thailand media sector - listed companyrs.listedcompany.com/misc/analyst/thanachart_090211.pdf ·...

This report is prepared by Thanachart Securities. Please contact our salesperson for authorisation. Please see the important notice on the back

Than

acha

rtSe

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Thailand Media Sector New competitive landscape

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 662 – 617 4978

[email protected]

THAILAND SECTOR NOTE 9 FEBRUARY 2011

This report is prepared by Thanachart Securities. Please contact our salesperson for authorisation. Please see the important notice on the back page.

Than

acha

rtSe

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THAILAND Sector Note 9 FEBRUARY 2011

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) (%) (%)

BEC World BEC TB BUY 43.00 20.7 12.1 15.0 13.4 7.2 6.5 6.7 7.5

GMM Grammy GRAMMY TB BUY 19.00 20.1 20.6 12.2 10.1 5.4 4.5 7.4 8.9

MCOT MCOT TB HOLD 33.50 10.6 5.4 13.3 12.6 7.1 6.6 6.8 7.1

RS RS TB BUY 5.00 8.2 30.4 10.8 8.3 6.0 4.4 4.6 6.0Source: 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. 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.


[email protected]

Households To Get Satellite Soon

0

50

100

15020

07

2008

2009

2010

F

2011

F

2012

F

2013

F

(%) Penetration rate% change

Source: AC Nielsen Media Research

Room For Satellite Ad Rate Hikes

0

2,000

4,000

6,000

Ad spend/min onSatellite

Ad spend/min onFTA

0

200,000

400,000(Bt/minute) (Bt/minute)

Ad spend/min on Satellite

Ad spend/min on FTA

Sources: BEC, GRAMMY

TV Share Of Incumbents To Fall

0

20

40

60

Jan-08 Oct-08 Jul-09 Apr-10 2014

(%) MCOT* Ch 7Ch 5 BEC's Ch 3

Source: Nielsen Media Research

Note: *MCOT's Modernine TV

CONTENT PHATIPAK NAVAWATANA

THANACHART SECURITIES 2

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 .......................................................................................................... 13

RS is our top pick; we prefer BEC to MCOT ..............................................................................................................................14

RS: Small but beautiful ..................................................................................................................................................................... 14

GRAMMY: New business model ...................................................................................................................................................... 15

BEC: Coasting on ad hikes............................................................................................................................................................... 16

MCOT: Bumpy road ahead............................................................................................................................................................... 17

Sector Valuation Comparison .....................................................................................................................................................18 Appendix ...... ..............................................................................................................................................................................19 Company notes ................................................................................................................................................................................

BEC World Pcl (BEC TB) — Coasting on ad hikes .......................................................................................................................... 20

GMM Grammy Pcl (GRAMMY TB) — New business model ............................................................................................................ 28

MCOT Pcl. (MCOT TB) ) — Bumpy road ahead ............................................................................................................................. 38

RS Pcl. (KTB TB) — Best satellite wave play.................................................................................................................................. 45

MEDIA SECTOR PHATIPAK NAVAWATANA


New competitive landscape

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 2013 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 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 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).

There will be some changes following market liberalization

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

MCOT will be hurt most since it needs to return some of its spectrum and bear extra costs: spectrum price and license fee



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 2020 while TrueVisions shares 6% of its revenue with MCOT based on its annual service revenue and its concession will end in 2019.

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 2020

5. VHF TrueVisions' concession No 2019 Sources: Company data, Thanachart estimates

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 30% of airtime from 70% currently (note that under the 2008 broadcasting law, the mix of content on non-commercial channels will be 30% entertainment and 70% non-entertainment, while the mix on commercial channels will be the reverse of the non-commercial 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

1980-2020 ─

Ch 5 Royal Thai Army Royal Thai Army State-owned

network

Frequency owner ─ ─

Ch 7 Bangkok

Broadcasting &

Television

Ratanaruk Group Private network Royal Thai Army na ─

Modernine TV MCOT Ministry of Finance State-owned

network

Frequency owner ─ Yes

NBT Television of

Thailand

Government public

relations

State-owned

network


TPBS Television of

Thailand

Government public

relations

State-owned

network


Sources: MCOT, Thanachart Compilation

BEC does not have to return spectrum as it operates under a concession contract. So it’s free from extra costs



More FTA terrestrial TV channels owing to the implementation of 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 2015. 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.

More FTA channels are expected to implement digitalization



Ex 3: More Channels Are Expected Under Digitalization

In the analog

(BEC)Ch. 3 Ch. 5 Ch. 7 MCOT NBT PBS

1 2 3 4 5 6 7 8 9 10 11 12 13 14

guard band guard band guard band guard band guard band guard bandguard band

In the digital (BEC)Ch. 3 Ch. 5 Ch. 7 MCOT NBT PBS

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Ch. 3/1 Ch. 5/1 Ch. 7/1 MCOT/1 NBT/1 PBS/1 Source: Thanachart estimates

Satellite TV will become a cheaper choice for content providers/operators

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

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 50% as of end-2010 with a growth rate of 35% pa. If this momentum can continue, it implies the penetration rate will be 100% in three years (or in 2013). We believe the major reasons for the fast-growing popularity of the satellite/cable TV are as follows:

With no spectrum bidding and low transponder rents, satellite TV will be a cheaper choice for providers to broadcast their content

More and more players will come into the industry

Satellite/cable TV is a fast-growing service with 50% penetration



1) Satellite/cable TV operators have been more confident about the business outlook since the broadcasting law in 2008 allowed advertising at six minutes per hour on satellite/cable TV (versus 12 minutes for FTA terrestrial TV), starting in March 2008. 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 1H08 beginning with the yellow-shirt protests followed by the red-shirt rally in 1H10, 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 100% In Three Years

0

20

40

60

80

100

120

140

2007 2008 2009 2010F 2011F 2012F 2013F

(%) Penetration rate % change

Sources: AC Nielsen Media Research, Nation Multimedia

Satellite TV is more popular than cable TV

Although cable has enjoyed strong growth over the past two years, its recent growth rate (during August 2009-August 2010) 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 2011. 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$100 (or Bt3,000). 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 40-80 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.

No subscription fee and low satellite dish prices make satellite TV more popular than cable



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

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2007 2008 2009 2010F 2011F

(Bt)

0

10

20

30

40

50

60

70(%)Estimated price of satellite dish (LHS)

Penetration rate (RHS)

Source: Thanachart estimates

Ex 7: Market Share Of Satellite/cable In August 2010 Was Close To That Of Free TV …

Ex 8: …But Satellite/cable Market Share To Surpass FTA In 2011F

Aug-10

Free TV56.1%

All satellite24.3%

Local cable12.2%

TRUE7.4%

Free TV34.0%

All satellite48.0%

Local cable10.4%

TRUE7.6%

Sources: AC Nielsen Media Research, Thanachart estimates Sources: AC Nielsen Media Research, Thanachart estimates



Incumbents will be worse off in the new era

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:

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 2011. 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 Bt5,000/minute versus Bt330,000-450,000 for FTA terrestrial TV.

Ex 9: Small Portion Of Ad Spending From Satellite/cable Ex 10: Big Difference In Ad Rates For Satellite/cable

6.0%

Free TV94.0%

Satellite/cable

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000(Bt/minute)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000(Bt/minute)

Ad spend/min on Satellite

Ad spend/min on FTA


BEC and MCOT will be worse off and GRAMMY and RS better off under the new environment

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



Increased competition, loss of pricing power and rising cost for incumbents

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 net-net, incumbents will end up losing something. Note that ad spending for TV has the largest market share, which accounts for 60% 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

0

10

20

30

40

50

60

70

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

(%)TV Radio New spapersMagazines Cinema OutdoorTransit In-store

0

10

20

30

40

50

60

Jan-

08

Apr-

08

Jul-0

8

Oct

-08

Jan-

09

Apr-

09

Jul-0

9

Oct

-09

Jan-

10

Apr-

10

Jul-1

0

2011

2014

(%) MCOT's Modernine TV Ch 7Ch 5 BEC's Ch 3


Both FTA terrestrial TV and smaller content providers are joining the new platform

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 100% 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.

FTA terrestrial operators have sent their “fighting channels” to the satellite network to protect their viewership

More competition means low bargaining power to raise ad rate for FTA operators

Three channels in satellite TV from Channel 7

One channel from Channel 5



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 50% 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 2010 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.

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 10 more in 2011. For RS, three channels are being broadcast in the satellite network.

Six channels from MCOT but no high-rating content

BEC is well equipped for the satellite business but hasn’t got in yet

GRAMMY and RS are very aggressive in satellite TV



Ex 13: Number Of Satellite Channels Run By Existing Operators

0

1

3 3

6 6

0

1

2

3

4

5

6

7

8

BEC Ch 5 Ch 7 RS MCOT GRAMMY

(Number of channels)




Clearer impact will be in medium to long term

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 2010. According to this law, the NBTC has to be set up within 180 days after the FAA became law (or about July 2011). 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 2012). 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

1H13

New FAA to be enacted

Broadcasting master plan

Draft FAA approved by parliament

Draft FAA to be approved by

Senate

180days

November2010

March 2010

The formation of the NBTC

Licensingprocess

December2010

1H12


NBTC will take at least one year to be formed



Satellite/cable TV isn’t a short-term threat to the incumbents

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-to-air TV during prime time, especially in watching soap operas (from 6.00pm-10.30pm). 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 100 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 2010, we expect the penetration rate of satellite/cable to have reached 50% versus 100% for FTA terrestrial TV.

Ex 15: No Strong Content In Satellite TV Variety

19%

New s18%

Documentaries16%

Movies13%

Sports12%

Music12%

Other10%

Sources: Satellite Magazine, Thanachart estimates

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



RS is our top pick; we prefer BEC to MCOT

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 Ex 18: Cheapest PE With Highest Earnings Growth

Y/E Dec (Bt m) 2009A 2010F 2011F 2012F Sales 2,174 2,900 3,100 3,381

Net profit 76 313 339 442

Norm profit 76 313 339 442

Norm EPS (Bt) 0.1 0.3 0.3 0.4

Norm EPS gr (%) (119.1) 183.6 8.2 30.4

Norm PE (x) 33.2 11.7 10.8 8.3

EV/EBITDA (x) 16.5 8.1 6.0 4.4

P/BV (x) 4.6 4.7 3.8 3.0

Div. yield (%) 0.0 4.3 4.6 6.0

ROE (%) 14.7 47.1 38.8 40.7

Net D/E (%) 61.1 3.3 (24.1) (40.7)

0

2

4

6

8

10

12

14

16

18

RS GRAMMY MCOT BEC

(x)

0

5

10

15

20

25(%)PE (LHS) 3-year EPS grow th (RHS)

Sources: Company data, Thanachart estimates Sources: Company data, Thanachart estimates

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 2010F to 40% in 2014F. 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 4Q10 alone, RS saw a big jump in revenue from satellite TV from only Bt20m in 9M10 to Bt50m. With the rising penetration rate of satellite TV coupled with

RS is our top pick in the sector due to more leverage to fast-growing satellite TV



RS’s quality programs, we expect satellite revenue to surpass that from the music business in 2014.

2) Its earnings are accelerating. We expect the firm to post 8.2% y-y earnings growth in 2011 and for this to speed up to 30% y-y in 2012. After that, earnings growth should stay at a high level of 29% in 2013-14.

3) The valuations of this under-covered stock still don’t reflect its strong growth prospects. It trades on a low 2011F PE of 10.8x (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 Ex 20: Earnings Are On An Upturn


Net profit 511 517 621 749

Norm profit 511 517 621 749

Norm EPS (Bt) 1.0 1.0 1.2 1.4

Norm EPS gr (%) (27.6) 1.2 20.1 20.6

Norm PE (x) 14.8 14.7 12.2 10.1

EV/EBITDA (x) 8.6 6.7 5.4 4.5

P/BV (x) 2.5 2.5 2.4 2.3

Div. yield (%) 6.1 6.1 7.4 8.9

ROE (%) 17.2 17.2 20.1 23.3

Net D/E (%) 12.2 16.0 9.0 0.6

0

200

400

600

800

1,000

1,200

2007 2008 2009 2010F 2011F 2012F 2013F 2014F

(Bt m)

20% CAGR


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 2009. 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 Bt650m in 2011 and enjoy a 50-100% growth rate over the next four years with revenue contribution of 20% in 2014, up sharply from 4% in 2010.

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.



3) 4Q10F 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 2011. We project 20% y-y earnings in 2011, accelerating to 22% in 2012-13. Hence, we expect massive earnings upgrades by the Street following the release of its results.

4) Trading on 12.2x 2011F PE and falling, 20% 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


Net profit 2,635 3,311 3,997 4,479

Norm profit 2,635 3,311 3,997 4,479

Norm EPS (Bt) 1.3 1.7 2.0 2.2

Norm EPS gr (%) (9.2) 25.7 20.7 12.1

Norm PE (x) 22.8 18.1 15.0 13.4

EV/EBITDA (x) 10.1 8.4 7.2 6.5

P/BV (x) 8.3 7.9 7.5 7.3

Div. yield (%) 4.3 5.3 6.7 7.5

ROE (%) 36.9 44.8 51.2 55.1

Net D/E (%) (59.4) (67.9) (70.9) (73.6)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

(x)

+2 STD = 2.3x

+1 STD = 1.9x

Average = 1.4x

-2 STD = 0.5x

-1 STD = 1.0x


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 2011 of 10% and a further 6% in 2012.

2) 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 2011 and 12% in 2012 (versus 11% for MCOT). The key 2011-12 earnings driver will turn to ad rate hikes from raising its utilization rate as almost 100% of airtime was utilized in 2010.

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.



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 15.0x 2011F PE. Even our TP implies 21x 2011F PE, which is still well below the peak of 30x.

MCOT: Bumpy road ahead

Ex 23: MCOT’s Valuation Ex 24: Earnings Less Exciting On High Regulatory Risk


Net profit 1,389 1,410 1,559 1,644

Norm profit 1,389 1,410 1,559 1,644

Norm EPS (Bt) 2.0 2.1 2.3 2.4

Norm EPS gr (%) 13.1 1.5 10.6 5.4

Norm PE (x) 15.0 14.7 13.3 12.6

EV/EBITDA (x) 8.4 8.0 7.1 6.6

P/BV (x) 2.8 2.7 2.7 2.6

Div. yield (%) 6.0 6.1 6.8 7.1

ROE (%) 19.0 18.7 20.2 20.7

Net D/E (%) (28.2) (27.8) (31.0) (30.4)

0

500

1,000

1,500

2,000

2006

2007

2008

2009

2010

F

2011

F

2012

F

2013

F

2014

F

(Bt m)


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 2011 and another 5% in 2012. 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 2011F PE multiple with dividend yield of 6.8% (with upside from Bt450m in extra revenue from BEC).



Ex 25: Sector Valuation Comparison

BEC GRAMMY MCOT RS Average

Rating BUY BUY HOLD BUY

Target price (Bt) Thanachart 43.00 19.00 33.50 5.00

Consensus 38.55 15.30 35.50 2.80

Consensus rec. BUY 15 1 12 0

HOLD 3 2 3 1

SELL 0 1 0 1

Norm profits (Bt m) 2009 2,635 511 1,389 76 4,610

2010F 3,311 517 1,410 313 5,551

2011F 3,997 621 1,559 339 6,516

2012F 4,479 749 1,644 442 7,314

Norm EPS (Bt) 2009 1.3 1.0 2.0 0.1 1.1

2010F 1.7 1.0 2.1 0.3 1.2

2011F 2.0 1.2 2.3 0.3 1.4

2012F 2.2 1.4 2.4 0.4 1.6

Norm EPS growth (%) 2009 (9.2) (27.6) 13.1 (119.1) (35.7)

2010F 25.7 1.2 1.5 183.6 53.0

2011F 20.7 20.1 10.6 8.2 14.9

2012F 12.1 20.6 5.4 30.4 17.1

P/BV (x) 2009 8.3 2.5 2.8 4.6 4.6

2010F 7.9 2.5 2.7 4.7 4.4

2011F 7.5 2.4 2.7 3.8 4.1

2012F 7.3 2.3 2.6 3.0 3.8

Norm PE (x) 2009 22.8 14.8 15.0 33.2 21.4

2010F 18.1 14.7 14.7 11.7 14.8

2011F 15.0 12.2 13.3 10.8 12.8

2012F 13.4 10.1 12.6 8.3 11.1

EV/EBITDA (x) 2009 10.1 8.6 8.4 16.5 10.9

2010F 8.4 6.7 8.0 8.1 7.8

2011F 7.2 5.4 7.1 6.0 6.4

2012F 6.5 4.5 6.6 4.4 5.5

Dividend yield (%) 2009 4.3 6.1 6.0 0.0 4.1

2010F 5.3 6.1 6.1 4.3 5.5

2011F 6.7 7.4 6.8 4.6 6.4

2012F 7.5 8.9 7.1 6.0 7.4

ROE (%) 2009 36.9 17.2 19.0 14.7 22.0

2010F 44.8 17.2 18.7 47.1 31.9

2011F 51.2 20.1 20.2 38.8 32.6

2012F 55.1 23.3 20.7 40.7 35.0

Net D/E (%) 2009 (59.4) 12.2 (28.2) 61.1 (3.6)

2010F (67.9) 16.0 (27.8) 3.3 (19.1)

2011F (70.9) 9.0 (31.0) (24.1) (29.3)

2012F (73.6) 0.6 (30.4) (40.7) (36.0)

Sources: Bloomberg, Company data, Thanachart estimates

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) (0.1) 2.4 (13.0) 1.7

BEC TB (9.8) (9.8) 32.7 (5.5) (4.7) (3.5) (10.2) (0.7)

GRAMMY TB (9.5) (1.4) 7.5 (5.9) (4.4) 4.9 (35.4) (1.2)

MCOT TB 4.3 9.0 32.7 3.4 9.4 15.3 (10.3) 8.2

RS TB 35.6 59.8 75.5 33.6 40.7 66.1 32.6 38.3

Sources: Thanachart estimates, Consensus SECTOR - SWOT ANALYSIS

S — Strength W — Weakness

The balance sheets of all operators are very strong with net cash

positions.

TV advertising will be dominant for quite some time in Thailand.

Low barriers to entry.

Relatively high regulatory risk.

O — Opportunity T — Threat

Consolidation in the sector.

100% penetration rate in satellite TV.

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 11.1 19.0 29.5 24.8 2.5 2.2 11.5 9.6 0.4 0.4 Hong Kong 28.6 26.4 17.4 14.1 3.7 3.1 11.6 9.6 2.5 2.9 India (75.4) 86.8 35.1 21.2 2.7 2.3 14.6 10.4 1.4 1.8 Indonesia 13.4 14.5 13.1 11.4 3.9 3.5 7.7 6.9 5.1 5.7 Malaysia 9.6 12.0 13.9 12.4 2.1 1.9 7.9 7.3 4.2 4.6 Philippines (9.3) (21.0) 12.1 15.9 2.2 2.2 5.5 6.0 6.0 4.6 South Korea 120.3 18.3 22.1 18.7 1.4 1.3 12.4 10.7 0.1 0.1 Thailand 14.9 17.1 12.8 11.1 4.1 3.8 6.4 5.5 6.4 7.4

Average (12.3) 36.3 22.0 16.7 3.0 2.7 10.2 8.3 3.4 3.7 Media stocks BEC World 20.7 12.1 15.0 13.4 7.5 7.3 7.2 6.5 6.7 7.5 GMM Grammy 20.1 20.6 12.2 10.1 2.4 2.3 5.4 4.5 7.4 8.9 MCOT 10.6 5.4 13.3 12.6 2.7 2.6 7.1 6.6 6.8 7.1 RS 8.2 30.4 10.8 8.3 3.8 3.0 6.0 4.4 4.6 6.0 Average 14.9 17.1 12.8 11.1 4.1 3.8 6.4 5.5 6.4 7.4

Sources: Thanachart estimates, Bloomberg Consensus


BUY (Unchanged) TP: Bt43.00 (Unchanged) 9 FEBRUARY 2011

New Information Upside: 43.3%

BEC World Pcl (BEC TB)

Coasting on ad hikes

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 2011. 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 0.7x PEG, BEC is a BUY.


[email protected]

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 (50% versus 100% 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 15.0x 2011F PE (or 0.7x PEG) and falling, BEC is a BUY.

Bargaining power to hike ad rates intact We still call for 21% y-y earnings growth in 2011 and 12% in 2012 (versus 11% for MCOT). The key earnings driver in 2011-12 will turn to ad rate hikes from raising its utilization rate as the firm utilized almost 100% of airtime in 2010. In our earnings forecast, we expect BEC to be able to boost ad rates by 10% in 2011 and 6% in 2012. The recent 6-20% 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 10% by October. We expect the upward ad rate momentum to continue into 2012 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 100% of its airtime (versus 20% for MCOT).

Than

acha

rtSe

curit

ies

COMPANY VALUATION

Y/E Dec (Bt m) 2009 2010F 2011F 2012F

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 4,208

Diff from cons (%) — 2.7 6.7 6.4

Norm profit 2,635 3,311 3,997 4,479

Prev norm NP — — — —

Chg from prev (%) — — — —

Norm EPS (Bt) 1.3 1.7 2.0 2.2

Norm EPS gr (%) (9.2) 25.7 20.7 12.1

Norm PE (x) 22.8 18.1 15.0 13.4

EV/EBITDA (x) 10.1 8.4 7.2 6.5

P/BV (x) 8.3 7.9 7.5 7.3

Div. yield (%) 4.3 5.3 6.7 7.5

ROE (%) 36.9 44.8 51.2 55.1

Net D/E (%) (59.4) (67.9) (70.9) (73.6)

PRICE PERFORMANCE

15202530354045

Feb-10 M ay-10 Aug-10 Nov-10 Feb-11

(Bt /shr)

(20)(10)01020304050

(%)BEC World Rel to SET Index

COMPANY INFORMATION

Price as of 8 Feb 11 (Bt) 30.00

Market cap (US$ m) 1,953

Listed shares (m shares) 2,000

Free float (%) 44

Avg daily turnover (US$ m) 4.89

12M price H/L (Bt) 40.5/21.4

Sector Entertainment

Major shareholder Maleenont family 56.6%


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

0

10

20

30

40

50

60

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10


10

20

30

40

Jan-

08

Jun-

08

Nov

-08

Apr-

09

Sep-

09

Feb-

10

Jul-1

0

Dec

-10


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

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2005 2006 2007 2008 2009 2010F 2011F 2012F

(Bt m)

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

2005 2006 2007 2008 2009 2010F 2011F 2012F

(Bt m)


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

0

20

40

60

80

100

120

140

2007 2008 2009 2010F 2011F 2012F 2013F

(%) Penetration rate % change

5

10

15

20

25

30

35

40

45

Jan-01 Jul-03 Jan-06 Jul-08 Jan-11

(x)

+2 STD = 34.1x

+1 STD = 27.7x

Average = 21.4x

-2 STD = 8.6x

-1 STD = 15.0x

Sources: AC Nielsen Media Research, Thanachart estimates Sources: Bloomberg, Thanachart estimates



Ex 7: Earning Growth Of BEC Will Outpace MCOT’s

Ex 8: But BEC’s PE vs MCOT’s Is Below The Average Trading Gap

21

1211

5

0

5

10

15

20

25

2011F 2012F

(%) BEC MCOT

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5


(x)

+2 STD = 2.3x

+1 STD = 1.9x

Average = 1.4x

-2 STD = 0.5x

-1 STD = 1.0x

Sources: Company data, Thanachart estimates Sources: Bloomberg, Thanachart estimates



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 600037 CH China 11.1 19.0 29.5 24.8 2.5 2.2 11.5 9.6 0.4 0.4 Phoenix Satellite 2008 HK Hong Kong 23.6 22.7 25.5 20.8 5.2 4.3 15.8 12.8 1.3 1.6 Television Broad 511 HK Hong Kong 11.9 6.5 13.5 12.7 2.8 2.6 7.9 7.6 4.7 5.0 Vodone Ltd 82 HK Hong Kong 50.4 50.0 13.3 8.8 3.0 2.3 11.0 8.4 1.4 2.0 Entertainment Ne ENIL IN India (202.9) 88.2 32.0 17.0 2.4 2.1 12.1 9.5 0.2 0.5 Ibn18 Broadcast IBN18 IN India (134.5) 277.6 87.6 23.2 2.7 2.4 20.0 10.5 na na Sun TV Network SUNTV IN India 41.8 19.3 22.4 18.7 7.0 5.7 10.9 9.7 1.6 1.8 Television 18 TLEI IN India (98.6) na na 42.1 1.4 1.4 21.9 15.2 na na TV Today Network TVTN IN India (74.6) 62.2 26.7 16.4 1.2 1.1 7.9 7.0 1.4 2.2 Zee Entertainment Z IN India 14.9 22.0 19.7 16.1 2.3 2.1 na na 1.7 1.9 Zee News Ltd ZEEN IN India (74.3) 51.5 22.5 14.8 1.6 1.5 na na 2.3 2.4 Surya Citra Media SCMA IJ Indonesia 13.4 14.5 13.1 11.4 3.9 3.5 7.7 6.9 5.1 5.7 Media Prima Bhd MPR MK Malaysia 9.6 12.0 13.9 12.4 2.1 1.9 7.9 7.3 4.2 4.6 ABC-CBN Corp ABS PM Philippines (14.4) (33.2) 13.1 19.6 1.9 1.8 6.5 6.9 5.1 2.6 Gma Network Inc GMA7 PM Philippines (4.1) (8.8) 11.1 12.2 2.5 2.6 4.4 5.2 6.8 6.6 On*Media Corp 045710 KS S. Korea 120.3 18.3 22.1 18.7 1.4 1.3 12.4 10.7 0.1 0.1 BEC World * BEC TB Thailand 20.7 12.1 15.0 13.4 7.5 7.3 7.2 6.5 6.7 7.5 GMM Grammy * GRAMMY TB Thailand 20.1 20.6 12.2 10.1 2.4 2.3 5.4 4.5 7.4 8.9 MCOT * MCOT TB Thailand 10.6 5.4 13.3 12.6 2.7 2.6 7.1 6.6 6.8 7.1 RS * RS TB Thailand 8.2 30.4 10.8 8.3 3.8 3.0 6.0 4.4 4.6 6.0 Average (12.3) 36.3 22.0 16.7 3.0 2.7 10.2 8.3 3.4 3.7

Source: Bloomberg Note: * Thanachart estimates using normalized EPS growth

APPENDIX BEC TB PHATIPAK NAVAWATANA


COMPANY DESCRIPTION COMPANY RATING

Rating Scale

Very Strong 5

Strong 4

Good 3

Fair 2

Weak 1

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.

012345

Financial

Risk

*Corp.Governance

Liquidity

Management Manage

ment

None 0

Source: Thanachart Sources: Thanachart, *CG Awards

THANACHART’S SWOT ANALYSIS


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.

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.


Because BEC makes its own programs, it will be able to

generate additional returns following liberalization in 2013.

BEC could launch new channels and create more revenue

in the wake of liberalization.

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 RISKS TO OUR INVESTMENT CASE

Consensus Thanachart Diff

Target price (Bt) 38.55 43.00 12%

Net profit 11F (Bt m) 3,746 3,997 7%

Net profit 12F (Bt m) 4,208 4,479 6%

Consensus REC BUY: 15 HOLD: 3 SELL: 0

HOW ARE WE DIFFERENT FROM THE STREET?

Our earnings forecast for 2011 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’.

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.

Sources: Bloomberg consensus, Thanachart estimates

Source: Thanachart

FINANCIAL SUMMARY BEC TB PHATIPAK NAVAWATANA


INCOME STATEMENTFY ending Dec (Bt m) 2008A 2009A 2010F 2011F 2012F

Sales 8,798 8,949 11,719 12,896 13,673Cost of sales 3,277 3,619 5,488 5,712 5,720 Gross profit 5,521 5,330 6,232 7,184 7,953% gross margin 62.8% 59.6% 53.2% 55.7% 58.2%Selling & administration expenses 1,447 1,550 1,547 1,531 1,613 Operating profit 4,074 3,780 4,685 5,653 6,339% operating margin 46.3% 42.2% 40.0% 43.8% 46.4%Depreciation & amortization 1,503 1,737 1,806 1,869 1,931 EBITDA 5,577 5,517 6,491 7,522 8,270% EBITDA margin 63.4% 61.6% 55.4% 58.3% 60.5%Non-operating income 163 109 211 232 246Non-operating expenses 0 0 0 0 0Interest expense (0) (0) (7) (0) (0) Pre-tax profit 4,237 3,889 4,889 5,885 6,585Income tax 1,251 1,169 1,467 1,766 1,976 After-tax profit 2,986 2,720 3,422 4,120 4,610% net margin 33.9% 30.4% 29.2% 31.9% 33.7%Shares in affiliates' Earnings (20) 0 0 0 0Minority interests (63) (85) (112) (123) (130)Extraordinary items (27) 0 0 0 0NET PROFIT 2,875 2,635 3,311 3,997 4,479Normalized profit 2,902 2,635 3,311 3,997 4,479EPS (Bt) 1.4 1.3 1.7 2.0 2.2Normalized EPS (Bt) 1.5 1.3 1.7 2.0 2.2

BALANCE SHEETFY ending Dec (Bt m) 2008A 2009A 2010F 2011F 2012F

ASSETS:Current assets: 5,339 5,542 7,048 7,359 8,386 Cash & cash equivalent 3,328 4,368 5,576 5,739 6,689 Account receivables 716 760 1,124 1,272 1,349 Inventories 0 0 0 0 0 Others 1,295 414 348 348 348Investments & loans 158 132 132 132 132Net fixed assets 1,693 1,611 1,559 1,493 1,416Other assets 1,485 1,506 1,692 1,692 1,692Total assets 8,675 8,791 10,431 10,677 11,626

LIABILITIES:Current liabilities: 1,467 1,436 2,551 2,273 2,850 Account payables 173 187 646 673 674 Bank overdraft & ST loans 3 0 226 (224) 231 Current LT debt 0 0 0 0 0 Others current liabilities 1,291 1,249 1,678 1,823 1,945Total LT debt 0 0 0 0 0Others LT liabilities 0 0 0 0 0Total liabilities 1,468 1,436 2,551 2,273 2,850Minority interest 135 166 278 401 531Preferreds shares 0 0 0 0 0Paid-up capital 2,000 2,000 2,000 2,000 2,000Share premium 1,167 1,167 1,167 1,167 1,167Warrants 0 0 0 0 0Surplus (6) (24) (24) (24) (24)Retained earnings 3,912 4,046 4,460 4,861 5,102Shareholders' equity 7,073 7,189 7,602 8,003 8,245

Sources: Company data, Thanachart estimates

Earnings are on an upward trend, starting this year

Balance sheet is very strong with a net cash position



CASH FLOW STATEMENTFY ending Dec (Bt m) 2008A 2009A 2010F 2011F 2012F

Earnings before tax 4,237 3,889 4,889 5,885 6,585Tax paid (1,089) (1,385) (1,186) (1,776) (1,890)Depreciation & amortization 1,503 1,737 1,806 1,869 1,931Chg In working capital (183) (31) 97 (122) (76)Chg In other CA & CL / minorities (130) (15) 214 156 37Cash flow from operations 4,338 4,195 5,820 6,012 6,587

Capex (155) (152) (200) (200) (200)ST loans & investments (499) 1,017 0 0 0LT loans & investments 65 26 0 0 0Adj for asset revaluation 0 0 0 0 0Chg In other assets & liabilities (1,323) (1,524) (1,741) (1,603) (1,653)Cash flow from investments (1,912) (633) (1,941) (1,803) (1,853)Debt financing 3 (3) 226 (450) 454Capital increase 0 0 0 0 0Dividends paid (2,300) (2,500) (2,897) (3,596) (4,238)Warrants & other surplus (2) (18) 0 0 0Cash flow from financing (2,300) (2,521) (2,671) (4,046) (3,784)

Free cash flow 4,183 4,042 5,620 5,812 6,387

VALUATIONFY ending Dec 2008A 2009A 2010F 2011F 2012F

Normalized PE (x) 20.7 22.8 18.1 15.0 13.4 Normalized PE - at target price (x) 29.6 32.6 26.0 21.5 19.2 PE (x) 20.9 22.8 18.1 15.0 13.4 PE - at target price (x) 29.9 32.6 26.0 21.5 19.2 EV/EBITDA (x) 10.2 10.1 8.4 7.2 6.5 EV/EBITDA - at target price (x) 14.8 14.8 12.4 10.6 9.6 P/BV (x) 8.5 8.3 7.9 7.5 7.3 P/BV - at target price (x) 12.2 12.0 11.3 10.7 10.4 P/CFO (x) 13.8 14.3 10.3 10.0 9.1 Price/sales (x) 6.8 6.7 5.1 4.7 4.4 Dividend yield (%) 4.5 4.3 5.3 6.7 7.5 FCF Yield (%) 7.0 6.7 9.4 9.7 10.6

(Bt)Normalized EPS 1.5 1.3 1.7 2.0 2.2 EPS 1.4 1.3 1.7 2.0 2.2 DPS 1.4 1.3 1.6 2.0 2.2 BV/share 3.5 3.6 3.8 4.0 4.1 CFO/share 2.2 2.1 2.9 3.0 3.3 FCF/share 2.1 2.0 2.8 2.9 3.2


With less capex, most of its FCF is paid as dividend

Trading at discount PE and EV/EBITDA multiples to historical peaks



FINANCIAL RATIOSFY ending Dec 2008A 2009A 2010F 2011F 2012F

Growth RateNet profit (%) 27.7 (8.4) 25.7 20.7 12.1EPS (%) 27.7 (8.4) 25.7 20.7 12.1Normalized profit (%) 30.4 (9.2) 25.7 20.7 12.1Normalized EPS (%) 30.4 (9.2) 25.7 20.7 12.1Dividend payout ratio (%) 93.9 98.7 96.5 100.0 100.0

Operating performanceGross margin (%) 62.8 59.6 53.2 55.7 58.2Operating margin (%) 46.3 42.2 40.0 43.8 46.4EBITDA margin (%) 63.4 61.6 55.4 58.3 60.5Net margin (%) 33.9 30.4 29.2 31.9 33.7D/E (incl. minor) (x) 0.0 0.0 0.0 (0.0) 0.0Net D/E (incl. minor) (x) (0.5) (0.6) (0.7) (0.7) (0.7)Interest coverage - EBIT (x) 26,806.4 36,279.6 720.1 74,244.8 31,672.8Interest coverage - EBITDA (x) 36,696.5 52,944.8 997.7 98,786.1 41,319.6ROA - using norm profit (%) 34.4 30.2 34.4 37.9 40.2ROE - using norm profit (%) 42.8 36.9 44.8 51.2 55.1

DuPontROE - using after tax profit (%) 44.0 38.1 46.3 52.8 56.7 - asset turnover (x) 1.0 1.0 1.2 1.2 1.2 - operating margin (%) 48.2 43.5 41.8 45.6 48.2 - leverage (x) 1.2 1.2 1.3 1.4 1.4 - interest burden (%) 100.0 100.0 99.9 100.0 100.0 - tax burden (%) 70.5 69.9 70.0 70.0 70.0WACC (%) 9.3 9.3 9.3 9.3 9.3ROIC (%) 87.0 70.5 116.2 175.7 217.5 NOPAT (Bt m) 2,871 2,644 3,279 3,957 4,438



BUY TP: Bt19.00 9 FEBRUARY 2011

Initiation Note Upside: 32.9%

GMM Grammy Pcl. (GRAMMY TB)

New business model

GRAMMY is a play on burgeoning satellite TV with revenue exposure rising from 4% in 2010F to 20% in 2014F. 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.


[email protected]

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 fast-growing satellite TV with revenue exposure rising to 20% in 2014F from 4% in 2010F. 2) Earnings are accelerating with a four-year CAGR of 20%. The key drivers will come from satellite TV and several cost-cutting initiatives. 3) Trading on 12.2x 2011F PE and falling, at 20% 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 20% in 2014 from 4% in 2010. 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 10 more channels in 2011 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 2010, GRAMMY also hiked the subscription fee for unlimited downloads from Bt20 to Bt26/month/subscriber. These moves should boost its margin.

4Q10F EPS to surge 36% y-y; positive surprise 4Q10F 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 2011. We project 20% y-y earnings growth in 2011, accelerating to 23% in 2012-14. Therefore, we are expecting massive earnings upgrades by the Street after results are released.

Than

acha

rtSe

curit

ies

COMPANY VALUATION

Y/E Dec (Bt m) 2009 2010F 2011F 2012F

Sales 7,878 8,508 9,054 9,781

Net profit 511 517 621 749

Consensus NP — 549 612 653

Diff from cons (%) — (5.9) 1.4 14.7

Norm profit 511 517 621 749



Norm EPS (Bt) 1.0 1.0 1.2 1.4

Norm EPS gr (%) (27.6) 1.2 20.1 20.6

Norm PE (x) 14.8 14.7 12.2 10.1

EV/EBITDA (x) 8.6 6.7 5.4 4.5

P/BV (x) 2.5 2.5 2.4 2.3

Div. yield (%) 6.1 6.1 7.4 8.9

ROE (%) 17.2 17.2 20.1 23.3

Net D/E (%) 12.2 16.0 9.0 0.6

PRICE PERFORMANCE

12

13

14

15

16

17


(Bt /shr)

(50)(40)(30)(20)(10)010

(%)GM M Grammy Rel to SET Index

COMPANY INFORMATION


Market cap (US$ m) 247

Listed shares (m shares) 530

Free float (%) 29


12M price H/L (Bt) 16.4/12.8


Major shareholder Mr. Paiboon Damrongchaitham

53.8%


COMPANY NOTE GRAMMY TB PHATIPAK NAVAWATANA


Initiate with a BUY; strong growth, high yield 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 20% in 2014F from 4% in 2010F.

Second, earnings are accelerating with a four-year forecast CAGR of 20%. The key drivers will come from satellite TV and several cost-cutting initiatives, especially in the sunset recording business.

Finally, trading on 12.2x 2011F PE and falling, 20% ROE and with a 7.4% dividend yield, GRAMMY is cheap at the current price.

Stands to reap benefits of fast-growing satellite TV 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 2011 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 10 channels within this year and the ultimate goal is to have 80 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 Bt5,000/minute on satellite channels in 2010. The company just revealed that it raised its ad rate to Bt25,000 (with 20-30% 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 50-100% 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

Initiate with a BUY on GRAMMY to a TP of Bt19.00/share

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



Ex 2: Surge In Ad Revenue From Satellite Business

Ex 3: Expect Satellite Business Revenue To Grow Strongly Over The Next Four Years

0

20

40

60

80

100

120

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

(Bt m)

0

500

1,000

1,500

2,000

2,500

2009 2010F 2011F 2012F 2013F 2014F

(Bt m)


Asset-light strategy 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 10 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 Bt1.0bn 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 Bt1.0bn 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.

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 10% y-y from this business in 2011, 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 30% to B26/month/subscriber, implemented in October 2010. 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 2011.

In response to the slump in the demand for physical music, the recording business has been undergoing a major restructuring since the beginning of 2011. 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.

10 business units are the long-term plan

Less business concentration on physical music with several cost-cutting programs

Digital business will be the firm’s major focus and its revenue growth should offset the decline in the recording business



Ex 4: Contribution From Satellite At 4% in 2010F … Ex 5: … But Will Increase To 20% In 2014F

Physical15.9%

Digital10.3%

Artist mgt6.4%

Rights mgt4.4%

Show biz2.8%

FTA TV24.7%

Satellite4.2% Radio

7.8%

Publishing2.4%

Event21.1%

Radio6.1%

Physical8.4%

Digital12.9%

Artist mgt5.3%

Rights mgt3.0%

Show biz2.8%

FTA TV22.3%

Satellite19.7%

Public1.8%

Event17.6%


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 20% y-y EPS growth in 2011 (versus flat growth in 2010), increasing to 21% and 23% in 2012 and 2013, 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

0

200

400

600

800

1,000

1,200

2007 2008 2009 2010F 2011F 2012F 2013F 2014F

(Bt m)

20% CAGR


4Q10F EPS to surge 36% y-y; positive surprise We expect GRAMMY to post 4Q10 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”. 4Q10 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.

New round of earnings growth cycle and accelerating too

4Q10F earnings should surge by 79% q-q and 36% y-y, 43% higher than the Street estimate



Ex 7: 4Q10F Earnings Set To Beat The Street

0

50

100

150

200

250

300

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

F

(Bt m)


Attractive valuations

GRAMMY’s valuations at the current price are attractive. Earnings look set to surge in 2011 and should reach a new high in 2012 but the stock is now trading at a 25% discount to its 2002 PE of 16x. ROE is also approaching a record of 23% in 2012F but its P/BV ratio doesn’t reflect that. Its low EV/EBITDA ratio at 5.4x in 2011F 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 7-10% over the next three years. The stock is also the second- cheapest in the media sector following RS. It trades on only 12.2x 2011F 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

(10)

0

10

20

30

40

50


(x)

+2 STD = 34.1x

+1 STD = 24.6x

Average = 15.1x

-2 STD = -4.0x

-1 STD = 5.6x

0.5

1.0

1.5

2.0

2.5

3.0

3.5


(x)

+1 STD = 2.5x

-2 STD = 1.0x

+2 STD = 3.0x

-1 STD = 1.5x

Average = 2.0x


GRAMMY is cheap compared to its historical valuations and its peers



Ex 10: GRAMMY’s Dividend Yield Ex 11: GRAMMY’s EV/EBITDA

0

2

4

6

8

10

12

14


(%)

+2 STD = 12.4%

+1 STD = 9.6%

Average = 6.9%

-2 STD = 1.5%

-1 STD = 4.2%

0

2

4

6

8

10

12

14

16

18


(x)

+2 STD = 11.6x

+1 STD = 8.9x

Average = 6.2x

-2 STD = 0.7x

-1 STD = 3.5x






APPENDIX GRAMMY TB PHATIPAK NAVAWATANA



Rating Scale

Very Strong 5

Strong 4

Good 3

Fair 2

Weak 1

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.

012345

Financial

Risk

*Corp.Governance

Liquidity

Management Manage

ment

None 0




GRAMMY has a very strong balance sheet with a net cash

position.

Well diversified revenue streams.

One of the strongest content providers in Thailand.

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.


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.

Liberalization of the broadcasting business.

Piracy of the company’s products.



Target price (Bt) 15.30 19.00 24%

Net profit 11F (Bt m) 612 621 1%

Net profit 12F (Bt m) 653 749 15%



Our earnings forecast for 2012 is about 15% above the Street’s as we’re more bullish on satellite TV.


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.


Source: Thanachart

FINANCIAL SUMMARY GRAMMY TB PHATIPAK NAVAWATANA



Sales 7,546 7,878 8,508 9,054 9,781Cost of sales 4,234 4,796 5,130 5,414 5,771 Gross profit 3,312 3,082 3,378 3,640 4,010% gross margin 43.9% 39.1% 39.7% 40.2% 41.0%Selling & administration expenses 2,455 2,629 2,867 2,997 3,208 Operating profit 857 452 510 643 802% operating margin 11.4% 5.7% 6.0% 7.1% 8.2%Depreciation & amortization 480 482 711 812 901 EBITDA 1,336 934 1,221 1,455 1,703% EBITDA margin 17.7% 11.9% 14.4% 16.1% 17.4%Non-operating income 260 247 275 294 322Non-operating expenses 0 0 0 0 0Interest expense (72) (55) (55) (55) (55) Pre-tax profit 1,045 644 731 882 1,069Income tax 246 139 219 265 321 After-tax profit 799 505 511 617 748% net margin 10.6% 6.4% 6.0% 6.8% 7.7%Shares in affiliates' Earnings 29 37 38 38 38Minority interests (122) (30) (33) (35) (38)Extraordinary items 0 0 0 0 0NET PROFIT 705 511 517 621 749Normalized profit 705 511 517 621 749EPS (Bt) 1.3 1.0 1.0 1.2 1.4Normalized EPS (Bt) 1.3 1.0 1.0 1.2 1.4


ASSETS:Current assets: 3,940 4,071 4,724 5,645 6,736 Cash & cash equivalent 1,068 908 1,100 1,800 2,600 Account receivables 1,742 1,725 2,098 2,232 2,412 Inventories 631 734 773 816 870 Others 499 704 754 797 855Investments & loans 1,378 1,364 1,364 1,364 1,364Net fixed assets 961 1,003 892 680 379Other assets 534 488 527 560 606Total assets 6,813 6,926 7,507 8,250 9,085

LIABILITIES:Current liabilities: 2,676 3,069 3,261 3,693 4,178 Account payables 957 1,071 1,153 1,216 1,297 Bank overdraft & ST loans 284 894 502 640 787 Current LT debt 536 152 586 746 918 Others current liabilities 898 952 1,021 1,090 1,176Total LT debt 392 289 586 746 918Others LT liabilities 71 83 89 95 103Total liabilities 3,138 3,440 3,936 4,534 5,199Minority interest 707 501 534 569 607Preferreds shares 0 0 0 0 0Paid-up capital 490 530 530 530 530Share premium 2,411 2,758 2,758 2,758 2,758Warrants 0 0 0 0 0Surplus (614) (859) (859) (859) (859)Retained earnings 681 555 609 718 850Shareholders' equity 2,968 2,984 3,038 3,147 3,279



Strong balance sheet with 0.1x net gearing




Earnings before tax 1,045 644 731 882 1,069Tax paid (246) (139) (219) (265) (321)Depreciation & amortization 480 482 711 812 901Chg In working capital (63) 28 (330) (114) (153)Chg In other CA & CL / minorities (85) (354) 57 65 66Cash flow from operations 1,131 660 949 1,380 1,562

Capex (527) (523) (600) (600) (600)ST loans & investments 26 (14) 0 0 0LT loans & investments 69 13 0 0 0Adj for asset revaluation 0 0 0 0 0Chg In other assets & liabilities (16) 77 (32) (28) (37)Cash flow from investments (449) (448) (632) (628) (637)Debt financing (22) 122 338 460 492Capital increase 0 388 0 0 0Dividends paid (549) (636) (463) (512) (617)Warrants & other surplus (173) (246) 0 0 0Cash flow from financing (744) (372) (125) (52) (125)

Free cash flow 604 137 349 780 962





Strong FCF will support dividend






Operating performanceGross margin (%) 43.9 39.1 39.7 40.2 41.0Operating margin (%) 11.4 5.7 6.0 7.1 8.2EBITDA margin (%) 17.7 11.9 14.4 16.1 17.4Net margin (%) 10.6 6.4 6.0 6.8 7.7D/E (incl. minor) (x) 0.3 0.4 0.5 0.6 0.7Net D/E (incl. minor) (x) 0.0 0.1 0.2 0.1 0.0Interest coverage - EBIT (x) 11.9 8.2 9.3 11.7 14.6Interest coverage - EBITDA (x) 18.5 16.9 22.2 26.4 31.0ROA - using norm profit (%) 10.4 7.4 7.2 7.9 8.6ROE - using norm profit (%) 23.7 17.2 17.2 20.1 23.3

DuPontROE - using after tax profit (%) 26.8 17.0 17.0 20.0 23.3 - asset turnover (x) 1.1 1.1 1.2 1.1 1.1 - operating margin (%) 14.8 8.9 9.2 10.4 11.5 - leverage (x) 2.3 2.3 2.4 2.5 2.7 - interest burden (%) 93.5 92.1 93.0 94.1 95.1 - tax burden (%) 76.5 78.4 70.0 70.0 70.0WACC (%) 10.5 10.5 10.5 10.5 10.5ROIC (%) 21.2 11.4 10.5 12.5 16.1 NOPAT (Bt m) 655 355 357 450 561



HOLD (From Buy) TP: Bt33.50 (Unchanged) 9 FEBRUARY 2011

Change in Recommendation Upside: 10.7%

MCOT Pcl. (MCOT TB)

Bumpy road ahead

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.


[email protected]

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 2011F PE with dividend yield of 6.8% (with upside from Bt450m 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 10% ad rate hike from January. Now there is just 10% upside from the current share price to our Bt33.50 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 10% 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 10% revenue growth in 2011. 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 2011F and another 5% in 2012 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 2013. Due to this cost, we project a 9% drop in 2013 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 knowledge-based 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.

Than

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COMPANY VALUATION

Y/E Dec (Bt m) 2009 2010F 2011F 2012F

Sales 4,797 5,227 5,562 5,839

Net profit 1,389 1,410 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 1,410 1,559 1,644

Prev norm NP — 1,663 1,506 1,546

Chg from prev (%) — (15.3) 3.5 6.3

Norm EPS (Bt) 2.0 2.1 2.3 2.4

Norm EPS gr (%) 13.1 1.5 10.6 5.4

Norm PE (x) 15.0 14.7 13.3 12.6

EV/EBITDA (x) 8.4 8.0 7.1 6.6

P/BV (x) 2.8 2.7 2.7 2.6

Div. yield (%) 6.0 6.1 6.8 7.1

ROE (%) 19.0 18.7 20.2 20.7

Net D/E (%) (28.2) (27.8) (31.0) (30.4)

PRICE PERFORMANCE

20222426283032


(Bt /shr)

(40)

(30)

(20)

(10)

0

10

(%)M COT Rel to SET Index

COMPANY INFORMATION




Free float (%) 23


12M price H/L (Bt) 31.3/21.9


Major shareholder Ministry of Finance 65.8%


COMPANY NOTE MCOT TB PHATIPAK NAVAWATANA


Cut EPS in 2010F to reflect no extra revenue from BEC We revise down our 2010 earnings by 15% to reflect no recognition of extra revenue of Bt405m (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 2011 to 2013 due to the delay in the NBTC’s establishment. So our earnings in 2011-12 are revised up by 2-4% but cut by 5% in 2013 to reflect the delay in the NBTC’s set-up.

Ex 1: Earnings Revisions For MCOT

2010F 2011F 2012F Normalized profit (Bt m) - new 1,410 1,559 1,644 - old 1,663 1,506 1,546Change (%) (15.3) 3.5 6.3 Revenue (Bt m) - new 5,227 5,562 5,839 - old 5,404 5,374 5,709 Change (%) (3.3) 3.5 2.3 Gross margin (%) - new 62.6 63.6 64.0 - old 65.0 62.5 61.1


Ex 2: EPS To Drop In 2013F Due To Regulatory Costs

Ex 3: Don’t Expect PE To Trade In High Range Due To Regulatory Risk And Fiercer Competition

0

500

1,000

1,500

2006 2007 2008 2009 2010F2011F2012F2013F2014F

(Bt m)

3

6

9

12

15

18

21

24


(x)

+2 STD = 21.1x

+1 STD = 17.1x

Average = 13.1x

-2 STD = 5.1x

-1 STD = 9.1x


COMPANY NOTE MCOT TB PHATIPAK NAVAWATANA


Ex 4: Dividend Yield Is High And Is The Only Attraction

Ex 5: PE Gap With BEC Has Narrowed Despite Less EPS Excitement

0

3

6

9

12

15

18

21


(%)

+2 STD = 13.4%

+1 STD = 10.4%

Average = 7.3%

-2 STD = 1.1%

-1 STD = 4.2%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5


(x)

+2 STD = 2.3x

+1 STD = 1.9x

Average = 1.4x

-2 STD = 0.5x

-1 STD = 1.0x

Sources: Bloomberg, Thanachart estimates Sources: Bloomberg, Thanachart estimates





APPENDIX MCOT TB PHATIPAK NAVAWATANA



Rating Scale

Very Strong 5

Strong 4

Good 3

Fair 2

Weak 1

Mass Communication Organization of Thailand is a state-owned enterprise which owns interests in communications companies. On 20 July 2004, the Thai government gave approval for it to be transformed into MCOT Public Co., Ltd (MCOT).

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Financial

Risk

*Corp.Governance

Liquidity

Management Manage

ment

None 0




MCOT has a very strong balance sheet with a net cash

position.

MCOT has received government support, including ad

spending and spectrum.

As 50% 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.


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.

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.



Target price (Bt) 35.50 33.50 -6%

Net profit 11F (Bt m) 1,616 1,559 -4%

Net profit 12F (Bt m) 1,691 1,644 -3%



Our earnings forecast for 2011 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.

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.


Source: Thanachart

FINANCIAL SUMMARY MCOT TB PHATIPAK NAVAWATANA



Sales 4,226 4,797 5,227 5,562 5,839Cost of sales 1,735 1,846 1,952 2,026 2,103 Gross profit 2,490 2,951 3,274 3,536 3,736% gross margin 58.9% 61.5% 62.6% 63.6% 64.0%Selling & administration expenses 960 1,140 1,339 1,392 1,476 Operating profit 1,530 1,811 1,936 2,144 2,260% operating margin 36.2% 37.8% 37.0% 38.5% 38.7%Depreciation & amortization 398 425 410 451 500 EBITDA 1,928 2,235 2,345 2,594 2,760% EBITDA margin 45.6% 46.6% 44.9% 46.6% 47.3%Non-operating income 127 68 78 83 88Non-operating expenses (1) (1) (1) (1) (1)Interest expense (0) (0) (1) (0) (0) Pre-tax profit 1,656 1,878 2,012 2,226 2,347Income tax 426 484 604 668 704 After-tax profit 1,230 1,393 1,409 1,558 1,643% net margin 29.1% 29.0% 27.0% 28.0% 28.1%Shares in affiliates' Earnings 0 0 0 0 0Minority interests (2) (4) 1 1 1Extraordinary items 0 0 0 0 0NET PROFIT 1,228 1,389 1,410 1,559 1,644Normalized profit 1,228 1,389 1,410 1,559 1,644EPS (Bt) 1.8 2.0 2.1 2.3 2.4Normalized EPS (Bt) 1.8 2.0 2.1 2.3 2.4


ASSETS:Current assets: 4,751 5,251 5,236 5,606 5,736 Cash & cash equivalent 1,829 2,109 2,150 2,421 2,470 Account receivables 663 719 831 884 928 Inventories 4 4 4 4 5 Others 2,256 2,420 2,252 2,297 2,334Investments & loans 90 90 90 90 90Net fixed assets 4,233 4,298 4,294 4,449 4,555Other assets 50 54 59 63 66Total assets 9,124 9,693 9,679 10,207 10,446

LIABILITIES:Current liabilities: 920 1,165 902 1,136 1,114 Account payables 50 54 80 83 86 Bank overdraft & ST loans 0 0 22 (18) 19 Current LT debt 0 0 0 0 0 Others current liabilities 870 1,112 800 1,070 1,009Total LT debt 0 0 0 0 0Others LT liabilities 1,006 1,037 1,130 1,202 1,262Total liabilities 1,926 2,202 2,032 2,338 2,376Minority interest 18 34 33 32 31Preferreds shares 0 0 0 0 0Paid-up capital 3,435 3,435 3,435 3,435 3,435Share premium 1,107 1,107 1,107 1,107 1,107Warrants 0 0 0 0 0Surplus 0 0 0 0 0Retained earnings 2,637 2,914 3,071 3,295 3,497Shareholders' equity 7,180 7,457 7,614 7,837 8,039







Earnings before tax 1,656 1,878 2,012 2,226 2,347Tax paid (426) (484) (604) (668) (704)Depreciation & amortization 398 425 410 451 500Chg In working capital 55 (52) (85) (50) (41)Chg In other CA & CL / minorities 9 141 (144) 225 (99)Cash flow from operations 1,692 1,906 1,589 2,184 2,003

Capex (278) (484) (400) (600) (600)ST loans & investments (11) (51) 0 0 0LT loans & investments (10) 0 0 0 0Adj for asset revaluation 0 0 0 0 0Chg In other assets & liabilities 85 21 82 63 51Cash flow from investments (214) (514) (318) (537) (549)Debt financing 0 0 22 (40) 36Capital increase 0 0 0 0 0Dividends paid (1,024) (1,100) (1,253) (1,336) (1,441)Warrants & other surplus 10 (12) 0 0 0Cash flow from financing (1,015) (1,112) (1,231) (1,376) (1,405)

Free cash flow 1,415 1,422 1,189 1,584 1,403





With less capex, most of its FCF is paid as dividend





Growth RateNet profit (%) 10.6 13.1 1.5 10.6 5.4EPS (%) 10.6 13.1 1.5 10.6 5.4Normalized profit (%) 10.6 13.1 1.5 10.6 5.4Normalized EPS (%) 10.6 13.1 1.5 10.6 5.4Dividend payout ratio (%) 89.5 89.0 90.0 90.0 90.0

Operating performanceGross margin (%) 58.9 61.5 62.6 63.6 64.0Operating margin (%) 36.2 37.8 37.0 38.5 38.7EBITDA margin (%) 45.6 46.6 44.9 46.6 47.3Net margin (%) 29.1 29.0 27.0 28.0 28.1D/E (incl. minor) (x) 0.0 0.0 0.0 (0.0) 0.0Net D/E (incl. minor) (x) (0.3) (0.3) (0.3) (0.3) (0.3)Interest coverage - EBIT (x) 30,248.3 19,721.9 3,482.4 15,298.2 47,157.8Interest coverage - EBITDA (x) 38,108.9 24,346.1 4,219.4 18,514.0 57,587.1ROA - using norm profit (%) 13.8 14.8 14.6 15.7 15.9ROE - using norm profit (%) 17.4 19.0 18.7 20.2 20.7

DuPontROE - using after tax profit (%) 17.4 19.0 18.7 20.2 20.7 - asset turnover (x) 0.5 0.5 0.5 0.6 0.6 - operating margin (%) 39.2 39.1 38.5 40.0 40.2 - leverage (x) 1.3 1.3 1.3 1.3 1.3 - interest burden (%) 100.0 100.0 100.0 100.0 100.0 - tax burden (%) 74.3 74.2 70.0 70.0 70.0WACC (%) 9.5 9.5 9.5 9.5 9.5ROIC (%) 20.3 25.1 25.3 27.4 29.3 NOPAT (Bt m) 1,136 1,344 1,355 1,501 1,582



BUY TP: Bt5.00 9 FEBRUARY 2011

Initiation Note Upside: 39.7%

RS Pcl. (RS TB)

Best satellite wave play

RS is the most leveraged play on the satellite TV boom with revenue exposure soaring from 2% in 2010F to 40% in 2014F. Earnings growth is also accelerating, rising from 8% y-y in 2011F to 29% in 2012-14F. It’s the cheapest too at 10.8x PE. BUY.


[email protected]

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 10.8x 2011F PE, at a 19% discount to MCOT and a 28% discount to BEC. This valuation seems unjustified given a four-year CAGR earnings growth of 24% y-y in 2011-14F, its net cash position, a high ROE of 40% and decent dividend yield of 4.6%. Assuming full dilution (in-the-money warrants), our DCF-based TP is Bt5.00/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 2011 onward. The penetration rate of this business is only 50% of households in Thailand and its average ad rate in 2010 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 50-100% over the next four years with revenue exposure soaring from 2% in 2010F to 40% in 2014F.

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 2011. This is quite impressive given that the firm will resume paying tax at a 30% rate while it will see no extra income from broadcasting the World Cup. The key earnings drivers in 2011 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 2012-14 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 10% increase in revenue from the satellite business would add 1.4% to RS’s total revenue and earnings in 2011 (versus 0.7% for GRAMMY). RS is also cheaper, trading at a lower PE with a stronger growth outlook.

Than

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COMPANY VALUATION

Y/E Dec (Bt m) 2009 2010F 2011F 2012F

Sales 2,174 2,900 3,100 3,381

Net profit 76 313 339 442

Consensus NP — 318 222 215

Diff from cons (%) — (1.5) 52.4 105.5

Norm profit 76 313 339 442



Norm EPS (Bt) 0.1 0.3 0.3 0.4

Norm EPS gr (%) (119.1) 183.6 8.2 30.4

Norm PE (x) 33.2 11.7 10.8 8.3

EV/EBITDA (x) 16.5 8.1 6.0 4.4

P/BV (x) 4.6 4.7 3.8 3.0

Div. yield (%) 0.0 4.3 4.6 6.0

ROE (%) 14.7 47.1 38.8 40.7

Net D/E (%) 61.1 3.3 (24.1) (40.7)

PRICE PERFORMANCE

1.01.5

2.02.5

3.03.54.0


(Bt /shr)

(60)(40)(20)0

204060

(%)RS Rel to SET Index

COMPANY INFORMATION




Free float (%) 47


12M price H/L (Bt) 4.0/2.0


Major shareholder Chetchotisak Family 53.8%


COMPANY NOTE RS TB PHATIPAK NAVAWATANA


Initiate with a BUY; our top sector pick

We initiate coverage on RS Pcl (RS) with a BUY rating. The stock is our top pick in the media sector for three reasons:

First, the counter is the most mispriced stock in the sector.

Second, RS is the most leveraged play to the satellite TV boom with revenue exposure soaring from 2% in 2010F to 40% in 2014F.

Finally, its earnings are accelerating too. We expect the firm to post 8.2% y-y earnings growth in 2011, speeding up to 30% y-y in 2012. After that, earnings growth should stay at a high level of 29% in 2013-14F.

The most mispriced

RS is our top pick and it’s the most mispriced stock in the media sector. We believe the major reason for this mispricing is that it isn’t well covered by the market. Only two brokers cover the stock (compared with four for GRAMMY, 15 for MCOT and 20 for BEC), according to Bloomberg. Low coverage results in two things for RS:

1) We believe the Street underestimates RS’s potential revenue and the driver for its earnings growth, which will be a surge in revenue from its satellite TV business over the next four years. Therefore, for this reason our earnings estimate in 2011 is 50% higher than the Street’s.

2) Based on our fully-diluted EPS forecast for 2011, the counter now trades on only 10.8x PE, or at a 12% discount to GRAMMY, a 19% discount to MCOT and a 28% discount to BEC. This valuation seems unjustified given a four-year CAGR earnings growth of 24% y-y in 2011-14F, a net cash position, high ROE of 40% and decent dividend yield of 4.6%.

Ex 1: Only Two Other Brokers Cover RS Ex 2: Street’s Earnings Estimate Is Far Below Ours

0

5

10

15

20

25

RS GRAMMY MCOT BEC

24

15

18

(No. of brokers covering stock)

339

442

222 215

0

100

200

300

400

500

600

2011F 2012F

(Bt m) Ours Street

Source: Bloomberg Sources: Bloomberg, Thanachart estimates

Initiate coverage on RS with a BUY to Bt5.00

The most mispriced in the sector as it’s not well covered

Trading on only 10.8x 2011F PE, at 12-28% discounts to its peers

Our earnings estimate in 2011 is 50% ahead of Street’s



Ex 3: Cheapest PE With Highest Earnings Growth Ex 4: RS Is Still Cheap based on P/BV

0

2

4

6

8

10

12

14

16

18

RS GRAMMY MCOT BEC

(x)

0

5

10

15

20


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0


(x)

+2 STD = 6.1x

+1 STD = 4.6x

Average = 3.2x

-2 STD = 0.4x

-1 STD = 1.8x


RS is the most exciting play on satellite TV

RS is the most leveraged play on booming satellite TV. The firm’s business strategy will turn from traditional music to the under-penetrated satellite business from 2011. The penetration rate in this business is only 50% of the households in Thailand. Its average ad rate is still far below those of free-to-air (FTA) channels. RS makes only Bt4,000/minute, or less than 1% of the ad rate on a FTA channel in prime time and 3% of that in non-prime time. Currently, the company operates three satellite channels including a new one called “Infinity” (still under soft launch with commercial operations due to begin in March-April 2011). This channel is considered to be a strategic move by RS into the satellite network. The content is exactly the same as FTA content with soap operas, documentaries, music, news, variety and game shows. Given satellite’s rising penetration rate and RS’s strong content, we expect revenue growth of 50-100% over the next four years with revenue exposure surging from 2% in 2010F to 40% in 2014F.

Ex 5: 3 Satellite TV Channels

Programs Content

1. Sabaidee TV Music

2. You channel Entertainment, variety

3. Infinity More like FTA channels Source: Company data

Significant revenue contribution from satellite over the next four years



Ex 6: Surge In Satellite Revenue In 4Q10 Ex 7: Expect Stellar Revenue Growth From Satellite TV

0

10

20

30

40

50

60

1Q10 2Q10 3Q10 4Q10

(Bt m)

0200400600800

1,0001,2001,4001,6001,8002,000

2010F 2011F 2012F 2013F 2014F

(Bt m)


Digital and satellite are the future business focus RS has branded itself as “The Entertainment Network”, with complete entertainment content such as recorded music, digital music, showbiz, film, sports, radio, TV, publishing and in-store media businesses. The key business strategy for the company over the next three years will be digital music, satellite TV and in-store media while recorded music is a sunset business and will contribute less revenue to the company in the future. The key drivers for the digital music business in the next three years will be new technology on 3G, where both picture and music quality and sound will be far better and the download time will be much faster than under 2G. As for the key drivers for satellite, we have already highlighted these in the previous section.

In 2010, the digital music and sports businesses were the major revenue contributors at about 18 and 20% of the total revenue, respectively. With the arrival of 3G technology, we expect digital music to be the main revenue contributor (about 20% of total revenue) for the company over the next four years. Revenue from the satellite businesses accounted for 2% in 2010F but the contribution will increase significantly over the next four years to 40% in 2014F.

Ex 8: Contribution From Satellite At 2% in 2010F … Ex 9: … But Will Increase To 40% In 2014F

Sports20.0%

Film1.2%

In-store media8.0%

Radio10.0%

Satellite2.0% FTA TV

6.0%

Show biz17.0%

Artist mgt9.0%

Digital18.0%

Physical9.0%

Physical1.8%

Digital20.4%

Artist mgt1.8%

Show biz11.3%

FTA TV3.3%

Satellite40.0% Radio

2.1%

In-store media8.0%Film

0.4%Sports10.9%


Digital and satellite TV are the major focus and will be the key earnings driver over the next four years



Earnings are on an upturn Despite no extra revenue of Bt500m from the World Cup tournament, we believe RS’s earnings are embarking on a multi-year growth cycle while they are also accelerating. We project 8.2% y-y earnings growth in 2011. This is quite impressive given that RS will resume paying a 30% tax rate (after using all the tax credit from the loss carry forward in 1H10) while it will earn no extra income from broadcasting the World Cup (license cost about Bt500m). We forecast earnings to accelerate to 29% in 2012-14.

The main earnings drivers in 2011 will be stellar revenue contribution from the satellite business, subscription fee hikes in the digital business (30% y-y to Bt26/subscriber/month) and more showbiz revenue (especially from government agencies). Robust 50-100% revenue growth in the satellite business and rise in digital business will be the key earnings driver in 2012-13. The combination of high satellite revenue growth and the resumption of extra revenue from the World Cup should drive earnings in 2014.

Ex 10: Resumption Of 30% Tax Rate Hinders Stellar Growth In 2011F …

Ex 11: … But EBITDA Growing Impressively

(400)

(200)

0

200

400

600

800

2006

2007

2008

2009

2010

F

2011

F

2012

F

2013

F

2014

F

(Bt m)

(400)

(200)

0

200

400

600

800

1,000

1,200

2006

2007

2008

2009

2010

F

2011

F

2012

F

2013

F

2014

F

(Bt m)


Earnings to grow by 8% y-y in 2011F and accelerate to 29% in 2012-14F, driven by satellite TV



We prefer RS to GRAMMY

We prefer RS to GRAMMY for the following reasons:

1) RS is a better choice than 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 surge in satellite revenue will have more of an impact on RS’s revenue and earnings than GRAMMY’s. Our sensitivity analysis suggests that a 10% rise in revenue in the satellite business would add 1.4% to RS’s total revenue and earnings in 2011 (versus 0.7% for GRAMMY).

2) RS is trading on undemanding valuations compared with GRAMMY on only 10.8x 2011F PE (versus 12.2x for GRAMMY) with a higher four-year CAGR earnings growth of 24% (versus 20% for GRAMMY).

Ex 12: RS’s EPS Is More Sensitive To Changes In Satellite Revenue Than GRAMMY

Ex 13: RS Also Offers A More Enticing PE With Higher EPS Growth

0.0

0.5

1.0

1.5

2.0

RS GRAMMY

(%)

0.7

1.4

0

2

4

6

8

10

12

14

16

RS GRAMMY

(x)

18

19

20

21

22

23



Prefer RS to GRAMMY as it’s more leveraged to the satellite boom and has a cheaper valuation

APPENDIX RS TB PHATIPAK NAVAWATANA



Rating Scale

Very Strong 5

Strong 4

Good 3

Fair 2

Weak 1

RS Public Company Limited (RS) operates diversified media and entertainment businesses. The company and its subsidiaries produce recorded music on CDs and tapes, television shows and dramas, radio programs, and movies, as well as publishing books and magazines.

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Financial

Risk

*Corp.Governance

Liquidity

Management Manage

ment

None 0




Swift adjustment in response to changes in consumer

needs.

RS has a very strong balance sheet with a net cash

position.

Well diversified revenue streams.

Stock has low liquidity in daily trading volume.

Relies heavily on some superstar artists.


The rising penetration rate of satellite TV will allow RS to

make more money from this business.

3G’s arrival will permit the firm to offer more services in the

digital business.

Liberalization of the broadcasting business.

Piracy of the company’s products.



Target price (Bt) 2.80 5.00 79%

Net profit 11F (Bt m) 222 339 52%

Net profit 12F (Bt m) 215 442 106%



Our earnings forecast for 2011 is about 52% above the Street’s as we’re more bullish on satellite revenues.


If the satellite TV business doesn’t deliver in line with our expectations due to a slower domestic economy or higher competition.

If the digital business faces a slump in revenue.


Source: Thanachart

FINANCIAL SUMMARY RS TB PHATIPAK NAVAWATANA



Sales 2,330 2,174 2,900 3,100 3,381Cost of sales 2,077 1,667 2,001 2,108 2,232 Gross profit 252 508 899 992 1,150% gross margin 10.8% 23.4% 31.0% 32.0% 34.0%Selling & administration expenses 626 436 551 543 558 Operating profit (373) 72 348 450 592% operating margin -16.0% 3.3% 12.0% 14.5% 17.5%Depreciation & amortization 386 100 106 119 135 EBITDA 13 172 454 569 727% EBITDA margin 0.5% 7.9% 15.6% 18.3% 21.5%Non-operating income 27 38 52 56 61Non-operating expenses 0 0 0 0 0Interest expense (39) (31) (31) (20) (20) Pre-tax profit (385) 79 369 485 633Income tax 14 3 55 146 190 After-tax profit (399) 76 314 340 443% net margin -17.1% 3.5% 10.8% 11.0% 13.1%Shares in affiliates' Earnings 0 0 0 0 0Minority interests 3 (1) (1) (1) (1)Extraordinary items (3) 0 0 0 0NET PROFIT (398) 76 313 339 442Normalized profit (395) 76 313 339 442EPS (Bt) (0.6) 0.1 0.3 0.3 0.4Normalized EPS (Bt) (0.6) 0.1 0.3 0.3 0.4


ASSETS:Current assets: 1,191 1,037 1,512 1,563 2,033 Cash & cash equivalent 193 113 500 500 900 Account receivables 541 518 691 739 806 Inventories 77 48 57 60 64 Others 379 358 264 264 264Investments & loans 4 2 2 2 2Net fixed assets 232 172 136 97 62Other assets 457 492 492 492 492Total assets 1,884 1,704 2,143 2,155 2,590

LIABILITIES:Current liabilities: 1,259 1,118 1,341 1,175 1,363 Account payables 277 222 266 280 297 Bank overdraft & ST loans 592 264 526 265 402 Current LT debt 9 159 0 0 0 Others current liabilities 381 473 549 630 664Total LT debt 119 28 0 0 0Others LT liabilities 6 3 4 5 5Total liabilities 1,384 1,149 1,345 1,180 1,368Minority interest 16 11 12 13 14Preferreds shares 0 0 0 0 0Paid-up capital 700 700 708 708 708Share premium 204 204 6 6 6Warrants 0 0 0 0 0Surplus (0) (17) (17) (17) (17)Retained earnings (420) (345) 88 264 511Shareholders' equity 484 543 786 962 1,208


Earnings are on an upward trend, starting 2011





Earnings before tax (385) 79 369 485 633Tax paid (14) (3) (55) (146) (190)Depreciation & amortization 386 100 106 119 135Chg In working capital 62 (3) (138) (36) (54)Chg In other CA & CL / minorities 40 74 174 85 36Cash flow from operations 89 247 455 507 560

Capex (424) (40) (70) (80) (100)ST loans & investments (1) 28 0 0 0LT loans & investments (4) 2 0 0 0Adj for asset revaluation 0 0 0 0 0Chg In other assets & liabilities 57 (32) (3) (3) (2)Cash flow from investments (371) (43) (73) (83) (102)Debt financing 288 (269) 75 (261) 138Capital increase 0 0 (190) 0 0Dividends paid 0 0 (78) (163) (195)Warrants & other surplus (0) (17) 198 0 0Cash flow from financing 288 (285) 5 (424) (58)

Free cash flow (334) 207 385 427 460


Normalized PE (x) (6.3) 33.2 11.7 10.8 8.3 Normalized PE - at target price (x) (8.9) 46.3 16.3 15.1 11.6 PE (x) (6.3) 33.2 11.7 10.8 8.3 PE - at target price (x) (8.8) 46.3 16.3 15.1 11.6 EV/EBITDA (x) 241.3 16.5 8.1 6.0 4.4 EV/EBITDA - at target price (x) 320.3 22.3 11.3 8.6 6.3 P/BV (x) 5.2 4.6 4.7 3.8 3.0 P/BV - at target price (x) 7.2 6.4 6.5 5.3 4.2 P/CFO (x) 28.1 10.1 8.0 7.2 6.5 Price/sales (x) 1.6 1.7 1.3 1.2 1.1 Dividend yield (%) - - 4.3 4.6 6.0 FCF Yield (%) (13.3) 8.3 10.5 11.7 12.6

(Bt)Normalized EPS (0.6) 0.1 0.3 0.3 0.4 EPS (0.6) 0.1 0.3 0.3 0.4 DPS - - 0.2 0.2 0.2 BV/share 0.7 0.8 0.8 0.9 1.2 CFO/share 0.1 0.4 0.4 0.5 0.5 FCF/share (0.5) 0.3 0.4 0.4 0.4


Surge in earnings supports strong FCF

Trading at very low PE multiples





Operating performanceGross margin (%) 10.8 23.4 31.0 32.0 34.0Operating margin (%) (16.0) 3.3 12.0 14.5 17.5EBITDA margin (%) 0.5 7.9 15.6 18.3 21.5Net margin (%) (17.1) 3.5 10.8 11.0 13.1D/E (incl. minor) (x) 1.4 0.8 0.7 0.3 0.3Net D/E (incl. minor) (x) 1.1 0.6 0.0 (0.2) (0.4)Interest coverage - EBIT (x) (9.6) 2.3 11.3 22.5 29.6Interest coverage - EBITDA (x) 0.3 5.6 14.7 28.4 36.4ROA - using norm profit (%) (20.0) 4.2 16.3 15.8 18.6ROE - using norm profit (%) (57.9) 14.7 47.1 38.8 40.7

DuPontROE - using after tax profit (%) (58.4) 14.8 47.3 38.9 40.8 - asset turnover (x) 1.2 1.2 1.5 1.4 1.4 - operating margin (%) (14.9) 5.0 13.8 16.3 19.3 - leverage (x) 2.9 3.5 2.9 2.5 2.2 - interest burden (%) 111.3 71.9 92.3 96.0 96.9 - tax burden (%) 103.6 96.7 85.0 70.0 70.0WACC (%) 11.5 11.5 11.5 11.5 11.5ROIC (%) (33.1) 6.9 33.6 38.8 57.0 NOPAT (Bt m) (373) 69 296 315 414


DISCLAIMER PHATIPAK NAVAWATANA


General Disclaimers And Disclosures:

This report is prepared and issued by Thanachart Securities Public Company Limited (TNS) as a resource only for clients of TNS,

Thanachart Capital Public Company Limited (TCAP) and its group companies. Copyright © Thanachart Securities Public Company

Limited. All rights reserved. The report may not be reproduced in whole or in part or delivered to other persons without our written

consent.

This report is prepared by analysts who are employed by the research department of TNS. While the information is from sources

believed to be reliable, neither the information nor the forecasts shall be taken as a representation or warranty for which TNS or

TCAP or its group companies or any of their employees incur any responsibility. This report is provided to you for informational

purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities.

Neither TNS, TCAP nor its group companies accept any liability whatsoever for any direct or consequential loss arising from any use

of this report or its contents.

The information and opinions contained herein have been compiled or arrived at from sources believed reliable. However, TNS,

TCAP and its group companies make no representation or warranty, express or implied, as to their accuracy or completeness.

Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in

this report shall be at the sole discretion and risk of the user.

TNS, TCAP and its group companies perform and seek to perform business with companies covered in this report. TNS, TCAP, its

group companies, their employees and directors may have positions and financial interest in securities mentioned in this report. TNS,

TCAP or its group companies may from time to time perform investment banking or other services for, or solicit investment banking or

other business from, any entity mentioned in this report. Therefore, investors should be aware of conflict of interest that may affect

the objectivity of this report.

DISCLAIMER PHATIPAK NAVAWATANA


Recommendation Structure:

Recommendations are based on absolute upside or downside, which is the difference between the target price and the current

market price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or more, the recommendation is

SELL. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. Unless otherwise specified, these

recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch

between upside/downside for a stock based on the market price and the formal recommendation.

For sectors, we look at two areas, ie, the sector outlook and the sector weighting. For the sector outlook, an arrow pointing up, or the

word “Positive”, is used when we see the industry trend improving. An arrow pointing down, or the word “Negative”, is used when we

see the industry trend deteriorating. A double-tipped horizontal arrow, or the word “Unchanged”, is used when the industry trend does

not look as if it will alter. The industry trend view is our top-down perspective on the industry rather than a bottom-up interpretation

from the stocks we cover. An “Overweight” sector weighting is used when we have BUYs on majority of the stocks under our

coverage by market cap. “Underweight” is used when we have SELLs on majority of the stocks we cover by market cap. “Neutral” is

used when there are relatively equal weightings of BUYs and SELLs.

Thanachart Securities Pcl. Research Team 28 Floor, Siam Tower Unit A1 989 Rama 1, Pathumwan Road, Bangkok 10330

Pimpaka Nichgaroon, CFA Head of Research Economics & Strategy, Chemical, Cement 662 - 617 4977 [email protected]

Supanna Suwankird Energy, Utilities 662 - 617 4972 [email protected]

Aungkana Tungwikromkrai, CFA Electronics (66) 2617 4968 [email protected]

Sarachada Sornsong Banks, Food, Auto 662 - 617 4966 [email protected]

Phatipak Navawatana Healthcare, Media, Telecoms 662 - 617 4978 [email protected]

Noppadol Pririyawut Senior Technical Analyst 662 - 617 4990 [email protected]

Phannarai Tiyapittayarut Property, Retail 662 - 617 4961 [email protected]

Saksid Phadthananarak Electronics, Transportation 662 - 617 4969 [email protected]

Pawarisa Lertkijkhunnanont Technical Analyst 662 - 617 4991 [email protected]

THANACHART SECURITIES www.TNSitrade.com

Headquarter Thanachart Securities Public Co. Ltd.

444 MBK Tower, 14th, 18-19 Floor Phayathai Road, Wangmai, Phatumwan, Bangkok 10330

Tel: 662 - 217 888, 662 - 217 9595, 662 - 661 9222 Fax: 662 - 217 9642

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