When to Buy SCMP
By Jean Hydleman, AsiaWise
2 May 2001 10:30 (GMT +08:00)
asiawise.com
SCMP (Holdings) Limited, the publisher of Hong Kong's South China Morning Post, was relatively unaffected by the slide in media stocks until recently. Where PCCW lost 90% and broadcaster TVB halved in value, SCMP merely slipped from a 52-week high of 8.35 Hong Kong dollars to the current price of HK$4.98, a drop of just 40%. After its initial slump from its high last May, SCMP has been trading in the HK$5 to HK$6 range. Since the first week in March it broke out of that trend, slipping from around HK$6.25 to its present level of just below HK$5.
Why is the stock trading so differently from other Hong Kong media and new economy stocks? First of all, SCMP never rose that dramatically during Internet fever. Although the company promised much with SCMP.com, investors were always concerned about the apparent lack of strategy and the initially high burn rate. The stock rose just 40% in response to the promise of an SCMP.com spin off whereas counters like TVB more than trebled in value.
Why is SCMP now falling when the rest of the sector is showing signs of recovery? First, there are investor concerns about the long-term holding intentions of Robert Kuok, especially since his sell down in TVB signaled a reduced interest in holding media stocks. Given the strong Kuok presence at the helm of both SCMP (Holdings) and SCMP.com, a sell down looks unlikely in the short to medium term. On the face of it, investor concerns are overdone on that front. Another factor decreasing chances of a Kuok sell down is the stock's lack of liquidity. This would make a sale in the open market unlikely.
A sale to a strategic investor also looks unlikely because of SCMP's fundamental outlook. The company has little or no long-term growth prospects. The company's core business is English-language newspaper publishing, where it remains dominant in this segment of the Hong Kong media market. Although the paper has a cover price, revenues are generated from advertising, classified job advertising in particular. The second largest revenue earner is display advertising -- much of which has come from high-end consumer advertising targeting the local affluent Chinese market.
Given its dominance, it is hard to see where the company can go now except down. First of all, it is constrained by its language -- English -- making it unattractive for the China market except for a small niche even if it were to obtain the licenses needed. Overseas editions are no longer appealing as overseas readers can now access Hong Kong and China news via the Internet. The Post is even finding Hong Kong tougher as it now has serious competition in the form of the beefed up Financial Times and Asian Wall Street Journal and the revived Hong Kong Standard in the form of iMail.
The paper is also facing increased competition from the local media. In the old days, SCMP was read widely by the local English- and Chinese-speaking financial community alike, because it provided the best financial coverage. However, over the past five years the local media has improved their market and financial coverage tremendously with far wider reporting on local companies and increased analytical content. There is no longer a need for Chinese people to obtain this news from the SCMP when they can read it in their own language. Again, financial and market news is also widely available on the Internet in both English and Chinese, making the SCMP superfluous to the local market.
The reduced local readership also poses a threat to SCMP's main revenue earners -- recruitment and consumer advertising. If locals are not reading the paper, does it really make sense for recruiters and consumer companies to pay a premium for advertising in the Post? For the time being, SCMP is holding on to these key revenue sources, not least because no local competitor has emerged with a credible competing package. However, that could easily change if cash gets tighter and there are cutbacks in recruitment and consumer advertising expenditure.
And like iMail, it must expect to be hit with much reduced notices income -- when rules requiring listed companies to publish print ads in one English and one Chinese daily are cancelled.
In the immediate future, South China Morning Post remains the company's cash cow, with its other businesses, SCMP.com, property and retail having little impact now that belts have tightened at SCMP.com. Given that little change is likely in the company's business, its share price should remain relatively stable in the short to medium term. For those who think the market is likely to fall again, SCMP remains a good defensive holding likely to trade in the range HK$4.50 to HK$5.50. The recent decline in actual price and relative performance seems to have come from a switch into growth businesses from investors who are more optimistic about the market as a whole and looking for good future earnings growth. |
