Hong Kong's TVB: closer to the Middle Kingdom

Oct 24, 2000

TVB has been granted one of five broadcasting licenses in China, which should boost company revenue and bring its plan for expansion closer to fruition.

The recent announcement by TVB [511] that it was revising downward its advertising rates for the coming year garnered most of the headlines and led to negative comments from analysts. However, news out of Beijing that the Company had been one of five foreign companies granted a broadcasting license should more than offset the shortfall in Hong Kong revenue. This, combined with news that TVB plans to launch a new PRC lifestyle and entertainment internet portal, places its Middle Kingdom aspirations closer to fruition.

News of the broadcasting license instantly enhances the Company’s longer-term earnings outlook. Strong viewership numbers are almost assured given TVB’s established brand name and expertise in Chinese language programming. Its stable of artists and singers gives the Company a huge jumpstart on any potential competitors.

“The licensing news is definitely positive for the Company,” says Brian Thomas, senior investment analyst with Dresdner Kleinwort Benson.

Stockhouse TVB image Thomas explains that with the TVB8 Galaxy channel being granted a broadcasting license by The State Administration of Film Radio and Television, TVB programmes can now be officially carried by cable networks on the mainland.

“This will mean increased advertising revenue for TVB as audience exposure is widened,” he says.

Before the issue of the official licenses, foreign channels were officially banned from general broadcasting in China, although access in three- to five-star hotels was permitted. However, some international TV firms were making semi-official inroads.

Phoenix Satellite [8002], backed by News Corp [X.NCP] of Australia, is also among the license recipients. Phoenix Satellite claims that its Chinese channel can be directly accessed by four million homes in Guangdong Province and that its signal can be received, in part or in full, in another 47 million households across the country.

Zenith Media, a media research firm, forecasts that there will be 125 million households with cable access in China by 2004.

Internet market also attractive

TVB also considers China’s internet market an attractive opportunity given its potential size and early stage of development. Its planned portal will fall under the operations of 70%-owned TVB.com, which already has a Hong Kong-based portal up and running. The PRC portal will be specifically designed to suit the needs of mainlanders and will primarily feature lifestyle and entertainment.

According to the China Internet Network Information Centre, the number of internet users in China as at the end of 1999 was 8.9 million and is doubling every six months. US-based internet research firm, Jupiter Communications, estimates that the total amount of internet-related ad expenditure in China grew four-fold to Rmb$415 million ($50.13 million) in the twelve months to Jun 2000 but yet only accounted for 2% of total media ad expenditure. Jupiter forecasts this figure to rise to 4% by 2002.

Meanwhile, TVB’s announcement, that prime time commercial rates on the English-language Pearl channel will be cut by an average of 20% beginning next year and those at the Chinese-language Jade channel will be raised by an average of 1%, is somewhat misleading. The advertising rate cut on the Pearl channel will have limited negative effect, as advertising is concentrated on the Jade channel.

TVB announced interim net profit growth of 18.2% YoY to HK$220.9 million ($28.33 million) for the six months to Jun 30 2000. The result was slightly below expectations as a result of a HK$71.8 million write-off of start-up costs in relation to Galaxy, TVB.com and TVB Australia, as well as a poor performance on the Taiwan front.

UBS Warburg ascribes a core fair value of HK$53.70 to the stock based on a discounted cashflow basis. However, the valuation does not account for the newly established businesses operating under Galaxy and TVB.com, as well as the potential value of the Company’s programme library. Inclusion of these three assets would lift the fair value estimate to HK$59.40 per share.

Friday’s closing price of HK$43.20 represents a 19.6% discount to Warburg’s core fair value estimate and a 27.3% discount to its full fair value estimate. At current levels, TVB offers a solid play for investors seeking exposure to China’s long-term internet and television potential.