This article first appeared in The Edge Financial Daily, on March 8, 2016.

Media Chinese International Ltd
(March 7, 65 sen)
Maintain market perform with an unchanged target price (TP) of 65 sen: Media Chinese International Ltd (MCI) announced that its wholly-owned subsidiary, Comwell Investment Ltd, last Friday entered into an exclusive memorandum of understanding (MoU) with Qingdao West Coast Holdings (International) Ltd, the ultimate controlling shareholder, which is a Chinese state-owned enterprise, in relation to the possible disposal of its entire 292.7 million shares in One Media Group Ltd (OMG).

The exclusivity period of the MoU will be valid until April 15. MCI owns a 73.01% equity stake in OMG. We were not surprised by the news as the management showed its intention to fully or partially dispose of OMG shares in mid-January. Should this materialise, the earnings’ impact to MCI is likely to be minimal, in our view.

OMG is primarily involved in the publishing of Chinese-language lifestyle magazines and provides digital and outdoor media services in China. As of the nine months ended Dec 31, 2015, OMG registered a turnover of HK$111.1 million (RM58.57 million) (-23.3% year-on-year [y-o-y]) and contributed 30% revenue to the group’s Hong Kong segment or 5.1% top line of MCI’s total turnover. In tandem with its tepid revenue trend, its earnings before interest, taxes, depreciation and amortisation plunged to HK$6.6 million (-75.5% y-o-y).

Based on pre-suspended last traded price of HK$1.47, OMG has a market capitalisation of HK$589.3 million and is trading at 0.79 times below its book value per share.

Outlook remains challenging in view of the cautious advertising spending environment, coupled with increased competitive pressure from other media platforms. While lower newsprint prices could provide some earnings cushion, it may have an adverse impact should ringgit continue to depreciate against the US dollar.

We make no changes to our financial year 2016 (FY16) and FY17 earnings forecasts. Maintain our TP at 65 sen based on a targeted FY17 price-earnings ratio of 8.0 times, representing -1.0 times standard deviation below its five-year mean. — Kenanga Research, March 7