Description

ORIENTIAL PRESS (18 HK-HK$0.84)

It has been the leading Chinese language newspaper group in Hong Kong for the last 25 years. OP owns the largest and 3rd largest circulation newspaper, the flagship newspaper Oriental Daily News (ODN) is read by 40% of Hong Kong’s population (AC Nielsen).

Positives

§ Very strong market position: ODN has a circulation of 530,000 copies, and The SUN its other newspaper has a circulation of 300,000. The next largest paper has a circulation of 170,000. Apple Daily, Jimmy Lee’s anti-Beijing paper is the No.2 paper with a circulation of 376,000. Apple Daily instituted a price war between ‘94 and ‘98, and ODN is one of the few papers that emerged as a winner. The Sun was set up as a competitive answer to Apple daily. It is operating at break-even. Jimmy Lee has moved to Taiwan to set up a paper there and another price war is extremely unlikely. The price war has damaged the smaller players in the market and I would expect very little in the way of competitive threat from them. In addition ODN is the most cost effective way to advertise in Hong Kong in terms of price per circulation.

§ Completion of major investment program: Oriental Press has very modern Plant, between ‘99 and ’00 it spent HK$ 1 billion on a major Cap. Ex. program (Current Mkt Cap HK$ 2.1 bn, Equity HK$2.2 bn) Therefore Cap. Ex. requirements will be very low for the next several years. I estimate these to run in the HK$50m range (2001 actual Cap. Ex. HK$27m) While it has positive operating Working Capital (due to a low level of subscriptions for a newspaper) it will need minimal WC as well, so Free Cash generation (pre div.) should be in the HK$450m range for several years.

§ Strong Balance Sheet: Early in 2000 when people thought this was an Internet stock (it has some high profile web-sites) Management sold primary shares to fund the Cap. Ex. program, they sold stock at @ HK$3 per share. That combined with the cash generation has lead to a net cash position of HK$850m (around 40% of Market Cap).

§ Valuation: This Company has proven its self to be a lasting franchise. However you can buy this company at 2.5x trailing EBITDA, 4.5x Free Cash Flow and 5.2x ’02 EPS (March Y/E), It normally pays out a high percentage of its earnings and so it yields 13%. Which is OK in an economy that is linked to fed policy through the Peg.

Negatives

§ Management: The Company is run by a family that owns 62% of the equity, while they have shown that they are very good at running a newspaper, they have not endeared themselves to shareholders. Apparently they are very willing to meet with shareholders in good times but tend to clam up when things are not going so well. It is well known in Hong Kong that the Father of current management was a member of the Triad, it should be stressed that current management has no links, and the HK regulators would never let them be listed if any connection where known (maybe some VIC members may be able to help me get a better feel for management) As is common in HK, many public companies also have property investments, I consider it a positive that they sold out of theirs a couple of years ago. They have a very focused operation, and seemingly have no interest in diversifying. There is a major question over what they are going to do with their cash.

§ Economy: In a pervse way I consider this a positive, the local economy is very depressed, ad volumes have not recovered since the Asian Crisis, you now have very few excesses in the economy, still ODN can earn very high returns. The economy is headed back into recession, the housing market are very depressed (HK property is now at its lowest level relative to incomes in 20 years), the whole economy is very dependent on housing prices. I believe that this is the overriding reason the stock is cheap, Hong Kong investors have little patience for stocks that have no growth.

§ China and the Peg: People always talk about the media being the big losers in the Hand-over, and this could be true, however multiples during the height of handover panic were 3x today’s level. Also ODN is the only newspaper you can take when you make the border crossing into China from HK, and the whole of (wealthy) Southern China speaks Cantonese as well (a free warrant?).
I consider the Peg a major negative, not because I think it will fall in the face of Sorros type pressure but because it builds up strain over time in the economy. HK is already very uncompetitive relative to its S-E Asia competitors. You can hedge your risk here.

Catalyst

Anticipation of improvement in the economy