[MEDIA]

GMA VS ABS-CBN
A RECOMMENDATION FOR INVESTORS
BA219 WFU GROUP 4 BAUZON, GARCIA, ROBOSA, SOLEO, TAYZON

EXECUTIVE SUMMARY
The media industry is in its maturity stage, making it a profitable one to invest in. There is a continuous demand for information, which guarantees stability for the industry and its players. At the same time, the presence of different platforms continues to broaden allowing room for growth. The industry players are composed of television and radio networks, broadsheets and tabloids, and periodicals. In the recent years, however, there has slowly been a shift from these traditional media to digital media such as the internet and mobile applications. In effect, hours spent watching TV and sales of broadsheets have slowly declined. The threat of decreasing audience participation can be viewed as an opportunity for these players to extend its reach by making their content available to the new media available now. A few players like ABS-CBN, GMA, and TV5 have explored these opportunities and found that it allowed them to capture some market shares and drive up their ratings. Expectations about a companys future performance were based on current performance as well as previous survey results. Finally, a deeper analysis into two networks namely GMA and ABS-CBN gives investors a broad picture as to the companys current cost structure and financial performance. While these companies have the potential to yield high revenues, each bears a significant amount of risk. Recommendations regarding the investors choice will consequently vary for the risk profiles for each investor.

INTRODUCTION
Background of the Industry The media has been a crucial player in the political, economic, and social scenes in Philippine history. The circulation of newspapers allowed room for sentiments against government decisions to be heard. Such instances are especially evident during the Spanish colonization and Marcos dictatorship wherein censorship was countered with underground publications (Tuazon). Media has also served to inform the public about day-to-day events. It aided in the coordination of relief operations for the recent floods in Metro Manila. Finally, media has become a source of popular culture as well as a form of entertainment with the constant production of films, reality shows, and TV series. Some programs on local television go as far as connecting with the lives of their Filipino audience (ISIS International, 2007). Such an industry is very relevant to the Philippine population. In a survey conducted by AG Nielsen, TV ownership in Luzon is at 92%, Visayas at 78%, and Mindanao at 85%. Moreover, Luzon and Mindanao approximately have a 94% television reach while Visayas has a 90% television reach (Nielsen Television Audience Measurement, 2006). Radio broadcasts are able to reach 82% of urban Philippines while newspaper reach is at 78% (The Philippine Communication Centrum, 2004). Suffice to say that, the industry players are able to successfully penetrate the Philippine market. The increasing popularity of social networking websites eventually lessened the average number of hours watching television or listening to the radio, and the daily volume of newspaper sales. Television viewing went down from an average of 8.1 hours per day to 7.7 hours. Newspaper readership dropped from 24% to 20%; however magazine readership increased from 16% to 18% (Philippine Daily Inquirer, 2011). Several factors can be attributed to the decrease. One of these is the 10% increase in internet usage in the Philippines. Another factor is the prevalence of videoke, DVDs, and other video peripherals (Philippine Daily Inquirer, 2011). With these trends, television stations and newspaper publishers have gone on further by adopting online news portals to expand the reach of their online market (Torres, 2012). Significance of the Study Investing in stocks can be very profitable, but it equally involves a significant amount of risk as share prices vary every day. While historical data cannot predict future stock performance, it gives an investor an idea of the risks and returns of his investment. With the industry in its maturity stage, the media industry has proven itself a staple in a Filipinos lifestyle; thus giving more stability and less volatility. Scope and Limitations This study of the media industry will provide an overview of its sub-industries namely print, radio, and television. Two corporations listed under the Philippine Stock Exchange will then be selected and evaluated according to the financial statements that they present to its stockholders. The study will be concerned with an overall profitability and risk assessment of the two selected media corporations.

PHILIPPINE ECONOMIC OVERVIEW OF THE MEDIA INDUSTRY

Media industry, also known as Mass Media, is defined as the means of communication that reach large numbers of people in a short time, such as television, newspaper, magazines, and radio. Where is Media Industry in the Economy? Media industry, also known as Mass Media, is defined as the means of communication that reach large numbers of people in a short time, such as television, newspaper, magazines, and radio. The competitive landscape in the media industry in the Philippines is the same with USs model of broadcasting, advertising, program popularity, and consumer demographics. The revenue of the broadcasting companies depends on advertising, programming mix and efficient operations. (Daquilanea-Tanoy, 2009) Advertising, the main source of revenue of media industry falls under the services sector in the Gross Domestic Product. Advertising is part of the services sector of the economy where people offer their skills and knowledge to improve productivity, performance, potential and sustainability. (Wikipedia, 2012) Here in the Philippines, the services sector yield 1.489 trillion pesos in the last quarter of 2011 which is 54 % of the GDP. In 2011, Employment in the services sector shoot up to 19.395 million from 18.682 million in the previous year. (Philippine Senate, 2012) According to the PWC, PricewaterhouseCoopers International Limiteds Global Industry Outlook, in 2010, Entertainment and Media industry has 4.6% growth globally. Entertainment and Media spending in the Philippines in 2010 is 3.708 billion dollars, with a compounded annual growth rate of 15.6%. (PricewaterhouseCoopers, 2011) In the third quarter of 2010, advertisers paid media firms $ 1.045 billion for ad placements. (Lucas, 2011) Also In the 2010, 75 percent of media spend, according to Nielsen Media Ads Spend Highlights, are spent on television placements. (Nielsen Company, 2010) By 2011 in the same quarter, advertisers paid 1.197 billion pesos to media firms. (Philippine Senate, 2012) Effect of Media on Economic Growth Media as Advertisers. According to the study titled The Role of Advertising in the Aggregate Economy: The Work and Spend Cycle in 2006, aggregate advertising expenditure has a non-material impact in the economy both in the long and short run. (Benedetto Molinari, 2006) However, advertising create a positive affect the demand of the goods being advertised. The study also found out that there is a spike in the aggregate consumption. High in the demand forces the producing firms to increase their outputs. Media as Broadcast. Media Freedom, Socio-political Stability and Economic Growth, suggests that freedom of information, and press freedom provides favorable business climate which in turn promotes investments. A media free from government control can promote economic growth and development as measured by domestic development. (Sudeshna Pal, 2011)

Key Players In 2009, According to the paper of Amy Daquilenae-Tanoy, titled The Future of Public Broadcasting in the Philippines, Radio reaches 85% of households while television reaches 74%. AM stations are broadcasted in several dialects while television is mainly use Filipino and English. (Daquilanea-Tanoy, 2009) As of 2010, there are 2,606 Broadcast and CATV stations registered in the Philippines. (National Telecommunications Commission, 2010) The major key players in the broadcasting business are ABSCBN Corporation (TV2), GMA Network Incorporated (TV7), the Manila Broadcasting Company, Associated Broadcasting Company (TV5), and Intercontinental Broadcasting Corporation (TV13). Competition Commercial Broadcast Media being the most lucrative compared to other types of media, the competition in this industry is toxic. Broadcasting companies yield high revenues but at the same time they at risk. Using the Porters Five Forces to analyze the Media industry competitors strategies, we have identified how these forces contribute to the benefit of the Philippine Economy. These five forces are as follows: Rivalry. In order to measure rivalry, according to Porter, economist use the industry concentration indicators, the concentration ratio indicates the market share of the largest firms. (Micheal Porter) According to the ratings service provider Nielsen TV Audience Measurement, on February 2012, GMA had 1.9 Million viewers over ABS-CBN, and 2.8 Million viewers over TV5. (Philippine Entertainment Portal, 2012) The Broadcasting competitors, GMA network, yielding 13.083 billion pesos in 2011 (GMA Network, 2012) and, ABS-CBN, which has 28.2 billion pesos in revenue (Villanueva, 2012) still maintains the lead. Threat of Substitutes. Substitute products refer to other products in other industries. A good example from Porter is the substitutability of different types of TV transmission: local station transmission to home TV antennas via the airways versus transmission via cable, satellite, and telephone lines. The new technologies available and the changing structure of the entertainment media are contributing to competition among these substitute means of connecting the home to entertainment. (Micheal Porter) In the case of the broadcasting companies, which main revenue source is advertising, the other industry that threatens their revenue is the Information technology industry. Today, due to the acceleration of progress of information and communication technology, the media industry expanded to the usage of computers, cellular phones, and the internet. (Bhattacharyya) Because of the presence of the internet, more and more households rely on their computers and mobile phones for information. Advertisers know this trend, increases their budget in advertising using the internet. Buyer Power. It is the impact of the customer, the advertisers, to the producing industry, the broadcasters. (Micheal Porter)In the context of broadcasting, the product is the airtime. On the

primetime shows produced or aired by the broadcasters, there is very limited time slot, at primetime viewers or listener volume is on its peak, making the advertisers power weak. Therefore, airtime prices on primetime are higher. Buyer powers strengthen when they are concentrated, few buyers have significant market share. Supplier Power. Suppliers, if powerful, have control over the producing sector. In the context of broadcasting, their suppliers are those who provide their technology to broadcast. (Micheal Porter) This includes electricity, transmission antennas, satellite subscriptions, etc. In the Philippines, these supplies are controlled by Communication industry and Electric Industry. Threat of New Entrants and Entry Barriers. When an industry is lucrative, it is inevitable that new firms will want to have a market share. According to Porter, industries that possess characteristics that protect the high profit level firms in the market inhibit additional rivals from entering the market. (Micheal Porter) In the Philippine Media industry, it is very difficult to enter the industry because of these barriers: Patented or propriety know-how. Media industry a firm should have a high technical know-how, strong marketing and advertising capabilities and a large amount of capital Restricted distribution of channels. In the Philippines, the technology we use for transmission is very limited. Technology should be bought from other countries. Therefore, it marginalizes the industry for the companies with large capital base. Difficulty in brand switching. In media, the brand strength is determined by the number of viewers and listeners. Entering in this market is difficult because viewers do not just switch from the channels and shows they use to watch.

INDUSTRY ANALYSIS
Under the 2009 Philippine Standard Industrial Classification (PSIC), the media industry and its players fall under Section J: Information and Communication. This section can be further divided into Publishing Activities (Division 58) and Programming and Broadcasting Activities (Division 60). Section J Information and Communication

Division 58 Publishing Activities

Division 60 Programming and Broadcasting Activities

Sub Class 58130 Publishing of newspapers, journals, and periodicals

Class 6010 Radio Broadcasting and Relay Stations and Studios Radio Broadcasting

Class 6020 Television Broadcasting and Relay Stations and Studios

Industry Players Among the players in this industry, only four are listed in the Philippine Stock Exchange ABS-CBN Corporation, GMA Network Incorporated, and Manila Broadcasting Corporation. All of these corporations participate in both radio broadcasting and television broadcasting activities. In addition to this, ABS-CBN Corporation and GMA Network, Inc. merged with the broadsheets, The Philippine Star and Philippine Daily Inquirer respectively. ABS-CBN Corporation airs on both ABS-CBN Channel 2 and Studio 23. It is also able to reach Filipinos overseas through ABS-CBN Globals The Filipino Channel (TFC). ABS-CBN operates 3 AM band stations and 14 FM band stations. Among its radio stations are Tambayan 101.9 (101.9 FM) and DZMM Radyo Patrol 630 (630 AM). Its movie production unit, Star Cinema and music production unit, Star Records both dominate its respective markets. ABS-CBN has a publishing unit whose main target is the affluent market. ABS-CBN also owns the Philippines largest cable service provider, SkyCable. GMA Network, Incorporated operates both GMA Channel 7 and GMA News TV. It has the international channels, GMA Pinoy TV, GMA Life TV, and GMA News TV international that reach out to Filipinos in the United States, Asia Pacific, and the Middle East. It owns RGMA, which airs Super Radyo DZBB 594 (594

AM) and Barangay LS 97.1 (97.1 FM). GMA also has its own film production units, GMA Films and Alta Productions Group, Inc. and recording company, GMA Records. Manila Broadcasting Corporation (MBC) focuses mainly on its radio broadcasts. The radio stations it operates include DZRH, Aksyon Radyo, Love Radio, Yes FM, Easy Rock, and Radyo Natin. It operates the television station, RHTV, however this station is not able to reach as much of the Filipino population as the leading television networks. The market shares of these players in the television and radio broadcasting can be further illustrated in the following charts:

Market Shares of Broadcast TV Channels in Mega Manila

2.3% 4.1% 14.3% 11.9% 40.2% GMA ABS-CBN TV 5 GMA News TV 27.2% Studio 23 Others

Source: AGB Nielsen TV Rankings (June 1-30, 2012), Philippine Daily Inquirer, August 6, 2012

There are three major networks in television broadcasting: ABS-CBN, GMA, and TV 5. GMA dominates Mega Manila with a cumulative share of 44.3%. It is followed by ABS-CBN with a cumulative share of 29.5% and TV 5 at 14.6%. Nielsen also expanded its study to include the national urban Philippines, and results show that both GMA and ABS-CBN acquired an equal amount of market shares at 37%. This survey shows that ABS-CBN is able to capture the nationwide audience better than GMA; though GMA still maintains overall market share. A study conducted by Applied Marketing Research, Inc. on the radio broadcasting class showed a high level of competition with a larger variety of stations in both the FM and AM bands. MBC acquired the highest market share in the FM band with most of its stations rating the higher in listenership. It is also important to note that while ABS-CBNs focus is mainly on television broadcast, Tambayan 101.9 is still competitive in relation to the other radio stations.

Market Shares of Broadcast FM Radio Channels in Metro Manila

18.1% 36.7% 13.3%

0.7% 1.1% 1.3% 1.5% 2.1% 2.2% 2.9%

3.8% 3.8%

3.9% 4.4% 4.2%

Love Radio Yes! FM Big Radio Tambayan 101.9 92.3 FM I! FM W Rock / EZ Rock Star FM Magic 89.9 Wow FM Pinas FM 95.5 Monster Radio Win Radio 97.9 Home Radio Others

Source: PRLS Metro Manila Survey March 2012, Manila Broadcasting Corporation Website

Market Shares of Broadcast AM Radio Channels in Metro Manila

5.6% 7.5% 4.6% 2.4% DZMM DZRH DWWW 79.9% DZAS Others

Source: PRLS Metro Manila Survey March 2012, Manila Broadcasting Corporation Website

ABS-CBN is the market share leader in the AM band, but it is also important to note that there is no clear domination of one network. Such competition can be attributed to low listenership in the AM band in comparison to the FM band.

Industry Life Cycle Analysis The media industry is currently in the maturity stage wherein competitors in the industry are more concerned with acquiring the most market share and not so much about growth (Investopedia). At this stage, consolidation has already occurred in order to keep smaller players on air. At the same time, entry into the industry is difficult as it would require high capital for the infrastructure and technology. In order for the network to increase its nationwide reach and coverage area, regional offices must be set-up. These requirements make it difficult for new players to enter the market. To illustrate, Manny Pangilinan penetrated the market not by building new structures, but by purchasing ABC 5 and turning it into TV 5. ABS-CBN, GMA, and MBC were all established in the late 1940s to early 1950s. All three have established themselves in their respective areas and acquired a significant share of the market. Value Chain Analysis The value chain analysis gives investors a broad idea of the activities that take place in the industry, and how these activities contribute to a companys competitiveness in the industry. Analyzing each step of the value chain helps management determine the weak areas of the chain and make necessary adjustments. Adjustments could include a change in supplier, a purchase of new technology, adopting better cost and management strategies. According to Porter, the firms activities can be classified into two: primary activities and supporting activities. Primary activities are activities that are concerned with the production and delivery of a good or service by the entity. Inbound logistics (information and content and client acquisition), operations (pre-production, production, and post-production), outbound logistics (broadcast of information), marketing and sales, and service (audience feedback) are classified under primary activities. Supporting activities increase the effectiveness of the primary activities. These include procurement, infrastructure, human resources, and technology. Information or content, network infrastructure, and appliances are the main elements that make up the value chain of the media industry. It begins with the manufacturing of the equipment, satellites, base stations, and infrastructure. The next step of the value chain is the creation of a network that will allow the infrastructure to transmit information. These activities are the firms supporting activities as these relate to procurement, technology development, and infrastructure. The firm, also known as the service providers will then utilize these networks, infrastructure, and equipment to acquire and process content and information. As the main source of income generation of media corporations is advertising, sales and marketing activities allow the firm to acquire advertisers. The content will then be received by the consumer through appliances such as the television, radio, and personal computers and are able to provide feedback to the company through surveys conducted and other channels such as SMS, social networking sites, and websites that the company has put in place. It was earlier mentioned that the media industry is in its maturity stage wherein the goal is to acquire as much market share as they can; thus, they must have achieved economies of scale and optimized its procurement processes. The survey conducted by Nielsen showed that GMA has a comparative

advantage in TV broadcast in Mega Manila; however ABS-CBN has the comparative advantage in regions outside Mega Manila. Similarly, MBC has comparative advantage in radio broadcasts over GMA and ABS-CBN. All these relate to audience feedback and even the firms customer reach. These weak areas in each corporation correspond to their outgoing logistics activities as well as service activities. Regulatory Agencies and Policies Several groups and policies have been put in place to regulate media operations in the country. Article XVI Section 11 of the Philippine Constitution talks about ownership of a media corporation. This section prohibits foreign ownership of media corporations. It also aims to regulate or prohibit monopolies in commercial mass media when the public interest so requires. Executive Order no. 546 requires broadcasting corporations to acquire legislative franchises from the National Telecommunications Commission in order to operate. There are two other regulatory groups in the media industry. The first is the Kapisanan ng Brodkaster ng Pilipinas (KBP), which enforces standards in programming, advertising, and trade practice through its Radio and Television codes. It is the industrys self-regulatory mechanism which means that it aims to balance both the interests of the government and the private sector. The second group is the Movie and Television Review and Classification Board (MTRCB). MTRCB has the power to review and approve all publicity materials for motion pictures and television programmes for materials both local and foreign-produced.

BUSINESS DESCRIPTION AND STRATEGIES

GMA Network, Inc. and ABS-CBN Corporation were selected from the listed media companies in the Philippine Stock Exchange. Preliminary analyses of the performance of both companies will begin with an overview of each companys mission, vision, values, and services as these elements determine the short-term and long-term strategies that the company will execute. From these strategies, the strengths, weaknesses, opportunities, and threats can be identified for both industry players. GMA Network, Inc. GMA Network, Inc. is a broadcasting company that is primarily engaged in television broadcasting, radio broadcasting, and new media services. Its core business is the production of television and radio programs on entertainment, and news and public affairs. It caters to both domestic and international audiences. Its programs and personalities have received various local and international awards. The company has 46 VHF (45 GMA owned and 1 affiliate) and 27 UHF TV stations all over the Philippines. The networks signal reaches approximately 97% of the countrys Urban TV Households (Source: 2011 AGB Nielsen Total Philippines Establishment).

The companys flagship channel is Channel 7 in Metro Manila. It also operates another channel, GMA News TV (formerly QTV 11). Currently, GMA has 3 international channels: GMA Pinoy TV (with 291,309 subscribers in 2011) GMA Life TV, and GMA News TV International. GMA derives majority of its revenues from television advertisements. The company also has subsidiaries and affiliates that are involved in media-related services such as movie making, sets and props construction, film syndication, music and video recording, new media, online gaming, post production services, and marketing services. Corporate Vision, Mission, and Values (lifted from GMA Network Corporate website) Mission We enrich the lives of Filipinos everywhere with superior entertainment and the responsible delivery of news and information. Vision We are the most respected, undisputed leader in the Philippine broadcast industry and the recognized media innovator and pacesetter in Asia. We are the Filipinos' favorite network. We are the advertisers' preferred partner. We are the employer of choice in our industry. We provide the best returns to our shareholders. We are a key partner in promoting the best in the Filipino. Values We place God above all. We believe that the Viewer is Boss. We value our People as our Best Assets. We uphold Integrity and Transparency. We are driven by our Passion for Excellence. We strive for Efficiency in everything we do. We pursue Creativity and Innovation. Subsidiaries and Affiliates (as of December 31, 2011)
SUBSIDIARIES GMA New Media, Inc. (NMI) Citynet Network Marketing and Productions, Inc. GMA Network Films, Inc. GMA Worldwide (Phils.), Inc. RGMA Marketing and Productions, Inc. (GMA Records) Scenarios, Inc. Script2010, Inc. (thru Citynet Network Marketing and Productions, Inc.) Alta Productions Group, Inc. GMA Marketing & Productions, Inc. OWNERSHIP 100% 100% 100% 100% 100% 100% 100% 100% 100% PRINCIPAL ACTIVITIES Converging Technology Television Entertainment Production Film Production International marketing, handling foreign program acquisitions and international syndication of programs Music recording, publishing and video distribution Design, construction and maintenance of sets for TV, stage plays & concerts Design, construction and maintenance of sets for TV, stage plays and concerts Pre- and post-production services Exclusive marketing and sales arm of GMA's airtime

Mediamerge Corporation (thru GMA New Media, Inc.) AFFILIATES INQ7 Interactive, Inc. Philippine Entertainment Portal, Inc. (thru GMA New Media, Inc.) X-Play Online Games, Inc. (thru GMA New Media, Inc.)

100% OWNERSHIP 50% 50%

Business development and operations for the Companys online publishing/advertising initiatives PRINCIPAL ACTIVITIES A joint multimedia news and information delivery company of the Philippine Daily Inquirer, Inc. and GMA Operation of Pep.ph, an entertainment Portal A partnership between IPVG Corp. and GMA New Media, Inc. which focuses on designing, operating and maintaining casual online gaming and casual online gaming-related portals A real estate holding company General management programming, research and event management services for the Companys radio stations PRINCIPAL ACTIVITIES Charitable institution

Mont-Aire Realty and Development Corp. (as stock dividends) RGMA Network, Inc. NON-STOCK CORPORATION GMA Kapuso Foundation

49% 49%

Source: GMA Network Inc. Form 17-A, 2011

Marketing Strategies Kapuso Kapuso is a term used by personalities of the GMA Network in identifying themselves with their audience and their colleagues. Kapuso means of one heart. GMA emphasizes the importance of people in their business in their corporate values. They believe that the viewer is boss and that their people are their best assets. GMAnetwork.com GMAnetwork.com was developed in response to digital platform developments and changes in media consumption. In an article by The Philippine Star last August 13, among the websites features were live social media feeds by different personalities of the GMA Network. The network goes on further to enable fans to personally connect with their favourite celebrities. YouScoop YouScoop is the pioneering citizen journalism tool of GMA News Online. It aims to empower their audience both here and abroad to participate in the sharing of content and insights. YouScoop allows the viewers to see day-to-day occurrences from a candid point-of-view. GMA New Media, Inc. GMA constantly emphasizes that content must be made available in all available media; hence, the creation of GMA New Media, Inc. One notable contributions of this subsidiary was the development of a mobile application in 2011. Inq7.net Last December 2006, GMA and leading broadsheet newspaper The Philippine Daily Inquirer entered into a merger that led to the development of the web portal, inq7.net. The website aimed to maximize

the strengths of both companies; thus giving the viewer a richer experience with better access to videos as well as written content. ABS-CBN Corporation ABS-CBN Broadcasting Corporation is a broadcasting company that is primarily engaged in television broadcasting, radio broadcasting, and new media services. Its core business is the production of television and radio programs for news, entertainment, and public affairs. It caters to both domestic and international markets. The companys main channel is ABS-CBN Channel 2 in Metro Manila which reaches approximately 97% TV households nationwide. It also has a UHF channel Studio 23 with 50% nationwide reach. In radio, the company operates 3 AM band stations, and 14 FM band stations. ABS-CBN also provides news and entertainment programs for nine cable channels. These programs are niche or market specific and include foreign entertainment programs, blockbuster Filipino movies, news and commentary, music, anim, and sports. Its in-house produced programs also reach foreign audiences through the distribution of ABS-CBN content to countries in Southeast Asia, Eastern Europe and Africa. ABS-CBN Globals The Filipino Channel (TFC) reaches an estimated 2 million Filipinos in the USA, Canada, Europe, Australia, Middle East, Japan, and a host of other Asia-Pacific countries via cable TV, direct-tohome satellite, Internet Protocol Television (IPTV), and the Internet. ABS-CBN also owns SkyCable, the Philippines largest cable television service provider which has close to 500,000 upscale subscribers in Metro Manila and key urban areas nationwide. The company likewise owns Star Cinema, its movie production unit for the local film market and Star Records for its local music production and distribution. ABS-CBN Publishing markets 14 different magazines with features on fashion and lifestyle, gossip and entertainment, culinary arts, interior design, sports, and other interests. ABS-CBN Interactive, the new media unit of ABS-CBN, promotes media and SMS tie-ups in the country (TV text promos and TV polls / voting systems), and likewise produces ABS-CBNs online properties entertainment and news sites, online games, and social networking. Corporate Mission and Values (lifted from the ABS-CBN Corporate Website) Mission We exist in the service of Filipinos worldwide, as well as of all humankind. We exist to inform and to entertain through creative content for any distribution platform. We innovate, diversify, and expand into enterprises where our expertise in content opens new business and service opportunities. We bring out the best in the Filipino, and reflect true Filipino sentiment.

Values Meritocracy. We believe in caring for our people. We believe in granting commensurate rewards at the right time for good performance. Excellence Judgement and Drive for results. We use best judgment to balance speed, quality and cost to attain best returns. Excellence Embracing change. We continuously explore new ways of doing things. We challenge even our past successes to achieve breakthroughs and to ensure our continuous improvement. Excellence Risk-taking. In a constantly changing competitive environment, we take action based on a careful assessment that opportunities and rewards are worth the risks. We ensure that everything possible is done to mitigate those risks. Teamwork Company Interest and Transparency. We place the good of the team over our own personal interests. Teamwork Ownership. We, individually, take personal accountability for our role, output and decision. Teamwork Confronting conflict. We believe in the constructive resolution of any conflict. We also believe in taking accountability for any conflicts caused. Teaching and Learning. Our work relies on constant teaching and learning. We train our people to become better than ourselves. We define areas for development and take deliberate action to fill our skill gaps. Honesty and Integrity. We deliver on our commitments. Our values are non-negotiable. Subsidiaries and Affiliates (as of December 31, 2011)
PHILIPPINE SUBSIDIARIES ABS-CBN Publishing, Inc. Star Recording, Inc. (Star Records) Roadrunner Network, Inc. Star Songs, Inc. Sarimanok News Network, Inc. ABS-CBN Interactive, Inc. The Big Dipper Digital Content & Design, Inc. Creative Programs, Inc. Studio 23, Inc. TV Food Chefs, Inc. ABS-CBN Film Productions, Inc. ABS-CBN Integrated and Strategic Property Holdings, Inc. ABS-CBN Global Cargo Corporation Sapientis Holdings Corporation Sky Cable Corporation (thru Sky Vision Corporation) Culinary Publications, Inc. (thru ABS-CBN Publishing, Inc.) E-money Plus, Inc. (thru ABS-CBN Global Ltd.) ABS-CBN Multimedia, Inc. (thru ABS-CBN Interactive, Inc.) Columbus Technologies, Inc. (thru Sapientis) Multimedia Telephony, Inc. (thru Sapientis) INTERNATIONAL SUBSIDIARIES ABS-CBN International ABS-CBN Telecom North America, Inc. (thru ABS-CBN International) ABS-CBN Global Ltd. ABS-CBN Middle East FZ-LLC (thru ABS-CBN OWNERSHIP 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 56.7% 100% 100% 100% 70% 66.5% OWNERSHIP 100% 100% 100% 100% PRINCIPAL ACTIVITIES Print publishing Audio and video production and distribution Post-production services Music Publishing Content development and programming services Interactive media services Digital film archiving and central library of content licensing and transmission Content development and programming services Content development and programming services Food and restaurant services Movie production Real Estate Non-vessel common carrier operations Holding company Cable television services Print Publishing Money remittance services Digital electronic content distribution Holding company Telecommunications services PRINCIPAL ACTIVITIES Cable and satellite programming services Telecommunications services Holding Company Cable and satellite programming services

Global Ltd.) ABS-CBN Middle East LLC (thru ABS-CBN Middle East FZ-LLC) ABS-CBN Europe Ltd. (thru ABS-CBN Global, Ltd.) ABS-CBN Australia Pty. Ltd. (thru ABS-CBN International) ABS-CBN Japan Pty. Ltd. (thru ABS-CBN Europe Ltd.) ABS-CBN Canada ULC (thru ABS-CBN International) ABS-CBN Shared Service PTE. ABS-CBN Global Hungary Kft. ABS-CBN Global Remittance (thru ABS-CBN International) ABS-CBN Europe Remittance Inc. (subsidiary of ABS-CBN Europe) ABS-CBN Canada Remittance Inc. (thru ABS-CBN Hungary) PHILIPPINE AFFILIATES Lopez, Inc. First Philippine Holdings Corporation Sky Vision Corporation

100% 100% 100% 100% 100% 100% 100% 100% 100% 100% OWNERSHIP Parent 43% by Lopez, Inc. 18.8% by ABS-CBN and 70% by Lopez, Inc. 56.2% by Lopez, Inc. 88.3% by Lopez, Inc. 49.0% 7.0%

Trading Cable and satellite programming services Cable and satellite programming services Cable and satellite programming services Cable and satellite programming services Corporate support and administrative services for various international ABSCBN subsidiaries and affiliates Holding company Money remittance services Money remittance services Money remittance services PRINCIPAL ACTIVITIES Holding company Holding Company Investing ventures related to cable television, cable communications, cable systems, television and media shopping networks, and film distribution

Lopez Holdings Corporation Bayantel Telecommunications Corporation AMCARA Broadcasting Network, Inc. Beyond Cable Holdings, Inc. NON-STOCK CORPORATIONS ABS-CBN Foundation, Inc. ABS-CBN Bayan Foundation, Inc. 71 Dreams Foundation Holdings

Holding company Holding company Television and radio broadcasting Holding Company PRINCIPAL ACTIVITIES Charitable institution Charitable institution Charitable institution

Source: ABS-CBN Corporation SEC Form 17-A, 2011

Marketing Strategies ABS-CBN has three key elements to their business strategy. The first element is the availability of content in different platforms and media. The second element is content creation and its quality thereof. The final element is efficiency maintaining a strong fiscal situation without sacrificing the quality of their products and services. Kapamilya ABS-CBN reaches out to its audience by identifying themselves as kapamilya. Kapamilya in English simply means member of the family. With the family being the strongest and most influential social unit here in the Philippines, ABS-CBN asserts the importance of their viewers in driving their performance forward. ABS-CBN Licensing Group The ABS-CBN Licensing arm was created to establish stronger brand recognition not just with the company, but also several brands under ABS-CBN through licensing. Among these brands are Fear

Factor, Big Brother, and the local production, Super Inggo. Their licensing programs include traditional licensing, promotional licensing, music, and publishing. Examples of forms of traditional licensing are branded apparel, toys, and books. Promotional licensing includes the logo design and advertisement conceptualization (ABS-CBN Licensing Profile). ABS-CBN Interactive, Inc. In order to keep up with the rapid technological advancements and increasing demand for digital information, ABS-CBN created ABS-CBN Interactive Inc. It is their task to make ABS-CBNs original content available on digital platforms such as the internet and Android market. This makes content available anytime, anywhere, in any device or medium as ABS-CBN promises its audience. ABS-CBN Publishing, Inc. ABS-CBN Publishing, Inc. caters to the affluent market (Upper A & B) with thirteen titles whose foci serve niche interests of their market. These range from fashion and lifestyle, gossip and entertainment, to culinary arts, parenting, and interior design. The Filipino Channel (TFC) On top of digital content that is readily available on the internet, ABS-CBN reaches out to Filipinos residing abroad through The Filipino Channel (TFC). TFC is aired in North America, Europe, Middle Eastern Asia, Japan, Australia, and other Asia-Pacific countries. SWOT Analysis Strengths Both companies are successful in reaching out to their nationwide market both through television and digital platforms. Moreover, the dominance of both ABS-CBN and GMA are unparalleled even by their rising competitor, TV5. Their success in maintaining a large portion of the market share can be attributed to the quality of their content and the personalities they endorse. GMAs main strength is its market leadership in the Philippines for its television broadcasts, but ABSCBN in particular is successful in reaching out to its worldwide audience in comparison to GMA. Their presence is seen even in Europe whereas international operations of GMA are only limited to the United States and Canada, Middle East Asia, and Asia Pacific Asia. Another advantage that ABS-CBN has over GMA is their capability to satisfy the needs of the affluent market through their magazine titles. They can increase market share by better relating to this particular market segment. Weaknesses ABS-CBN and GMA both operate radio stations in the AM and FM bands; however both control very little market share. In this aspect, ABS-CBN outperforms GMA for radio listenership.

Opportunities With a proper content management team, both ABS-CBN and GMA can improve their performances in radio broadcasting. Minimal investment would be required since they already have the infrastructures in place. The working class is their target market; nonetheless, creating programs for listeners from the affluent market may also strengthen their brand as a whole. Unlike ABS-CBN, GMA has not yet tapped its Filipino audience in other parts of the world such as Europe, Africa, and other areas of Asia. Exploring these markets can generate revenues and acquire market share from ABS-CBN. Threats TV5 remains to be a significant threat to both ABS-CBN and GMA. TV5 currently enjoys a recent injection of capital by Manny Pangilinan. This allowed the network to upgrade their technologies, and more importantly hire well-liked personalities from the competing networks. The rumoured merger between GMA and TV5 could be detrimental to GMAs performance because of differences in management styles, corporate values, and strategies. An external threat would be the increasing daily usage of internet and the declining hours of TV viewing. Both networks must put equal effort in making content available online. Furthermore, they should maximize the use of digital technology in order to maintain the same reach to its audience.

FINANCIAL ANALYSIS
In order to determine how GMA and ABS-CBN are financially structured, 2007-2011 financial statements of both GMA and ABS-CBN will be analyzed using common size analysis to determine how accounts are distributed within a financial statement and to detect structural differences of GMAs and ABS-CBNs financial accounts. In order to determine which company is more profitable, 2007-2011 financial statements of both GMA and ABS-CBN will be analyzed using ratio analysis to determine their respective profitability ratios, and to determine their strengths and weaknesses over the other with respect to cost management and operating efficiency. Both methods of analysis above will be coupled with trend analysis, to determine the trend of GMAs and ABS-CBNs financial structure and profitabilty in the last 5 years. The following analysis will use the 2007-2011 financial statements of GMA and ABS-CBN, both actual and common size. Data from these statements can be found in Appendix A, and will be referred to from time to time during the analysis. COMMON-SIZE ANALYSIS Asset Distribution and Structure. From the common size graph of GMAs assets below, it can be seen how its current assets (~60%) dominate its asset structure for the last 5 years mainly due to its very high level of receivables. ABS-CBN, on the other hand, is dominated by non-current assets. We can see later how these respective structures influence both companys liquidity, solvency and operating efficiency ratios.
GMA ABS-CBN

Liability Distribution and Structure. From the common size liability graph of GMA below, it can be seen how its liabilities are just less than 30% of its assets for the last five years and how it is composed of mostly current/operating liabilities. ABS-CBNs liablities, on the other hand, is more than 50% of its assets and approaches 60% in 2011. A major component of its liabilities are debts. Based on the graph, even without calculating for ratios, it can be concluded that GMAs assets are financed more by equity or investors while ABS-CBNs are financed more by creditors.
GMA ABS-CBN

Equity Distribution and Structure. Below is the common-size equity distibution of both companies with respect to total assets. As expected GMAs total common-size equity is so high with common stocks as the dominant account. This supports the claim earlier that GMAs assets are financed more by investments. However, an interesting thing to note for ABS-CBN is that, its retained earnings is very high (40-50%) that its graph almost coincides with its total equity graph. This simply means that around 40-50% of its assets are earned and roughly reflects ABS-CBNs ability to generate earnings.
GMA ABS-CBN

Common-size Income Structure. Common-size income accounts for the last 5 years for both GMA and ABS-CBN is shown below. It can be seen that ABS-CBNs cost of sales and operating expenses are significantly higher than GMAs, affecting the formers ability generate higher percentage of profits and incomes. This will be discussed in more detail during the analysis of profitability/cost management.
GMA ABS-CBN

RATIO ANALYSIS Profitability of both GMA and ABS-CBN for 2007-2011 will be analyzed using ROA, ROE, EPS and PER. Profitability will then be further analyzed by decomposing ROE into its profitability levers, also known as the Du Pont decomposition. General Profitability Evaluation. Shown below are the calculated values of ROA, ROE, EPS and PER for both GMA and ABS-CBN. GMA ROE ROA Formula Net Income / Equity Operating Income / Assets ABS-CBN ROE ROA Dec-11 0.170439634 0.179237344 Dec-10 0.266383049 0.284900544 Dec-09 Dec-08 0.273149234 0.258987237 0.292713538 0.291720062 Dec-08 0.094227152 0.073967307

Dec-11 0.134705846 0.032867863

Dec-10 0.188947064 0.134211778

Dec-09 0.109375562 0.081021655

GMA EPS Average Share Price PER ABS-CBN EPS Average Share Price PER

Dec-11 Dec-10 Dec-09 Dec-08 Dec-07 0.353 0.58 0.58 0.487 0.502 6.3 6.19 7.7 3.6 7.7 17.8470255 10.67241379 13.27586207 7.392197125 15.33864542 Dec-11 Dec-10 Dec-09 3.207 4.211 2.225 33.875 49.75 29.75 10.56283131 11.81429589 13.37078652 Dec-08 1.803 15.125 8.38879645 Dec-07 1.648 0.962 0.583737864

Graphs of these values are as follows:

ROA. Looking at the ROA numbers and graphs above, it can be seen that every peso of asset of GMA generates more than twice as much operating income than what ABS-CBN generates in every peso worth of asset. This gap in ROI is so wide, even if the cost of financing was not considered a characteristic of ROA and we know ABS-CBN has significant debts based on the common-size analysis in the previous sections. As far as ROA is concerned GMA totally trumped ABS-CBN. ROE. Looking at the ROE numbers and graphs above, GMA still has advantage over ABS-CBN with respect to this ROI. For every peso worth of equity, GMA generates more net income than ABS-CBN. It is worth to note, though, that the ROE values for both companies are closer in 2011 than in previous years. The ROE values will be decomposed later into its components to further analyze both companies drivers of profitability. EPS and PER. Earnings per share for ABS-CBN have been consistently much higher than GMAs in the last 5 years as shown in the numbers and graphs above. One reason for this is the financing structure of both companies, where GMA relied heavily on investments which resulted in much higher outstanding shares while ABS-CBN relied more on loans. Therefore, it is difficult to determine which company is more profitable using this ratio. With regards to the expensiveness of the shares of each company, PER or Price-Earnings Ratio, indicated that GMAs and ABS-CBNs shares have more or less the same level of

expensiveness, during 2008-2011. In 2007 and 2011, however, a share of ABS-CBN is much cheaper than GMAs, if based on PER. So based on EPS and PER alone, ABS-CBN might has the advantage over GMA. Du Pont Decomposition of ROE. Calculated values for ROEs levers of profitability as follows. The levers are cost management, efficiency and leverage, and ROE is just the product of each levers values. GMA COST MANAGEMENT EFFICIENCY LEVERAGE ROE Formula Net Income / Sales Sales / Assets Assets / Equity Net Income / Equity Dec-11 0.153727153 0.890368264 1.245232179 0.170439634 Dec-10 Dec-09 Dec-08 0.232166123 0.24295887 0.224547714 0.912325847 0.884469309 0.873629848 1.257644101 1.271113881 1.3202077 0.266383049 0.273149234 0.258987237

ABS-CBN COST MANAGEMENT EFFICIENCY LEVERAGE ROE Graphs as follows:

Dec-11 0.096622772 0.598006397 2.331315865 0.134705846

Dec-10 Dec-09 Dec-08 0.114526818 0.077275599 0.070403298 0.752368292 0.65124526 0.666746742 2.192817393 2.173368361 2.007345639 0.188947064 0.109375562 0.094227152

Cost Management. Cost management ratios indicate how good a company is in controlling and reducing costs and expenses and since less cost means more profits, there ratios affect profitability. The particular cost management ratio that resulted from the Du Pont breakdown is known as the net profit margin ratio. In the case of GMA and ABS-CBN, GMA consistently have the higher net profit margin ratio than ABS-CBN in the last 5 years. The higher net profit with respect to total sales ratio was a result of its ability to keep its costs and expenses low. Clearly, GMA has the advantage here. Operating efficiency. These ratios indicate how efficient the company is in generating sales using its assets. The particular efficiency ratio from the Du Pont breakdown is the asset turnover ratio.

Comparing GMAs and ABS-CBNs asset turnover ratios, it can be seen that in the last 5 years, GMA consistently generated more sales for each peso worth of asset. Clearly GMA is more efficient in the usage of its assets, and has the advanatge here over ABS-CBN. Leverage. Leverage gives an indication the amount of capital supplied by parties other than owners. As can be seen from the numbers and graphs above, ABS-CBN had the higher leverage in the last 5 years than GMA and rightly so, because from the common-size analysis discussed earlier, ABS-CBNs financing structure relied more on creditors while GMAs relied on investors. ABS-CBN has the advantage here over GMA. However, its leverage level is not enough to pull its profitability up to the level of GMA. Cost Management Breakdown. The discussion of cost management above only considered the net profit margin ratio, which includes all the expenses and costs in a given period. However it is important to determine which particular cost or expense had the greatest impact on a companys cost management performance. Below are calculations and graphs of gross profit margin and operating profit margin ratios, which are also indicators of a companys cost management ability. GMA Gross Profit Margin Operating Profit Margin Formula Gross Profit / Sales Operating Income / Sales Dec-11 0.71504987 0.201306977 Dec-10 0.465684434 0.178385744 Dec-10 Dec-09 Dec-08 0.787765482 0.808756261 0.795643305 0.312279373 0.330948214 0.333917234 Dec-09 0.408501678 0.124410356 Dec-08 0.464848223 0.110937635

ABS-CBN Gross Profit Margin Operating Profit Margin

Dec-11 0.339830428 0.054962394

From the data and graph above, it is quite obvious what went wrong for ABS-CBN its gross profit is too low compared to its sales. Since gross profit is just sales minus cost of sales, this just means ABS-CBNs cost of sales is too high with respect to its sales compared to GMAs. This effect trickles down to its operating profit, and this is one of the reasons for its lower operating profit margin. Based on the common size analysis of the income statements, it can be shown that ABS-CBNs operating expenses is higher than GMAs, and this is the other reason for its lower operating profit margin. These negative effects trickle down, again, to its net income, plus ABS-CBNs interest expenses, and all these resulted in ABS-CBNs much lower net profit margin than GMA. Operating Efficiency Breakdown. As mentioned above in the discussion of the efficiency from the Du Ponts decomposition of ROE, there are other operating efficiency ratios, and they will be analyzed to explain the efficiency values, or asset turnover, from the Du Pont decomposition. These component

efficiency ratios of asset turnover are: inventory turnover, accounts receivable turnover and fixed asset turnover. Calculations and graphs as follows. GMA Inventory Turnover A/R Turnover Fixed Asset Turnover Formula Cost of Sales / Inventory Credit Sales / AR Sales / Fixed Assets Dec-11 Dec-10 Dec-09 Dec-08 46.8453315 41.79931928 42.57771958 48.30611644 2.444815988 2.358221035 2.464379762 2.36081796 2.496738944 2.792383146 2.590045483 2.436767219

ABS-CBN Inventory Turnover A/R Turnover Fixed Asset Turnover

Dec-11 Dec-10 Dec-09 Dec-08 115.0660404 92.20985543 66.01575561 53.21458391 4.160986546 5.367059479 4.85228339 4.682503372 1.639489535 1.848332556 1.489548259 1.619377647

From the numbers and graphs above, ABS-CBN is doing well compared to GMA when it comes to inventory turnover, ITO, and accounts receivable turnover, ARTO. However it looks like the effect of ABS-CBNs fixed asset turnover, FATO, has more weight in its overall efficiency ratio, asset turnover, and this dragged down its asset turnover value. It is worth noting that inventories and ITO in the media industry is not as important as in the, say, manufacturing since the line of business in the media industry is not dependent on inventories. Also operating cycle calculation is not that applicable, since it includes days sales in inventory, DSI. FINANCIAL ANALYSIS SUMMARY Financial analysis shows that between GMA and ABS-CBN, GMA is the more profitable company. Analysis shows that its much better profitability is caused by its better cost management, efficiency in using its assets, and its financing structure which leaned more on investments. ABS-CBN, on the other hand, while having a better leverage that GMA, does not have the right levels of cost management and efficiency ratio to pull its profitability level on par with GMAs. Also ABS-CBN seemed to have a slight edge over GMA when it comes to EPS and PER, but since both companies have a different financing structure, these values are not very indicative of their respective profitability.

RISK ANALYSIS
In order to determine which company is less risky to invest in, the following risk elements will be analyzed: market risk and financial risk. Under market risk, equity, interest rate, and currency risk of both companies will be analyzed. Under financial risk, risk-related ratios of both companies will be determined and compared. Quality of earnings for both companies will also be discussed since low quality of earnings indicates risk to an investor. MARKET RISK Equity Risk and Interest Rate Risk. Equity risk is defined as the risk that one's investments will depreciate because of stock market dynamics causing one to lose money while interest rate risk is the risk borne by an interest-bearing asset, such as a loan or a bond, due to variability of interest rates (Wikipedia). From the 2007-2011 financial statements of both GMA and ABS-CBN, it can be seen that both companies owned interest-bearing financial assets, which is subject to interest rate risk, and GMA owned equity securities, which is subject to equity risk. However, the level of these assets is very low compared to total assets, and rightly so, because GMAs and ABS-CBNs line of business is not really dependent on these assets. Therefore, because of very low levels, these assets present insignificant equity and interest rate risk to an investor. Foreign Exchange Risk. Foreign exchange risk (also known as exchange rate risk or currency risk) is a financial risk posed by an exposure to unanticipated changes in the exchange rate between two currencies (Wikipedia). Since GMA and ABS-CBN both have international operations and/or subsidiaries, part of their earnings is earned not in Philippine peso but in the currencies of the their respective international operations. It is therefore essential to determine which company has the greater percentage of international revenues over its total revenues because that company will be more exposed to foreign exchange fluctuations and therefore, riskier. From sample data, it looks like ABS-CBN has a larger international operation base and therefore has a greater percentage of international revenues over total revenues. From the 2009 SEC filing of ABS-CBN, the revenues from ABS-CBNs global operations contributed to around 21% of its total Revenue. For the same year, the SEC filing of GMA showed that its international operations contributed to only 7% of its total revenue. In 2011, data showed that ABS-CBNs global operation revenues comprised 17% of its total revenue and for GMA, the number is 9.9%. Based on these sample statistics, it can be seen that ABS-CBNs global operations is a larger source of revenue for ABS-CBN, than GMAs international operations to GMA. ABS-CBN, therefore, is riskier as far as foreign exchange rate risk is concerned.

FINANCIAL RISK Calculated financial risk-related ratios are as follows: Dec-11 Liquidity/Solvency Current Ratio - GMA Current Ratio - ABSCBN Quick Ratio - GMA Quick Ratio - ABSCBN Leverage Interest Coverage - GMA Interest Coverage - ABSCBN Debt Ratio - GMA Debt Ratio - ABSCBN Equity Ratio - GMA Equity Ratio - ABSCBN 3.618579725 1.757858912 2.850644139 1.593620086 Dec-10 Dec-09 Dec-08 Dec-07

3.701851 3.516876 3.228408 2.522342 1.363281 1.330567 1.215326 1.380148 3.158614 3.09528 2.729866 2.117013 1.221897 1.068489 0.910347 1.045877

-137.117827 31.63916341 0.193794787 0.590820673 0.806205213 0.409179327

-69.1743 -22.6871 0.199912 0.548328 0.800088 0.451672

-136.035 -66.3541 -119.107 -30.4127 83.42824 -13.0673 0.209492 0.21748 0.269282 0.539085 0.540733 0.452904 0.790508 0.78252 0.730718 0.460915 0.459267 0.547096

Current Ratio and Quick Ratio. The current ratios of GMA are almost or greater than twice the respective current ratios of ABS-CBN for the years 2007-2011. Since these ratios indicate the ability of both companies to meet its debt and other fixed obligations, it can be said that GMA fares better than ABSCBN in this aspect. An interesting thing to note here is that GMAs current obligations are tied to operating activities and there are no debt-rated obligations. ABS-CBN, on the other hand, have obligations related to short-term debts and interest for its long-term debts. Quick ratios for the companies have the same trend since inventory is not really a very significant element in the media industry. The graph for the current and quick ratios are as follows.

Interest Coverage Ratio. The interest coverage ratio measures the extent to which earnings cover the interest obligations of the company. However, in the case of GMA, and in some years for ABS-CBN, interest obligations are negative which means those really are not obligations. In cases like this, the interest coverage ratio is negative which does not really reflect the purpose of the ratio. In cases like this, let us just say that the ratio is infinite. For GMA, interest expense for 2007-2011 are all negative, so

interest coverage ratio is infinite. This is due to the fact that GMA does not really have long-debts or any interest-bearing obligations. ABS-CBN, on the other hand, had a ratio of 31.6 for 2011 and 83.4 for 2008. The rest of the years, ABS-CBN has an infinite interest coverage ratio. These data indicate that GMA has no risk whatsoever of not being able to pay for its interest obligations and ABS-CBN has only a very minimal risk. Debt Ratio and Equity Ratio. The calculated debt ratios and equity ratios of GMA and ABS-CBN for 20072011 show how the assets of both companies are financed. GMAs financing leaned more on equity which is in the range of 73-80% of its assets. ABS-CBN, on the other hand, leaned more on debt, which is around 45-60% of its total assets. Having debts does not mean that ABS-CBNs financing strategy is not sound because the company can leverage on debts to earn more, to be more profitable. However, when financial risk is concerned, ABS-CBN is riskier for an investor since creditors always have a prior claim over investor to the companys assets. Investing on a company having debts may be a case of higher risks, higher reward since debt can make return on equity higher if the conditions are right. The graphs of GMAs and ABS-CBNs debt and equity ratios are as follows:

QUALITY OF EARNINGS Earnings convertability to cash. Common-size analysis of GMAs and ABS-CBNs income statements indicates that GMA has a net profit margin of 15-25% range in the last five years while ABS-CBN has a range of 7-12%. However these profits, or earnings, are not necessarily cash and problems may arise if a company does not have enough cash to pay some of its current liabilities. Because of this cash flows of both companies will need to be analyzed. Cash flow trend for both GMA and ABS-CBN as follows:

GMA

ABS-CBN

At first glance, GMAs net cash flow trend for 2010-2011 looks alarming because ending cash flows are negative. However, looking at its individual activities shows that cash inflow from operations is high and has a stable trend and cash outflow from investing activities is moderate and can be supported by inflow from operations. However, GMA has been paying out large amounts of dividends in the last couple of years making net cash flows for those years negative. As far as cash flow risk is concerned, GMA has no risk since it has a stable inflow from operations and dividends are not always necessary and its level can always be adjusted by the company. ABS-CBNs net cash flow trend, on the other hand, looks good at first. However, looking deeper into its activities shows that its operations inflow cannot always fully support its investing and financing activities. It has been issuing debts to partly cover its investing activities and other financing activities such as payment of dividends and payment of existing debts. This issuance of debts every period is part of the reason why its net cash flow trend is positive. However, because its operations cannot fully support its activities, ABS-CBN is riskier than GMA. Source of Earnings. The source of earnings is indicative of the quality of earnings and quality of earnings is said to be high if earnings are derived from recurring transactions related to the basic business of the company. For GMA, from its notes to its 2007-2011 financial statements, its source of earnings are its television and radio airtime activities, subcription income, and production income, which is their main line of business. So for GMA, as far as this parameter is concerned, its quality of earnings is high. The same can be said for ABS-CBN. From its notes to 2007-2012 financial statements, its source of revenue is its main line of business -- sale of airtime and services. Stability and Predictability of Earnings. The stability and predictability of earnings is another indication of high quality earnings because if earnings are stable and predictable, future earnings will also be predictable by virtue of extrapolation or trending. And if future earnings are predictable, risk can be minimized. To analyze GMAs and ABS-CBNs stability and predictability of earnings, 5-year actual-size values for their gross operating income, operating profit, and net income will be trended and compared. Below are the graphs.

GMA

ABS-CBN

From the graph above, it can be seen that GMAs trend is more stable and smoother and predicting its 2012 levels from the graphs alone is easier than predicting ABS-CBNs. However, it should be noted that the shared trend of both companies in 2009-2011 is a result of the 2010 Philippine national elections boosting the media industrys profits in 2010 and going back to normal in 2011. It looks like the media industry has a 4-year profits cycle in which the peak profits coincide with election years. Therefore, predictability of GMAs and ABS-CBNs earnings might not be solely tied to how these companies are run but also in the profits cycle of the media industry. If the 2010 levels were disregarded, it seems that the stability and predictability of the earnings graph of both GMA and ABS-CBN are about the same. Consistent and Conservative Accounting Policies. These result in prudent measurement of financial condition and income and from GMAs and ABS-CBNs respective notes to their financial statements, both entities are using the same accounting standards. With regards to accounting policies, from the notes, there is no indication that either company is not conservative or inconsistent in their application of their respective adopted policies. RISK ANALYSIS SUMMARY Market risk analysis shows that there is no significant risk involved in both GMA and ABS-CBN as far as equity and interest rate risk is concerned due to the low level of tradable securities and interest-bearing assets for both company. However, ABS-CBN is found to be riskier with respect to foreign exchange risk because a larger percentage of its revenues are earned in foreign currency. With respect to financial risk, ABS-CBN is riskier to invest in than GMA, mainly because of its lower liquidity and solvency, and of its large percentage of debts over its total assets. With respect to quality of earnings, ABS-CBN is riskier than GMA. The determinant that pulled ABSCBNs quality of earnings down is its cash flow risk. The risk level based on the other determinants of quality of earnings is more or less for GMA and ABS-CBN.

Overall, market risk, financial risk and quality of earnings analysis, shows that ABS-CBN is riskier to invest in than GMA.

INVESTMENT RECOMMENDATION AND JUSTIFICATION

Financial Performance From the financial analysis, GMA was found to be able to manage its costs and expenses better, and able to generate sales from using its assets more than ABS-CBN in 2007-2011. These contributed to GMAs higher profitability than ABS-CBN. Common-size analysis showed that the financing structure of both company differed greatly, with GMA relying on investors while ABS-CBN on creditors. While this setup gave ABS-CBN more leverage than GMA, it did not result in more profitability, at least not in the level of GMAs profitability. From the risk analysis, ABS-CBN was found to be riskier than GMA in the following areas: market risk in the form of foreign exchang risk because of ABS-CBNs greater dependence on foreign income than GMA, financial risk in the form of solvency and liquidity risk because of ABS-CBNs financial structure, and quality of earnings risk in the form of cash flow risk since the positive cash flows of ABS-CBN cannot be attributed solely to its operating activities but also by its yearly issuance of debts. For other risk parameters, such as equity risk and interest rate risk, the risk level of both GMA and ABS-CBN are just about the same. So based on the analysis of the numbers and financial statements of both companies from 2007-2011, the groups recommendation is to invest in GMA rather than in ABS-CBN. Market Leadership GMA Network as the market leader proves to be the ideal media company to purchase shares from. Its size is small in comparison to its competitor, ABS-CBN, which means that there is more room for the company to grow. Among their opportunities that have to be explored are the expansion of its international operations, improvement on its radio broadcasts, and further innovation of its content on its digital platforms. More importantly, GMA management expects performance to improve in the next months and these are based on increased advertising revenues and upcoming nationwide events. Forecasted Operational Performance GMA reported in August 2012 that their profit for the first half of 2012 was down by 4% from its performance last year attributing it to a weak first quarter performance. They however said that they will be able to meet their profit target of PhP 2.8 billion, which is PhP 1 billion higher than their 2011 profit with increased advertising revenues entering in the second half of the year (Montecillo, 2012). ABS-CBN on the other hand reported that their income for the first half of 2012 was down by 45%. It is important to note that part of the income from the first quarter of 2011 came from gains from the sale of SkyCable shares. Despite this, the second quarter performance of 2012 was still down by 11%. ABSCBN expects to recover in the second half of the year (BusinessWorld Online, 2012).

Drawing from their success with Eleksyon 2010, GMA Network is expected to outperform ABS-CBN in terms of news coverage for the elections approaching in 2013. According to AGB Nielsen, Eleksyon 2010 posted a 12.5% TV rating compared to ABS-CBNs 11.2% in Mega Manila. Its primetime newscast, 24 Oras posted a 33.7% rating against TV Patrols 22%. During this period, overall market share for both networks were 51.3% for GMA and 34.5% (PhilStar.com, 2010). Share Price Movement In the past last six months, the performance of the GMA share price has followed an upward trend from a share price of PhP 8.85 in March 2012 to PhP 10.00 in August 2012. This may be indicative of their performance for the first half of the year. The movement of ABS-CBNs share prices followed a downward trend from PhP 33.34 in March 2012 to PhP 27.90 in August 2012. Its six-month high was in May where its share price rose to PhP 41.50 (BusinessWeek.com, 2012). Conservative investors or investors with low risk profiles would ideally purchase shares from GMA Network, Inc. as share prices continue to increase throughout the year. With ABS-CBN share prices at its lowest in six months, investors with high risk profile would purchase their shares with the expectation that share prices will grow in the coming months.