Luxury Dip Takes Bite Out Of Phoenix
Beijing’s crackdown on excessive spending by officials has claimed one of its first victims in the media sector, with word that leading independent broadcaster Phoenix Satellite TV’s (HKEx: 2008) profits tumbled in the first half of the year due to flagging revenue from luxury goods advertisers. The news isn’t all that surprising, since Beijing’s crackdown has been going on for more than a year now. Now we’ll have wait and see how long the slowdown lasts, whether it intensifies, and who else is most vulnerable.
The last time we saw this kind of major hit in the advertising market came about a year ago, when makers of baijiu liquor were pummeled by a food safety scandal that quickly become a longer-term downturn as the government austerity campaign intensified. Makers of famous brand liquors like Moutai (Shanghai: 600519) and Wuliangye (Shenzhen: 000858), which can cost thousands of yuan per bottle, took the biggest hits in that downturn and are still struggling to recover.
The downturn in luxury goods has been well documented, with many of the world’s most famous brands reporting slowing sales growth and even declines as they scramble to re-engineer their China strategies. That rapid and sudden slowdown prompted many brands to sharply curb their advertising spending in the first half of this year, leading to Phoenix’s own profit warning. As one of the few independent broadcaster in China, Phoenix has a devoted and highly educated viewer audience that would appeal to such advertisers.
Phoenix said it expects its profit to drop by HK$165-HK$205 million for the first 6 months of the year, equal to about $21-$26 million. (company announcement) That would represent a drop of up to half from 2013, when the company reported a net profit of HK$412 million. Phoenix didn’t give any revenue guidance, but I would expect that its TV advertising revenue probably fell sharply in the period, perhaps as much as 25 percent.
In fairness, I should point out the drop in luxury spending was just one of 3 factors cited by Phoenix for the sharp decline. The company also blamed a one-time gain that artificially inflated last year’s profit. Depreciation of the yuan in the first half of the year also hit profits, since the Chinese currency posted one of its first prolonged declines during that period after years of steady appreciation against the US dollar.
While the currency and one-time gain are short-term factors, the luxury downturn is almost certain to persist and even accelerate, which will create headaches for Phoenix and other companies dependent on such revenues. So the big questions become: Who else will be affected, and how long will the downturn last?
Many may be wondering if the big Internet companies might also take a hit, since names like search leader Baidu (Nasdaq: BIDU), top web portal Sina (Nasdaq: SINA) and leading microblogging site Weibo (Nasdaq: WB) are all very dependent on advertising revenue. That looks unlikely, since most of these web companies have younger, less affluent audiences who aren’t the main target audience of luxury goods makers. Baidu previously reported a 59 percent rise in its first quarter revenue, and I expect it and the others should see relatively strong growth continue in the current quarter.
Traditional media like newspapers, magazines and especially TV stations are likely to take the brunt of this downturn, since their audiences tend to be older, wealthier people, and are thus favored by luxury goods makers. As to how long the downturn will last, I do expect it will probably continue for at least the next year or two until the government eases up. In that kind of climate, traditional media could be looking at a tough period ahead through the end of this year and into 2015.
Bottom line: Traditional media companies are likely to take a hit over the next 1-2 years from the luxury spending slowdown, though Internet media companies will feel less impact.
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