This article first appeared in The Edge Financial Daily on March 22, 2018

Media Chinese International Ltd
(March 21, 43 sen)
Downgrade to underperform with a target price of 35 sen: Media Chinese International Ltd (MCIL) closed on a strong note at 43 sen (up about 25%) on Tuesday, tracking gains of its dual listing in Hong Kong, which surged 274% over the past two days to HK$2.69 (RM1.34). The surge was mainly due to the initial public offering (IPO) of Most Kwai Chung (MKC), in which MCIL holds a 10% stake (or a 7.5% stake post listing), witnessing overwhelming interest in its IPO subscriptions. While the current massive share price differential could provide an arbitrage opportunity to MCIL shareholders, one should take note that the share transfer (from Bursa Securities to the Hong Kong Stock Exchange [HKEX] and vice versa) is subject to stamp duty and share registration, which could take weeks. Thus, the arbitrage opportunity may potentially diminish by then given the high trading volatility of HKEX. Besides, the negligible financial impact (to MCIL due to its insignificant stake in MKC) could also cool down the irrational trading sentiment.

MKC, the operator of online video outlet TVMost and local satirical magazine 100Most, has reportedly secured HK$22.6 billion via its IPO, recording an oversubscription of 2,790 times for its retail tranche, according to The Standard (a local English newspaper). MKC started book building last Friday and is set to issue 67.5 million shares or 25% at between HK$1 and HK$1.20 per share. It aims to raise up to HK$81 million and will make its debut on March 28. The group recorded a strong profit after tax (PAT) of HK$43 million (+63% year-on-year [y-o-y]) in financial year 2017 (FY17) on the back of a sturdy revenue of HK$95 million (+74% y-o-y, mainly driven by aggressive expansion of its digital media services, which accounted for 72% of the group’s total turnover). Its eight months of FY18 revenue, however, declined by 27% y-o-y to HK$55 million, no thanks to the absence of the event segment and a lower print media contribution. The lower revenue, coupled with non-recurring listing expenses of about HK$9.2 million (with HK$12.2 million yet to be recognised), has resulted in MKC’s PAT dipping 84% y-o-y to HK$5.1 million. For the full financial year, MKC expects to record a lower PAT y-o-y due to a lower margin for its print media segment, and higher operating expenditure.

The sturdy oversubscription to MKC shares could suggest potentially strong share price performance ahead. This may have a positive impact on MCIL’s non-current assets (under investments accounted for using the equity method) and total equity, but not the profit and loss statement based on the group’s current accounting policies.

While we expect the country’s gross advertising expenditure (adex) (ex-pay TV) to climb 4.5% y-o-y in 2018 (driven by the low base effect and pre-14th general election-led adex push), the overall adex outlook is expected to remain cautious in view of subdued consumer spending and the continuing shift of print advertising dollars to the digital media. In addition, newsprint prices are expected to continue trending upwards, which could further put pressure on the print incumbents. Besides, MCIL’s travel segment is also expected to continue to face challenges such as competition from airlines, reducing margins and travel restrictions imposed by the US government, which could dampen travelling activities.

We downgrade the stock rating to “underperform” given the lack of key earnings catalyst amid a challenging adex outlook. Having said that, in view of the current strong trading sentiment, we would advocate investors to ride on the trend and sell on strength progressively. — Kenanga Research, March 21