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Investment Research

Company Report

Media Chinese International Limited

Date: 2 August 2012

Still a good read

With 80% market share, MCIL has a de-facto monopoly on Chinese newspaper in Malaysia. Revenue has been growing at high single digit and net income has been growing at almost 20% per year.

Buy
Fair value Previous FV Share price Yield Capital gain Total return Conviction Stock code Market cap RM2.00(ex RM1.60) N/A RM1.51 +7% +45% +52% High MCIL MK RM2,564m

MCIL currently has a pending 41 sen capital repayment that is expected to be paid out by 4Q12. Post capital repayment, MCIL will still continue to yield 7% based on our estimates. Therefore, we believe MCIL earnings growth and dividend potential is underappreciated at current price. Based on DDM, we derived a fair value of RM2.00 for MCIL. We have also assigned a High conviction rating to MCIL. Overall, we have a BUY on MCIL.

John LEE
john@nonameresearch.com

nonameresearch.com | 2 August 2012

Dominance in Chinese Print Underappreciated

De-facto monopoly in Malaysia
Stronger post April 2008 merger. Recall that the current MCIL is the result of the merger between Sin Chew Media Bhd, Nanyang Press Holdings Bhd and Ming Pao Enterprise Corporation Ltd (HK) in 2008. MCIL now produces five dailies, two free dailies, 30 magazine titles and a legacy travel and tour business. Out of the five dailes, four dailies are circulated in Malaysia (Sin Chew, Nanyang, China Press and Guang Ming) and one in HK (Ming Pao). Total circulation is a respectable 1 million copies per day. All five dailies are well established publications. Except for Guang Ming, all four other publications were in circulation before 1960s. Broadly, the dailies are positioned as below.
Table 1: MCIL newspapers

Newspaper Sin Chew Nanyang Siang Pau China Press, Guang Ming Ming Pao

Description MCIL flagship publication. Accounts for half MCIL Malaysia circulation. 1st in circulation in Malaysia Oldest Chinese newspaper in Malaysia. Focused on business and finance. 4th in circulation in Malaysia More tabloid and entertainment related. 2nd and 3rd in circulation in Malaysia Circulated in HK. More serious in nature. Targeted at academics and decision makers. 4th most widely circulated dailies in HK

MCIL controls 80% of Chinese newspaper adex and circulation. In Malaysia, MCIL has total circulation of roughly 800k copies per day or 80% of total Malaysia Chinese newspaper circulation of 1 million copies per day. Sin Chew on its own controls almost half or 390k copies per day. This compares favourably with the market leader in other language segments such as Star at 290k copies per day and Harian Metro at 390k copies per day. Due to it dominant share of circulation, MCIL also controls 80% of the Chinese newspaper adex in Malaysia. For all practical purposes, MCIL is the de-facto Chinese newspaper monopoly in Malaysia.
Table 2: Top newspaper by segment (as at 1H2011)

Segment English Malay Chinese

Publication The Star Harian Metro Sin Chew

Copies per day (end 2011) ~290k ~390k ~390k

Owner STAR MPR MCIL

Source: Audit Bureau of Circulation

nonameresearch.com | 2 August 2012

Further potential upside if revenue growth continues

Net income growing rapidly. Revenue has been growing at high single digit for the past two years to RM1,447m in 2012. Consequently, net income has been growing at more than twice the rate of revenue growth. Net income grew 24% and 17% in 2011 and 2012 respectively (the 143% growth in 2010 was due to low base effect as GP margin compressed due to high newsprint price). It is apparent that net income rapid growth has been driven by margin expansion (from 4% in 2009 to 13% in 2012) and this can be expected to continue as long as revenue continues to grow.
Table 3: MCIL revenue and net income 2009-2012 FYE-Mar (RM m) Revenue Net income Revenue growth Net income growth Net income margin 2009 1,286 55 2010 1,226 134 -5% 143% 11% 2011 1,349 166 10% 24% 12% 2012 1,447 194 7% 17% 13%

4%

Note: MCIL reports in USD and translates the financials into RM using a single point exchange rate instead of a weighted average exchange rate

Concerns about macro risks overdone. It is often mentioned that media companies (including MCIL) are high beta and are therefore susceptible to macro risks. This is true to a certain extent as adex is generally the first to be scaled back during recessions as (1) adex is generally discretionary (2) consumer demand is typically weak during recessions and may blunt marketing campaigns efficacy. However, just focusing on this point presents an overly negative view of media companies for it ignores three important points. Firstly, despite short term fluctuations, adex in Malaysia has consistently been on an uptrend across all segments including TV, radio, print and outdoor. More specifically, newspaper adex in Malaysia has been growing at 7% CAGR in the last decade. In other words, despite the 2000 tech crash, the Sept 11 attacks, the 2004 SARS outbreak, the 2008 Lehman collapse and the ongoing Eurozone crisis, adex continued its upward march. Secondly, it is often forgotten that media companies in Malaysia are effectively mini monopolies in each of their own niche. Every niche has a dominant market leader e.g. MCIL dominates Chinese newspaper, Harian Metro dominates Malay newspaper, Star dominates English newspaper, TV3 dominates FTA TV, Astro dominates pay-TV, Jobstreet dominates online recruitment etc. With market leadership comes pricing power which helps during both bad and good times. Thirdly, from an investment perspective, labelling a stock high beta merely substitutes one problem for another for now the assessment shifts from industry analysis to macro analysis. At any rate, the label high beta is of little utility as the label, instead of being negative/positive, is at best neutral. What goes down fast also comes back up fast. This can be seen in MCIL 142% net income growth in 2010 (bear in mind that MCIL financial year end is Mar. Hence, almost of MCIL FY2009 is actually in 2008 which explains the depressed net income of RM55m for FY2009).

nonameresearch.com | 2 August 2012

Based on the above, it is perhaps better to focus on MCIL dominance in the Chinese newspaper market in Malaysia than speculating on the potential fallout from the Eurozone crisis or China crisis or whatever the flavour of the month may be. After all, the adex will come back and MCIL will still have 80% market share.

nonameresearch.com | 2 August 2012

Valuation and Conclusion

Valuation method and key assumption
Based on DDM, we derived a fair value of RM2.00 (RM1.60 ex-capital repayment) for MCIL. At the ex capital repayment price of RM1.10 (current price RM1.51 less 41 sen capital repayment), this represents a potential total return of 52% comprising 7% dividend yield and 45% capital gain. MCIL paid out 7.2 sen DPS in FY2012 or a 63% payout out of 11.5 sen EPS. Even at such low payout ratio, MCIL is already yielding 6.5% based on the ex-capital repayment price of RM1.10 Conservatively, MCIL revenue should be able to grow mid to high single digit in the short term and net income will grow at multiple of revenue or 10% to 15%. Under such circumstances MCIL should be able to deliver roughly 12 sen EPS after accounting for higher interest expense due to leverage Assuming 75% payout, this translates to 9 sen DPS. At 9 sen DPS, MCIL will be yielding a high 8% net dividend yield (based on the ex-capital repayment price of RM1.10) We estimated 8 sen DPS for FY2013. This translates to a yield of around 7% at ex-capital repayment price of RM1.10

Note: On 16 July 2012, MCIL announced a capital repayment through special dividend of RM700m (41 sen per share). This is still pending and is expected to complete in 4Q12

Key risks
Short term adex shock. While adex is sensitive to short term macro shocks in the short term, adex has also been on a long term uptrend in Malaysia. Historically, despite the ups and downs in recent years, newspaper adex in Malaysia has been growing at 7% per year. Based on this and also adex behavior during the Lehman crisis in 2008, MCIL adex could potentially decline in the event of a macro shock but it will also recover quickly.

Conclusion
With 80% market share, MCIL has a de-facto monopoly on Chinese newspaper in Malaysia. Revenue has been growing at high single digit and net income has been growing at almost 20% per year. MCIL currently has a pending 41 sen capital repayment that is expected to be paid out by 4Q12. Post capital repayment, MCIL will still continue to yield 7% based on our estimates. Therefore, we believe MCIL earnings growth and dividend potential is underappreciated at current price. Based on DDM, we derived a fair value of RM2.00 for MCIL. We have also assigned a High conviction rating to MCIL. Overall, we have a BUY on MCIL.

nonameresearch.com | 2 August 2012

Historical Statistics
Profit and Loss (FYE-Mar)
1,600 1,400 1,349 1,226 1,447

Payout Ratio (FYE-Mar)

70% 63% 48%

60%
50% 40%

1,200 1,000

RM m

800
600 400 200 -

30%
20%

25%

134

166

194

10%

0% 2010
Revenue

2011
Net income

2012

2010

2011
Payout ratio

2012

Net Income Margin (FYE-Mar)

16% 14%

EPS and DPS (FYE-Mar)

14.0

13%
12% 11%

12.0
10.0 9.8

11.5

12% 10% 8%
6% 4% 2% 0%

Sen

8.0

7.9

7.2
4.7

6.0
4.0

2.0
2.0

2010 2011
Net income margin

2012

2010
EPS

2011
DPS

2012

Revenue by Segment (FYE-Mar)

Travel and related 15%

Revenue and Net Income Growth (FYE-Mar)

160% 140% 120% 143%

North America 6%

100%
80% Malaysia and other SEA 62% 60% 40% 20% 34%

19% 6%
-5% 2010
Revenue growth

HK and China 17%

15%

0%
-20% 2011
Net income growth

2012

nonameresearch.com | 2 August 2012 Rating structure The rating structure consists of two main elements; fair value and conviction rating. The fair value reflects the security intrinsic value and is derived based on fundamental analysis. The conviction rating reflects uncertainty associated with the security fair value and is derived based on broad factors such as underlying business risks, contingent events and other variables. Both the fair value and conviction rating are then used to form a view of the security potential total return. A Buy call implies a potential total return of 10% or more, a Sell call implies a potential total loss of 10% or more while all other circumstances result in a Neutral call.

Disclaimer This report is for information purposes only and is prepared from data and sources believed to be correct and reliable at the time of issue. The data and sources have not been independently verified and as such, no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this report. The information and opinions in this report are not and should not be construed as an offer, recommendation or solicitation to buy or sell any securities referred to herein. Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction.