This article first appeared in The Edge Financial Daily on July 6, 2018

KUALA LUMPUR: There may be no near-term catalysts for media players for the remainder of 2018, with a soft advertising market amid an uneventful second half (2H18), said a local bank-backed research house.

Pressures will arise from rising industry competition and raw material prices, said Hong Leong Investment Bank (HLIB) Research analyst Rachael Hong in a note yesterday.

Hong said advertising expenditure (adex) contracted 7.6% year-on-year (y-o-y) in the first quarter of this year (1Q18), with print adex hit the hardest, plunging by 20.7% y-o-y.

Though Hong expects to see a slight adex improvement in the upcoming 2Q18 results in August mainly on the 14th general election, World Cup and Hari Raya, she does not expect the adex uptrend to be sustained in 2H18.

Newsprint prices have risen by about 35% y-o-y from about US$680 (RM2,747.20) to US$710 per tonne.

“We may witness margin compressions for Star Media Group Bhd, Media Prima Bhd and Media Chinese International Ltd. The financial impact from rising paper prices will only be seen later as most print players preload their inventories three to six months forward,” read the note.

Higher costs, shrinking advertising revenue and declining circulation rates will hit the profitability of the print segment hard, added Hong.

Pay-TV service provider Astro Malaysia Holdings Bhd will not be spared either, she said, with its subscription rate “facing sustainably some downward pressures”, as the government has promised to make broadband services more affordable with higher quality, which would lead to over-the-top content providers like Star Media’s dimsum and Media Prima’s Tonton playing more prominent roles. Meanwhile, the zero-rated goods and services tax (GST) to be replaced with the sales and services tax (SST) would be a non-event for the sector.

“Pre-GST, media players were able to pass on the SST to their customers. Astro used to charge a 6% service tax on subscribers. Newspaper was a GST-free item,” said Hong.

“We think print will remain unfavourable and subscription rates for pay-TV will start to see more disruptions. The road ahead will be tougher for media players given the soft advertising market. It is crucial for media players to evolve faster than ever and to differentiate from their peers,” she added. HLIB Research has maintained its earnings forecasts and an “underweight” view on the sector. It has also maintained its “hold” calls and target prices on all media stocks, save for Media Prima, which was downgraded to “sell” from “hold”.