This article first appeared in The Edge Malaysia Weekly on April 24, 2017 - April 30, 2017

WEAK advertising expenditure (adex) growth, high newsprint cost, threat of new players, shift to digitalisation and depreciation of the ringgit against the US dollar — these are among the many risks and challenges facing the media industry.

Media Chinese International Ltd (MCIL) may be controlling four Chinese newspapers in the country — Sin Chew Daily, Nanyang Siang Pau, China Press and Guang Ming Daily — for years, but the group is not immune to the pressure of declining newsstand sales and digital disruption.

In fact, given its murky prospect, MCIL is currently off the radar screen of investors and analysts. However, it is worth highlighting that despite the downturn, the group continued to pay steady dividends in the last three financial years.

According to data from the Audit Bureau of Circulations (ABC), the combined circulation of Sin Chew Daily, China Press and Guang Ming Daily declined 21% to 602,081 copies in first half of 2016 from 760,140 copies in first half of 2013 (see bar chart).

It is worth noting that Nanyang Siang Pau no longer submits its numbers to ABC, but data compiled by adQrate Sdn Bhd shows that the newspaper sells 80,000 copies per publishing day (see table).

In terms of adex, all four titles saw a decline from 2013 to 2016 (see line chart).

On a more positive note, MCIL’s flagship product, Sin Chew Daily, has 1.4 million readers — its highest ever. Combined with the group’s other publications, MCIL reaches 2.7 million readers today.

The group also operates Charming Holidays, a travel agency in Hong Kong, as well as Delta Tours & Travel Services in Canada and the US.

In the nine months ended Dec 31, 2016 (9MFY2017), MCIL saw its net profit decline 40% year on year to RM64.3 million. Revenue also fell 14% y-o-y to RM1.07 billion.

On the weaker financial performance, MCIL says its tour and travel-related service segment has been adversely affected by weak consumer spending, reduced demand for European tours amid security concerns and competitive peer pressure.

For its fourth quarter ended March 31, 2017 (4QFY2017), MCIL remains conservative on the prospect of the overall business environment in view of uncertainties in global economic conditions and persistent softness in the advertising market.

Currently, four research houses — Kenanga Research, Hong Leong Investment Bank (HLIB) Research, AmResearch and AllianceDBS Research — have rated MCIL as a “hold”. Two others — Affin Hwang Capital and CIMB Research — have a “sell” call. Their target prices are between 47 sen and 67 sen.

Maybank Kim Eng Research is the only one that has a “buy” recommendation, with a target price of 72 sen.

Taking Bloomberg’s consensus target price of 59 sen, MCIL could have a 7%  downside, based on its closing price of 63 sen last Thursday.

Year to date, the counter has risen 4%, giving the group a market capitalisation of RM1.06 billion.  The stock is trading at a trailing 12-month (TTM) PER of 14 times.

In a Feb 28 report, Kenanga Research media analyst Cheow Ming Liang highlights that MCIL’s outlook remains challenging in view of the country’s subdued consumer spending, shrinking advertising expenditure and currency volatility.

“While newsprint prices are expected to remain firm, they may have an adverse impact should the ringgit continue to ­depreciate against the US dollar. The group’s travel business, meanwhile, is expected to continue to face difficult market conditions amid growing safety and security concerns as well as cut-throat competition,” he says.

“Having said that, we understand that the group will continue to step up efforts to diversify its revenue stream, such as e-commerce, and focus on improving operational efficiencies,” he says.

HLIB Research analyst Nafisah Azmi says MCIL is expected to face more challenges due to soft adex expectations, slowing economy in Greater China and the continued decline in the tourism industry in Europe.

“Although we favour MCIL for its prudent cost management and strong cash generative business, we believe that adex will remain soft mainly due to macro headwinds and poor consumer sentiment,” she says.

HLIB Research maintains its “hold” call with an unchanged target price of 61 sen, based on a PER of 9.5 times.

As widely expected, no dividend was declared for the third quarter as MCIL normally rewards its shareholders in the second and fourth quarters of each financial year. However, it is learnt that management intends to distribute a minimum 50% of its profit as dividend or to provide for a 6% dividend yield.

Previously, MCIL had said it might reward its shareholders with a special dividend from the disposal of One Media Group Ltd for HK$498 million.

“If there is money, of course we can [consider],” MCIL executive director and CEO Francis Tiong Kiew Chiong told reporters after the group’s annual general meeting on Aug 12 last year.

Kiew Chiong is a distant relative of group executive chairman Tan Sri Tiong Hiew King.

“We have to fulfil the condition precedent, a circular has to be issued to shareholders, and we have to convene an EGM (extraordinary general meeting). After we have gone through that process, then only the money will come in. We can talk about a special dividend after that,” executive director Patrick Leong Chew Meng said.

MCIL is expected to see a net gain of HK$363 million from the sale of its 73% stake in One Media to Chinese state-owned company, Qingdao West Coast Holdings International Ltd.

The Hong Kong-listed One Media is a media subsidiary of MCIL focusing on Greater China. Apart from Ming Pao Weekly in Hong Kong, One Media also publishes Ming Watch magazine in China and Hong Kong, and TopGear magazine in China, Hong Kong and Taiwan.

At its current price, MCIL is offering a TTM dividend yield of 6.7%. The Bermuda-incorporated firm declared a dividend per share (DPS) of 1.1 US cents, 0.93 US cent, 1.43 US cents in FY2016, FY2015 and FY2014 respectively. It is worth noting that MCIL paid a bumper dividend of 13 US cents in November 2012, bringing its total DPS in FY2013 to 14.68 US cents.

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