GMM Grammy - GRAMMY 3QCY12 profit down sharply, upward revision to CY12 loss outlook

GMM Grammy - GRAMMY 3QCY12 profit down sharply, upward revision to CY12 loss outlook Bloomberg Reuters GRAMMY TB GRAMMY.BK Report type: Company Update Company Overview GRAMMY is a fully integrated entertainment company. Its businesses are divided into three major categories: (1) music business and related business, (2) media business and (3) movie business. GRAMMY reported a 3QCY12 net profit drop of 95% y-y to a mere Bt9.12mn due chiefly to escalating costs and expenses from sales of set top boxes and home shopping business. Huge expenses are expected to tip GRAMMY into a massive loss in 4QCY12. GRAMMY is expected to book around Bt600mn-Bt700mn charges for license fees, transponder costs and production costs but the figures are less than what it has previously guided for Bt1bn due to the delay in pay TV services as a consequence of the delay of pay TV licenses granted by the NBTC. The NBTC is expected to grant pay TV licenses to registered satellite and cable TV operators before the end of this year with services to be launched in early CY13. The outlook brightens for GRAMMY in CY13 thanks to the launch of pay TV services as ad and subscription revenues would offset the impact of huge license fees and production costs of around Bt1bn. We revise upwards our CY12 loss outlook for GRAMMY to Bt337.78mn and we cut our CY13 profit view to Bt85.55mn. We maintain a TRADING SELL call on GRAMMY with a CY13 target price of Bt15/share based on a P/B of 2x. What is the news? GRAMMY reported a 3QCY12 net profit drop of 95% y-y to a mere Bt9.12mn as total revenue growth of 12.39% y-y was offset by escalating costs and expenses from sales of set top boxes to broaden its pay TV and satellite TV platform and home shopping business. How do we view this? Huge expenses are poised to tip GRAMMY into a massive loss in 4QCY12. GRAMMY is expected to book around Bt600mn-Bt700mn charges for license fees, transponder costs and production costs. Further losses are also expected for set top box sales as fiercer competition would lead it to cut prices and the home shopping business would remain in the red. To reflect the exceptionally low 3QCY12 results and massive loss expectations in 4QCY12, we revise upwards our CY12 loss outlook for GRAMMY to Bt337.78mn. Looking ahead into CY13, the outlook brightens thanks to the launch of pay TV services as ad and subscription revenues would offset the impact of huge license fees and production costs of around Bt1bn. As the risks remain for pay TV services in terms of subscriber numbers and ad revenue, we therefore cut our CY13 net profit outlook for GRAMMY to Bt85.55mn. GMM GRAMMY Thailand Equities Research 26 November 2012 Rating 4.00 Trading Sell - Previous Rating 4.00 Trading Sell Target Price (Bt) 15.00 - Previous Target Price (Bt) 19.20 Closing Price (Bt) 17.60 Expected Capital Gains (%) -14.8% Expected Dividend Yield (%) 0.0% Expected Total Return (%) -14.8% Raw Beta (Past 2yrs w eekly data) 0.45 Market Cap. (USD mn) 304 Enterprise Value (USD mn) 368 Market Cap. (Bt mn) 9,333 Enterprise Value (Bt mn) 11,363 3M Average Daily T/O (mn) 0.6 52 w eek range 16.9-34 Closing Price in 52 w eek range 40.00 32.00 24.00 16.00 8.00 0.00 Nov-11 Major Shareholders (%) 1. Mr. Paiboon Damrongchaitham 2. Chase Nominees Limited 42 3. Mr. Thaveechat Jurangkool CG Report - 2011 (Excellent) 54.5 Key Financial Summary FYE 12/10 12/11 12/12F 12/13F Revenue (Btmn) 8,637 9,100 11,150 12,852 Net Profit (Btmn) 523 626 (338) 86 EPS (Bt) 0.99 1.18 (0.64) 0.16 Net Profit, adj. (Btmn) 523 590 (338) 86 EPS, adj. (Bt) 0.99 1.11 (0.64) 0.16 P/E (X),adj. 17.8 15.9 (27.5) 110.0 BVPS (Bt) 7.19 6.87 6.90 7.49 P/B (X) 2.4 2.6 2.6 2.3 DPS (Bt) 0.81 0.54 0.00 0.00 Div. Yield (%) 4.6 3.1 - - Source: Bloomberg, PSR est. *All multiples & yields based on current market price Valuation Method P/B'13 (2x) Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 0% 50% 100% Volume, mn GRAMMY TB EQUITY SETI rebased Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 7 6 5 4 3 2 1 0 8.9 5.2 Investment Actions? Rolling forward our valuation to CY13 and cutting our P/B target to 2x from 2.50x, we slash our target price for GRAMMY to Bt15/share. We maintain a TRADING SELL call on GRAMMY. Analyst Phillip Research Team +65 65311240 research@phillip.com.sg MICA (P) 012/01/2012 Ref. No.: TH2012_0388 1 of 7

GMM Grammy - GRAMMY Thailand Equities Research 26 November 2012 3QCY12 net profit down 95% y-y GRAMMY posted a net profit drop of 95% y-y to Bt9.12mn weighed down by loss from new business. In 3QCY12, total revenue rose by 12.39% y-y to Bt2,558mn. Much of the growth came from a stellar growth of 151.57% y-y in revenue from broadcasting business boosted by revenue of Bt100mn from sales of set top boxes, revenue of Bt80mn from the live broadcast of UEFA Euro 2012 tournament and a 36% growth in ad revenue from satellite TV channels to Bt225mn. Revenue from event management business jumped 32.47% y-y and revenue from movie business surged 63.06% y-y thanks to the release of one movie Seven Something against none in the same year-ago period. Showbiz revenue leapt 18.03% y-y. Even though the number of concerts in 3QCY12 were less than 3QCY11, revenues were however higher. Revenue from other businesses grew 17.55% y-y. On the downside, revenue from music business slipped 19.78% y-y due chiefly to a drop in digital downloads. Revenues from radio and publishing businesses shrank 11.47% and 12.77% y-y respectively. Total costs shot up 23.78% y-y on set-top-box costs as well as license and production costs of UEFA Euro 2012 live broadcast. SG&A expenses soared by 25.22% y-y, largely blaming the startup of new business operations and marketing expenses for GMM One, formerly known as GMM Z. Profits from affiliates jumped 33.09% y-y. Finance costs swelled 103.41% y-y on increased overdraft and short-term loans to fund new businesses. In this period, the sharp profit slide was largely blamed on losses from sales of satellite TV set top boxes, UEFA Euro 2012 and home shopping business. the new estimate, we assume GRAMMY will achieve total revenue of Bt11,150mn. If GRAMMY could launch its pay TV services next year, ad and subscription revenues would offset the impact of huge license fees and production costs of around Bt1bn. GRAMMY aims to sell another one million set top boxes in CY13 against an estimate of 1.3mn boxes in CY12. The home shopping business is expected to remain in the red but losses are likely to narrow. On this basis, we estimate GRAMMY will deliver CY13 total revenue of Bt12,852mn. To reflect the risk of pay TV services in terms of subscriber numbers and ad revenue, we cut our CY13 net profit outlook for GRAMMY to Bt85.55mn from a previous view of Bt179.40mn. Rolling forward our valuation to CY13 and cutting our P/B target to 2x from 2.50x, we slash our target price for GRAMMY to Bt15/share. We maintain a TRADING SELL call on GRAMMY. Massive loss expected in 4QCY12 on huge expenses Huge expenses are poised to tip GRAMMY into a massive loss in 4QCY12. GRAMMY is expected to book around Bt600mn - Bt700mn charges for license fees, transponder costs and production costs but the figures are less than what it has previously guided for Bt1bn due to the delay in pay TV services as a consequence of the delay of pay TV licenses granted by the NBTC. The NBTC lately kicked off the regulation process for cable and satellite TV operators by allowing them to register for non-frequency broadcasting licenses. GRAMMY has already applied for relevant licenses with the NBTC. The licenses are likely to be granted to registered satellite and cable TV operators before the end of this year with services to be launched in early CY13. GRAMMY is also anticipated to see further losses from satellite TV set top box sales as fiercer competition would lead it to cut prices. The home shopping business would remain in the red. The music business is likely to continue its downturn. On the other hand, the outlook for the media business brightens, reflecting the flood impacts, which caused a slowdown in ad spending a year ago. There will be one movie The Countdown to be released in 4QCY12 against the release of one movie Top Secret which generated weak box office revenue in 4QCY11 as a result of floods. Showbiz is also likely to perform better thanks to a lineup of big concerts such as Big Mountain Festival, 25th anniversary of Bab Bird Bird concert, the musical play Miss Saigon, and a big event Grammy Wonderland. Upward revision to CY12 loss forecast and cut in CY13 profit outlook To reflect the exceptionally low 3QCY12 results and massive loss expectations in 4QCY12, we revise upwards our CY12 loss outlook for GRAMMY to Bt337.78mn from Bt110.60mn. Under 2 of 7

GMM Grammy - GRAMMY Thailand Equities Research 26 November 2012 Ratings History 40 35 30 25 20 15 10 Target Price Market Price Source: Bloomberg, PSR Jun-13 Mar-13 Dec-12 Sep-12 Jun-12 Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 Dec-10 Sep-10 Jun-10 1 2 3 4 5 Phillip Group Rating System Total Returns Recommendation Rating > +20% Buy 1 +5% to +20% Accumulate/Trading Buy 2-5% to +5% Neutral 3-5% to -20% Reduce/Trading Sell 4 >-20% Sell 5 Remarks We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk rew ard profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation 3 of 7

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