANCE (Bt/shr) GMM Grammy (%) 17 Rel to SET Index (1) (2) 14 (3) 13 (4) 12 (5) Feb - 1 M ay- 1 Aug - 1 Nov- 1 Feb - 11 COMPANY INFORMATION Price as of 8 Feb 11 (Bt) 14.3 Market cap (US$ m) 247 Listed shares (m shares) 53 Free float (%) 29 Avg daily turnover (US$ m).6 12M price H/L (Bt) 16.4/12.8 Sector Major shareholder Entertainment Mr. Paiboon Damrongchaitham 53.8% 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.

31 COMPANY NOTE GRAMMY TB PHATIPAK NAVAWATANA Initiate with a BUY; strong growth, high yield Initiate with a BUY on GRAMMY to a TP of Bt19./share We initiate coverage on GMM Grammy (GRAMMY) with a BUY rating for three reasons: First, the stock is set to reap the benefits of fast-growing satellite TV with revenue exposure rising to 2% in 214F from 4% in 21F. Second, earnings are accelerating with a four-year forecast CAGR of 2%. The key drivers will come from satellite TV and several cost-cutting initiatives, especially in the sunset recording business. Finally, trading on 12.2x 211F PE and falling, 2% ROE and with a 7.4% dividend yield, GRAMMY is cheap at the current price. Stands to reap benefits of fast-growing satellite TV Significant jump in revenue contribution from satellite over the next four years Business strategy will focus more on satellite with many more new channels Strong content allows GRAMMY to leverage more on satellite TV with low operating costs Ad rates on satellite have plenty of room to catch up with those for FTA We expect GRAMMY to be one of the prime beneficiaries of fast-growing satellite TV. This is because: 1) GRAMMY s recent strategy has been to focus more on the fast-growing satellite business. Its key strategy in 211 of concentrating on so-called Star Businesses has led to a significant business shift once again at the beginning of this year. The recording business has been hurt the most from this restructuring plan (see details in the next section). GRAMMY now has six satellite TV channels Fan TV (country music), Bang Channel (entertainment variety), Green (contemporary music), Act Channel (rerun soap opera), Saranae Channel (entertainment variety) and The Money Channel (investment). One more channel will be launched in March this year with the theme being Japanese and Korean TV series. GRAMMY plans to add at least five to 1 channels within this year and the ultimate goal is to have 8 satellite channels within the next two years. 2) GRAMMY can leverage on its strong content and expertise in producing programs supplied to FTA terrestrial TV for the satellite business. The firm has a strong foothold in FTA terrestrial TV. GRAMMY now produces about 33 programs such as soap operas, music, variety and game shows which it supplies to FTA channels. So it will be able to earn additional revenues from satellite channels with low operating costs by re-running these programs on the satellite network. 3) Its ad rates on satellite channels are still far below those for FTA terrestrial TV, leaving room for substantial increases. GRAMMY earned an average ad rate of Bt5,/minute on satellite channels in 21. The company just revealed that it raised its ad rate to Bt25, (with 2-3% discounts) from the beginning of this year. Despite this recent ad rate hike, there will be significant room to catch up with those on FTA channels since its ad rate is less than 3.8% of the average ad rate on FTA channels in prime time and 17.5% of that in non-prime time. With its strong content and the rising penetration rate of satellite TV, we expect 5-1% ad rate hikes on GRAMMY s satellite channels over the next four years. Ex 1: 6 Satellite TV Channels Programs Content 1. Fan TV Country music 2. Bang Channel Entertainment variety 3. Green Contemporary music 4. Saranae Channel Entertainment variety 5. Act Channel Soap opera re-runs 6. Money Channel Investment Source: Company data THANACHART SECURITIES 29

32 COMPANY NOTE GRAMMY TB PHATIPAK NAVAWATANA Ex 2: Surge In Ad Revenue From Satellite Business (Bt m) Ex 3: Expect Satellite Business Revenue To Grow Strongly Over The Next Four Years (Bt m) 2,5 2, 1,5 1, 5 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q F 211F 212F 213F 214F Asset-light strategy 1 business units are the long-term plan GRAMMY sees its business focus being shifted from a traditional music operator to becoming a content provider and multimedia network operator. Under the new business structure, there will be at least 1 business units in the company from three businesses now (music, media and showbiz). These will be music, digital, broadcasting (mainly satellite TV), showbiz, GMM Inter (to manage international copyrights), telesales (home shopping), sports (both domestic and international rights), animation, tourism and property. Capex of Bt1.bn has been set to accommodate this new business structure. This plan will be a long-term strategy (four to five years) and not a one-year plan. So the Bt1.bn in capex should be spread over four to five years. Instead, corporate concentration over the next two years for GRAMMY will be on the digital music business and satellite TV. For satellite TV, we have already discussed this in detail in the previous section. So in this section we will focus on the digital music business only. Digital business will be the firm s major focus and its revenue growth should offset the decline in the recording business Less business concentration on physical music with several costcutting programs The digital music business will become the major revenue and earning driver in response to changes in consumer behavior. Given no 3G technology, the firm expects revenue growth of 1% y-y from this business in 211, which should be enough to offset the decline in revenue from the recording business. The drivers for the revenue growth will be a subscription fee rate hike of 3% to B26/month/subscriber, implemented in October 21. GRAMMY also plans to further develop digital download software and content, making sure that customers can easily access its large music library and to ensure that the company has all the content and technology to facilitate the arrival of 3G technology in 211. In response to the slump in the demand for physical music, the recording business has been undergoing a major restructuring since the beginning of 211. The restructuring program is to reduce unnecessary costs by outsourcing music production (including the songwriters and studios) and cutting inventory of physical music assets like CDs and VCDs. The benefits of this policy are: i) to allow the firm to reduce fixed costs including personnel costs and inventory ii) to increase the cash cycle from having low inventory; and iii) to lower provisions for obsolete inventory. Net-net, this policy will help improve the profitability of this business and strengthen the firm s balance sheet and cash flow. THANACHART SECURITIES 3

33 COMPANY NOTE GRAMMY TB PHATIPAK NAVAWATANA Ex 4: Contribution From Satellite At 4% in 21F Ex 5: But Will Increase To 2% In 214F Show biz 2.8% Rights mgt 4.4% FTA TV 24.7% Artist mgt 6.4% Digital 1.3% Satellite 4.2% Radio 7.8% Physical 15.9% Publishing 2.4% Event 21.1% FTA TV 22.3% Show biz 2.8% Rights mgt 3.% Artist mgt 5.3% Digital 12.9% Satellite 19.7% Physical 8.4% Radio 6.1% Public 1.8% Event 17.6% New round of earnings growth cycle and accelerating too At the beginning of a new earnings growth cycle We believe GRAMMY is at the beginning of a new earnings growth cycle and earnings growth is also accelerating. We expect it to deliver 2% y-y EPS growth in 211 (versus flat growth in 21), increasing to 21% and 23% in 212 and 213, respectively. The key drivers will come from satellite TV (see details in the previous section), high-margin digital music business and several cost-cutting initiatives in the recording business. Ex 6: Earnings Are On An Upturn (Bt m) 1,2 1, 2% CAGR F 211F 212F 213F 214F 4Q1F EPS to surge 36% y-y; positive surprise 4Q1F earnings should surge by 79% q-q and 36% y-y, 43% higher than the Street estimate We expect GRAMMY to post 4Q1 earnings of Bt185m, surging by 79% q-q and 36% y-y. The key earning drivers are: i) strong revenue growth from the satellite TV business; ii) solid revenue from FTA TV, mostly from sitcoms and soap operas; and iii) a robust recovery in showbiz, including big concerts Body Slam and Big Mountain Music Festival. 4Q1 earnings will act as the first driver for GRAMMY s share price since earnings look set to come in 43% better than the market s expectation. THANACHART SECURITIES 31

34 COMPANY NOTE GRAMMY TB PHATIPAK NAVAWATANA Ex 7: 4Q1F Earnings Set To Beat The Street (Bt m) Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1F Attractive valuations GRAMMY is cheap compared to its historical valuations and its peers GRAMMY s valuations at the current price are attractive. Earnings look set to surge in 211 and should reach a new high in 212 but the stock is now trading at a 25% discount to its 22 PE of 16x. ROE is also approaching a record of 23% in 212F but its P/BV ratio doesn t reflect that. Its low EV/EBITDA ratio at 5.4x in 211F implies a 5.4-year payback period assuming zero growth for EBITDA in the future. A cash position with solid EBITDA of Bt1.2bn-1.4bn pa should bolster GRAMMY s dividend yield of 7-1% over the next three years. The stock is also the second- cheapest in the media sector following RS. It trades on only 12.2x 211F PE (an 8.4% discount to MCOT and an 18.7% discount to BEC). Ex 8: GRAMMY s PE Ex 9: GRAMMY s P/BV (x) STD = 34.1x +1 STD = 24.6x Average = 15.1x (x) STD = 3.x +1 STD = 2.5x Average = 2.x 1-2 STD = -4.x -1 STD = 5.6x STD = 1.5x -2 STD = 1.x (1) Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11.5 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 THANACHART SECURITIES 32

35 COMPANY NOTE GRAMMY TB PHATIPAK NAVAWATANA Ex 1: GRAMMY s Dividend Yield (%) STD = 12.4% STD = 9.6% 8 Average = 6.9% 6-1 STD = 4.2% STD = 1.5% Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Ex 11: GRAMMY s EV/EBITDA (x) STD = 11.6x 1 +1 STD = 8.9x 8 Average = 6.2x STD = 3.5x 2-2 STD =.7x Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Valuation Comparison Ex 12: Valuation Comparison With Regional Peers EPS growth PE P/BV EV/EBITDA Div yield Name BBG code Country 11F 12F 11F 12F 11F 12F 11F 12F 11F 12F (%) (%) (x) (x) (x) (x) (x) (x) (%) (%) Beijing Gehua 637 CH China Phoenix Satellite 28 HK Hong Kong Television Broad 511 HK Hong Kong Vodone Ltd 82 HK Hong Kong Entertainment Ne ENIL IN India (22.9) Ibn18 Broadcast IBN18 IN India (134.5) na na Sun TV Network SUNTV IN India Television 18 TLEI IN India (98.6) na na na na TV Today Network TVTN IN India (74.6) Zee Entertainment Z IN India na na Zee News Ltd ZEEN IN India (74.3) na na Surya Citra Media SCMA IJ Indonesia Media Prima Bhd MPR MK Malaysia ABC-CBN Corp ABS PM Philippines (14.4) (33.2) Gma Network Inc GMA7 PM Philippines (4.1) (8.8) On*Media Corp 4571 KS S. Korea BEC World * BEC TB Thailand GMM Grammy * GRAMMY TB Thailand MCOT * MCOT TB Thailand RS * RS TB Thailand Average (12.3) Source: Bloomberg Note: * Thanachart estimates using normalized EPS growth THANACHART SECURITIES 33

36 APPENDIX GRAMMY TB PHATIPAK NAVAWATANA COMPANY DESCRIPTION GMM Grammy Public Company Limited (GRAMMY) operates diversified media and entertainment businesses. The company and its subsidiaries produce recorded music, television and video programs, and movies, as well as publishing books and magazines, organizing and promoting live concerts, and manufacturing compact discs and videotapes. COMPANY RATING Financial Manage 2 Risk 1 ment Manage ment Rating Scale Very Strong 5 Strong 4 Good 3 Fair 2 Liquidity *Corp. Governance Weak 1 None Source: Thanachart Sources: Thanachart, *CG Awards THANACHART S SWOT ANALYSIS S Strength GRAMMY has a very strong balance sheet with a net cash position. Well diversified revenue streams. One of the strongest content providers in Thailand. W Weakness Stock has low liquidity in daily trading volume. Long relationships with staff, especially in the music business, make it very difficult for the firm to undertake a major restructuring. O Opportunity The rising penetration rate of satellite TV will allow GRAMMY to make more money from this business. 3G s arrival will permit the firm to offer more services in the digital business. T Threat Liberalization of the broadcasting business. Piracy of the company s products. CONSENSUS COMPARISON Consensus Thanachart Diff Target price (Bt) % Net profit 11F (Bt m) % Net profit 12F (Bt m) % Consensus REC BUY: 1 HOLD: 2 SELL: 1 HOW ARE WE DIFFERENT FROM THE STREET? RISKS TO OUR INVESTMENT CASE If the satellite TV business doesn t deliver in line with our expectations due to a slower domestic economy or higher competition. If the restructuring of the music recording business doesn t go as planned. Our earnings forecast for 212 is about 15% above the Street s as we re more bullish on satellite TV. Accordingly, our TP is 24% above our peers. Sources: Bloomberg consensus, Thanachart estimates Source: Thanachart THANACHART SECURITIES 34

37 FINANCIAL SUMMARY GRAMMY TB PHATIPAK NAVAWATANA INCOME STATEMENT FY ending Dec (Bt m) 28A 29A 21F 211F 212F Earnings are on an upward trend, starting this year Sales 7,546 7,878 8,58 9,54 9,781 Cost of sales 4,234 4,796 5,13 5,414 5,771 Gross profit 3,312 3,82 3,378 3,64 4,1 % gross margin 43.9% 39.1% 39.7% 4.2% 41.% Selling & administration expenses 2,455 2,629 2,867 2,997 3,28 Operating profit % operating margin 11.4% 5.7% 6.% 7.1% 8.2% Depreciation & amortization EBITDA 1, ,221 1,455 1,73 % EBITDA margin 17.7% 11.9% 14.4% 16.1% 17.4% Non-operating income Non-operating expenses Interest expense (72) (55) (55) (55) (55) Pre-tax profit 1, ,69 Income tax After-tax profit % net margin 1.6% 6.4% 6.% 6.8% 7.7% Shares in affiliates' Earnings Minority interests (122) (3) (33) (35) (38) Extraordinary items NET PROFIT Normalized profit EPS (Bt) Normalized EPS (Bt) BALANCE SHEET FY ending Dec (Bt m) 28A 29A 21F 211F 212F Strong balance sheet with.1x net gearing ASSETS: Current assets: 3,94 4,71 4,724 5,645 6,736 Cash & cash equivalent 1, ,1 1,8 2,6 Account receivables 1,742 1,725 2,98 2,232 2,412 Inventories Others Investments & loans 1,378 1,364 1,364 1,364 1,364 Net fixed assets 961 1, Other assets Total assets 6,813 6,926 7,57 8,25 9,85 LIABILITIES: Current liabilities: 2,676 3,69 3,261 3,693 4,178 Account payables 957 1,71 1,153 1,216 1,297 Bank overdraft & ST loans Current LT debt Others current liabilities ,21 1,9 1,176 Total LT debt Others LT liabilities Total liabilities 3,138 3,44 3,936 4,534 5,199 Minority interest Preferreds shares Paid-up capital Share premium 2,411 2,758 2,758 2,758 2,758 Warrants Surplus (614) (859) (859) (859) (859) Retained earnings Shareholders' equity 2,968 2,984 3,38 3,147 3,279 THANACHART SECURITIES 35

38 FINANCIAL SUMMARY GRAMMY TB PHATIPAK NAVAWATANA CASH FLOW STATEMENT FY ending Dec (Bt m) 28A 29A 21F 211F 212F Strong FCF will support dividend Earnings before tax 1, ,69 Tax paid (246) (139) (219) (265) (321) Depreciation & amortization Chg In working capital (63) 28 (33) (114) (153) Chg In other CA & CL / minorities (85) (354) Cash flow from operations 1, ,38 1,562 Capex (527) (523) (6) (6) (6) ST loans & investments 26 (14) LT loans & investments Adj for asset revaluation Chg In other assets & liabilities (16) 77 (32) (28) (37) Cash flow from investments (449) (448) (632) (628) (637) Debt financing (22) Capital increase 388 Dividends paid (549) (636) (463) (512) (617) Warrants & other surplus (173) (246) Cash flow from financing (744) (372) (125) (52) (125) Free cash flow VALUATION FY ending Dec 28A 29A 21F 211F 212F Trading at discount PE and EV/EBITDA multiples to historical peaks Normalized PE (x) Normalized PE - at target price (x) PE (x) PE - at target price (x) EV/EBITDA (x) EV/EBITDA - at target price (x) P/BV (x) P/BV - at target price (x) P/CFO (x) Price/sales (x) Dividend yield (%) FCF Yield (%) (Bt) Normalized EPS EPS DPS BV/share CFO/share FCF/share THANACHART SECURITIES 36

39 FINANCIAL SUMMARY GRAMMY TB PHATIPAK NAVAWATANA FINANCIAL RATIOS FY ending Dec 28A 29A 21F 211F 212F Growth Rate Net profit (%) 4.4 (27.6) EPS (%) 4.4 (27.6) Normalized profit (%) 4.4 (27.6) Normalized EPS (%) 4.4 (27.6) Dividend payout ratio (%) Operating performance Gross margin (%) Operating margin (%) EBITDA margin (%) Net margin (%) D/E (incl. minor) (x) Net D/E (incl. minor) (x) Interest coverage - EBIT (x) Interest coverage - EBITDA (x) ROA - using norm profit (%) ROE - using norm profit (%) DuPont ROE - using after tax profit (%) asset turnover (x) operating margin (%) leverage (x) interest burden (%) tax burden (%) WACC (%) ROIC (%) NOPAT (Bt m) THANACHART SECURITIES 37

40 HOLD (From Buy) TP: Bt33.5 (Unchanged) 9 FEBRUARY 211 Change in Recommendation Upside: 1.7% MCOT Pcl. (MCOT TB) Bumpy road ahead Thanachart Securities We downgrade MCOT to Hold. Although its valuations are undemanding, this is justified given uninspiring earnings growth. Its prospects remain dim, especially following the establishment of the NBTC because of the spectrum return issue and higher license fee costs. Its 6.8% dividend yield is the only attraction. Downgrade to HOLD We downgrade MCOT to HOLD from Buy. The reasons why we don t have a Sell rating are its undemanding valuation at 13.3x 211F PE with dividend yield of 6.8% (with upside from Bt45m extra revenue from BEC). But we don t see any positive catalysts to drive the stock for three reasons. 1) The recent share price surge has reflected the 1% ad rate hike from January. Now there is just 1% upside from the current share price to our Bt33.5 TP. 2) We aren t very bullish on MCOT s satellite TV business as we don t see its content as competitive versus GRAMMY and RS s. Most programs are also co-produced with independent operators so profit from this business will be shared. 3) MCOT will be a prime victim of the emergence of the NBTC both via the risk of high spectrum prices and higher operating costs from the license fees. Unexciting earnings It s old news that MCOT will benefit from the 1% ad hike in January but we don t believe this will translate into exciting earnings growth like at BEC. The ad hike was applied to brand new and high-rating programs, not across the board, implying less than 1% revenue growth in 211. Most programs that can raise ad rates are airtime rental or revenue-sharing ones. Thus, the leverage effect from ad hikes for MCOT is less than at BEC. Unexciting EPS growth of 11% in 211F and another 5% in 212 already reflects these factors. Headwinds following NBTC set-up MCOT s earnings prospect also remains uninspiring, especially following the set-up of the NBTC. According to the frequency return requirement, MCOT must return at least one spectrum used to broadcast the Modernine channel. MCOT said it is likely to join the bidding process to get back this spectrum. At this stage, it remains unclear what the spectrum price will be. So we haven t incorporated this cost in our model. But one thing that s certain is that if MCOT gets the spectrum, it will need to pay for the operating license, which is already reflected in our earnings forecasts starting in 213. Due to this cost, we project a 9% drop in 213 earnings. Content still relatively mediocre It has already started in the satellite business with six channels. Most of its programs are co-produced with other independent operators and focus on news and knowledgebased programs and none are pure entertainment. MCOT will find it very hard to compete in the changing environment so we don t expect it to be a key player. COMPANY VALUATION PHATIPAK NAVAWATANA phatipak.nav@thanachartsec.co.th Y/E Dec (Bt m) 29 21F 211F 212F Sales 4,797 5,227 5,562 5,839 Net profit 1,389 1,41 1,559 1,644 Consensus NP 1,487 1,616 1,691 Diff from cons (%) (5.2) (3.5) (2.8) Norm profit 1,389 1,41 1,559 1,644 Prev norm NP 1,663 1,56 1,546 Chg from prev (%) (15.3) Norm EPS (Bt) Norm EPS gr (%) Norm PE (x) EV/EBITDA (x) P/BV (x) Div. yield (%) ROE (%) Net D/E (%) (28.2) (27.8) (31.) (3.4) PRICE PERFORMANCE (Bt/shr) (%) MCOT Rel to SET Index (1) (2) 22 (3) 2 (4) Feb - 1 M ay- 1 A ug - 1 No v- 1 Feb - 11 COMPANY INFORMATION Price as of 8 Feb 11 (Bt) 3.25 Market cap (US$ m) 677 Listed shares (m shares) 687 Free float (%) 23 Avg daily turnover (US$ m).87 12M price H/L (Bt) 31.3/21.9 Sector Entertainment Major shareholder Ministry of Finance 65.8% 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.

41 COMPANY NOTE MCOT TB PHATIPAK NAVAWATANA Cut EPS in 21F to reflect no extra revenue from BEC We revise down our 21 earnings by 15% to reflect no recognition of extra revenue of Bt45m (Bt285m after tax) from extension of its concession with BEC. The additional costs from free TV operators applying for operating licenses will be pushed out from 211 to 213 due to the delay in the NBTC s establishment. So our earnings in are revised up by 2-4% but cut by 5% in 213 to reflect the delay in the NBTC s set-up. Ex 1: Earnings Revisions For MCOT 21F 211F 212F Normalized profit (Bt m) - new 1,41 1,559 1,644 - old 1,663 1,56 1,546 Change (%) (15.3) Revenue (Bt m) - new 5,227 5,562 5,839 - old 5,44 5,374 5,79 Change (%) (3.3) Gross margin (%) - new old Ex 2: EPS To Drop In 213F Due To Regulatory Costs Ex 3: Don t Expect PE To Trade In High Range Due To Regulatory Risk And Fiercer Competition (Bt m) 1,5 1, (x) STD = 21.1x +1 STD = 17.1x Average = 13.1x STD = 9.1x -2 STD = 5.1x F211F212F213F214F 3 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Sources: Bloomberg, Thanachart estimates THANACHART SECURITIES 39

42 COMPANY NOTE MCOT TB PHATIPAK NAVAWATANA Ex 4: Dividend Yield Is High And Is The Only Attraction (%) STD = 13.4% STD = 1.4% 9 Average = 7.3% 6-1 STD = 4.2% 3-2 STD = 1.1% Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Sources: Bloomberg, Thanachart estimates Ex 5: PE Gap With BEC Has Narrowed Despite Less EPS Excitement (x) STD = 2.3x STD = 1.9x 1.5 Average = 1.4x STD = 1.x -2 STD =.5x.5. Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Sources: Bloomberg, Thanachart estimates Valuation Comparison Ex 6: Valuation Comparison With Regional Peers EPS growth PE P/BV EV/EBITDA Div yield Name BBG code Country 11F 12F 11F 12F 11F 12F 11F 12F 11F 12F (%) (%) (x) (x) (x) (x) (x) (x) (%) (%) Beijing Gehua 637 CH China Phoenix Satellite 28 HK Hong Kong Television Broad 511 HK Hong Kong Vodone Ltd 82 HK Hong Kong Entertainment Ne ENIL IN India (22.9) Ibn18 Broadcast IBN18 IN India (134.5) na na Sun TV Network SUNTV IN India Television 18 TLEI IN India (98.6) na na na na TV Today Network TVTN IN India (74.6) Zee Entertainment Z IN India na na Zee News Ltd ZEEN IN India (74.3) na na Surya Citra Media SCMA IJ Indonesia Media Prima Bhd MPR MK Malaysia ABC-CBN Corp ABS PM Philippines (14.4) (33.2) Gma Network Inc GMA7 PM Philippines (4.1) (8.8) On*Media Corp 4571 KS S. Korea BEC World * BEC TB Thailand GMM Grammy * GRAMMY TB Thailand MCOT * MCOT TB Thailand RS * RS TB Thailand Average (12.3) Source: Bloomberg Note: * Thanachart estimates using normalized EPS growth THANACHART SECURITIES 4

43 APPENDIX MCOT TB PHATIPAK NAVAWATANA COMPANY DESCRIPTION COMPANY RATING Mass Communication Organization of Thailand is a state-owned enterprise which owns interests in communications companies. On 2 July 24, the Thai government gave approval for it to be transformed into MCOT Public Co., Ltd (MCOT). Manage ment Financial Risk Manage ment Rating Scale Very Strong 5 Strong 4 Good 3 Fair 2 Liquidity *Corp. Governance Weak 1 None Source: Thanachart Sources: Thanachart, *CG Awards THANACHART S SWOT ANALYSIS S Strength MCOT has a very strong balance sheet with a net cash position. MCOT has received government support, including ad spending and spectrum. W Weakness As 5% of its airtime comes from airtime rental and revenue sharing, MCOT has to share revenue with independent producers. Therefore, the company will benefit less from the industry upturn. Competition in the radio business, which makes up 16% of total revenue, has been fierce. So it will be an earnings drag for MCOT, especially in the industry upturn. O Opportunity MCOT could launch new channels and generate higher revenues in the wake of industry liberalization. Since MCOT now allows TrueVisions to air adverts, this provides it with more revenue-sharing. T Threat Liberalization will bring more competitors to the market and will erode future profitability. Satellite and cable TV s increasing market share will offer more choice to advertisers and could pose a threat to MCOT s ad rate hikes going forward. CONSENSUS COMPARISON Consensus Thanachart Diff Target price (Bt) % Net profit 11F (Bt m) 1,616 1,559-4% Net profit 12F (Bt m) 1,691 1,644-3% Consensus REC BUY: 12 HOLD: 3 SELL: RISKS TO OUR INVESTMENT CASE If the cost of producing its own programs is higher than we currently estimate. The firm could face cost overruns due to the launch of new businesses such as TV on mobile and satellite TV. HOW ARE WE DIFFERENT FROM THE STREET? Our earnings forecast for 211 is about 4% below other brokers as we are less bullish on TV revenue than the street. Our TP is 6% below the Street s accordingly. Sources: Bloomberg consensus, Thanachart estimates Source: Thanachart THANACHART SECURITIES 41

44 FINANCIAL SUMMARY MCOT TB PHATIPAK NAVAWATANA INCOME STATEMENT FY ending Dec (Bt m) 28A 29A 21F 211F 212F Earnings are on an upward trend, starting this year Sales 4,226 4,797 5,227 5,562 5,839 Cost of sales 1,735 1,846 1,952 2,26 2,13 Gross profit 2,49 2,951 3,274 3,536 3,736 % gross margin 58.9% 61.5% 62.6% 63.6% 64.% Selling & administration expenses 96 1,14 1,339 1,392 1,476 Operating profit 1,53 1,811 1,936 2,144 2,26 % operating margin 36.2% 37.8% 37.% 38.5% 38.7% Depreciation & amortization EBITDA 1,928 2,235 2,345 2,594 2,76 % EBITDA margin 45.6% 46.6% 44.9% 46.6% 47.3% Non-operating income Non-operating expenses (1) (1) (1) (1) (1) Interest expense () () (1) () () Pre-tax profit 1,656 1,878 2,12 2,226 2,347 Income tax After-tax profit 1,23 1,393 1,49 1,558 1,643 % net margin 29.1% 29.% 27.% 28.% 28.1% Shares in affiliates' Earnings Minority interests (2) (4) Extraordinary items NET PROFIT 1,228 1,389 1,41 1,559 1,644 Normalized profit 1,228 1,389 1,41 1,559 1,644 EPS (Bt) Normalized EPS (Bt) BALANCE SHEET FY ending Dec (Bt m) 28A 29A 21F 211F 212F Balance sheet is very strong with a net cash position ASSETS: Current assets: 4,751 5,251 5,236 5,66 5,736 Cash & cash equivalent 1,829 2,19 2,15 2,421 2,47 Account receivables Inventories Others 2,256 2,42 2,252 2,297 2,334 Investments & loans Net fixed assets 4,233 4,298 4,294 4,449 4,555 Other assets Total assets 9,124 9,693 9,679 1,27 1,446 LIABILITIES: Current liabilities: 92 1, ,136 1,114 Account payables Bank overdraft & ST loans 22 (18) 19 Current LT debt Others current liabilities 87 1, ,7 1,9 Total LT debt Others LT liabilities 1,6 1,37 1,13 1,22 1,262 Total liabilities 1,926 2,22 2,32 2,338 2,376 Minority interest Preferreds shares Paid-up capital 3,435 3,435 3,435 3,435 3,435 Share premium 1,17 1,17 1,17 1,17 1,17 Warrants Surplus Retained earnings 2,637 2,914 3,71 3,295 3,497 Shareholders' equity 7,18 7,457 7,614 7,837 8,39 THANACHART SECURITIES 42

45 FINANCIAL SUMMARY MCOT TB PHATIPAK NAVAWATANA CASH FLOW STATEMENT FY ending Dec (Bt m) 28A 29A 21F 211F 212F With less capex, most of its FCF is paid as dividend Earnings before tax 1,656 1,878 2,12 2,226 2,347 Tax paid (426) (484) (64) (668) (74) Depreciation & amortization Chg In working capital 55 (52) (85) (5) (41) Chg In other CA & CL / minorities (144) 225 (99) Cash flow from operations 1,692 1,96 1,589 2,184 2,3 Capex (278) (484) (4) (6) (6) ST loans & investments (11) (51) LT loans & investments (1) Adj for asset revaluation Chg In other assets & liabilities Cash flow from investments (214) (514) (318) (537) (549) Debt financing 22 (4) 36 Capital increase Dividends paid (1,24) (1,1) (1,253) (1,336) (1,441) Warrants & other surplus 1 (12) Cash flow from financing (1,15) (1,112) (1,231) (1,376) (1,45) Free cash flow 1,415 1,422 1,189 1,584 1,43 VALUATION FY ending Dec 28A 29A 21F 211F 212F Trading at discount PE and EV/EBITDA multiples to historical peaks Normalized PE (x) Normalized PE - at target price (x) PE (x) PE - at target price (x) EV/EBITDA (x) EV/EBITDA - at target price (x) P/BV (x) P/BV - at target price (x) P/CFO (x) Price/sales (x) Dividend yield (%) FCF Yield (%) (Bt) Normalized EPS EPS DPS BV/share CFO/share FCF/share THANACHART SECURITIES 43

46 FINANCIAL SUMMARY MCOT TB PHATIPAK NAVAWATANA FINANCIAL RATIOS FY ending Dec 28A 29A 21F 211F 212F Growth Rate Net profit (%) EPS (%) Normalized profit (%) Normalized EPS (%) Dividend payout ratio (%) Operating performance Gross margin (%) Operating margin (%) EBITDA margin (%) Net margin (%) D/E (incl. minor) (x)... (.). Net D/E (incl. minor) (x) (.3) (.3) (.3) (.3) (.3) Interest coverage - EBIT (x) 3, , , , ,157.8 Interest coverage - EBITDA (x) 38, , , , ,587.1 ROA - using norm profit (%) ROE - using norm profit (%) DuPont ROE - using after tax profit (%) asset turnover (x) operating margin (%) leverage (x) interest burden (%) tax burden (%) WACC (%) ROIC (%) NOPAT (Bt m) 1,136 1,344 1,355 1,51 1,582 THANACHART SECURITIES 44

47 BUY TP: Bt5. 9 FEBRUARY 211 Initiation Note Upside: 39.7% RS Pcl. (RS TB) Best satellite wave play Thanachart Securities RS is the most leveraged play on the satellite TV boom with revenue exposure soaring from 2% in 21F to 4% in 214F. Earnings growth is also accelerating, rising from 8% y-y in 211F to 29% in F. It s the cheapest too at 1.8x PE. BUY. Initiate with a BUY; our top sector pick RS is our top sector pick and it s the most mispriced media stock. We believe the major reason for this mispricing is that it isn t very well covered by the market. The counter now trades at 1.8x 211F PE, at a 19% discount to MCOT and a 28% discount to BEC. This valuation seems unjustified given a fouryear CAGR earnings growth of 24% y-y in F, its net cash position, a high ROE of 4% and decent dividend yield of 4.6%. Assuming full dilution (in-the-money warrants), our DCFbased TP is Bt5./share. Initiate with a BUY. Most exciting play on satellite TV RS s key business strategy will shift from traditional music to the under-penetrated satellite business from 211 onward. The penetration rate of this business is only 5% of households in Thailand and its average ad rate in 21 was less than 3% of the ad rate for free-to-air (FTA) channels during non-prime time. The company now runs two satellite channels and plans to open at least one more in March this year. The content on this channel will be similar to FTA terrestrial programs, ranging from soap operas to game shows. Given the rising satellite penetration rate and RS s strong content, we forecast stellar revenue growth of 5-1% over the next four years with revenue exposure soaring from 2% in 21F to 4% in 214F. Earnings are accelerating too RS is in the early stages of a multi-year earnings growth cycle and earnings are also accelerating. We forecast 8.2% y-y earnings growth in 211. This is quite impressive given that the firm will resume paying tax at a 3% rate while it will see no extra income from broadcasting the World Cup. The key earnings drivers in 211 will be a strong jump in satellite revenue, price hikes for digital music and more revenue from the in-store media. We project earnings to accelerate by 29% y-y in with the key earnings driver being satellite TV. We prefer RS to GRAMMY We prefer RS to GRAMMY on the fast-growing satellite theme. RS has a lower revenue base and its revenue structure is less diversified than GRAMMY s. Thus, the same magnitude of satellite revenue surge will have a greater impact on RS s revenue and earnings than on GRAMMY s. Our sensitivity analysis suggests that a 1% increase in revenue from the satellite business would add 1.4% to RS s total revenue and earnings in 211 (versus.7% for GRAMMY). RS is also cheaper, trading at a lower PE with a stronger growth outlook. COMPANY VALUATION PHATIPAK NAVAWATANA phatipak.nav@thanachartsec.co.th Y/E Dec (Bt m) 29 21F 211F 212F Sales 2,174 2,9 3,1 3,381 Net profit Consensus NP Diff from cons (%) (1.5) Norm profit Prev norm NP Chg from prev (%) Norm EPS (Bt) Norm EPS gr (%) (119.1) Norm PE (x) EV/EBITDA (x) P/BV (x) Div. yield (%) ROE (%) Net D/E (%) (24.1) (4.7) PRICE PERFORMANCE (Bt/shr) RS Rel to SET Index (%) (2) 1.5 (4) 1. (6) Feb - 1 M ay- 1 Aug - 1 Nov- 1 Feb - 11 COMPANY INFORMATION Price as of 8 Feb 11 (Bt) 3.58 Market cap (US$ m) 13 Listed shares (m shares) 883 Free float (%) 47 Avg daily turnover (US$ m).63 12M price H/L (Bt) 4./2. Sector Entertainment Major shareholder Chetchotisak Family 53.8% 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.