We are making an “overweight” recommendation about the Indonesian media sector, given our expectation of a rebound in advertising expenditures in 2017 in line with a pickup in the growth of gross domestic product (GDP) and supported by attractive valuation levels.

We are adopting a bullish stance over the free-to-air television platform thanks to cyclical advertising and a bearish view about the subscription-based pay-TV segment.

We also like companies with good content libraries, as we believe these will play a crucial role during the transition of distribution platforms to online over the medium-longer term.

Hence, we have “buy” ratings on Surya Citra Media (SCMA) and Media Nusantara Citra (MNCN), a “hold” rating on Link Net (LINK) and a “reduce” call on highly geared Global Mediacom (BMTR) and Visi Media Asia (VIVA).

Indonesia’s advertising industry is a US$2 billion market that is expected to grow at a compound annual rate (CAGR) of 8 percent from 2014 to 2017. It is one of the most underpenetrated advertising markets in the region at a mere 0.2 percent of GDP (versus about 0.5 percent for Asia), according to our estimates.

Indonesia’s gross prime-time TV rate cards are now at about US$5,000 for a 30-second spot, notably lower than $6,000 in Malaysia, $11,000 in Thailand, $16,000 in Philippines and $40,000 in Singapore.

TV is the best medium for advertisers to seek audience eyeballs, accounting for 64 percent of the ad pie (a proportion that has held stable since 2010), followed by print at 19 percent (down from 27 percent in 2010), online at 12 percent (up from 1 percent in 2010), outdoor at 3 percent and radio at 2 percent.

TV’s muted growth in 2015 was fueled by the economic slowdown, as GDP touched a six-year low of 4.67 percent in the second quarter of last year, while the Indonesian rupiah exchange rate against the US dollar hit a 17-year high of Rp 14,800 in the third quarter. It was not derived from online cannibalization, with TV advertising expenses expected to rebound to 8 and 10 percent growth year-on-year this year and next year.

With the national free-to-air TV license recently renewed in October 2016 for another 10 years (2016 to 2026), the existing top four groups should continue to dominate with more than 95 percent of the TV broadcasting market. Hary Tanoesoedibjo’s MNCN is the market leader with a 37.1 percent audience share, followed by Eddy Sariaatmadja’s SCMA with 25.6 percent, Bakrie’s VIVA with 18.6 percent and Chairul Tanjung’s Trans with 15.1 percent.

By 2020, we believe that the content assets of SCMA’s Indonesia Entertainment Group (IEG) and Screenplay could be worth $700 million, while MNCN’s MNC Pictures — assuming it buys Sinemart given the already existing exclusive relationship between Sinemart and MNCN’s RCTI — would be valued at $1 billion. That compares with the currently underappreciated levels of almost zero, boosting existing market capitalization by 30 to 50 percent if they can be unlocked, according to our estimates.

In our view, unlocking content value will be the key catalyst over the medium term. With distribution platforms continuing to evolve over time — from radio to TV and now to online — content should remain the king of core values of media companies, especially in Indonesia where the local language barrier is strong.

The Indonesian media sector trades at what we see as an undemanding price-to-earnings ratio (PER) of 16 times the 2017 earnings estimate, with a visible 16 percent earnings per share (EPS) growth, in our forecasts. This compares favorably with the market’s PER of 17 times for 2017 and 12 percent EPS growth and also the Indonesia consumer staples sector’s PER of 33 times, retail sector’s PER of 22 times in our forecasts, as well as its regional media peers’ PER of 27 times, based on a Bloomberg consensus.

The key risks to our “overweight” thesis would be three things. First, faster-than-expected cannibalization from online advertising. Second, a macro-economic downturn impacting on ad-spending growth from consumer good companies. Third, a weaker rupiah that can affect imported content and the US dollar debt.

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The writer is research analyst at Bahana Securities

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