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GMM Grammy

Deeper FY14 net loss now expected

GMM Grammy Plc (GRAMMY)

Investment thesis

We have downgraded our rating from TRADING BUY to HOLD, as we now expect a deeper FY14 net loss. The effect of unfavorable publishing and music industry dynamics has been exacerbated by weak consumption and political chaos (which hit events revenue). We have not yet factored the digital TV business into our projection, as the upcoming launch of 24 digital terrestrial channels (all chasing ad spend) is unprecedented in Thailand—the "unknown unknowns" are such that we don't believe it appropriate to attempt to model for new entrants to the TV broadcast industry.

FY14 net loss forecast revised deeper

The firm reported a Bt556m net loss for 4Q13, flattish YoY but 95% QoQ deeper in the red and 121% deeper than we had expected. All business units except TV and movies posted YoY revenue declines for 4Q13—music (down 14% YoY), radio (down 10%), publishing (down 21%) and events (down 13%).

In light of the unfavorable environment, we have revised our FY14 net loss forecast 84% deeper to Bt1.8bn, pegged to an 11% cut to our revenue projection for this year. The top-line projection downgrade reflects lower assumptions for music sales and media (publishing, radio & TV) and events. We estimate a Bt600m net loss for 1Q14, 165% YoY and 8% QoQ deeper in the red, due to weak consumption and higher contents costs (accelerated amortization of existing programming plus the new Fox content will start amortizing in 1Q14).

Digital TV to post losses for the first two years

GRAMMY guides for net losses for its digital TV business (an SD channel and an HD channel) for the first two years—a Bt400-500m loss in the first year. It budgets total production and SG&A expenses for the two channels in the range of Bt400m-1bn and CAPEX of Bt120m. The production costs for the HD channel will be 25% higher than for the SD channel. GRAMMY will initially simulcast the programming of its "One" satellite TV channel on its HD channel and gradually add new content. It will eventually start decommissioning loss-making free-to-air satellite TV channels, so we can expect the number of satellite channels to decline somewhat from the current nine.

As noted, we haven't tried to factor the digital terrestrial TV business into our model—the unprecedented upcoming surge in the number of channels makes guestimating ad rates and OPEX a fool's errand.

Content costs to peak in FY14

We expect content amortization costs to rise to Bt850m in FY14—Bt600m for existing content (the last year of amortization) and Bt250m for the new Fox programming (starting 1Q14). Content amortization costs should drop to Bt300m in FY15 when only Fox programming is to be amortized.

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