Heard in Asia
16 June 2005

TVB, Phoenix Are Positioned To Grow in China's TV Market
The Asian Wall Street Journal
(c) 2005 Dow Jones & Company, Inc. To see the edition in which this article appeared, click herehttp://awsj.com.hk/factiva-ns

By Geoffrey A. Fowler

Just last year, global investors and multinational media companies were giddy at the prospect of state regulators moving quickly to commercialize China's media sector, which includes some 400 million television households. Foreign broadcasters such as Viacom's MTV were allowed to beam their programs deeper into China, and new rules invited foreign-owned media companies to form production joint ventures to feed content-hungry Chinese TV channels.

Then the picture turned fuzzy. The State Administration of Radio, Film and Television, under a new chief, has slowed the changes -- for example, announcing that foreign media companies won't be allowed to use the joint ventures to put their valuable brand logos on TV. Sarft is weighing a ban on foreign cartoons during prime time.

Spending on advertising in China totaled US$18.9 billion last year, the bulk of it in TV, according to Nielsen Media Research, which estimates that sum is growing about 30% a year. Many analysts expect that by the end of the decade, China will overtake Japan as the world's No. 2 market for advertising behind the U.S. Privately, international media companies and investors looking to tap into that growth say they are now confused and worried by the mixed signals.

They might want to look at a handful of TV companies listed in Hong Kong, a special administrative region of China that is free of state media controls. These companies have continued to develop their exposure to the mainland market, missing the headlines but bringing in the ad dollars.

One of them is Television Broadcasts, known as TVB in Hong Kong, where it is the dominant TV network. The company also happens to be a dominant TV network across the border in Guangdong province, and is finally on its way to reaping a reward for that influence.

For years, cable-TV companies in Guangdong made millions of dollars by splicing their own ads in to stolen TVB signals. Then, late last year, TVB was given legal permission to broadcast in the region, and this year it scored a HK$50 million, or about US$6.5 million, broadcast fee from Southern Media, owned by the provincial government.

That is a modest gain, and TVB may be limited by its reliance on broadcasting in Cantonese, widely spoken only in southern China. But the decades-old broadcaster's brand and franchise are already considerable around China and elsewhere in Asia, through syndicated programming dubbed into Mandarin, China's official language, and analysts say the scale of TVB's opportunity in China over the long term could transform the company. TVB's stock has been on a steady climb in recent months, thanks in part to ad sales in Hong Kong. Yesterday, it rose HK$1.20 to close at HK$42.60, up 18% from the end of 2004.

Hong Kong's No. 2 broadcaster, Asia Television, or ATV, also now has legal permission to broadcast in Guangdong. The company may list on Hong Kong's stock exchange in the fourth quarter.

Phoenix Satellite TV may be the most interesting of all. While the city's terrestrial broadcasters are ramping up their revenue-reaping efforts, Phoenix has already become the first TV company outside China's mainland to eke a steady stream of revenue out of Chinese advertising. The company, in which Chief Executive Liu Changle and News Corp. each own about a 38% stake, announced in March that it swung to a profit for 2004, earning HK$150.5 million. In addition to its Phoenix stake, News Corp. owns a Mandarin-language entertainment channel called Xing Kong.

Phoenix says advertisers have finally come to see its footprint of nearly 50 million households across China as a solid way to reach high-end Chinese markets.

"Right now, given the regulatory environment, Phoenix remains the only real electronic media play beyond the Internet companies," says Vivek Couto, an analyst with Media Partners Asia.

Phoenix, which listed in 2000, and its 24-hour InfoNews Channel made their mark among mainland viewers for their coverage of the September 2001 terrorist attacks in the U.S. and other international events, such as the U.S. presidential elections, which always take a back seat to government affairs on domestic Chinese TV. With that reputation, and distribution largely focused on hotels, wealthy residential compounds, universities and government offices, Phoenix has found a niche among high-end advertisers boosting spending in China, such as luxury-goods and financial-services companies.

As a short-term investment, Phoenix is still just a penny stock on Hong Kong's Growth Enterprise Market, though it aims to move to the main board before year end and is considering issuing new shares. Its shares closed yesterday at HK$1.36 apiece, down two Hong Kong cents on the day.

Some analysts call that expensive, noting that the company's price-to-earnings ratio of about 45 is far above that of most other TV companies, such as TVB's ratio of 25. After turning a profit in 2004, Phoenix disappointed investors when it failed to meet expectations for the first quarter of 2005, and the shares are lower than they were a year ago.

The argument for Phoenix, from both an advertising and an investing standpoint, is that while foreign companies and even domestic giants -- like the monopoly network China Central Television, or CCTV -- already make popular entertainment programming in China, Phoenix is the only broadcaster outside the mainland given license to provide 24-hour Mandarin-language news in China.

"In China, the government still regards the broadcasting platforms as mouthpieces -- something they have to have very tight control over -- which prohibits them [from adopting] a more market-oriented approach to their programming," says Phoenix Vice President Liu Shuang. "Because we are based in Hong Kong, we are not subject to that kind of scrutiny."

Meanwhile, Phoenix's connections could help the company expand its footprint. Mr. Liu, the CEO, is a former member of the People's Liberation Army and reporter for the Central People's Radio Station in Beijing. Bank of China, through a wholly owned subsidiary, owns an 8% stake in the company and has a seat on Phoenix's board.