Hong Kong Economic Times Holdings Limited 423 HK W
October 16, 2009 - 12:42pm EST by
johnv928
2009 2010
Price: 1.64 EPS $0.14 $0.19
Shares Out. (in M): 432 P/E 5.5x 4.5x
Market Cap (in $M): 708 P/FCF 3.3x 3.2x
Net Debt (in $M): 336 EBIT 69 92
TEV (in $M): 371 TEV/EBIT 4.6x 3.7x

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Description

Hong Kong Economic Times Holdings Limited:  HKET may be the cheapest newspaper asset in the world. At HK$1.64, the stock offers the opportunity to purchase the "Wall Street Journal of Hong Kong" at an extremely compelling valuation on an absolute basis and at a deep discount to global comps facing profound secular pressure. HKET has a highly cash generative business leveraged to a cyclical rebound in Hong Kong's advertising spend and capital markets activity, and in contrast to North American peers with significant declines in readership, has maintained stable circulation. We believe the company is conservatively worth ~3x its current share price, with limited downside owing to HK$0.78 of net cash per share, HK$0.27 FCFPS and a 10% dividend yield on adjusted equity value.

Overview

HKET publishes a Chinese-language financial newspaper, operates a Bloomberg-like market data service, and has a classified recruitment business.  HKET has an enterprise value of HK$370mm and for the fiscal year ending March 2010, we estimate the company will generate revenue and EBIT of HK$780mm and HK$92mm, respectively. Management has increased the company's dividend payout ratio in each of the last four years, most recently to 60% of earnings.

(HKD in mm)

  Value Per Share     FYE March 31,
Price             1.64       2008 2009 2010E
Shares              432     TEV/EBITDA             1.9x             3.3x             2.8x
  Equity Value              708             1.64   TEV/EBIT             2.2x             4.6x             3.7x
Min. Int. (Est. Mkt Value)                15             0.03   Adj. FCF Yield          32.2%          30.2%          31.5%
Cash               (63)            (0.15)   Adj. P/E             2.7x             5.5x             4.5x
Term Deposits             (284)            (0.66)   Adj. Div. Yield          15.3%          10.0%          13.3%
Held-to-Maturity Investments                 (4)            (0.01)          
  Adjusted Equity Value              371             0.86          
 

Wall Street Journal of Hong Kong:  With ~65% market share, the Hong Kong Economic Times is Hong Kong's Chinese-language equivalent of the Wall Street Journal.  Between FY2003 and FY2008, circulation revenue and ad revenue grew at 19% and 11% annual rates, respectively. Circulation has shown remarkable resilience over time, and is now less than 2% off its 2007 peak after increasing 8% sequentially in 1H09.

(in thousands)                                      
  2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
  1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H
Avg. Circ.        80.6        75.3        71.1        73.3        72.0        73.4        70.3        78.2        80.9        80.7        85.6        80.5        87.6        82.7        90.6        94.7        90.8        86.1        93.1
  YoY Growth       (11.8%)     (2.6%)      1.2%      0.1%     (2.4%)      6.5%    15.1%      3.2%      5.8%     (0.3%)      2.3%      2.8%      3.4%    14.5%      0.3%     (9.1%)      2.4%
  Seq. Growth       (6.5%)     (5.6%)      3.2%     (1.9%)      2.0%     (4.2%)    11.2%      3.5%     (0.2%)      6.1%     (6.0%)      8.8%     (5.6%)      9.5%      4.6%     (4.1%)     (5.2%)      8.0%

Increasing stock market activity has historically driven higher circulation and ad rates.  In 2H08, average daily trading volumes on the Hong Kong Stock Exchange Main Board fell 50% and this trend continued through April 2009. Recently, however, volumes have picked up: 

(HKD in bn)      
  2008 2009 % Change
Jan              119                48               (60.0%)
Feb                83                40               (52.2%)
Mar                89                47               (47.8%)
Apr                86                62               (28.5%)
May                76                79                  4.0%
Jun                64                73                14.0%
Jul                63                69                  9.4%
Aug                59                70                17.8%
Sep                68                  -                       - 
Oct                62                  -                       - 
Nov                47                  -                       - 
Dec                43                  -                       - 
  YTD                72                61               (15.0%)

Similarly, IPO listings, which generate announcement revenue for the company, were down nearly 30% year-to-date through August but increased dramatically in September and the number of IPO applications approved in principle and under review has jumped, suggesting listing activity is likely to accelerate in the near term.

(HK $ in millions)        
         
  Number of Listings
  2007 2008 2009 '08-'09 Growth
January                  1                  1                  2                   100.0%
February                  7                  3                  3                            - 
March                  5                  6                  2                    (66.7%)
April                  6                  -                  1                            - 
May                  5                  3                  3                            - 
June                  8                  8                  7                    (12.5%)
July                14                  6                  5                    (16.7%)
August                  1                  7                  1                    (85.7%)
September                  5                  2                  7                    250.0%
October                  9                  3                  -                            - 
November                  8                  3                  -                            - 
December                13                  5                  -                            - 
  Total                82                47                31                            - 
         
YTD (Jan.-Sept)                52                36                31                    (13.9%)
Fiscal YTD (Apr.-Sept)                39                26                24                      (7.7%)

As the Hong Kong economy and stock market activity recover, HKET is well positioned to benefit from growth in its readership within the financial community and increasing advertising and IPO listing announcement revenue.

Lagging Share Price Performance and Valuation:  Due to their shared dependence on the health of Hong Kong's capital markets, Hong Kong Exchanges and Clearing (which operates the Hong Kong Stock Exchange) and HKET have historically exhibited a tight correlation in their share price performance. This relationship has recently broken down as the table of indexed share price performance below demonstrates:

  423 HK 388 HK
12/29/2006              100              100
6/29/2007              122              129
12/31/2007              243              259
6/30/2008              149              133
12/31/2008                56                86
6/30/2009                72              141
9/30/2009                73              164
10/15/2009                74              164

While the HSI and Hong Kong Exchanges and Clearing shares have rebounded 106% and 180%, respectively, from their lows, HKET has recovered only 45%. We expect HKET shares to snap back as investors recognize this disconnect.

With an adjusted P/E of 4.5x, HKET also trades at a ~60% discount to its Hong Kong newspaper peers SCMP Group and Next Media despite superior defensive characteristics and growth. Shares in US comp Gannett trade at 8.5x earnings and 7x EBITDA, and trading levels for the bank debt and bonds of distressed US newspapers imply valuations of 4.5x EBITDA and higher, despite the severe secular pressures they face.

Hidden Value in "Chinese Bloomberg": The company's ET Net segment (reported as the Financial News Agency segment) provides investors with market data and news.  Because of its dedicated staff of reporters that cover Hong Kong listed companies, ET Net is the dominant service-provider for Chinese language terminals, with over 70% market share (ahead of Reuters).  Like Bloomberg, ET Net has an "economic moat" that protects it from competition: proprietary content, "mission critical" information, a reputation for reliability, and a network effect.  In FY2008, ET Net grew operating profit 134% and in FY09 at 38% even as Hong Kong's financial sector contracted.  The current monthly rate per terminal is US$130 versus US$1,500 per month for Bloomberg, suggesting significant room for price increases.  While this business is currently small, it has tremendous growth prospects and deserves a high valuation.

New Publications and Lifestyle Portals:  HKET launched three new publications between October 2005 and October 2007.  Combined, the new publications lost HK$10 million to HK$15 million in both FY2007 and FY2008, and broke even in FY09. Management has said that these publications can achieve run-rate EBIT of HK$30 million within the next few years. In addition, in FY09, the company launched three internet-based "lifestyle portals" providing food, travel and health-related information and services. These lost HK$11mm in FY2009, but we conservatively estimate can contribute HK$5mm over time.

Cost Cuts:  Management has identified HK$60mm of cost cuts for FY2010. These include the benefits of headcount reductions and pay cuts already implemented in Q1 2010 to staff costs (47% of total opex) and collapsing newsprint prices (14% of total opex, down 40% from December 2008 peak levels):

Cost Cuts      
Staff Costs                36   Cut 10% through 5%-10% paycuts beginning April 2009 and ongoing headcount reductions
Newsprint                  9   Cut 10% through procurement initiatives, expected declines in newsprint pricing in 2H, and reduced page counts, page size, and paper weight
Other                15   Vendor contract renegotiations, lease reductions, etc. 
  Total                60    
  
Collapsing newsprint prices      
 (USD/Metric Tonne) 2008 2009 % Change
March              616              692             12.5%
June              666              532            (20.1%)
September              724              451            (37.7%)
December              750                  -  

Free Option on China:  China is a vast opportunity for HKET.  As of December 2007, China had an estimated 138 million investment accounts compared to 1.6 million investors in Hong Kong.  ET Net has already established partnerships with two leading market data providers in China and is poised to dominate the Chinese market for Hong Kong data and financial news.  If HKET is able to achieve even a small fraction of its Hong Kong ET Net and newspaper penetration in China, that business could conservatively be worth HK$10-HK$20 per share. We do not include this in our valuation but highlight it as a significant free option.

Historical Results and FY2010 Projections

The following FY2010 projections assume no near-term benefit from expansion into China, continued declines in advertising, listing and recruitment revenue and no ramp in ET Net, new publications and other new initiatives. Declines in advertising revenue are more than offset by approximately HK$60mm cost cuts described above. We believe FY2010 will represent trough revenue for the company as adspend and financial newspaper readership recover. 

  FYE March 31,
  2003 2004 2005 2006 2007 2008 2009 2010E
P&L                
Printed Media              367              369              442              534              623              688              579              550
Financial News Agency, Information and Solutions              117              103              107              116              128              172              193              193
Recruitment Advertising and Training                56                45                59                72                82                86                67                33
Lifestyle Portals                  -                  -                  -                  -                  -                  -                  3                  6
  Total Turnover              540              516              608              722              833              946              841              782
                 
Printed Media                55                39                60                77                94                89                18                49
Financial News Agency, Information and Solutions                 (3)               (12)                  2                  9                16                37                51                51
Recruitment Advertising and Training                  8                11                20                30                31                26                12                  -
Lifestyle Portals                  -                  -                  -                  -                  -                  -               (11)                 (8)
Corporate                  -                  -                  -                  -                  -                 (0)                 (1)                 (1)
  Total Operating Profit                61                38                81              117              140              152                69                92
Finance Income                 (1)                 (1)                 (1)                  4                  5                  9                  6                  9
  PBT                60                37                81              120              145              161                75              101
Taxes               (11)               (10)               (14)               (21)               (25)               (27)               (11)               (17)
  Net Income before Min. Int.                48                27                66              100              120              134                64                84
Minority Interests               (11)                 (1)                 (1)                 (1)                 (0)                 (1)                 (1)                 (1)
  Net Income                38                26                65                98              120              133                62                83
                 
EPS             0.12             0.08             0.21             0.25             0.28             0.31             0.14             0.19
Dividends                27                  5                  6                37                47                57                37                50
Payout Ratio          70.7%          17.3%           8.6%          37.8%          39.2%          43.0%          59.8%          60.0%
                 
Cash Flow                
EBIT                        152                69                92
Startup Losses                            -                11                  8
Est. New Publications Losses                          15                  -                  -
  Adjusted EBIT                        167                80                99
D&A/Other Non-Cash                          30                34                34
  Adj. EBITDA                        197              113              133
Net Capex                         (58)               (14)               (14)
Normalized Taxes                         (29)               (13)            (16)
W/C                          10                26                15
  Adj. FCF                        120              112              117
A/T Cash Interest                            7                  5                  8
A/T Startup/New Publications Losses                         (12)                 (9)                 (6)
Tax Differences                            7                 (2)                  -
  FCF                        122              106              118
Increase in pledged time deposits                           (2)                 (0)                  -
Dividends Paid                         (47)               (57)               (37)
  Net Change in Cash and Investments                          72                49                81
BoP Cash and Investments                        230              302              351
  EoP Cash and Investments                        302              351              432

 The following table bridges FY09 to FY10 EBIT:

FY09 EBIT

               69

Cost Cuts

               60

Newspaper Ad Revenue Decline

              (34)

New Publications

                 -

ETNet

                 -

Recruitment

              (12)

Lifestyle Portals

                 3

Commercial Printing (Incl. in Printed Media)

                 6

  FY2010 EBIT

               92

Valuation

For HK$1.64, you are receiving HK$0.78 of current cash balance (net of minority interest), HK$0.27 of FY2010 FCF, and ET Net and core operations for 3x FY2010 EPS of HK$0.19 on trough cyclical revenue, with free options on a cyclical adspend/circulation rebound, HKET's new publications, the recruitment business's return to profitability, the lifestyle portals and potential China expansion. We arrive at a target value of HK$4.50 based on a sum-of-the-parts analysis. The company's current net cash balance and FY10 FCF are worth HK$1.05 per share. The performing portion of the business, including ET Net and core publications valued at 15x and 10x earnings, respectively, are worth HK$2.42.  This represents over 100% upside to the current share price and is arguably overly-conservative given the cyclical revenue decline reflected in our FY2010 projections. Valuing HKET's new publications and recruitment business at 10x normalized earnings and the lifestyle portals at 15x implies an incremental HK$1.03 of upside, for total value of HK$4.50, nearly triple the current share price.

(HKD in mm)                
    Mar-10 Per Share
    PBT Taxes Net Inc. P/E Value EPS Value
Printed Media/Corp                  48                 (8)                40           10.0x              403             0.09             0.93
Financial News Agency, Info & Solutions                  51                 (8)                43           15.0x              640             0.10             1.48
  Sub-Total                  99               (16)                83           12.6x            1,043             0.19             2.42
Cash (Incl. 2010 FCF)                    9                 (1)                  8           62.0x              469             0.02             1.09
Minority Interests                   (2)                  0                 (1)           10.0x               (15)            (0.00)            (0.03)
  Total                107               (18)                89           16.8x            1,498             0.21             3.47
                 
                 
    Normalized Per Share
    PBT Taxes Net Inc. P/E Value EPS Value
New Publications                  30                 (5)                25           10.0x              251             0.06             0.58
Recruitment Advertising and Training                  16                 (3)                13           10.0x              130             0.03             0.30
Lifestyle Portals                    5                 (1)                  4           15.0x                63             0.01             0.15
China Expansion                    -                  -                  -                  -                  -                  -                  -
  Total                  51                 (8)                42           10.5x              444             0.10             1.03
                 
Total                157               (26)              131           14.8x            1,941             0.30             4.50
 

 

 

Catalyst

 -Hong Kong Stock Exchange trading/listing activity recovery

-Cost cuts

-ET Net return to growth

-New publications profitability

-Dividend increases

-Expansion into China

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