Bangkok--6 May--Fitch Ratings
Fitch Ratings (Thailand) Limited has assigned Thailand-based GMM Grammy Public Company Limited (GMM) a National Long-Term rating of ‘BBB+(tha)’ with a Stable Outlook and National Short-Term rating of ‘F2(tha)’.
Key Rating Drivers
Leading Media and Entertainment Company: GMM is a fully integrated entertainment and media company in Thailand. The company is a dominant player in the local music industry with over 80% market share by sales of recordings. It is one of the key movie producers and content providers for free TV with over 30 programmes produced in 2013. Fitch expects GMM’s traditional businesses - including music, movie and event management - to continue to generate stable cash flow, which should partly support the investment requirements of its new businesses - digital free TV and pay TV.
Expanding Broadcasting Business: The broadcasting business is likely to be a key growth driver for GMM in the medium term. The company plans to launch digital free TV channels in mid-2014, after it won the bid for two digital free TV licences in December 2013 and received the licences in April 2014. During the initial launch phase, it aims to move most of its content from satellite TV channels to the new platform. The likely higher advertising rates for digital free TV due to wider viewer coverage than that of satellite TV should boost the group’s revenue in the medium term. However, the size and presence of a number of new operators in the digital TV market may lead to higher price competition than expected.
Challenges in Pay TV: Fitch believes that GMM will face challenges in its new pay TV business. The company has to increase subscribers to cover heavy upfront costs for content acquisition. Fitch expects GMM’s pay TV business will continue to report losses for at least the next two years, until it achieves the breakeven subscriber level of around 400,000 (end-2013: around 100,000 subscribers).
Margin Pressure: Low earnings from its new businesses will put pressure on GMM’s profit margin in 2014. Nonetheless, the profit margin is likely to improve after 2015 as revenues from digital TV and pay TV start to increase. With the operating costs of these businesses largely fixed, a large proportion of any increase in revenue translates into profit.
Large Investment: Fitch expects the high fees for the digital TV licences and content acquisition costs for the pay TV business to result in negative free cash flow and limited financial flexibility for GMM for at least two years. However, the likely increase in earnings from the new businesses after 2015 is likely to improve GMM’s financial leverage, despite higher debt. Funds flow from operations (FFO)-adjusted net leverage is likely to remain around 3.5x in 2015 and 2016.
Rating Sensitivities
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- The company demonstrates strong cash flow generation from its digital TV and pay TV businesses, leading to positive free cash flow while FFO-adjusted net leverage is below 3.5x, both on a sustained basis.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Earnings and cash flow deterioration leading to FFO-adjusted net leverage of over 4.5x on a sustained basis.