Media Prime time to overweight Overweight (Initiate) We initiate our coverage on media companies MNC Nusantara Citra (MNCN/ Buy/ TP IDR2,700) and Surya Citra Media (SCMA/ Buy/ TP IDR3,870). We like SCMA on the back Initiation of its: 1) low gearing and high free cash flow (FCF), 2) robust dividend payout ratio, and July 29, 2016 3) stellar ROE compared to peer. For MNCN, we favor the company due to 1) its strong audience share, 2) top notch power ratio, 3) the fact that it is the only TV operator that has integrated studio facilities located in one area in Kebon Jeruk, (MNC studio complex). PT Daewoo Securities Indonesia We also believe MNCN will benefit from the strengthening of the rupiah given its USD debt exposures. Trade Christine Natasya Indonesian media: appealing outlook ahead +62-21-515-1140 [email protected] We believe the media industry is well positioned to benefit from the continued expansion of private consumption. Given the large population base (4th populous country in the world) combined with stable income growth of consumers, we believe fast moving consumer goods (FMCG) companies are likely to benefit from this favorable macro backdrop. Furthermore, we expect FMCG companies to gear up their advertisement spending to maximize their position in the market. Even though Indonesia has exhibited high ad spend growth over the past couple of years (16% CAGR during 2011-2016F), we note that the average price for 30-second prime-time spot is relatively inexpensive at only USD5,400/spot compared to peer countries such as Australia, Singapore, Philippines (indicating ample room for growth). Furthermore, existing free-to- air TV operators are likely to benefit from the natural entry barrier given broadcasting license is limited by the regulators. Expecting better revenue in2Q on the back of Ramadhan We project revenue growth for both MNCN and SCTV will jump in 2Q, largely due to the sahur (“pre-dawn meal” which refers to food consumed early in the morning) base effect. As a quick reminder, Ramadhan was held during mid-June to July last year (vs. during the early part of June in 2016). MNCN and SCMA feature popular religious dramas during sahur in Ramadan. We initiate coverage on SCMA with a buy recommendation and a target price of IDR3,870, implying 34.7x 2016F P/E. We think the premium valuation on SCMA is justified, given that SCMA has a strong track record and a solid balance sheet. Our IDR3,870 target price is derived by using a blended calculation of target P/E at 35x and Discounted Cash Flow (DCF) method with 10-year time span. We initiate our coverage on MNCN with a trading buy rating and a target price of IDR2,700, implying 27.5x 2016F P/E. Our target price of IDR2,700 was derived using a blended calculation of target P/E at 28x and Discounted Cash Flow (DCF) method with 10-year time span. Media companies covered in this report TP ROE (%) P/E(x) P/B(x) Company name Ticker Rating (IDR) 2016F 2017F 2016F 2017F 2016F 2017F Media Nusantara Citra MNCN Buy 2,700 14.2 16.6 22.4 17.8 3.1 2.9 Surya Citra Media SCMA Trading Buy 3,870 47.5 47 29.6 25 12.6 10.7 Source: Daewoo Securities Research Analysts who prepared this report are registered as research analysts in Indonesia but not in any other jurisdiction. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. July 29, 2016 Media CONTENTS Investment summary 3 Indonesian media: appealing outlook ahead 3 Buy rating for SCMA (TP IDR3,870) and Trading buy for MNCN (TP IDR2,700) 4 Overview of the media industry 5 Private consumption is the backbone for advertisement demand 5 FMCG companies, especially cigarettes companies dominate the TV ad spend 9 TV companies’ biggest revenue comes from PT.Wira Pamungkas Pariwara 11 Ad supply: Limited for TV, yet huge potential for online advertisement 13 Biggest media TV competitor: Online advertisement 15 Surya Citra Media 18 Company Background 18 PT Indonesia Entertainment Group 20 Management team 21 Famous TV shows/drama currently played on SCTV 23 Famous TV shows/drama that is currently playing on Indosiar 24 SCMA investment in iflix 25 Analyzing the Sports content 26 Investment thesis on SCMA 28 Surya Citra Media (Valuations) 34 Surya Citra Media (Ticker SCMA IJ/ Buy/ TP: IDR3,870) 35 Media Nusantara Citra 39 Company Background 39 MNCN’s local content 40 MNC Pictures 40 Talent management 41 MNC Channels 41 MNC’s FTA stations appeal to different audience segments 47 Famous dramas currently played on RCTI 47 Famous dramas that are currently played on GlobalTV 48 Famous dramas that are currently played on MNC TV 49 MNCN charges more premium advertising cost through its quality contents 50 Investment thesis on MNCN 51 Media Nusantara Citra (Valuations) 54 Media Nusantara Citra (Ticker MNCN IJ/ Trading buy/ TP: IDR2,700) 55 Risks to our call 58 Daewoo Securities Research 2 Daewoo Securities Research July 29, 2016 Media Investment summary Indonesian media: appealing outlook ahead We believe Indonesia’s TV media industry is well poised to benefit from the continued private consumption expansion. Given the large population base (Indonesia is the world’s 4th largest populous country) combined with stable income growth of consumers, we believe fast moving consumer goods (FMCG) companies are likely to benefit from this favorable macro backdrop. Furthermore, we expect FMCG companies to increase their advertisement expenses to maximize their position in the market. Even though Indonesia has already exhibited high ad spend growth over the past couple of years (16% CAGR during 2011-2016F), we note that the average price for 30-second prime-time spot is relatively inexpensive at only USD5,400/spot compared to peer countries such as Australia, Singapore, Philippines (indicating ample room for growth). Furthermore, existing free-to-air TV operators are likely to benefit from the natural entry barrier given broadcasting license is limited by the regulators. Figure 1. Indonesia ad spending has grown by 16% CAGR in 2011-2016F 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: Media Partners Asia, Daewoo Securities Research Figure 2. Average price for 30 seconds prime-time spot USD/spot 90,000 80,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 5,400 0 Australia Singapore Philippines Thailand Vietnam Malaysia Indonesia Source: Media Partners Asia, Daewoo Securities Research Daewoo Securities Research 3 Daewoo Securities Research July 29, 2016 Media Figure 3. Prime time all demography (Free-to-air TV market share) 4% MNC Group 11% 14% SCMA VIVA Trans group 48% Others 23% Source: Nielsen, Daewoo Securities Research Buy rating for SCMA (TP IDR3,870) and Trading buy for MNCN (TP IDR2,700) We like Surya Citra Media (SCMA) due to 1) its ability to maintain strong revenue growth despite lower audience share compared to Media Nusantara Citra (MNCN), 2) better monetization of its audience shares, and 3) high dividend payout ratio and strong cash position, as well as its stellar EBITDA margin compared to peers. MNCN, we favor the company due to 1) its strong audience share, 2) top notch power ratio, 3) the fact that it is the only TV operator that has integrated studio facilities located in one area in Kebon Jeruk, (MNC studio complex). We also believe MNCN will benefit from the strengthening of the rupiah given its USD debt exposures. Risks to our investment call Risks to our call include 1) growing internet penetration which should prompt higher demand for digital advertisement growth and pose threat to the conventional TV ad market, 2) government’s regulation on cigarettes advertisement (as a quick reminder, cigarette companies command a large portion of TV operators’ revenue), as well as 3) macroeconomic factors such as weaker-than- expected Indonesian GDP (Daewoo forecast: 5.1% in 2016F, 5.3% in 2017F), commodity prices, inflation rate, as well as the rupiah value against other countries. Daewoo Securities Research 4 Daewoo Securities Research July 29, 2016 Media Overview of the media industry Private consumption is the backbone for advertisement demand Private consumption is a crucial part of Indonesia’s economy Indonesia’s 1Q16 GDP growth picked up 4.9% YoY. Although 1Q16 GDP growth is below the 2- year average of c. 5.0% YoY growth, at the same time, we note that 1Q16 GDP print was higher than the 4.7% YoY growth in 1Q15. Given private consumption is a key growth driver for the broader economy (accounting for c. 55% of Indonesia’s economic output), we judge private consumption growth to be an important economic indicator for growth. We suspect consumers now have greater purchasing power following the sharp decline in inflation (average CPI: 4.3% YoY in 1Q16 vs. 6.4% YoY in FY15). However, contrary to market expectations, private consumption growth remained sluggish in 1Q16 (4.9% YoY). Despite fatter pockets for consumption, we judge that mid-to-higher income households are hesitant to spend. We attribute this conservative spending to escalating uncertainties related to the macroeconomic environment. Nevertheless, we forecast consumption growth to pick up in 2Q16. Our view largely embeds the Ramadan effect, school holiday and Idul Fitri festive. Furthermore, low inflationary pressures and potential fund flows into Indonesia from the tax amnesty program should add more momentum to private consumption, in our opinion. We retain our view that economic growth is likely to hinge on private consumption. However, we remain positive on the broader economic growth outlook given 1) strong willingness from the government to pace up its spending initiatives, 2) implementation of multiple economic packages to bolster the sagging economy and 3) elimination of bureaucratic hurdles for investments.