This company, which primarily creates and acquires content (kids content/film/programming) and distributes by broadcast and paid TV, theatrical, physical media, and digital channels, has been grouped into content maker - drama& film sector in video &audio goods and service industry.
It seems that demand for subscription for paid linear channels (drama and film) has been weak and presented a general downturn trend as indicated by declining number of subscribers for most of channels. To lower costs of subscribers and deal with declining demand for TV channels, the platform operators of distribution decrease bundles of channels, which caused large difficulties for many less attractive TV channels in maintaining their viewers. However, the more specific bundle of TV channels and the availability to subscribe for specific channel from digital platform helps stimulates demand for some of better channels from those who, otherwise, would not like to subscribe a bundle of channels from TV distributors. We have seen fast increase in subscription for some of smaller channels. However, for most of companies the growth from digital platform is too slow to offset their loss in linear cable platform. It seems that many companies depend on raising contractual rates for their channels to deal with declining subscribers.
In the downward trend of TV industry, companies’ revenue of advertising has declined accordingly as well.
There is a downward trend (except for China) in the industry of motion picture, which may be rooted to declining admissions of theatres in those regions.
The general decrease in subscription has hurt profitability of those TV channels makers in this sector. However, we have seen increasing margins for many companies in this sector in 2018 probably attributable to quick increase in consumers’ demand for video content and continuingly increasing subscription for their digital platform. The typical company in this sector has an about 44-47% gross margin in 2018 with a SG&A as percentage of sales of about 22% and operating margin of 24%.
The typical enterprise price/EBI ratio is 13 (12 months trailing).
It seems that domestic demand for subscription for channels of this company has been weak and declining as indicated by decreasing domestic subscribers (5-9% annual declining while increased rates charged). As subscribers stayed away, its advertising revenue fell as well (2-5% annual decrease). Revenue from films production has been fluctuating but generally declining during the same period of time due to unfavourable climate in theatrical industry. However, its international revenue has been growing fast as a result of increasing subscribers for its channels and offset partially declining domestic revenue.
The first half year of fiscal 2018 compared with the same period of 2017(ended Mar 31, 2018)
International affiliate revenue increased 10% (higher rate, more subscribers).
Domestic revenue of theatrical products decreased 1%
International revenue of theatrical products decreased 11%.
Its gross margin has been down from about 47% to 45% since 2015 primarily due to lower margin from motion pictures sector. This company’s SG&A as percentage of sales went up to about 25% and we have seen decreased operating margin (about 21% in 2018 for 12 month trailing).
Stock performance
Currently this company has an enterprise price/EBI ratio of about 12(12 month trailing) or 12(forward based on first half year performance). We think this stock may be slightly undervalued considering its peers’ ration and its strong performance in its international market.