Untapped potential in China media

Most attention last week focused understandably on the 26% collapse in China's exports in February, although there was better news that mainland consumers are still spending as fixed asset investment rebounded.
China's retail sales grew 15.2% in the first two months of the year to 2 trillion yuan ($293.8 billion) while fixed asset investment rebounded 26% from the year-ago period.
While retail sales are not generating the 20%-plus growth we were seeing earlier, there is encouragement the recent surge in bank lending and the stimulus program are having some positive impact.
There had been hopes China's consumers could rescue the world economy by taking up the slack from credit-strapped Americans or Europeans. That's always appeared far-fetched, especially when U.S. retail sales are still more than three times the size of China's.
But it's less of a stretch to see this mainland spending at least put some life into consumer- or stimulus-related stocks.
A key theme this year for investors has been stimulus program beneficiaries -- largely commodities, materials or capital goods makers who stand to gain from infrastructure building.
But as well as erecting new bridges and roads, China is also quickening the build out of infrastructure for a modern digital economy.
For instance, it was the urgent need for stimulus that finally secured agreement on 3G licensing in January after years of procrastination. While there's room for debate who amongst the listed telecom carriers gains from this, China's domestic vendors look to be clear winners as they get the lion's share of contracts.
Indeed, Hong Kong-listed ZTE has put in an impressive run this year with the share price now doubling from its November lows. China's leading telecom vendor Huawei Technologies for now remains unlisted.
As well as building out telecom infrastructure, China wants to accelerate development of its TV industry. This is a sector of keen interest but its political sensitivity means it is difficult to invest in or often understand what's going on.
Strict government controls on content that largely prohibit foreign channels and foreign investment in the sector, as well as significant piracy, mean the TV industry in China is surprisingly underdeveloped. Most of the interesting content is watched on the less-regulated Web using peer-to-peer streaming rather than traditional TV. If you travel to China you may find you have a decent choice of international channels but only because they are allowed in 3-star hotels and above and some foreigner compounds. Elsewhere it's largely CCTV and more CCTV.
Like with 3G, the stimulus program could be hastening infrastructure build outs.
CSFB highlighted in a recent note that there has been an acceleration in the pace of analog cable TV network upgrades as lending to the sector is increased due to stimulus directives. There are now around 45 million digital cable households in China. This translated into above-expectations results from infrastructure provider China Digital Media

Another reason for interest in the TV sector is potential exposure to the mainland consumer.
With retail sales still pretty strong, it appears advertisers are still willing to spend to reach the mainland wallet. Last week CTR Market Research released a forecast that measured advertising spending will grow between 5% and 8% in 2009 in China. Again that's slower than last year's double-digit growth but stands out next to the declines expected in Hong Kong or the U.S.
In terms of TV broadcasters, it's again difficult to find investable exposure due to the regulatory restrictions.
But the prospect of reaching a billion-strong audience means interest remains strong.

Many expect the reason Want Want noodle king, Taiwanese billionaire Tsai Eng-meng recently bought into Hong Kong's struggling ATV Channel is to exploit its ability to broadcast into neighboring Guangdong. If Beijing's relations with Taiwan improve further, perhaps more can be done with unlisted ATV in China.
The one foreign satellite channel that has a real cross-China footprint is Hong Kong-based and listed Phoenix Satellite TV. On Friday it released results with sales growing 18% to HK$1.39 billion, showing media spending looks to be in relatively good health. (News Corp, the publisher of this report, holds a minority share. It sold 20% to China Mobile in 2006.)
More disappointing was that its bottom line only grew 2.9% to HK$286 million due to a spike in costs.

The company did not give a forecast for 2009 but the fact advertisers have few other places to go to replicate its footprint mean it is in a fairly enviable position.
Ultimately how regulation develops will determine the pace of investment in China's TV future and whether Phoenix starts facing more competition.
Opening up and stimulating China's media industry would also help fill the hole in the economy left by vanishing exports.