Reconnecting cord-cutters

  • We see piracy as a symptom of a larger socio-economic malaise, namely weak purchasing power that goes with the territory in developing economies.
  • We expect Astro’s FY1/22-24F growth to come from luring back those who can afford legal media services. Media Prima relies mostly on ad sales.
  • Reiterate Overweight. Broadcasters Astro and Media Pima are our top picks as they look poised for earnings rebound in CY21-23F.

Piracy, a major headache for developing economies

In 2019, a study by Astro Malaysia found that the country’s media industry lost RM2.3bn in revenue to piracy. We are of the view that the figure has only grown since as cord-cutting has been amplified by the economic damage caused by the Covid-19 pandemic. In our view, piracy is a symptom of a larger socio-economic problem endemic to developing economies: the population’s weak purchasing power, which hampers their ability to procure discretionary items and services. On the other hand, we do believe that many of Astro’s lapsed subscribers include those who are able to afford legal services; we see this as a potential market for Astro to tap with its digital convergence strategy.

Who is most affected by piracy in Malaysia’s media sector?

Astro has the highest risk exposure to media piracy because it is anchored on a direct-to-consumer (DTC) model. Between FY1/16 and FY1/21, we estimate Astro lost c.483,485 households, or 14.8%, of its pay-TV subscribers. Media Prima is not directly affected by piracy as most of its income is derived from advertising sales. Its role in the global streaming landscape is providing content to third-party international video-streaming players. Star Media and Media Chinese Int’l (MCIL) are not affected by video piracy. However, they are contending with uneconomical digital ad sales, stiff competition from
free news portals, and the waning relevance of print media.

Astro developing its pull factor to bring back lapsed subscribers

Our Add call on Astro is based on its strategy to integrate its pay-TV service with up to 15 third-party subscription-based video-on-demand (SVOD) services by end-FY1/23F, which we believe could be the one-two punch that could bring its lapsed subscribers back into its fold; this refers to former Astro subscribers who can afford licensed media services yet choose not to for various reasons. Past that, however, could be trickier. Income pressure has become more evident in Malaysia over the past few years, where complaints over the rising cost of living have regularly surfaced in the public sphere and news articles. If one’s income cannot even cover one’s physiological needs, then there will be even less (or none) to allocate for media services and entertainment. Based on Department of Statistics Malaysia data, the average Malaysian household spent only RM13.60/month (or 0.3% of the 2019 mean household expenditure of RM4,534/month) on TV and video. That cannot even cover the RM18.30/month subscription for Disney+ Hotstar, which is one of the cheapest SVOD services around.

Reiterate sector Overweight

We believe that Astro is doing its level best to win over those who have the means to procure licensed media services. Our FY1/22-24F forecasts for Astro are based on gradual yoy growth in subscribers from cord-cutters who are more financially stable; we are not expecting this streaming-integration strategy to swiftly take the company back to its earnings peak. Media Prima’s upside comes from having more SVOD services entering Malaysia, as it supplies its content to these international players. We reiterate Overweight on the media sector, as we see the market is not pricing in broadcasters’ earnings recovery upside. Astro’s CY22F EV/EBITDA is at a 74% discount to the pay-TV and streaming giants’ weighted average of 18.8x, while Media Prima is trading below its CY22F BV. Our 88 sen TP for the stock values it at 1.5x CY22F P/BV, 2 s.d. above the mean P/BV it was trading when it was drawing losses in FY16-1H20. Downside risk: persistent piracy.