TVB's splendid run looks set to continue
Invest in a company which has a durable competitive advantage, like a castle surrounded by a deep moat. Isn't that what the investment maestro Warren Buffet teaches us?
In the media and entertainment industry, the mighty TVB is such a company. No other company has threatened the pseudo-monopoly of TVB in viewership and TV advertising.
Examining the profit and loss account of TVB from 1990 to 2005, I am amazed at its excellent performance: sales increased from $1.5 billion to $4.17 billion, up 178 per cent, or at a compound growth of 7 per cent a year. Sales - mostly advertisement income supplemented by programme licence income - kept growing even in 1997 and 1998, the worst of the Asian crisis and the property crash. Operating profit rose from $375 million to $1.45 billion, up 289 per cent, or at a compound growth of 9.4 per cent a year. Net profit for shareholders rose from $327 million to $1.18 billion, up 261 per cent, or at a compound growth of 8.9 per cent a year.
In 2005 sales and profit both reached record highs. There was no substantial retreat in sales and profit during those 15 years.
Last year sales gained 9.4 per cent year on year to $4.17 billion, thanks to income growth of Hong Kong terrestrial television broadcasting, and more income from distributing TV channels in China, Taiwan, Hong Kong and elsewhere.
Advertisement income net of agency commissions was $2.68 billion, up 3.3 per cent year on year; programme licensing income was $791 million, up 3.1 per cent; subscriptions $414 million, up 12 per cent; sponsorship programme income was $337 million, up 191 per cent.
Income from Hong Kong gained 12 per cent to $2.56 billion, Taiwan 5.7 per cent to $744 million, Malaysia and Singapore flat at $338 million, and the US and Canada flat at $209 million. The growth spot was still the home market.
Operating profit gained 35 per cent to $1.45 billion.
Last year there was an exceptional profit of $149 million from disposal of financial assets, a 51 per cent interest in pay-TV associate TVB Pay Vision (formerly GSTV).
Share of loss of associates was $187 million, worsened by 13 per cent, due to continued loss by the 49 per cent-owned TVB Pay Vision.
Reported net profit for shareholders was $1.18 billion, up 64 per cent, or $2.69 per share, again exaggerated by the Pay Vision disposal. On a recurring basis, that means excluding the disposal gain, recurring profit was about $1.06 billion, up 42 per cent year on year, or $2.42 per share, boosted by higher advertisement and licensing income.
Given further strong economic growth in Hong Kong and the World Cup football games, prospects for this year should be bright. Group sales could be $4.4 billion, up 5.3 per cent; recurring net profit could be $1.11 billion, up 4.5 per cent, or $2.53 per share.
Excluding Pay Vision, profit of TVB this year could be as high as $1.27 billion, up 5 per cent, or $2.90 per share. Given the rather high historic price/earnings valuation range of TVB of about 16-20 times earnings, this existing business could be worth as much as $46-$58.
TVB shared 49 per cent of the net asset of the loss-making associate Pay Vision, or $245 million, or 56 cents per TVB share.
Simply adding up these two values gives $46.6-58.6 per share of TVB. Current share price of $45.25 implies potential appreciation of as much as 29 per cent, which is attractive for a low-profit-growth pseudo monopoly.
The good news is that Pay Vision will supply programmes to NOW cable TV for a fee of $50 per month per subscriber, so that given the growth in subscribers for NOW, and its increasing patronage of TV programs supplied by TVB Pay Vision, there is a chance for Pay Vision to turn around to profitability in a few years, therefore boosting equity value of TVB even further.
The biggest risk is competition from ATV and other pay-TV companies such as iCable and NOW, besides fewer property adverts.
As at Friday my $10 million simulated portfolio earned a return since January 2005 of 28.8 per cent and despite recent market weakness still outperformed the Hang Seng Index by 7.5 percentage points, excluding dividends. Including dividends, it earned 35 per cent. I disposed of 2,000 shares of Manulife in exchange for 11,000 shares of TVB.
Henry Chan is head of research at Quam. He does not own shares of TVB.