Editor: Kevin Cheng Tel: (852) 2277 6626 Email ...research.cyberquote.com.hk/page/htm/kc/share... · Our forecast puts FY14 DPS at Bt0.35/share. We also downgrade RS shares to ‘NEUTRAL.’

21 May 2014

Page | 1 MCI (P) 046/11/2013 Pef. No.: TH2014_0204

RS - RS

Return to profitability expected in 2QFY14 helped by World Cup windfalls

THAILAND | MEDIA | COMPANY UPDATE

BLOOMBERG RS TB │ REUTERS RS.BK

RS swung to a net loss of Bt4.54mn in 1QFY14 from a net profit of Bt68mn in 1QFY13 due chiefly to an enormous cost escalation and faltering revenue hit by the twin effects of political and economic headwinds.

Earnings are poised for a return to profitability in 2QFY14 helped by satellite TV business and World Cup windfalls. In y-y terms, 2QFY14 profit is also expected to be better than 2QFY13 but political and economic uncertainties may remain a concern on the outlook in 2HFY14.

We slash our FY14 profit outlook for RS by 10.4% but the new profit target still represents a growth of 10.9% y-y. Following earnings cut, we trim our FY14 target price for RS to Bt7.70/share. Our forecast puts FY14 DPS at Bt0.35/share. We also downgrade RS shares to ‘NEUTRAL.’

RS swung to a net loss of Bt4.54mn in 1QFY14 from a net profit of Bt68mn in 1QFY13 due chiefly to an enormous cost escalation and faltering revenue. In this period, total revenue slid 3.2% y-y as a big drop in revenue from music distribution business hit by the twin effects of political and economic headwinds offset a strong revenue growth from media business. Total costs shot up 25.7% y-y due to higher amortization of La Liga sports licensing costs, as well as production costs of dramas for Channel 8 and costs of radio business after the addition of ‘Cool Celsius 91.5’ in late 1QFY13. A huge cost escalation was the main culprit behind the quarterly loss though SG&A expenses inched down 7.4% y-y thanks to selling expense controls and lower provision for doubtful debt. In this period, the results also included a reversal of deferred tax provision. How we view this Earnings are poised for a return to profitability in 2QFY14 helped by (i) satellite TV business on the back of improvements in both ad rates and ad utilization and (ii) the 2014 FIFA World Cup finals slated to begin on Jul 12. In y-y terms, 2QFY14 profit is also expected to be better than 2QFY13. However, there remains a concern on the outlook in 2HFY14 in the face of sluggish economic conditions and prolonged political uncertainty. There is also a risk of additional impairment provision for La Liga sports license. For this reason, we slash our FY14 profit outlook for RS by 10.4% to Bt438mn but the new profit target still represents a growth of 10.9% y-y. Investment Action The 52.97mn new shares from the exercise of the recently matured RS-W2, which are slated to begin trading anytime soon, would push the total number of outstanding shares higher to 1,022.65mn. The forecast is based on assumptions that the warrants would be fully exercised. Following earnings downgrade, we slash our FY14 target price for RS to Bt7.70/share based on a P/E multiple of 18x. Our forecast puts FY14 DPS at Bt0.35/share. We also downgrade RS shares to ‘NEUTRAL’ from ‘ACCUMULATE’ due to limited upside from current trading levels.

Key Financial Summary

FYE Dec FY10 FY11 FY12 FY13 FY14F FY15F

Revenue (Btmn) 0 2,729 2,812 3,461 4,515 3,870

NPAT (Btmn) 209 284 394 438 415

EPS (Bt) 0.24 0.32 0.41 0.43 0.41

NPAT, adj. (Btmn) 0 209 284 394 438 415

EPS, adj. (Bt) 0.00 0.24 0.32 0.41 0.43 0.41

P/E (X),adj. #DIV/0! 34.2 25.6 20.0 19.1 20.0

BVPS (Bt) 0.00 1.33 1.43 1.65 1.71 1.77

P/B (X) #DIV/0! 6.2 5.7 5.0 4.8 4.6

DPS (Bt) 0.00 0.15 0.25 0.35 0.35 0.35

Div. Yield (%) 0.0% 1.8% 3.0% 4.3% 4.3% 4.3%

**Multiples and yields are based on

latest closing price

Source: Bloomberg, PSR est.

Analyst Phillip Research Team +65 65311240 [email protected]

RS - RS 21 May 2014

Page | 2

1QFY14 loss hit by escalating costs RS swung to a net loss of Bt4.54mn in 1QFY14 from a net profit of Bt68mn in 1QFY13 due chiefly to an enormous cost escalation and faltering revenue hit by the twin effects of political and economic headwinds. In 1QFY14, total revenue slid 3.2% y-y to Bt696mn as top-line growth from media business was eclipsed by a big revenue drop in music distribution business. (i) Revenue from media business continued to grow at a healthy pace of 34.9% y-y

boosted by higher ad utilization and sale of La Liga content through ‘Sun Box’ set-top-box. In this period, revenues from satellite TV business and La Liga swelled 38.5% and 138.9% y-y respectively while revenue from radio business held steady.

(ii) Revenue from showbiz business edged up a measly 8.7% y-y as domestic political protests led to the postponement and cancellation of events.

(iii) Revenue from music distribution business tumbled 57.3% y-y due largely to a reduction in number of new album releases in the face of political turmoil and the absence of new concert CDs. In this period, physical music sales plunged 77.3% y-y. Revenue from digital business plummeted by 41.9% y-y. Copyright collection shrank 27.0% y-y.

Total costs shot up 25.7% y-y on higher amortization of La Liga sports licensing costs, as well as production costs of dramas for Channel 8 and costs of radio business after the addition of ‘Cool Celsius 91.5’ in late 1QFY13. A huge cost escalation was the main culprit behind the quarterly loss though SG&A expenses inched down 7.4% y-y thanks to selling expense controls and lower provision for doubtful debt. In this period, the results also included a reversal of deferred tax provision. Return to profitability expected in 2QFY14 helped by World Cup windfalls In 1QFY14, political turmoil took a toll on media business but things are likely to get better in 2QFY14 especially satellite TV business in terms of improvements in ad rates and ad utilization. Music business also shows signs of improving in q-q terms. In showbiz business, there would be a backlog of Bt200mn to be booked as revenue in 2QFY14-4QFY14. Revenue from sales of ‘Sun Box’ set-top-boxes which are bundled with World Cup and La Liga contents is also set to rise as the broadcast of the 2014 FIFA World Cup finals is slated to begin on Jun 12. RS aims to sell 500,000 ‘Sun Box’ set top boxes. Note that 100,000 set-to-boxes have already been sold. RS has also sub-licensed the World Cup broadcasting rights to PSI which guarantees minimum sales of 500,000 boxes, of which 250,0000 boxes have already been sold. RS would also realize around Bt560mn-Bt580mn in revenue from sponsorship and ad sales for 22 matches of the World Cup finals to be aired on free TV. However, profit from World Cup may come in lower than previously estimated and expenses from digital TV business tend to rise. Even though there would be the remaining 10% revenue from World Cup to be booked in Jul 2014, sluggish economic conditions and political uncertainty after the imposition of martial law would hurt overall business of RS. There is also a risk of additional impairment provision for La Liga sports license if thing does not go according to the business plan. Uncertainty of ad utilization in digital TV business due to the early stages of digital TV era and fierce competition also gives us an excuse to slash our FY14 profit outlook for RS by 10.4% to Bt438mn from Bt489mn but the new profit target still represents a growth of 10.9% y-y. Downgrade to ‘NEUTRAL,’ FY14 target price cut to Bt7.70/share The 52.97mn new shares from the exercise of the recently matured RS-W2, which are slated to begin trading anytime soon, would push the total number of outstanding shares higher to 1,022.65mn. The forecast is based on assumptions that the warrants would be fully exercised. Following earnings downgrade, we slash our FY14 target price for RS to Bt7.70/share based on a P/E multiple of 18x. Our forecast puts FY14 DPS at Bt0.35/share. We also downgrade RS shares to ‘NEUTRAL’ from ‘ACCUMULATE’ due to limited upside from current trading levels.

RS - RS 21 May 2014

Page | 3

Total Returns Recommendation Rating> +20% Buy 1+5% to +20% Accumulate 2-5% to +5% Neutral 3-5% to -20% Reduce 4<-20% Sell 5

We do not base our recommendations entirely on the above quantitative return bands. We

consider qualitative factors like (but not limited to) a stock's risk reward profile, market

sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts,

and speculative undertones surrounding the stock, before making our final recommendation

Ratings History

PSR Rating System

Remarks

12345

Source: Bloomberg, PSR

0.00

5.00

10.00

15.00

20.00

Jun

-12

Sep-1

2

Dec-1

2

Mar-1

3

Jun

-13

Sep-1

3

Dec-1

3

Mar-1

4

Jun

-14

Sep-1

4

Dec-1

4

Market PriceTarget Price

RS - RS 21 May 2014

Page | 4

Industry Group Name Sector Name Sector Index

Agro & Food Industry Agribusiness AGRI

[AGRO] Food & Beverage FOOD

Consumer Products Fashion FASHION

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Personal Products & Phamaceuticals PERSON

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[INDUS] Industrail Materials & Machinery IMM

Packaging PKG

Paper & Printing Materials PAPER

Petrochemicals & Chemicals PETRO

Steel STEEL

Property & Construction Construction Materials CONMAT

[PROPCON] Construction Services CONS

Property Development PROP

Property Fund & REITs FP&REIT

Resources Energy & Utilities ENERG

[RESOURC] Mining MINE

Services Commerce COMM

[SERVICE] Media & Publishing MEDIA

Health Care Services HELTH

Tourism & Leisure TOURISM

Professionsl Services PROF

Transportation & Logistics TRANS

Technology Electronic Components ETRON

[TECH] Information & Communication Technology ICT

PHILLIP RESEARCH STOPHILLIP RESEARCH STOPHILLIP RESEARCH STOPHILLIP RESEARCH STOCK SELECTION SYSTEMSCK SELECTION SYSTEMSCK SELECTION SYSTEMSCK SELECTION SYSTEMS

We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation

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Total ReturnTotal ReturnTotal ReturnTotal Return RecommendationRecommendationRecommendationRecommendation RatingRatingRatingRating RemarksRemarksRemarksRemarks >+20%>+20%>+20%>+20% BuyBuyBuyBuy 1111 >20% upside from the current price>20% upside from the current price>20% upside from the current price>20% upside from the current price

+5% to +20%+5% to +20%+5% to +20%+5% to +20% AccumulateAccumulateAccumulateAccumulate 2222 +5% to +20%upside from the curren+5% to +20%upside from the curren+5% to +20%upside from the curren+5% to +20%upside from the current pricet pricet pricet price ----5% to +5%5% to +5%5% to +5%5% to +5% NeutralNeutralNeutralNeutral 3333 Trade within ± 5% from the current priceTrade within ± 5% from the current priceTrade within ± 5% from the current priceTrade within ± 5% from the current price ----5% to 5% to 5% to 5% to ----20%20%20%20% ReduceReduceReduceReduce 4444 ----5% to 5% to 5% to 5% to ----20% downside from the current price20% downside from the current price20% downside from the current price20% downside from the current price

<<<<----20%20%20%20% SellSellSellSell 5555 >20%downside from the current price>20%downside from the current price>20%downside from the current price>20%downside from the current price

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