Sector financial performance:

This company, which primarily produces content/programming including entertainment, sports, news, TV series, and films, and distributes by their own broadcasting stations, paid TV, theatrical, physical media, and their own live and on-demand internet distribution earning revenue from affiliate fees (based on cable subscription), advertising, and licensing fees of content, has been grouped into content maker – news, sports, and drama& film sector in video &audio goods and service industry.

Generally, companies in this sector have experienced weak demand, especially from cable subscribers, for their channels. However, some of major channels providers seem to still be able to raise contractual rate to offset the declining subscribers. We have also seen companies to benefit from increased affiliates fees paid for their channels’ broadcasting and retransmission.

It seems that advertising revenue presents a downturning trend for most of companies in this sector and revenue from licensing their film and TV series content presents a similar trend as well.

The leaving subscribers of paid TV channels caused intensive competition among companies in this sector for programming sources (for examples, sports events), which may be the reason behind increasing programming costs. At the same time, while increasing contractual rates help offset the impacts of lower number of subscribers these impacts eventually hurt profitability of those companies that heavily depend on subscription of paid TV as indicated by decreased cash flow (EBI) in 2018. The impacts seem to be minor for companies that more depend on affiliate fees from broadcasting because of increased affiliate fees and re-transmission as indicated by increased cash flow in 2018.

Typical gross margin seems to be declining since 2016, which present an about 37% gross margin in 2018. With the SG&A as percentage of 16%, we see the operating margin is about 22% down from about 24% in 2016.

                                                                                                       click for reading more about this industry

Company performance:

It seems that domestic demand, from paid TV and broadcasting, for programing/channels of this company has been weak as indicated by gradually declining subscribers/viewers. However, this company has been benefiting from rising contractual rate of its channels due to higher quality content provided. And it seems that the decrease in revenue resulted from decreasing subscribers has been able to be offset by raised rate so far.

While has been supported by some of special channels the advertising revenue of this company started to fall in 2018 reflecting the declining rating as a result of downturning situation in TV industry.

Film and TV series revenue fluctuated but experienced huge pressure from unfavourable theatrical situation.

The first three quarter of fiscal 2018 compared with 2017(ended Mar 31, 2018)

Net revenue increased 3% attributable to increase in affiliate fees both in paid TV network and broadcasting, driven by increase in contractual rates domestically and increase in higher rate and more subscribers internationally offset by decrease in domestic subscribers, and to increase in content revenue (film and TV series) offset by decrease in advertising revenue from broadcasting network.

Fiscal 2017 compared with fiscal 2016

Net revenue increased 4% attributable to increase in affiliate fees both in paid TV network and broadcasting, driven by increase in contractual rates domestically and increase in higher rate and more subscribers internationally offset by decrease in domestic subscribers, to increase in advertising revenue from broadcasting network offset by decrease in content revenue (film and TV series) from theatrical and home entertainment.

Fiscal 2016 compared with fiscal 2015

Net revenue (organic) increased 1% attributable to increase in affiliate fees both in paid TV network and broadcasting, driven by increase in contractual rates domestically and increase in higher rate and more subscribers internationally offset by decrease in domestic subscribers, and to increase in advertising revenue offset by decrease in content revenue (film and TV series) from theatrical and home entertainment.

Its gross margin has been at around 33% since 2015 due to increased marketing costs of theatrical and increased programing costs offset by spinning off of lower margin business.

This company’s SG&A as percentage of sales was basically flat at 13% and we have seen flat operating margin (about 20%).

Stock performance

Currently this company has an enterprise price/EBI ratio of about 27(12 month trailing) or 29(forward based on first quarter performance). We think it may be overvalued (without considering potential merger) compared with its peers its performance in future may lie on subscription of digital platform for its news and sport content.