The disruptive economy right before your eyes

After exhausted reading the research report and hearing market gossip for a full week, I spent the weekend at home watching my new smart TV.

I am very impressed with the increasingly sophisticated TV technology, but with a relatively cheaper price.

Ten years ago, you have to spend IDR 15 mio just to get a regular LCD TV, while now you can get a LED smart TV with half price.

After quite tired of waiting for my kids watching Pink Fonk, and deaf to hear the song “Baby Shark”, I finally got a chance to try my new TV.

Our choice fell to the “Baby Driver” movie.

We chose the film on the website: www.bioskopkeren.com

Fascinated by the excellent image quality and beauty of Lily James, I was finally surprised by the reality.

That is, actually what is in front of my eyes, the example of disruptive economy that actually happened. 

I realized that since my TV got home, we hardly ever watched regular TV channels.

We as consumers, prefer the ability to choose.

Even our kids prefer the video options available on Youtube rather than Disney channels.

This really made me think about the existence of the pay-free TV industry in Indonesia: will the pay-free TV industry will survive in the future? Does the current stock price reflect existing threats?

The above data is the revenue data of 3 TV companies in Indonesia. Although not entirely complete, the above data reflect the large industrial market share.

In the last 5 years, there seems to be no problem with the growth of this industry. The trend of industrial income is still growing.

However, the potential for future growth is somewhat dubious, because:

1. In the short term, the world’s consumer companies to cut their marketing spending worldwide. The announcement was made solely by major companies such as UNVR, P&G and confirmed by the advertising giant, WPP.
2. Sir Martin Sorrell, WPP’ Chief Executive also said: “The digital disruption is a fundamental one”. A very clear second factor is the long-term trend of changing the way advertisers go digital.

With these short and long-term challenges, it is highly probable that the TV media companies will face many headwinds to grow its revenue in the future. What happens abroad, sooner or later will arrive also to Indonesia.

Currently, the top 3 media companies market share looks like this:

Clearly MNCN market share appears to be falling, while SCMA is stable while MDIA is increasing sharply.

However, in terms of margin, SCMA has decreased a lot, while the other two stagnated or slightly increased:

The margin decrease trend followed a decrease in ROE on SCMA and MNCN.

Of these three companies, it seems clear that SCMA performance looks most dubious.

I am very anxious with SCMA’ ROE decline that has lasted for 5 years in a row.

Usually this sustained decrease signifies a structural problem.

And it seems the market agrees with my view on this:

From the chart above you can see the SCMA’ ROE as a leading indicator of stock price.

And it seems that the downward trend in ROE will continue with less revenue from customers, changes in advertising technology and tight competition.

Which makes me think that judging stock prices based on the level of SCMA valuation in the past is a mistake.

Below is a valuation table based on price to book value:

Stock	2012	2013	2014	2015	2016	Avg.
SCMA IJ	12.40	9.60	17.68	13.15	13.71	13.31
MNCN IJ	4.73	5.64	5.09	3.46	3.06	4.40
MDIA IJ			10.14	9.19	6.74	8.69

Although SCMA is currently trading at 8x book value (lower than historical average), but from P/E side, SCMA is trading at 19x E17, a level that is above the market average. And do not forget the SCMA’ ROE is in a downward trend, which means that SCMA is indeed worth trading at a lower book value.

With the industry map already changing, it is rather difficult to guess the proper level of valuation for SCMA. Comparison with similar companies abroad can be done, but I am not sure about the similarity of SCMA business model with companies abroad.

With a rather opaque outlook, coupled with SCMA problems that still continue to occur, it seems wiser to avoid this stock for a while.

A market that is too focused on the short term, may be enthusiastic about seeing improved audience share data. But I believe it is an approach that listens to short-term noises only. By doing so, market focus on the data volatility rather than firm’ fundamentals in the long run.

I believe in what I saw in the weekend, that what appears before my eyes, is a form of disruptive economy that is underway in Indonesia. This process happens faster than disruptive economy in other sectors.
Underweight SCMA.

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.