321
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 225: NCTY Quarterly Income Statement
$ in millions
1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08E 1Q'09E 2Q'09E 3Q'09E 4Q'09E
Revenue 270.0 270.0 316.0 423.7 439.4 455.1 408.4 446.6 467.2 479.3 570.2 583.8
Online games services 266.8 262.3 310.9 427.4 438.0 454.0 406.8 445.2 465.8 477.9 568.7 582.3
Game operation support 2.5 7.0 2.0 -3.4 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0
SMS services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other revenue 0.7 0.7 9.0 -0.4 1.3 0.9 1.5 1.3 1.4 1.4 1.4 1.4
COGS -139.7 -155.4 -183.8 -221.1 -231.4 -241.0 -227.6 -251.0 -265.3 -270.2 -334.8 -344.7
Gross Profit 130.3 114.6 132.2 202.5 208.0 214.0 180.9 195.6 202.0 209.1 235.4 239.1
Operating Expenses -58.1 -74.5 -88.5 -122.6 -94.0 -100.3 -103.0 -116.1 -116.8 -119.8 -142.5 -145.9
Sales & Mktg. expenses -16.1 -22.5 -31.9 -32.8 -22.4 -26.8 -24.8 -35.7 -37.4 -38.3 -45.6 -46.7
G&A expenses -32.4 -40.6 -48.6 -58.7 -59.1 -58.0 -56.9 -58.1 -60.7 -62.3 -74.1 -75.9
R&D expenses -9.6 -11.4 -8.0 -12.4 -12.5 -15.6 -21.2 -22.3 -18.7 -19.2 -22.8 -23.4
Other expenses 0.0 0.0 0.0 -18.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Share-based compensation -6.2 -9.2 -17.2 -15.4 -12.0 -12.1 -12.2 -17.0 -17.0 -17.0 -17.0 -17.0
EBIT 72.1 40.1 43.7 79.9 114.1 113.7 77.9 79.5 85.2 89.3 92.8 93.2
Adj. EBIT (ex-share-based comps.) 78.3 49.3 60.9 95.4 126.1 125.8 90.1 96.5 102.1 106.3 109.8 110.1
EBITDA 121.9 106.2 116.8 151.0 182.9 184.8 149.6 190.8 210.7 219.6 218.2 225.3
Equity earnings in affiliates -1.5 -2.1 -0.7 -1.4 -0.4 -0.6 -0.3 -0.9 -0.9 -0.9 -0.9 -0.9
Net Other Income 3.5 13.7 2.0 1.4 -11.6 9.8 26.6 -2.2 -4.4 -4.6 -7.3 -7.0
Pre Tax Profit 74.2 51.7 45.0 79.9 102.0 122.9 104.3 76.4 79.8 83.8 84.6 85.3
Tax Expense/(Credit) 8.1 1.1 6.8 -6.7 10.5 7.0 6.4 7.6 8.0 8.4 8.5 8.5
Net Profit (after MI) 66.1 50.6 38.2 86.0 89.7 115.9 98.4 68.8 71.9 75.4 76.2 76.8
Net Profit (excl 123R option exp.) 72.3 59.8 55.4 101.4 101.7 128.0 110.6 85.7 88.8 92.4 93.1 93.7
Pre Tax EPS (US$) 3.00 1.96 1.53 2.73 3.65 4.46 3.78 2.77 2.89 3.03 3.06 3.08
After Tax EPS (US$) 2.67 1.92 1.30 2.94 3.21 4.20 3.57 2.49 2.60 2.73 2.75 2.77
After Tax EPS Diluted (US$) 2.65 1.90 1.29 2.93 3.21 4.19 3.56 2.47 2.57 2.70 2.72 2.73
After Tax EPS Diluted excl 123R option exp. (US$) 2.89 2.24 1.87 3.45 3.64 4.63 4.00 3.07 3.18 3.30 3.32 3.34
Margins (%)
Gross Margin 48.2 42.4 41.8 47.8 47.3 47.0 44.3 43.8 43.2 43.6 41.3 41.0
Operating Margin (excl 123R option expense) 29.0 18.3 19.3 22.5 28.7 27.7 22.1 21.6 21.9 22.2 19.3 18.9
EBITDA Margin 45.1 39.3 37.0 35.6 41.6 40.6 36.6 42.7 45.1 45.8 38.3 38.6
Net Margin 24.5 18.7 12.1 20.3 20.4 25.5 24.1 15.4 15.4 15.7 13.4 13.1
Net Margin (excl 123R option expense) 26.8 22.2 17.5 23.9 23.1 28.1 27.1 19.2 19.0 19.3 16.3 16.1
Sequential Growth (%)
Revenue -4.5 0.0 17.0 34.1 3.7 3.6 -10.2 9.3 4.6 2.6 18.9 2.4
Gross Profit -3.3 -12.0 15.3 53.2 2.7 2.9 -15.5 8.2 3.2 3.6 12.5 1.6
Adj. EBIT -9.3 -37.0 23.5 56.6 32.2 -0.2 -28.4 7.1 5.9 4.1 3.3 0.3
Pre Tax Profit -26.6 -30.3 -13.0 77.6 27.7 20.5 -15.2 -26.7 4.5 4.9 1.0 0.8
Net Profit -37.1 -23.4 -24.6 125.2 4.3 29.2 -15.1 -30.1 4.5 4.9 1.0 0.8
After Tax EPS Diluted -37.7 -28.3 -32.1 127.2 9.6 30.6 -15.1 -30.7 4.4 4.8 0.8 0.6
After Tax EPS Diluted excl 123R option exp. -35.7 -22.5 -16.6 84.7 5.3 27.2 -13.5 -23.1 3.5 3.8 0.7 0.5
Source: Company reports and J.P. Morgan estimates.
322
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 226: NCTY Annual Balance Sheet
$ in millions
2007 2008E 2009E 2010E
Cash and Cash Equivalents 294.17 279.74 327.44 400.27
Account Receivables 3.54 4.99 6.60 7.28
Inventory 13.40 14.26 18.84 20.80
Total Other Current Assets 9.55 13.41 13.56 13.56
Total Current Assets 320.66 312.41 366.43 441.90
Gross Fixed Assets 78.63 137.52 198.99 264.99
Accumulated Depreciation (32.89) (60.56) (106.54) (170.66)
Net Fixed Assets 45.73 76.95 92.45 94.33
Other Long Term Assets (Intangibles + Goodwill) 40.83 32.37 38.18 21.34
Long Term Investments and Associates 23.83 71.07 71.30 70.76
Total Long Term Assets 110.39 180.39 201.93 186.44
Total Assets 431.05 492.81 568.36 628.33
ST Debt and Current Portion of LT Debt 14.15 - - -
Accounts Payable 37.85 35.66 47.11 51.99
Other Current Liabilities 6.42 10.41 13.76 15.18
Total Current Liabilities 58.43 46.07 60.87 67.17
Long Term Debt - - - -
Other Long Term Liabilities - 0.03 0.03 0.03
Total Long Term Liabilities - 0.03 0.03 0.03
Share Capital 0.31 0.33 0.33 0.33
Share Premium 294.60 319.40 334.58 346.50
Other Reserves 2.75 3.62 3.66 3.66
Retained Earnings 74.96 123.36 168.90 210.64
Preferred Stock - - - -
Total Equity 372.62 446.71 507.47 561.13
Total Liabilities and Equity 431.05 492.81 568.36 628.33
Source: Company reports and J.P. Morgan estimates.
323
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 227: NCTY Annual Cash Flow Statement
$ in millions
2007 2008E 2009E 2010E
Net Income 31.99 54.31 44.21 41.75
Add Non cash Expenses/(income) - - - -
Depreciation and Amortization 28.15 39.29 65.61 80.96
Extraordinaries 0.08 0.21 - -
Other Non-Cash Items 6.38 7.77 10.00 10.00
Changes in Working Capital: - - - -
(Increase)/Decrease Receivables (2.19) (1.11) (1.55) (0.68)
(Increase)/Decrease Inventories 1.41 0.44 (4.43) (1.95)
(Increase)/Decrease Other Current Assets (5.89) (2.93) - -
Increase/(Decrease) Payables 11.38 (5.88) 11.07 4.88
Increase/(Decrease) Other Current Liabilities (0.55) 3.37 3.23 1.43
Net Cash from Operations 70.76 95.47 128.14 136.38
Cash Flow from Investing - - - -
Purchase of Property, Plant & Equipment (31.81) (50.36) (60.00) (66.00)
Purchase/Sale of Other LT assets / amortization (16.24) (3.27) (25.74) -
Purchase/Sale of Investments (19.12) (44.91) 0.53 0.53
Net Cash from Investing Activities (67.17) (98.55) (85.21) (65.47)
Cash Flow from Financing - - - -
Issuance/Repayment of Debt 9.29 (15.53) - -
Change in other LT liabilities (Intangibles + Goodwill) - 0.03 - -
Change in Common Equity - net 163.20 (11.06) 1.76 1.92
Payment of Cash Dividends - - - -
Other Financing Charges, Net (6.46) (13.41) (0.00) 0.00
Net Cash from Financing Activities 166.04 (39.98) 1.76 1.92
Net Effect of Exchange Rate Changes - - - -
Net Change in Cash and Cash Equivalents 169.63 (43.06) 44.69 72.83
Cash at end of the Period 294.17 279.74 327.44 400.27
Source: Company reports and J.P. Morgan estimates.
324
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
UOL, Neutral, R$7.3
We maintain our Neutral rating and R$7.5 Dec-09 price target for UOL, a leading
Brazilian online media portal and Internet company. We expect advertising revenues
to suffer from weaker GDP growth in Brazil. Key points on the company:
• Weak resource allocation and potential lack of opportunities: the company
holds a net cash position of R$567m, constituted by R$264m raised during the
IPO in the end of 2005 and free cash flow thereafter, which was intended to be
used for acquisitions. However, only minor acquisitions were made, and there is
no guidance that a deal of significant stature will be closed or the cash distributed
back to shareholders (bylaws set minimum dividend payout of 1%, unlike usual
25% for Brazilian companies). We believe the long permanence of these
resources might indicate a lack of opportunities for the company.
• Downside to advertising business on global downturn: Internet advertising has
been presenting strong growth, which we believe will be affected by the
economic downturn (JPM revised ‘09E Brazilian GDP growth to 1.8% from
5.1%). During the conference call with investors, UOL admitted that there might
be a slowdown in this line in 1Q09.
• Low visibility on margins ex-subscription business: while there is no margin
disclosure per business, declining or stagnant margin trends challenge company
guidance that advertising revenues have higher margins than subscription
revenues. The company attributes this to development and marketing costs for
new products, but we believe there could be a recurring need to update the portal
and keep revenues growing.
• 2009 drivers. In our view, the following factors will drive shares in 2009: (1)
impact of downturn in advertising, (2) margin recovery.
• 4Q’08 estimates. We expect the company to post net revenues of R$151m,
EBITDA of R$32m and EPS of R$0.2.shr in the fourth quarter.
Our estimates for 2008-10 are in the table below. They were introduced in our note
Brazilian TMT: Small Caps Also Affected by Downturn, Cutting Estimates for
Positivo/UOL, published on Nov 17th.
Table 228: UOL Financial Snapshot
R$ in millions, except per share data
UOL 4Q'08E F'08E F'09E F'10E F'08E Y/Y F'09E Y/Y F'10E Y/Y
JPMorgan
Revenue 150.6 573.6 574.9 636.9 9.2% 0.2% 10.8%
EBITDA 32.1 132.7 132.9 149.5 -2.5% 0.1% 12.4%
EPS(R$/shr) 0.2 0.9 0.9 0.9 -6.2% 0.3% 2.3%
Consensus
Revenue NA 575 626 670 10% 9% 7%
EBITDA NA 138 154.5 170 1% 12% 10%
EPS NA 0.85 0.86 1.035 -8% 2% 20%
Source: J.P. Morgan estimates, Company data, and Bloomberg
Latin American Media & Internet
Andre Baggio
AC
(55-11) 3048-3427
andre.baggio@jpmorgan.com
Banco J.P. Morgan S.A.
325
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Our Estimates and Outlook for 2009
We expect a sharp deceleration in revenue growth during 2009, to 0.2% from 9.2%
in 2008E, given that the key driver of the company has been the advertising business,
which we expect to suffer as companies reduce marketing expenses on the global
crisis. EBITDA is expected to increase 1.4% in 2009, as we believe margins could
present some recovery in 2009 to 23% from 3Q08's low of 20%. EPS are expected to
increase 0.2%, lower than EBITDA as depreciation charges should be higher on the
back of investments in the company's new datacenter.
Our Estimates and Outlook for 2010
We assume the economic crisis will be mostly over by 2010, and that growth should
resume for UOL. We expect revenues to increase 10.8% and EBITDA to rise 12.4%
on a 0.2pp margin expansion. EPS are projected to increase 2.3%, on the back of
higher tax rates, as currently the company enjoys fiscal benefits of investing in
Norway bonds, which we assume will end in 2010.
We Hold a Price Target of R$7.5
Our R$7.5/shr price target for Dec-09 is based on a DCF model employing 13.7%
WACC (454bps country risk), 4.2% 10yr revenue CAGR, 24% long-term EBITDA
margins, 12% long-term CAPEX, 2% growth in perpetuity, all in nominal US$. We
apply a 25% discount factor on our DCF to account for increased investor aversion to
small-cap stocks with reduced visibility.
Valuation and Rating Analysis
We maintain our Neutral rating for UOL. The company trades at a low multiple of
8.5x P/E’09E, 55%, lower than peers’ 18.8x, but we believe this is offset by (1)
negative short-term prospects given GDP slowdown, (2) low visibility regarding
long-term margins and margin recovery from current low levels, and (3) a large net
cash position of R$567m as well as a dividend policy of distributing only 1% of net
income.
Risks to Our Rating and Price Target
Key risks to the upside include: (1) high resilience in Brazilian Internet advertising
industry, which could gain share in total advertising revenues offsetting the economic
downturn; (2) change in dividend policy or high dividend payment; (3) significant
uptake in margins; and (4) large and accretive acquisitions.
To the downside, risks include: (1) further deterioration in margins and (2) steeper
decline in Internet access markets.
326
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 229: UOLL4 Annual Income Statement
R$ in millions
INCOME STATEMENT
2007 2008E 2009E 2010E
Paying subscribers 1,685 1,816 1,914 2,031
Subs Revs, Gross 525 518 538 561
Ads and Other Revs, Gross 192 276 273 338
Gross Revenue 716 794 812 899
Net Revenue 525 574 575 637
Recurring Cash Costs -389 -441 -442 -487
Adj. EBITDA 136 133 133 149
Adj. EBITDA Margin 25.9% 23.1% 23.1% 23.5%
Non Recurring Items 18 -2 0 0
EBITDA 154 131 133 149
EBITDA margin 29.4% 22.9% 23.1% 23.5%
Depreciation -44 -58 -77 -82
Net Interest Expense 31 52 68 71
Non Op Income -8 0 0 0
Income Taxes -23 -23 -21 -33
Net Income 109 103 103 105
Shares O/S 120.1 120.1 120.1 120.1
EPS (R$/shr) 0.91 0.85 0.86 0.88
Source: Company reports and J.P. Morgan estimates.
327
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 230: UOLL4 Quarterly Income Statement
R$ in millions
1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08E 1Q'09E 2Q'09E 3Q'09E 4Q'09E
Paying subscribers 1,640 1,700 1,730 1,685 1,700 1,740 1,780 1,816 1,841 1,864 1,889 1,914
Subs Revs, Gross 128 131 134 132 130 127 130 132 133 134 135 136
Ads and Other Revs, Gross 34 52 46 59 53 69 73 81 54 69 71 80
Gross Revenue 162 183 180 191 183 196 203 213 187 203 206 216
Net Revenue 118 129 132 146 137 142 144 151 133 144 146 153
Recurring Cash Costs -90 -93 -96 -111 -101 -108 -113 -118 -103 -110 -112 -117
Adj. EBITDA 28 36 37 36 36 34 31 32 30 34 34 36
Adj. EBITDA Margin 23.7% 27.9% 27.8% 24.4% 26.3% 23.8% 21.3% 21.3% 22.3% 23.3% 23.3% 23.3%
Non Recurring Items 2 17 1 -1 -1 1 -2 0 0 0 0 0
EBITDA 30 53 37 34 35 35 29 32 30 34 34 36
EBITDA margin 25.3% 41.0% 28.2% 23.5% 25.5% 24.6% 20.2% 21.3% 22.3% 23.3% 23.3% 23.3%
Depreciation -9 -11 -12 -12 -13 -14 -15 -16 -18 -19 -20 -20
Net Interest Expense 9 8 8 5 8 11 17 17 16 17 17 18
Non Op Income 0 0 0 -8 0 0 0 0 0 0 0 0
Income Taxes -8 -12 -1 -3 -5 -9 -4 -5 -5 -5 -5 -6
Net Income 22 38 32 18 25 24 27 27 23 26 26 28
Shares O/S 120.1 120.1 120.1 120.1 120.1 120.1 120.1 120.1 120.1 120.1 120.1 120.1
EPS(R$/shr) 0.19 0.31 0.27 0.15 0.21 0.20 0.22 0.22 0.19 0.22 0.22 0.23
Source: J.P. Morgan estimates and Company report
328
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 231: UOLL4 Annual Balance Sheet
R$ in millions
2007 2008E 2009E 2010E
Cash and Equivalents 475 598 685 789
Accounts receivable 74 83 85 88
Other Current Assets 38 32 33 36
Total Current Assets 588 714 803 913
Total LT Assets 114 117 119 132
PP&E, Net 65 59 74 68
Deferred charges 0 0 0 0
Total Assets 798 938 1,043 1,161
Suppliers + Other Acc. Payable 59 88 89 93
Short Term Debt 0 0 0 0
Other Current Liabilities 83 88 90 99
Total Current Liab. 142 176 179 192
Long Term Debt 0 0 0 0
Other LT Liabilities 15 18 18 18
Minorities 2 2 2 3
Shareholder Equity 639 742 844 949
Net Debt -475 -598 -685 -789
Adj. Net Debt -475 -598 -685 -790
BVPS (R$/shr) 5.32 6.17 7.03 7.90
Source: Company reports and J.P. Morgan estimates.
329
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 232: UOLL4 Annual Cash Flow Statement
R$ in millions
2007 2008E 2009E 2010E
Net Income 109 103 103 105
Depreciation 44 58 77 82
Cash Earnings 153 161 180 188
Chg Work. Cap -6 31 1 6
Cash Flow After WC 147 192 181 194
Capex -60 -103 -92 -76
as % of revs 11% 18% 16% 12%
LT Assets 1 -4 -2 -13
Total Investment -59 -106 -94 -89
Free Cash Flow Equity 88 85 87 105
Chg Short Term debt 0 0 0 0
Chg Long Term debt 0 0 0 0
Chg Other LT Liabilities 0 2 0 0
Chg Other Financing -8 36 0 0
Dividend Payments 0 0 0 -1
Total Financing CF -8 38 0 -1
Change in Cash 80 124 87 104
Dividend per Share(R$/shr) 0.00 0.00 0.00 0.01
Source: Company reports and J.P. Morgan estimates.
330
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
. Term Liabilities - 0.03 0.03 0.03
Share Capital 0.31 0 .33 0 .33 0 .33
Share Premium 294.60 319.40 334 .58 346.50
Other Reserves 2.75 3.62 3.66 3.66
Retained. (106.54) (170.66)
Net Fixed Assets 45.73 76.95 92.45 94 .33
Other Long Term Assets (Intangibles + Goodwill) 40.83 32.37 38.18 21.34
Long Term Investments and