MCIL is controlled by Tan Sri Tiong Hiew King. Tiong has interests in Progresif Growth Sdn Bhd and Conch Company Ltd, which own 19% and 15%, respectively, of MCIL. He also owns another 5% of MCIL via direct interest.
Tiong serves as MCIL’s group executive chairman and is also the executive chairman of Rimbunan Hijau, a large conglomerate engaged in timber harvesting; processing and manufacturing of timber products; tree-planting and other businesses around the world.
Rimbunan Hijau holds an 11% shareholding in Malaysia’s sole newsprint manufacturer, Malaysian Newsprint Industries (MNI; capacity: 250,000MT per annum), whom MCIL sources some of its newsprint from. MNI’s other shareholders are Norske Skog Industrier ASA, The New Straits Times Press (Malaysia) Bhd and Hong Leong Group.Leading Chinese newspaper publisher in Malaysia and Hong Kong
MCIL’s portfolio of media products comprises five dailies with a total daily circulation of over one million, two free dailies and over 30 magazine titles in key cities in North America, Southeast Asia and Greater China, serving a vast population of readers literate in the Chinese language.
In terms of operations, MCIL is overwhelmingly dominant in Malaysia. Its newspapers command more than 70% share of the daily circulation of Chinese newspapers (excluding Nanyang Siang Pau whose daily circulation figures are not audited but estimated at approximately 100,000). No other competitor comes close. Its flagship newspaper, Sin Chew Daily is the No 1 Chinese newspaper and its daily circulation is only second to Malay tabloid Metro Ahad (1HFY10: 405,506 copies daily).
In Hong Kong, its Ming Pao Daily News has the third highest daily circulation. Ming Pao Daily News and Yazhou Zhoukan are held in high regard for being the most credible and independent publications in Hong Kong. MCIL also publishes a weekly and a monthly in Greater China and free dailies in Canada (Vancouver and Toronto) under the Ming Pao brand name.Still very much a Malaysian company
Due much to its Malaysian origin, Malaysia contributes the most to revenue at over 60%, followed by Greater China at less than 20% and North America at less than 10%. We estimate that circulation revenue: adex revenue mix in Malaysia and Greater China is approximately 40%:60% while in North America, we estimate it at 0%:100% as the two newspapers there are distributed free. MCIL also has a travel business which primarily caters for the Chinese diaspora for travel between North America and Greater China.
Ebitda-wise, Malaysia contributes disproportionately higher at some 90% due to higher operating leverage and greater economies of scale while Greater China contributes less than 10%. North America and travel broke even at Ebitda level in FY10 but we do not expect both segments to contribute materially to Ebitda going forward due to their still weak operating environment.
As MCIL derives most of its earnings from Malaysia, our analysis is therefore centred on its operations here. MCIL is basically a proxy to Malaysian Chinese consumer sentiment.
According to the 10th Malaysia Plan, the average Chinese household earns some 25% more than the average Malaysian. Therefore, MCIL’s relationship with the Chinese community works to its benefit.Quality content reflected in strong circulation growth
From FYE June 2006 to FYE June 2009, MCIL’s Chinese newspapers recorded an impressive 3% CAGR in daily circulation. We deem this as impressive as all the major mainstream newspapers (The Star, The New Straits Times, Berita Harian and Utusan Malaysia) have been experiencing declining daily circulation due to competition from Internet news portals.
Only Harian Metro, Kosmo and theSun have recorded stronger daily circulation growth. Harian Metro and Kosmo have been popular due to their Malay tabloid content while theSun is free and the number of its distribution points (LRT stops, major office buildings, etc) has been increasing.
MCIL management attributes its daily circulation growth to its quality content and editorials. Strong daily circulation is needed to maintain and grow its share of readership and newspaper adex, which has been rising.
Its strong daily circulation growth is also reflected in low discount rates. Discount rates are the difference between net adex (adex actually received) versus gross adex (adex based on rate cards as reported by Nielsen Media Research). For any given newspaper, the stronger the daily circulation, the lower the discount rate due to its stronger bargaining power with advertisers. We estimate that MCIL’s average discount rate stands at approximately 30%, at par with The Star, the leading Malaysian English newspaper.
Chinese newspaper adex growth not as tepid as one might expectWe received feedback from some investors who commented that MCIL’s newspaper adex share may be growing but newspaper adex itself is losing share to TV. In other words, MCIL is gaining a larger share of a shrinking pie. This has been especially obvious over the last five years.
After drilling down into the details, we note that this was due to TV adex growing faster than the adex for other media, including newspaper adex. Newspaper adex itself did grow. Over the last five years, newspaper adex grew by 5% CAGR while Chinese newspaper adex (of which MCIL commands approximately 70% share) grew by a higher 8% CAGR due to increasing share of newspaper adex. Both grew faster than the average real GDP of 4% over the same period.
Therefore, at the very least we can expect newspaper and Chinese newspaper adex growth to grow in tandem with real GDP growth going forward. Chinese newspaper adex may again grow faster than overall newspaper adex if its daily circulation and readership share continues to improve. Given its enviable position in the Chinese newspaper industry, MCIL is well positioned to capitalise on this opportunity.
Risk factors
We identified four risk factors most pertinent to MCIL. We do not deem declining daily circulation as a major risk due to its stable readership base and track record of increasing daily circulation.
1. Licensing. MCIL’s publishing permit in Malaysia is governed by the Printing Presses and Publications Act. On Oct 27, 1987, Sin Chew Daily’s publishing permit was suspended because it reported on the controversial Operasi Lalang. However, the permit was restored five months later on April 8, 1988. Its latest run-in with the authorities was on Sept 12, 2008, when the newspaper was issued a show-cause letter by the Home Affairs Ministry for its “sensitive” articles but its publishing permit was not suspended.
We deem the risk of MCIL losing its publishing permit as low because of its leading position in the Chinese newspaper industry. This was evident by the public support shown for Sin Chew Daily and its reporter Tan Hoon Cheng who was arrested on Sept 12, 2008, only to be released a day later due to public pressure.2. Adex growth. Naturally, MCIL’s earnings will be most exposed to adex growth. We estimate that every one percentage point (ppt) decrease in adex growth will dilute its EPS by 2%. This result is similar to our sensitivity analysis on Star Publications (M) Bhd. In our universe of media stocks under coverage, Media Prima Bhd is the most sensitive where every 1ppt decrease in adex growth will dilute its EPS by 3%.
3. Newsprint cost. MCIL consumes approximately 150,000 MT of newsprint every year. Its Malaysian operations consume about 120,000 MT per annum while the remaining is consumed by its Greater China and North American operations. Newsprint prices fluctuate in tandem with pulp and energy prices. We estimate that every US$50/MT increase in average newsprint price will dilute its EPS by 12%. Newsprint prices are currently hovering at around US$650/MT.
4. Foreign exchange. Newsprint prices are denominated in USD. A weaker USD will translate into cheaper newsprint prices in RM terms. We estimate that every 10% appreciation in the RM against the USD will accrete 12% to its EPS. The USD is currently trading at the exchange rate of RM3.12.
Assumptions
Again, as MCIL derives most of its earnings from Malaysia our assumptions are therefore centred on its Malaysian operations. As Greater China, North America and travel contribute less than 10% of Ebitda, we will not delve into their respective assumptions.
1. Daily circulation. Our forecast figures (ex-Nanyang Siang Pau) are based on the ABC (Audit Bureau of Circulation) Report: Circulation figures for the period ended Dec 31, 2009. They conservatively imply nil growth in total daily circulation. We understand that total daily circulation for the period ended June 30, 2010 will show 1% to 2% growth y-o-y but we choose to err on the conservative. Nanyang Siang Pau’s forecast figures are based on its audited figure for the period ended June 30, 2007. They have not been audited by the Audit Bureau of Circulation since but we understand that its daily circulation is still hovering at that level.
2. Adex growth. Our adex growth assumption basically assumes 1x real GDP growth going forward. Adex growth may turn out to be stronger as MCIL’s readership share increases and is translated into higher newspaper adex share. Again, we choose to err on the conservative. Encouragingly, we understand that 1QFY11 adex growth is in the high teens in percentage terms.
3. Average newsprint price and average USD/MYR exchange rate. Newsprint prices are currently hovering at approximately US$650/MT and we believe that they will remain range bound as long as crude oil prices remain below US$8 per barrel. YTD, the average USD/MYR exchange rate is RM3.22 and we believe the exchange rate will remain range bound between RM3.20 and RM3.30 going forward.
Valuation and recommendation
Our RM1.20 target price is based on 12x CY11 PE or one-third discount to Star’s 12-year average one-year forward PE. We understand that MCIL has an informal net dividend payout ratio (DPR) policy of 30% to 60% but for the last two years, it has exhibited 50% net DPR compared to Star Publications’ 70% to 80% historical net DPR. Even at our target price, investors can expect a decent 4% net dividend yield based on 50% net DPR. Currently trading at only 8x CY11 PE, MCIL is unreasonably cheap compared to Media Prima and Star Publications.
At its current price, MCIL is offering investors net dividend yields higher than Star Publications and Media Prima which are trading at much higher valuations. We do not believe that this is sustainable and expect MCIL’s valuation gap with Star Publications and Media Prima to narrow once it delivers earnings closer to theirs which we believe will happen this financial year. As a reality check, we derived a discounted cash flow (DCF)/share valuation of RM1.50. Thus, our RM1.20 target price is reasonable in that it implies a moderate 20% discount to DCF/share.
This article appeared in The Edge Financial Daily, September 9, 2010.
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