i-Cable, CTI Chase FTA Ad Dollars

Shares of pay-TV and broadband operator i-Cable (1097.HK) and the innovative telco City Telecom (CTI) (1137.HK) have risen this week after they announced plans to apply for a free-to-air (FTA) television license in Hong Kong.

CTI, the largest alternative broadband operator in the territory after PCCW, saw its shares in Hong Kong soar by 14.5% from Monday to close Thursday at HK$1.28. i-Cable rose 1.6% over the same period, closing at HK$4.35.

According to MPA research, the TV ad pie in Hong Kong is worth about HK$2.7 bil. or US$350 mil. in net terms (i.e. after discounts) with FTA accounting for almost 90% of the pie. Incumbent broadcaster and leading Chinese drama producer TVB controls ~75% of the pie while i-Cable has only a 7% share.

Second-ranked FTA player ATV has repeatedly tried to challenge TVB in the FTA market, but it has made few inroads into reducing TVB’s audience or advertising share with limited financial resources at its disposal. CTI chairman Ricky Wong was recently appointed ATV boss during a brief and controversial tenure.

The TV ad market declined by 15% last year, says MPA, with a significant recovery since Q3 offset by large scale declines over 1H. This year, MPA expects TV advertising in Hong Kong to grow by more than 6%.  

Challenges to overcome
i-Cable first said last July it was considering entering the FTA market, despite a regulatory climate that forbids any company to hold two TV licenses.  It remains positive about overcoming legislative issues, with a number of lawmakers calling for greater variety in FTA content and more competition.

The operator said it would submit a bid later this month, and tentatively expects its free service to begin nine months after the award of a license.

i-Cable’s fundamentals have weakened over the past few years but its recent EPL football win - paying US$210 mil. through to 2013 - could put it back on track, helping to bolster ARPU, ad revenues and subscriber take-up of basic and HDTV services all at once.

Question marks remain about how effectively i-Cable can compete with the likes of TVB in the FTA market, which not only boasts a number of celebrities tied to exclusive contracts, but also vast content production capabilities and significant free cash flow levels. EBITDA profits for TVB are expected to touch HK$1.5 bil. for FYE Dec. 2009 versus a modest HK$0.25 bil. for i-Cable.

CTI meanwhile, whose bid does not breach any cross-ownership issues, has already made its application to the Broadcasting Authority, saying it would devote HK$210 mil. in investment to take its FTA service to operating EBITDA breakeven. CTI’s new service will transmit news, infotainment, factual and kids programming in both analog and digital formats. The company plans to cover all Hong Kong homes by 2016. EBITDA breakeven for the service could occur within three years.

CTI is in a decent financial position and will be able to fund plans from its current HK$200 mil. in operating free cash flow and HK$80 mil. net cash. At end-August 2009, CTI reported more than 390,000 broadband users and had installed set-top boxes into 170,000 homes for its IPTV service.

i-Cable reported 947,000 TV subs at end-June 2009 and 260,000 broadband users. i-Cable had HK$621 mil. in net cash at end-June.