Indonesia Media, Do Not Miss The Train

We upgrade the media sector to OVERWEIGHT (from Neutral) on the economy’s potential recovery, driven by government support in boosting consumption. The media industry’s long-term growth outlook remains strong, as TV dominates the ad spend market. Meanwhile, online companies have helped improve the growth of media operators via aggressive ad spending on TV stations. We expect the industry to grow by 12% YoY in FY16. Media Nusantara Citra and Surya Citra Media account for more than 60% of the national audience share; our top pick is Media Nusantara Citra.

Media industry growth was supported by online media companies in FY15; for FY16, we expect even higher contributions. Demand for advertising spending slowed down in FY15 on the back of softened consumption. This resulted in slower revenue growth for fast-moving consumer goods (FMCG) companies, which were forced to cut ad costs. On a positive note, the media industry’s growth was helped by online media companies’ aggressive expansion, according to Nielsen. Online companies like Traveloka have significantly increased their ad spend on TV to IDR367bn in 1H15 (1H14: IDR13bn).

We expect the media industry to grow by 12% in FY16 on improved consumption, backed by the Government’s infrastructure initiatives and village funds disbursement. The latter could boost consumption of the low-income segment, which is also the target market for the FMCG companies. Generally, free-to-air (FTA) TV has the largest market share of the low-income group and for people living outside of Java Island.

SCTV and RCTI set to benefit from the recovery
In the past few years, Surya Citra Televisi (SCTV) and Rajawali Citra Televisi Indonesia (RCTI) have dominated the media business, evidenced by their strong audience share in both prime time and non-prime time. As we expect the media industry to recover, both TV stations would have more bargaining power to improve their rate cards, and we expect lower discounts to be given to advertisers. For FY16, we estimate the overall rate card to improve by 10-12%.

Upgrade sector call to OVERWEIGHT as we rely on a potential recovery in the economy, which could result in higher earnings for Surya Citra Media (Surya Citra) and Media Nusantara Citra (Media Nusantara). We also estimate a higher rate card in FY16 on the back of lower discounts given to advertisers. Indonesia’s TV ad rates are considered the lowest in the region.

Media Nusantara is our top pick based on i) attractive valuations, ii) based on Nielsen data, Media Nusantara’s prime time audience share improved in Nov 2015 while that of other media groups diminished, and iii) we forecast for RCTI’s (its leading TV station) ad revenue to grow at 14% in FY16; the Euro 2016 football tournament ought also to give an additional ad revenue boost.

Potential upside and risks: a potential re-rating for the media sector is possible, if ad spend improves earlier in 1H16. Meanwhile, the risks are a slower-than-expected economic recovery in FY16 and the implementation of digitalisation, which could lead to higher capex.

Anticipating a Silver Lining In 2016
2015 was a tough year for the media industry. As the economy comes under pressure – which results in slower revenue growth for the FMCG companies and, in turn, forces them to cut costs – inevitably, ad spend takes the first hit. The trends show the softening ad expenses from the FMCG firms. Besides the FMCG companies’ ad expenses, we also consider the economy’s growth for our forecasts on industry growth as we see a positive correlation between the ad spend and GDP growth.

In the past few years, Indonesia’s TV ad growth has been pretty strong, driven by high and stable GDP growth; in 2010-2014, the industry grew at an annual average of 21%, in line with the high GDP growth of 6-6.5%. As GDP in FY15 may fall to 4.7-4.8%, we estimate for a slower ad spend growth.

Which industries have cut their ad spend the most?
Based on Nielsen data, the food & beverage (F&B) industry is still the major contributor in terms of TV ad spend (+5% YoY in 1Q15) despite the slowdown in the economy. It was supported by the instant noodle industry players like Indofood CBP Sukses Makmur (Indofood CBP) (ICBP IJ, BUY, TP: IDR16,300) and the Wings Group. The industries that cut their ad spend budget the most were corporates & public services and toiletries & cosmetics, by 44% YoY and 12% YoY respectively.

We are positive on the media industry recovery, due to the following:
i. We are positive on the recovery of the economy, as our economist expects the GDP growth to pick up to 5.1% in FY16 from an estimated 4.8% in FY15
ii. Indonesia has strong fundamentals – the largest population in ASEAN (250m), the urbanisation trend and an expanding middle class
iii. Demand exceeds supply, with only 10 national FTA channels while only 20% of airtime can be allocated to advertisers
iv. There is room for TV ad rates to grow due to the conditions listed above
v. The sector has a low maintenance capex of c.USD10m-40m

We expect the media industry to grow 12% in FY16 on the back of higher GDP
In 2016, we expect the media industry to recover on the back of: i) improvements in the domestic economy, and ii) potential margins improvement from lower discounts and higher rate cards.

Our economist expects Indonesia’s GDP to grow at 5.1% in FY16
This would be on the back of government programmes for infrastructure, as well as village funds to support the income and consumption of the low-income segment of the economy. As we understand that FTA TV has the largest market share from this segment and is also the target market for FMCG companies, we estimate that the leading TV channels (SCTV and RCTI) could benefit from improved rate cards and margins. This is due to their strong audience share. We expect the overall rate card to improve by 10-12% pa for the strong channels in FY16.

Valuation
We value both companies Media Nusantara and Surya Citra using DCF as we believe this method better captures the medium- and long-term growth prospects of both companies. We use a WACC of 11.3% for Media Nusantara and 10.7% for Surya Citra, and for both companies we use a terminal growth rate of 3%. We show the valuation in the individual company reports.

As a corroborative methodology we employ a peer comparison with other companies involved in the media sector in Thailand and Malaysia. As we show in Figure 15, the market dynamic is different as the rate card in Indonesia has room to grow since Indonesia’s TV ad rates are some of the lowest in the region. Surya Citra’s SCTV and Media Nusantara’s RCTI channels charge a prime time rate of IDR60m (USD5,400) per 30 seconds. In Thailand in comparison, companies charge double at around USD10,800 per 30 seconds.

For non-prime time hours, Surya Citra and Media Nusantara charge rates that are 30-40% lower than prime time rates. As we deem the TV ad rates in the country are low in comparison, thus the domestic players have further room to increase them. Thus the ROEs of the two Indonesian companies are among the highest of the peers.

Surya Citra currently trades at 25.6x 1-year forward P/E, a premium to Media Nusantara’s 11.8x 1-year forward P/E. We believe the premium valuation for Surya Citra vs Media Nusantara is justifiable given its higher ROEs and healthy balance sheet (no USD debt exposure).

Government Stimulus Packages Could Help Boost Purchasing Power
Government spending could be the key driver for improvement in media industry growth. In 2015, the Government introduced several stimulus packages in order to improve economic growth. In our opinion, the Government’s help in boosting consumption could lead to better growth for the media players. In the latest seventh policy stimulus, such help includes:
i. A 50% discount on employees’ income tax for two years
ii. Tax facilities for capital investments in certain areas
iii. The expediting and easing of the land certificate process

In our opinion, the seventh policy stimulus package is unlikely to greatly boost purchasing power. However, it does continue to signal the Government’s effort in supporting the domestic economy. Furthermore, we are positive that the improvement in the economy can lead to better growth for the FMCG companies, which can translate into higher growth for the media industry. This is because we understand that FMCG companies contribute 70% of the ad spend in the FTA TV market.

The disbursement of village funds could be a key catalyst
The disbursement of village funds could be the key catalyst for economic growth. In our opinion, it could help support the income and consumption levels of the low-income segment as this segment is the biggest audience for FTA TV and also the target market for FMCG companies like Indofood CBP, Mayora Indah and Unilever Indonesia (Unilever).

If there is some improvement in the low-income segment, we could see the FMCG firms investing more in TV ads as a way of introducing their new products. We expect the leading media companies to benefit from such a scenario. Please refer to our 7 Dec 2015 strategy report Seventh Stimulus Package Starting To Lose Steam for more details.

SCTV And RCTI Dominate Ad Revenue
SCTV and RCTI are the giants in the industry
The softened ad spend growth in FY15 has resulted in higher growth for the Top 2 players, ie SCTV and RCTI. In an ad spend growth slowdown situation, the FMCG companies have less cash for ad expenses and are likely to choose stations that have better audience share. In the past few years, SCTV and RCTI have dominated in terms of audience share in the local TV channels. This has resulted in higher revenue shares for both TV stations.

Other TV stations – like Indosiar (+27% YoY), tvOne (+51% YoY) and ANTV (+97% YoY) – have seen revenue share showing improvements. The introduction of variety shows like D’T3rong and D’Academy was a big success for Indosiar. Note that D’Academy was aired for 3-4 months (Mar 2014 to Jun 2014) and, during this period, Indosiar’s prime time audience share increased to an average of 17%.

In 2015, the new season of D’Academy was reportedly a huge success for Indosiar as prime time audience share jumped to a 20.4% average between Feb 2015 and May 2015. Another TV station, ANTV, was able to successfully maintain its prime time audience share due to its Indian TV dramas and recent Turkish TV dramas like Cansu & Hazal, which was in Nielsen’s list of Top 10 programmes in Nov 2015.

High audience shares could produce higher ad rates
A company that wants to advertise its products on TV stations would look at the station’s audience share first. Typically, advertisers examine a TV station’s audience share rating for three months before deciding whether to place their ads or not. If so, the contract is reviewed each month, dependent on the TV channel’s ratings. Ratings are calculated by multiplying audience share with the number of audience watching. TV stations that have a high audience share would have the highest bargaining power when it came to increasing their ad rates.

Based on Nielsen data, Media Nusantara’s prime time audience share improved in Nov 2015 while that of other media groups diminished. The company’s prime time audience share grew 18% MoM to 40.9% during the month, supported by RCTI, which saw its prime time audience share (+33% MoM) boosted by its new programme line-up that included hit programmes like Anak Jalanan. Meanwhile, Media Nusantara’s other TV stations, like MNCTV, also saw prime time audience shares improving by 2% MoM during that month. However, Global TV’s prime time audience share dropped by 8% MoM in that period.

Non-prime time audience share was dominated by Surya Citra
The company was successful in improving its non-prime time audience share in Nov 2015 by 4% MoM to 30.2% due to Indosiar’s strong performance, with the station’s non-prime time audience share jumping 8% MoM to 14.1%. This was thanks to TV shows like “Stand Up Comedy Academy”, which now airs in a non-prime time TV slot. In our opinion, Surya Citra has managed to capture the audience share from Trans Corp, which saw its non-prime time audience share falling by 7% MoM to 17.5%.

Potential margins improvement from lower discounts
As audience share and ad revenues have focused towards the top two players (SCTV and RCTI) in the past few years – due to their strong and stable audience share – we have seen that both stations have more bargaining power in terms of rate cards and discounts offered. In 2014, Surya Citra took the first step to change its pricing and discounts offered to Unilever – one of the big advertisers. As a result, the company lost some of the business in 3Q14 to Media Nusantara.

However, due to SCTV’s strong audience share, Surya Citra has been able to get the business back from Unilever in 1Q15. Furthermore, the company has successfully changed the pricing system with Unilever by using spot prices. It previously used cost per rating points (CPRP). Meanwhile, RCTI is to broadcast the UEFA Euro 2016 (Euro 2016) football tournament, which could improve its FY16 topline. Historically, football competition events normally result in ad revenue improving significantly.

In 2016, we believe both TV stations would be able to maintain their audience share performance and improve their margins from higher rate cards and lower discounts due to their premium programmes when compared to the other TV stations.

Rate card has room to grow as Indonesia’s TV ad rates are the lowest in the region. Surya Citra’s SCTV and Media Nusantara’s RCTI channels charge a prime time rate of IDR60m (USD5,400) per 30 seconds. In Thailand and the Philippines, in comparison, companies charge around USD10,800 and USD17,135 per 30 seconds respectively. For non-prime time hours, Surya Citra and Media Nusantara charge rates that are 30-40% lower than prime time rates. As we deem the TV ad rates in the country are low in comparison, domestic players have room to increase them.

Broadcasters To Further Tighten Costs In FY16
The two largest local media groups are to focus on tightening costs. In 2015, the two largest media groups in Indonesia, Surya Citra and Media Nusantara, which account for more than 60% of the national audience share, reduced their costs by:
i. Reducing exposure to USD-denominated content, especially the English Premier League and European Champions League football broadcasts;
ii. Using more in-house productions and local content (eg soap operas, music competitions, stand-up comedy, etc).

In Jun 2015, Surya Citra discontinued its UEFA Champions League broadcasts, which led to an improvement in the company’s GPM YoY to 61.8% in 3Q15 from 57.9% in 3Q14. Surya Citra is also not extending the contract for English Premier League broadcasts, which are slated to end in June. Thus, we expect an improvement in the company’s margins. Surya Citra is focusing on local drama series, which are still preferred by many Indonesians.

Local content still dominates since Indonesians prefer to watch local content on TV which tends to comprise live recordings, soap operas (sinetrons) and variety shows. Outside of big cities like Jakarta and Surabaya, as well as areas like Bali, many Indonesians still prefer to watch local content. We believe this is largely due to the language barrier and differences in lifestyles.

As such, the demand for imported content (especially from outside Asia) is still limited. Normally, the mid- to upper-class would be the target audience for imported content like Hollywood movies, which are offered via pay-TV channels from companies such as MNC Sky Vision (Indovision) (MSKY IJ, SELL, TP: IDR1,100) and First Media. The FTA segment tends to focus more on airing local content.

Reasonable costs to produce local content
Indonesian preference for local content is an advantage for the media companies since they are able to save on costs due to the cheaper price of local content. Following our channel checks, we found that the cost per drama series is IDR200m-300m (USD20,000) per episode, while the cost for a variety series is IDR25m-30m (USD2,500). This is much cheaper vis-à-vis Hollywood content that could cost an average of USD30,000 per episode. Also, local content is priced in IDR, which means there is no USD exposure.

Nielsen’s research proves local content is preferred
According to Nielsen’s research in 2014, the percentage of viewers and numbers of hours of watching TV in cities outside Java is higher than in the island itself. Furthermore, TV viewing patterns of the day did not differ significantly among consumers in Java and outside the island – it remained high in the prime time hours (6pm-10.20pm). However, the type of events most watched in Java is very different from the ones enjoyed elsewhere.

On the island, people tend to watch more football games like the Under-19 Tournament, which dominated the top programmes (ie, 6 of 10). However, outside Java, only two out of 10 programmes were football matches. Viewers outside of the island prefer to watch local productions like soap operas, talent shows, variety shows, comedies, etc.

Aggressive Expansion From Online Companies Benefits Media Operators
What is the impact of online ads on TV?
According to Mr Italo Gani, the CEO of advertising start-up company Adskom, in the past few years, e-commerce companies have spent huge amounts of their budgets on ads and growing investments in electronic business firms like Tokopedia. In Indonesia, the online companies are in their early stages where they need to get market share hence, they are aggressively advertising their presence in traditional media like TV.

We believe the huge expansion from online companies is likely to benefit TV operators since such companies would have an additional source of income, which could replace the cigarette industry. In our opinion, TV is still the best tool to promote products in Indonesia. Some of the reasons are:
i. TV stations can reach all Indonesians living throughout the archipelago;
ii. The infrastructure for broadband is a setback. It cannot reach remote areas yet.

In the long run, if the online companies have grown bigger in scale, we believe that the online companies would only be able to take market share from newspapers, radio, magazines, etc.

E-commerce is aggressively advertising on TV, which benefits media operators. In order to grab market share and get more established in the domestic market, the e-commerce companies are aggressively advertising in traditional media such as TV. Based on Nielsen data, the online advertisers were consistently in the Top 20 of the biggest spenders in 2015 (Figure 4) on the main channels. Companies like Traveloka have shown significant increases in their ad spend in TV; as at 1H15 the company spent IDR376bn on ads from IDR13bn in 1H14.

In our opinion, in the medium term, online companies could be another source of income for the media companies. In fact, the online companies have helped the growth of the industry in FY15 despite the slowdown from other industries as a result of the slowing down of the domestic economy. In FY16, we also expect high contributions to income from the online companies.

Based on our ground checks on TV advertising, we see that the consumer companies still dominate the ad slots in the two leading TV stations – SCTV and RCTI – by 62% for both during an hour-long show. We did a ground check on ads in TV stations by watching two TV programmes from start to finish. We watched programmes on RCTI and SCTV in order to know their utilisation rates for a 1-hour show. Based on our checks, we noted that RCTI had advertisements for between 20-21 minutes during that hour-long broadcast. By comparison, SCTV ad slots per 1-hour show stood at 14 minutes.

Besides that, we also checked the types of companies that advertised their products on both TV stations. Based on our own checks, 62% of the ads were still controlled by FMCG companies like Unilever, Indofood CBP, Mayora Indah and the like. Furthermore, we also found out that online companies like Traveloka and BliBli.com have shown a significant increase in ad expenses earmarked for ads on the TV stations.