MNC Investor Newsletter, Volume 1, 2010
2010 - Jakarta, 21 Mei 2010

Introduction

Media Nusantara Citra’s (MNC) fundamentals have firmed up considerably during the first four months of 2010. The company is benefiting from improved operating leverage, driven by a number of factors, including:

• High levels of macro economic growth and advertising industry growth


• Improved performance and better optimization at TV stations TPI and Global TV


• Continued strength of RCTI, the television market leader


• Robust performance of print and digital media assets


• Cost savings and synergies across the MNC business

Macro Fundamentals Are Strong

Indonesia has a stable, attractive economic profile. It remains an outperformer in Southeast Asia and ranks only behind China, India as a leading consumer and media proxy in Asia. Fourth quarter GDP growth reached 5.4% year-on-year in 2009 and real GDP growth is expected at ~6% CAGR over the next five years (see Exhibit 1)

Consumption remains robust and contributes more than 60% to national GDP.  Key advertising categories – corporate, IT, food & beverages, cosmetics, auto – remain strong. Newer categories – pharmaceuticals, property, travel and apparel – are also healthy.

Exhibit 1: Real GDP Growth, Selected Asian Markets

 Source: CEIC, Bloomberg

The media industry has huge potential

According to Zenith Optimedia, the Indonesian advertising market will grow by 9% in 2009 and by 14% in both 2011 and 2012. Over 2009–14, the advertising market is expected to grow at an average annual rate of 11.4%, higher than any other Asian market except India, according to Media Partners Asia (MPA).  Broadly, the media industry has cemented its position as a leading proxy for a consumption-driven economy. The prospects for future media industry growth are good, anchored to a resilient economy, a strong advertising market and growing consumption of both traditional media and digital media. Indonesian media industry revenues grew by 9% in net terms during 2009 to reach approximately US$2.1 billion (see Exhibit 2). This is still equivalent to <0.6% of nominal GDP, suggesting significant room for future growth. MPA forecasts indicate that media industry turnover will climb at an 11.4% CAGR over the next five years, to reach more than US$3.5 billion in net advertising and subscription revenues.

Exhibit 2: Indonesia Media & Entertainment Revenues (US$ mil.)

Source: MPA, Zenith Optimedia, PwC

The TV industry will remain a key driver of growth, with >50% share of media industry revenue by 2014.  Television viewership will continue to grow – the consumer home, especially the mass market, is geared towards FTA TV in particular, as broadband and digital penetration remains low.  The key driver of TV industry sales will remain free-to-air terrestrial advertising, though pay-TV subscription sales will also grow in importance, as pay-TV market penetration grows from a low base.  MNC and parent Global Mediacom have the best industry leverage across both FTA and pay segments.  In FY 2009, MNC has a 35% share of both the net TV ad pie and of the TV audience. Mediacom has a 51% stake in MNC Sky Vision, which has 78% pay-TV market share.

Total net advertising volume will reach ~USD 3.5 billion by 2009, lower than China, India and Korea but far greater than other individual ASEAN markets, and also overtaking Taiwan.  There is significant scope for growth as Indonesia’s economy expands. Advertising expenditure as a proportion of GDP remains low (0.6%, according to ZenithOptimedia), significantly lower than Malaysia, Singapore, Thailand and the Philippines. FTA TV will continue to control more than 65% of the ad pie, with media buyers and advertisers regarding FTA as the main advertising channel to reach both mass market and premium segments. TV station rate cards are expected to increase by 15–20% pa pre-discounts, according to media buyers, while newspapers are expected to see 10% average increases. So far, Indonesian TV has gravitated towards national media and national advertisers, but the nascent growth of local TV may occur, parallel to the gradual emergence of more local advertising.

MNC fundamentals are improving with significant momentum in 2010

MNC recorded Rp 3.92 trillion or US$ 417 million in consolidated revenues for FYE Dec. 2009, relatively flat year-on-year growth. Revenues from advertising and non advertising were relatively stable as compared to the same period last year. The relatively slower growth in advertising-based revenues, 79% of total company turnover, were primarily due to an extraordinary event - the Euro Cup 2008 and the less than optimal fourth quarter 2009 performance from TPI due to the bankruptcy case. Subscription, licensing and circulation revenues were relatively stable in FY 2009, due to the absence of popular TV viewer participation voting programs such as the Indonesian Idol and KDI, and stringent credit control over newspaper agencies has subsequently reduced circulation revenues.

EBITDA reached US$ 82 million, flat year-on-year though margins remained relatively stable at 20%. The EBITDA were less than optimal due to TPI’s weak performance in fourth quarter 2009 and a new transition in Global TV's strategy of expanding its targeted audience from children to young families and young professionals. The wider targeted segment of Global TV had resulted in higher program acquisition costs over the short-term though revenues and EBITDA will grow rapidly over the medium-term.

Going forward, we are very confident of generating significant earnings momentum in FYE Dec. 2010, boosted by an improved operating performance at all our key assets. Recent consensus estimates from equity analysts and from independent analyst suggest that MNC EBITDA will rebound to a 31-35% level in FYE Dec 2010. During the first four months of 2010, MNC has set new company records with its key performance indicators. Key items of note include:

• Revenues increased by 28% year-on-year to Rp 1,467 trillion


• EBITDA soared by 88% to Rp 455 billion, an impressive 31% margin versus 21% a year ago


• Operating profit grew 109% to Rp 395 billion.

Key Drivers of MNC’s performance

The ratings of MNC’s TV stations remain strong and stable with group audience share growing to 36% as of end-April, 2010. (see Exhibit 3). RCTI remains the market leader. MNC has signed a contract to exclusively secure broadcast rights for the 2010 FIFA World Cup for two of its TV stations, RCTI and Global TV. This will provide big benefit to ratings and advertising revenues during the year. There are also various regional elections that will help drive MNC advertising growth during 2010. MNC also continues to invest prudently to produce its own programs and acquire quality programs from attractive global media libraries owned by Disney and Viacom in particular. RCTI’s self-owned programming portion averages about 70%;

Exhibit 3: First Four Months 2010 Audience Share

Source: AGB Nielsen

Key Drivers of MNC’s performance (cont’d)

Apart from RCTI’s continued market leadership and strength, MNC is also expected to benefit from a big improvement at TPI and Global TV as these two stations capitalize on their expanded target segments.

With respect to TPI, we note that the Supreme Court’s ruling on March 26, 2010 to reaffirm its decision on December 15, 2009 to nullify the decision made by Central Jakarta Commercial Court, has ended any future attempt by Crown Capital Global Limited to file for the same legal proceedings against TPI.

Therefore, the Supreme Court’s ruling has restored the confidence of customers, advertisers, production houses and suppliers to intensify their business activities with TPI. Going forward, we firmly believe that TPI’s business activities will result in a much stronger overall performance.

With respect to the print segment, the new equipment and technology for our print media business will definitely enhance the printing quality and delivery time for our print media assets, particularly Seputar Indonesia. This subsequently should be able to help generating  higher revenues in 2010 and beyond.

We also believe our digital media business will continue to improve and scale up from a small base. The acquisition of Letang Game Ltd at the start of 2010 will further strengthen Linktone's product offering as Letang’s online games have been ranked amongst the top 5 most popular games in China. In addition, the purpose of acquisition of Innoform Media Pte Ltd, on March 17, 2010, whereby MNC together with Linktone has acquired a 75% shareholding, will strengthen the content distribution and content aggregation of the MNC group in Asia.

Comparative Analysis

MNC remains the largest media company in Indonesia by market share and EBITDA as illustrated by Exhibit 4. Because if much improved operating leverage and better prospects for EBITDA growth in 2010, MNC’s share price has also appreciated considerably, rising by as much as 60% in Q1 (see Exhibit 5). Trading at an average 6.5 times forward EBITDA however, MNC is still undervalued.  A CLSA report in February, 2010 says that MNC stock is cheap and that “there is a limited downside from the current level… a recovery in ad spend, improved investor sentiment and a turnaround in some of MNC’s loss making units should provide upside.” Furthermore, by the end of 2010, MNC is expected to be generating significant levels of profit, making it one of the leading broadcasters in Asia Pacific (see Exhibit 7).

Exhibit 4: Leading Media Groups in Indonesia

Source: MPA Analysis

Exhibit 5: Leading Asia Media Performers, Q1 2010 (By Share Price Increase)

Source: Bloomberg

 Exhibit 6: Comparative Asia Media Valuations

Source: Bloomberg

 Exhibit 7: Comparative Asia Media EBITDA Generation

Source: MPA Analysis

Appendix

Top RCTI Programs
                

* 1 Jan - 31 Mar 2010
Source: AGB Nielsen Media Research

Top Global TV Programs

* 1 Jan - 31 Mar 2010
Source: AGB Nielsen Media Research

ADDITIONAL INFORMATION:

About PT Media Nusantara Citra Tbk

MNC is the largest and the only integrated media company in Indonesia with operations encompassing content production, content distribution, nationwide free-to-air television networks, 24-hour program TV channels, newspaper, tabloid, magazine, radio networks, online media, Value Added Services, advertising agency and talent management. MNC has the largest content library stands at more than 93,350 hours and keep growing by more than 10,000 hours per year.