GMM Grammy

GMM Grammy Plc (GRAMMY) 

Investment thesis
We have upgraded our GRAMMY rating from SELL to TRADING BUY, premised on market anticipation of the firm winning two digital TV licenses at the upcoming auction—we expect a share price surge. Note that we still forecast net losses for FY14-15, due to heavy OPEX tied to the GMM Z pay-TV and terrestrial digital TV platforms. In fundamental terms, recovery is still some way off, but we now expect the home shopping to break even much sooner than we did before.
FY13 net loss forecast revised deeper …
We have revised our FY13 net loss forecast deeper by 11% (to Bt978m loss) to factor in a 13% downgrade to our revenue projection for the year. The downgrade was prompted by the unfavorable political environment, which will cause delays opening of state agency project tenders. Our FY13 events revenue forecast dives 38% to Bt1.16bn. The ongoing political conflict intensifies the scale of the domestic consumption slowdown.
…but FY14 net loss forecast is now shallower
Expanded expectations for GRAMMY’s home shopping channel prompted us to revise our FY14 net loss forecast shallower by 13%. We now expect the channel to break even within 2-2.5 years (we originally assumed 3-5 years). Home shopping revenue jumped by 689% YoY for 3Q13 and by 1,469% YoY for 9M13. GRAMMY guides—based on a survey that it commissioned—that industry-wide home shopping revenue will jump 50% in 2014 to Bt15bn. Our FY14 GRAMMY home shopping revenue assumption is now Bt700m, upgraded 40% from our earlier estimate.
Pay-TV subscription business to break even in 2016
We expect FY14 new pay-TV subscribership of 280k (an average of 23k new subs per month, up 53% from 15k/month in 3Q13), led by Fox content, which will start airing in Jan 2014. Our model indicates that the pay-TV unit will break even in 2016, assuming ARPU of Bt400-500/month.
Bt11.5/share incremental values from two variety channels 
On Oct 28-29, GRAMMY applied to the NBTC to bid for two digital TV variety channels at its upcoming auction—one standard-definition (SD) and one high-definition (HD). Assuming that it were to win one SD channel, we estimate that it would add Bt6.4/share of value. Assuming that it were to win one HD channel, it would add Bt5.1/share.
For the SD channel, we assume project IRR of 11.7%, premised on a Bt32k/min mean ad rate in the first year, rising to Bt86k/min in the fifth year. For the HD channel, we estimate project IRR of 10.2%, premised on a Bt46k/min mean ad rate in the first year, rising to Bt102k/min in the fifth year. We assume mean utilization rates of 5% in the first year, rising to 36% in the fifth year for both channels (Figures 9 and 10).