Thursday, March 21, 2019

TVB vs Netflix

Recently, I did a poll on InvestingNote. It was an exercise to (1) remove the bias of choosing a company based on brand names and (2) choosing a company to invest in solely using financials.

InvestingNote Screengrab as of 21 March 2.20pm
Without the company name, most investors stated correctly that if solely based on the financials, value investor will choose Company A. Growth Investors will choose Company B.

Overall, it seems that more investors prefer a stable company than one is burning cash. But I have a feeling if I reveal the names of the companies, things may change?

Nevertheless, did I carry out this exercise so that I understand more about investors? NOPE. 

I was actually looking to invest into TVB due to their recent share price drop and negativity news.

Thus, I was looking for a competitor to compare its financials and I picked Netflix.

Many may disagree that they have the same business model. But in my opinion, their strategy as stated below are probably having over 60% similarity.

TVB Strategy

Pros: 

  • Established actors and actress in HK (Some are very famous overseas as well).
  • Stable Base in HK
  • Advertising Revenue 
  • Consistent upbringing of new actor and actress.

Cons:

  • Famous actors and actress leaving for China (Eg Charmaine Seah)
  • Seem to have a reducing base in Asia
  • Does not appeal to westerners.
  • Streaming websites

Uncertainty:

  • Switching to Internet TV
  • The growth into China has always seem to be a roadblock. 

Netflix Strategy

Pros:

  • Use lesser Known Actor and Actress to act as lead, Cheaper.
  • Cheap production + Good story-line
  • Opening up to international audience (Turkey, Korean)
  • Consistent upbringing of new actor and actress to fame or fame again.

Cons:

  • Not getting into Apple TV Service
  • Yet to get into China. 
  • Streaming websites
  • The significant number of dramas on-going - to increase cost

Uncertainty:

  • Short seasons, if the season get more popular, will the actor and actress be willingly to work for less.
  • How long can good story-lines continue to increase?

In Short

After comparing their strategy and their financials, I decided to ignore both companies and move on.

Firstly, I ignore Netflix simply due to its cash burning business and increasing debt. I am uncertain if their business is for the super long hual.

Secondly, I ignore TVB due to their recent negative scandals. Basically, they invested over HK$800 million in SMI Holdings Bonds in order to get more access into China. Since SMI Holdings had to be suspended and restructure, the bonds took a HK$500 million impairment. This resulted in the company having losses of $200 million. 

Although the last sentence do indicate that TVB does have $300 million of cash profit for 2018, but I will have prefer if their impairment was the full impairment of HK$800 million. This is because in this case, I will not need to worry about them taking a second impairment in future. 

On the other hand, I do believe SMI Holdings will recover from the setback and TVB may end up have a controlling stake in SMI Holdings. But these are assumptions with huge uncertainty and significant risks involved. 

Therefore, there seems to be too much uncertainty at stake and I choose not to invest in either company.

Please do your own due diligence before you invest in the above counters.

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