Malaysia Stock Market

[rextech]

S&P

Nanyang Press Holdings

Recommendation: HOLD

Price: MYR3.76 12-Month Target Price: MYR4.20 Date: December 7, 2006

Summary: Listed in 1989, Nanyang Press Holdings (Nanyang) is a newspaper and magazine publisher. The company publishes two Chinese dailies, Nanyang Siang Pau and China Press, and is the largest Chinese language magazine publisher in Malaysia.

Analyst: Lee Leng Hoe, CPA

Highlights

• There have been several new developments for Nanyang, namely: (i) the proposed acquisition of Nanyang shares by Ezywood Options Sdn Bhd (Ezywood), which will end up owning 44.8% of Nanyang shares; (ii) the Mandatory General Offer (MGO) for the remaining shares not owned by Ezywood if the acquisition goes through; (iii) the completion of a new printing plant at Jalan Chan Sow Lin; (iv) more color pages for both Nanyang Siang Pau and China Press newspapers; and (v) the cover price hike of Nanyang Siang Pau’s day edition in July 2006 and night edition in Oct. 2006.

• We have adjusted our forecasts upwards to a net loss of MYR9.0 mln from a net loss of MYR10.1 mln) for FY07 and a net loss of MYR5.9 mln (from a net loss of MYR7.7 mln) for FY08 to impute additional revenue from a higher color : black-and-white advertising ratio for its major newspapers and from Nanyang Siang Pau’s cover price hike.

Investment Risks

• The main risk to our recommendation and target price include the conditional share sale agreement between Huaren and Ezywood falling through, leading to the failure of the proposed MGO. Other risks include lower-than-expected growth in circulation and advertising revenue, an unexpected increase in global newsprint prices and major changes in the Chinese newspaper industry landscape.

Recommendation

• We maintain our Hold recommendation with an unchanged target price of MYR4.20, which is the proposed MGO target price.

• We expect the Chinese newspaper segment to remain challenging due to advertising rate war among Chinese newspapers, changing advertisement spending (adex) patterns, higher raw material prices and operating costs (due to higher oil prices) and overall weak market sentiment. Nanyang has taken positive steps, however, to mitigate the tough business environment by targeting to increase color advertising revenue, raising Nanyang Siang Pau’s cover price and reducing overall operating costs. Nevertheless, we believe Nanyang will still incur losses in FY07 and FY08.

• In the immediate term, we believe the potential new shareholders may add synergistic value to the company. The move could possibly result in some advertising cross-selling, cost savings due to economies of scale or even a rebranding and repositioning of the Chinese newspapers in order to avoid cannibalization of adex revenue.

Nevertheless, we believe any potential revenue and cost savings from this proposed acquisition would only be seen from FY08 onwards.

• We project Nanyang to post a net earnings CAGR of 4.4% (from 9.6%) over the next two years. Due to the projected losses for the next two years, we do not expect Nanyang to pay any dividends in the next few years.
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