With President Joko '€œJokowi'€ Widodo administration fixated on proper licensing (from the aviation to the retail sector), we believe that Indonesian media companies could be at risk as they are not in compliance with the current Broadcasting Law.

Based on our conversation with the Indonesian Broadcasting Commission (KPI), it is possible that the Broadcasting Law could be more stringently applied going forward, adversely impacting both Media Nusantara Citra Tbk (MNCN) and Surya Citra Media Tbk (SCMA) in our media universe.

According to industry experts that we talked to, the spirit of the Indonesian Broadcasting Law is to ensure the independency and neutrality of media companies in spreading information. Additionally, an anti-monopoly sentiment is also part of the essence of the law, particularly given the sensitive and influential nature of the industry.

It is worth noting that most of the Indonesian national free-to-air (FTA) TV stations are owned or controlled by conglomerates with political exposure. Evidently, during the quiet period in the 2014 elections, the KPI had warned various TV stations for continuing to broadcast politically related news to benefit certain presidential candidates.

With broadcasting companies not in compliance with government Regulation No.50/2005 (table 1) on single individual/entity limitation ownership, we see the potential that this issue could be once again raised by the government for consideration of revision as the Independent Coalition for Broadcasting Democratization (KIDP). Currently, individuals or entities controlled by conglomerates with political interests could own more than one TV-broadcasting company and license.

Three of the listed media companies are not in compliance with the current Broadcasting Law. Additionally, MNCN and Visi Media Asia Tbk (VIVA) are two of the three listed media companies'€™ key persons who have political exposure. As such, disciplinary measures by the government on the Broadcasting Law could result in the forced spin-off of the various media companies'€™ subsidiaries as stipulated in government regulation No.50/2005 Article 32.

Following government regulation No.50/2005 Article 32, MNCN is not in compliance by having three TV stations, in which its ownership amounts to nearly 100 percent. Additionally, in Article 33 of the regulation, only single ownership by media type is allowed for each entity while MNCN owns multiple TV, radio and print-media companies. Therefore, a forced break-up on these ownerships would likely have a significant impact on MNCN'€™s revenues, as MNCN owns three TV stations (versus two at SCMA).

As the Jokowi administration places high importance on legality and licenses, the media sector is susceptible to policy risk with regard to the current Broadcasting Law, in our view. It is possible that moves could be made to strengthen Law No.32/2002 (table 2), which was established to prevent and avoid misleading media information, particularly related to politics in view that certain media have the propensity to favour certain political affiliations.

Apart from the aforementioned policy risk, we believe the Indonesian media sector would be hurt by lower ad spending growth from 18 to 20 percent in 2014, to the 12 percent forecast for 2015, as projected by the Indonesian Advertising Association (P3I), attributable to rupiah weakness and the continued uncertain domestic political condition. Hence, we reiterate our underweight stance on the Indonesian media sector.

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The writer is an analyst at the research department, Bahana Securities

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