[Indonesia] Media Media (Overweight) 2021F outlook: Adspend to recover Mirae Asset Sekuritas Indonesia Christine Natasya [email protected] The Ministry of We see a neutral impact from government’s intention to convert analog into digital TV Communication and Private television broadcasters have to comply with the government’s national plan to convert Informatics targets all analog television to digital television, as stipulated in the Omnibus Law or Job Creation Bill provinces to be digital-ready (RUU Ciptakerja). In Indonesia, the use of an analog system requires TV broadcasting to use by mid-2021 328 MHz out of the entire frequency capacity of 700 MHz. A digital dividend refers to the radio spectrum which is released in the process of digital television transition. After the government’s analog switch-off (ASO) plan is accomplished, there will be savings (the so-called digital dividend) of 112 MHz which can be used for the benefit of digital transformation. That migration of TV broadcasting begins with applying digital technology to the television broadcasting system through terrestrial transmission media, which is carried out gradually and ends with the termination of the use of analog technology in the nation-wide scope. MNCN is ready to face the digitalization era as it already has transmission, studio, and other facilities. Thus, the company might not need to incur additional costs. Meanwhile, SCMA needs a small investment as the company has digitized all of its studios, cameras, and libraries and needs to spend another USD10mn for wider coverage of the digital broadcasting. We think that the digitalization era only has a minor impact on existing FTA TV players. Looking ahead, new players will have to request for a license to operate a FTA TV channel. Adspend to recover Low base of 2020; Expect a rebound in the economy in 2021F We expect the adspend growth to recover in 2021F, vs. 2020F, on the back of expectations on economic re-opening, return of sports live programmes on TV, and low base of 2020. Furthermore, the government has set the assumption of economic growth at around 5% for 2021, even though the COVID-19 pandemic will still be around. The Finance Minister, Sri Mulyani Indrawati, assessed that the trend of economic recovery will begin to show up in the fourth quarter of 2020. We predict GDP to reach 4.15% in 2021F. Maintain Overweight stance Maintain sector call at Overweight on Media sector We maintain our Overweight view on Media sector. We believe the rock bottom of ad spend has passed, precisely in 2Q20. MNCN’s FY20F EBITDA may decelerate by 3.3% YoY, but it will grow by 8.8% YoY in 2021F, in our forecast. On the other hand, SCMA’s EBITDA will grow by 10.9% YoY in 2020F due to EBITDA margin expansion this year, given the efficiencies achieved by the company. Nonetheless, we forecast both of SCMA’s and MNCN’s revenue to rise by 8.4% and 10.1% YoY, respectively, in 2021F. Meanwhile, we forecast both SCMA’s and MNCN’s net profit in 2021F to increase by 10% and 27.4% YoY, respectively. We maintain our 2020F-2022F forecasts as we expect that a re-opening of economy on vaccine hopes in 2021 should underpin FMCG consumers’ purchasing power as well as ad spend recovery. Media companies will continue to focus on their digital content by strengthening their presence in the OTT market. Regarding FTA TVs, we think rate card hikes will resume in FY21F as we believe that an economic recovery will be the next key catalyst for the sector. The downside risk is a stringent PSBB, which should lead to further weakening of adspend. Key investment metrics Target price P/E (x) P/B (x) ROE (%) ROA (%) Company Ticker Rating (IDR/share) FY20F FY21F FY20F FY21F FY20F FY21F FY20F FY21F Surya Citra Media SCMA Buy 2,100 18.5 16.8 3.6 3.0 21.8 19.5 16.4 15.3 Media Nusantara Citra MNCN Buy 1,130 5.9 4.7 0.9 0.8 13.7 14.9 9.4 10.9 Source: Mirae Asset Sekuritas Indonesia Research PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. November 17, 2020 Media CONTENTS The Ministry of Communication and Informatics targets all provinces to be digital- ready by mid-2021 3 Transition into digital TV 3 Expecting digital dividend because digital TV needs less spectrum 6 More investment needed but insignificant for media companies’ balance sheets 6 Adspend to recover 7 Low base of 2020; Expect a rebound in the economy in 2021F 7 Everything increasingly going digital 9 MNCN’s AVOD business model: RCTI+ 9 SCMA more skewed towards SVOD business model 12 Recommendation 14 Maintain Overweight on the sector 14 Surya Citra Media 15 Media Nusantara Citra 18 Mirae Asset Sekuritas Indonesia Research 2 November 17, 2020 Media The Ministry of Communication and Informatics targets all provinces to be digital-ready by mid- 2021 Transition into digital TV Reasons behind government’s plan of the analog switch-off (ASO) Private television broadcasters have to comply with the government’s national plan to convert analog television to digital television, as stipulated in the Omnibus Law or Job Creation Bill (RUU Ciptakerja). We believe there are several reasons behind the government’s intention to accelerate the implementation of digital television. First of all, Indonesia is lagging behind regional peers in the digital migration. Malaysia and Singapore, for example, made television fully digital in 2019; meanwhile, Japan and South Korea finished their ASOs in 2011 and 2012, respectively. Switching to digital TV is necessary as the world is moving away from analog to digital broadcasting. Secondly, in terms of quality, digital TV broadcast offers more optimal picture quality. Moreover, there is an added value from the frequency restructuring. Going digital will allow the government to free up frequency spectrum which can be used for higher quality and faster mobile services that ultimately benefit consumers. Last but not least, the government may aim for more effectiveness of broadcasting industry. Despite its more positive value added to Indonesia’s employment in the long run due to usage of frequency, the digitalization of TV industry will eventually lead to equal distribution of content and media broadcast. Figure 1. Section from Job Creation Bill Source: RUU Ciptakerja, Mirae Asset Sekuritas Indonesia Research Mirae Asset Sekuritas Indonesia Research 3 November 17, 2020 Media What is digital TV? The word “digital” refers to the way in which TV channels are broadcasted and received in population homes. A digital television transition, also called the analog switch-off (ASO) or the digital migration, is the process by which older analog television broadcasting technology is converted to and replaced by digital television. That migration of TV broadcasting begins with applying digital technology to the television broadcasting system through terrestrial transmission media, which is carried out gradually and ends with the termination of the use of analog technology in the nation-wide scope. The migration of terrestrial television broadcasting from analog technology to digital technology, as referred to in the Omnibus Law, Article 60 of the first paragraph, and the cessation of TV analog broadcast (analog switch-off) shall be completed no later than 2 (two) years from the commencement of the Act. Members of the Indonesian Private Television Association (Asosiasi Televisi Swasta Indonesia/ATVSI) will have to prepare immediately to have this migration to digital TV (ASO) as it is mandated in the Omnibus Law, which has just been signed by our President. Figure 2. Section from Job Creation Bill Source: RUU Ciptakerja, Mirae Asset Sekuritas Indonesia Research The above section from the Job Creation Bill basically states that: TV broadcasting companies must follow technological development, which includes the broadcasting migration from analog to digital technology. Migration of terrestrial television broadcast from analog technology to digital technology and the analog switch-off shall be completed within two years after the Law takes effect. Additional arrangements for broadcast migration from analog technology to digital technology will be regulated by government regulations. Mirae Asset Sekuritas Indonesia Research 4 November 17, 2020 Media Indonesia to adopt the second generation of terrestrial digital video broadcasting standard Referring to the Minister of Communication and Information’s Regulation No. 05 of 2012, Indonesia will adopt the second generation of terrestrial digital video broadcasting standard (DVB-T2), which is a development of the DVB-T digital standard, which was previously established in 2007. This means that when analog TV channels are switched off 2 years from the signing of RUU Ciptakerja (which is around October 2022), all TV channels will then broadcast in digital only by using the DVB-T2 television standard. DVB-T2 stands for “Digital Video Broadcasting – Second Generation Terrestrial”, which is an extension of the television standard, DVB-T, created for the broadcast transmission of digital terrestrial television. DVB-T2 is adopted as the industry standard in key European and Asian countries. The device offers higher efficiency, robustness, and flexibility, enabling efficient use of valuable terrestrial spectrum for the delivery of audio, video and data services to fixed, portable, and mobile devices. The Indonesian Private Television Association (Asosiasi Televisi Swasta Indonesia/ATVSI) reports that currently only 12 provinces in Indonesia have readily available digital infrastructure, while the remaining 22 provinces do not have a clear concept. Meanwhile, infrastructure development in 22 provinces is estimated to take 1-1.5 years. Figure 3. DVB-T2 Source: Ali Express, Mirae Asset Sekuritas Indonesia Research What consumers have to do Meanwhile, all Indonesian households are encouraged to switch to digital TV to continue watching free-to-air (FTA) TV channels as the analog TV signals will be switched off around the fourth quarter of 2022.