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 the live and on-demand internet distribution earning revenue from advertising, affiliate fees (based on air to free broadcasting and cable subscription), 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.

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Company performance:

It seems that revenue growth of this company has been attributable to continuingly increasing

TV station affiliate fees (including retransmission fees from cable network distributors) and increasing subscription of its digital channels/programming in the past several years. However, its advertising revenue fluctuated and presented downward trend generally.

It TV series revenue fluctuated but experienced upward trend.

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

Net revenue increased 13% attributable to increase of 16% in affiliate fees (including subscription) both in digital network and broadcasting and increase of 18% in content revenue (TV series international licensing fees). Its adverting revenue was flat excluding acquisition.

Fiscal 2017 compared with fiscal 2016

Net revenue increased 4% attributable to increase of 26% in affiliate fees (including subscription) both broadcasting and retransmission, cable channels, and digital channels and increase in content revenue offset by decrease in advertising revenue.

Fiscal 2016 compared with fiscal 2015

Net revenue increased 4% attributable to increase in affiliate fees (including subscription) both broadcasting and retransmission and digital channels and increase in advertising revenue offset by decrease in content revenue (licensing).

Its gross margin has been at around 36% since 2015. This company’s SG&A as percentage of sales was basically flat at 16% and we have seen flat operating margin (about 20%).

Stock performance

Currently this company has an enterprise price/EBI ratio of about 17(12 month trailing) or 16(forward based on first quarter performance). We think it may be fairly valued compared with its peers and its performance in linear broadcasting TV.