StarHub – Daiwa

A beneficiary of the revised Media Market Conduct Code

What has changed?

• On 12 March 2010, the government announced a revision to the Media Market Conduct Code that requires pay-TV providers to cross-carry each other's content acquired or renewed on an exclusive basis on or after 12 March 2010.

Impact

• We believe the new regulation could improve the current competitive environment for pay-TV content, as evidenced by the aggressive bidding for the rights to broadcast the BPL by Singapore Telecom (SingTel) (ST SP, S$3.14, 3, TP: S$3.09) in 2009. Pay-TV operators look unlikely to bid aggressively for exclusive content in the future as they can still have the access to this and, at the same time, increase their subsidies to gain market share. We think this means the rising cost of content can be curbed in the long run, but that the competition may shift from exclusive content to customer subsidies.

• The new regulation will not be applied retroactively, and therefore, it should have little impact on StarHub, given StarHub's existing exclusive content is under multi-year contracts (StarHub did not disclose the details of its existing agreements with content partners due to confidentiality).

Valuation

• We have raised our six-month target price to S$2.27 (from S$1.92), equivalent to a PER of 13x on our FY10 EPS forecasts, on a par with the sector average as we believe the new regulation would probably remove the share-price overhang from the content competition driven by SingTel.

Catalysts and action

• Considering what we consider to be its attractive dividend yield of 9.1% for FY10-12, one of the highest in the region, its valuation (a 12.6x PER on our FY10 EPS forecast) looks undemanding to us. Nevertheless, SingTel's aggressive stance in the pay-TV market, which may shift the scope of competition from exclusive content to customer subsidies, could impair the defensiveness of StarHub. We maintain our 3 (Hold) rating, as we see limited upside potential to our target price.

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