Note: This piece was originally written up as case study for personal reference rather than as a stock recommendation. Please feel free to send me any comments or thoughts on the article via email.

Overview:
Elang Mahkota Teknologi (Emtek) is an investment holding company focused on the technology, media and telecommunications sectors in Southeast Asia. The company’s primary value drivers today are two free-to-air television channels (SCTV and Indosiar), held through its ~60% stake in the listed Surya Citra Media (SCM). These assets produce strong cash flow, generate high returns on capital and have historically had leading audience share positions.

In recent times, however, both channels have lost some ground in terms of audience share. The company is working to address this problem and the recent acquisition of a highly rated content production house (Sinemart) could be the catalyst for a turnaround. From a macro perspective, there are also reasonable tailwinds for investors in the Indonesian television space because advertising spend is expected to grow at mid-single digit rates for the foreseeable future, television still represents the majority of advertising spending in the country and total ad spend as a percentage of GDP in Indonesia is low relative to developed economy benchmarks.

Despite the positive trends outlined above, the media landscape in Indonesia is evolving quickly and traditional channels such as television face increased competition from online and mobile channels. Recognising this, Emtek has in recent years reallocated surplus cash flow from its TV channels toward investments in the internet and digital media space across Southeast Asia. Today, the company has a portfolio of early-stage investments that includes, amongst others, PropertyGuru (a leading regional online real estate portal), iFlix (a regional version of Netflix) and Kudo (an online-to-offline e-commerce platform that was recently an acquisition target for Grab). As a result, Emtek is well positioned to benefit from a number of attractive, long term trends in the Southeast Asian internet and media space.

Emtek is run by a team of owner-operators, all of whom have significant skin in the game. The company is led by Eddy Sariaatmadja, who founded the company in the early 1980s and directly owns an ~18% stake in the listed parent company (but is effectively the controlling shareholder). For folks who are familiar with the region, Pak Eddy is a well known name. He was also one of the key shareholders of London Sumatra before its acquisition by Indofood Agri Resources back in 2007. Since Emtek’s IPO in 2010, which facilitated the exit of a private equity investor, the company’s shares have appreciated some ~10x (and this excludes payouts to investors).

Finally, a short personal note here: many years ago, in one of my first jobs out of college, I actually helped advise on a deal for Emtek. I was only a junior bank analyst at the time but my brief set of interactions with their team was almost like a course in entrepreneurial finance. I left the banking industry soon after that transaction closed to pursue other interests but have continued to follow the company closely since then.

Familiar Playbook:
If Emtek’s evolution as outlined above seems familiar, you are probably thinking of Naspers, the South African media, entertainment and internet group. Here’s a quick recap of their story (for now, let’s conveniently skip over their rather disturbing role in the apartheid). In its early history, Naspers was a publisher of newspapers, books and magazines. Then, in the 1980s, the company founded Mnet, a pay-TV business. It subsequently established DStv, a similar service, in 1995. Over time, the pay-TV business has established itself as a near monopoly across Sub-Saharan Africa while Naspers also remained a major publisher of newspapers and magazines in South Africa.   

In the late 1990s, Naspers was both early and correct in betting on the internet as the next major growth driver for the company. More specifically, the company used the cash flow generated from its maturing TV and media business to support its early stage investments in a number of global technology and e-commerce companies. Then, Naspers hit a home run. In 2001, the company acquired a ~46.5% stake in Tencent for US$34m. The eventual success of Tencent meant at one point the value of that holding was about the same as Naspers’ market cap. Even excluding the Tencent stake, however, Naspers has built a valuable investment portfolio that today includes (amongst others) Mail.ru, Allegro and Flipkart.

Here’s how the investor Steven Romick of FPA Crescent described his fund’s original investment thesis for Naspers back in the third quarter of 2014:

“The market values Naspers’s stake in Tencent at ~$48 billion but the parent company at just ~$45 billion. Going long Naspers and shorting a proportionate number of Tencent shares effectively allows us to create a Naspers “stub” at a negative $3 billion valuation. We feel Naspers is worth substantively more, even after tax-affecting for a disposition of Tencent.”

“The market is paying us to own both Pay TV with positive cash flows and media assets with attractive market positions along with an internally-funded portfolio of emerging market e-commerce investments. When the price is right, even absolute value investors like us can feel like emerging market venture capitalists.”

To be clear, I am not counting on any of Emtek’s current early stage investments turning out like Tencent. However, there are two key takeaways from the commentary above. First, it’s not unreasonable in my view to look at Emtek today as an early innings (but perhaps more regionally focused) Naspers. It’s really a bet on the internet and media space in the Southeast Asia and whether the company is well positioned to capture some of that future value. Second, to the extent one wants to play the emerging markets venture capital game, it’s better to pay as little for it as possible. To me, an ideal scenario would be one where the majority of Emtek’s value is covered by its existing operations with the venture capital investments thrown in as “free” call options. 

Investment Highlights & Valuation:
Emtek has a number of key characteristics that should be favourable for prospective investors with a mid to long-term orientation:

• With a current market cap of US$3.5bn, it is significantly smaller than other publicly listed comparables in the same mould. For example, Kinnevik (~US$8bn), Naspers (~US$70bn) and Softbank (~US$80bn) all trade at multiples of Emtek’s market cap. This is an advantage because it would take relatively less for a home run investment to move the valuation needle for Emtek.
• The company’s platform value gives it a competitive advantage as an early-stage media and internet investor in Indonesia and, to a certain extent, in Southeast Asia. Management understands the region, has permanent capital and, perhaps most importantly, can offer operational value-add to its portfolio companies.
• Both the holding company and its key operating business are not highly leveraged. This characteristic, along with its permanent capital base, allows Emtek to take a long term view as an investor in early-stage, growth businesses.
• Underappreciated ecosystem benefits. For example, through SCM, Emtek owns a growing library of high quality media content. While the upfront cost of creating content is high, the marginal cost of replicating and distributing it through other channels is very low. Today, a lot of that content is formatted for television but Emtek also has access to other valuable distribution channels (e.g. iFlix, Blackberry Messenger in Indonesia). Over time, this should result in even higher returns on capital invested in content creation.
• Reporting and disclosure for its early-stage investment portfolio should improve over time. Currently, there is very little valuation data for investors to work with. Management is also fairly low profile, which I don’t expect will change much. Over time, however, if the early stage investments contribute more to the company’s overall valuation, I foresee better reporting that will allow investors to make sense of the company’s overall transformation and business model.

Below is a snapshot of Emtek’s current trading statistics:

And here is what my valuation build up looks like (the axis units are IDR per share):

The resulting gap to get to the current share price is about IDR 1,794 (~22% of the share price). So, if you are comfortable with the assumptions above, Emtek trades at an adjusted price to book of ~1.3x. That premium to book reflects what the market is willing to pay for the capital allocation skills (or “platform value”) of Emtek’s owner-operator team. It’s not an unreasonable premium, but I don’t know if I am comfortable paying that today. I would personally like to see a slightly longer track record of value realisation with the unlisted portfolio and would also wait for a time when Indonesia is a little more out of favour than it is today. Just for context, Buffett’s Berkshire Hathaway trades at ~1.5x reported book (and book value there is likely understated).

To succeed with an investment like this, one probably needs to be slightly ahead of the curve (in other words, before a home run investment) while at the same time not pay up significantly for it. I don’t know if investors in Naspers or Softbank knew ex-ante that those companies’ respective investments in Tencent or Alibaba would become the home runs they eventually did, but I’m guessing you could have adopted a “wait and see” approach and found an attractive entry point even if it wasn’t right at the beginning. It’s probably the same with Emtek today and it will definitely be an interesting company to follow (along with the companies in its investment portfolio).

On a final note, some investors might prefer to play the Indonesia media theme directly via SCM. My personal view is that while there’s enough that makes SCM an attractive standalone investment, there are likely to be fairly limited opportunities for capital reinvestment in the traditional media space over time. Regardless of who wins in the Indonesian media landscape over the long term, they are probably not going to win it with television.

Anyway, with all that being said, let’s take a quick look at each of Emtek’s divisions.

Media Division (SCM):
Overview:
Emtek’s media business is largely held under SCM, which is also listed on the Indonesian Stock Exchange. As of September 30th, Emtek owns a ~60% stake in SCM. The current market cap of SCM is ~US$3.35bn, so Emtek’s stake is worth ~US$2bn (which is ~58% of Emtek’s total market cap).

SCM has a number of operating subsidiaries but the “crown jewel” assets are SCTV and Indosiar, both leading free-to-air channels that broadcast nationwide. Other units include IEG and Screenplay, which engage in the development, production and distribution of content and PT Surya Trioptima Multikreasi, which is focused on the music recording sector. At the end of 2016, IEG also acquired an ~80% stake in content production house Sinemart (more on that later).

SCTV and Indosiar are each broadcasted via 30+ transmission stations, covering a total population of ~180m people across Indonesia. As of the third quarter of 2016, the two channels had a combined all time audience share of ~25.7%, down from ~29.1% as at the end of 2015 (see table below). SCTV’s content and programming, in particular, has struggled to connect with its audience in recent years. Furthermore, the majority of this lost audience share went to the dominant channel RCTI, which is owned by SCM’s primary competitor MNC.

Content:
Currently, programming for SCTV and Indosiar is a mix of the company’s own content as well as third party content. SCM already produces their own content across a range of categories including talent shows, reality shows, games, news and special programs. However, SCTV still sources its prime time local dramas (an important driver of audience share) from other content production houses. Partly in order to address its recent decline in audience share, SCM acquired an ~80% stake in leading content production house Sinemart at the end of 2016. Sinemart is the prime time content provider of leading channel RCTI and the producer of the hit local drama “Anak Jalanan.”

Long term, the investment should prove to be valuable for SCM. Sinemart can produce much needed high quality content in the local drama category that could serve as a catalyst to improve audience share numbers. A further advantage of owned content is that, once created, it can be distributed and licensed across various other platforms and channels. As a result, the returns on capital are potentially very high. It is still early days following the acquisition, but there are already some positive signs for SCM’s television channels. For example, four of the new local prime time dramas premiered on SCTV towards the end of February have already recorded audience share increases based on the first few weeks of data. The company’s first quarter results should give a better indication of how both channels are doing.

Industry Tailwinds:
The commercial TV business in Indonesia is attractive for a number of reasons. First, Indonesians watch a lot of television. According to a slightly dated report by Roy Morgan Research, average television consumption was 29.5 hours per week in 2014, which was nearly 80% of then total weekly media consumption. That is a significantly higher percentage than other Asian countries, although India and Vietnam were close. Over time, the share of TV time as a percentage of total media consumption is almost certain to come down in Indonesia as a result of higher penetration rates across other channels (e.g. online, mobile) but TV is not going away anytime soon.

Here’s another interesting data point. A recent study by Millward Brown found that smartphone owners in Indonesia (~30% of the population) now do the majority (>50%) of their video viewing through internet-enabled digital devices such as a mobile phone, tablet or laptop. However, television still remains the most popular single channel for video viewing amongst certain segments, especially slightly older demographics (e.g. 35-45 year olds).

Second, television still accounts for the majority of non-digital ad spending in Indonesia. According to data from Nielsen, total spending for 2015 (based on the gross card rate) was approximately US$8.77bn. Television accounted for the majority of this spending, taking a 72% share of the total. Again, more ad spending is likely to go online and digital over time, but TV ad spend is still a growing channel. SCM’s management expects free-to-air advertising spend to grow at a compounded annual growth rate of 6.5% from 2015 to 2020.

Finally, ad spending as a percentage of GDP across emerging market economies is still pretty low relative to developed country benchmarks. Based on what I have read, ad spend is about 1% of GDP in western economies such as the US and UK whereas it’s significantly lower in countries such as India and Indonesia. That gap is likely to narrow over time.

Financial Highlights:
Below is a snapshot of SCM’s operating results (2016 numbers are based on my estimates and I’ve just used a single exchange rate to keep it simple):

As you can see, top line growth has slowed in recent years but ~5% annual revenue growth for the next 3-5 years should be achievable given a payoff from management’s recent turnaround efforts and overall tailwinds for the commercial television space in Indonesia. Even in a moderate growth environment, however, SCM will continue to produce significant amounts of free cash flow – roughly about 25 cents per dollar of revenue based on my calculations. Over time, capex might increase given that more content is produced in-house (note the uptick in 2015). However, if the company gets it content licensing and distribution strategy right, incremental revenues from other channels should go straight to the bottom line (which is positive for cash flow).

Online Division:
In 2012, aware of how the media landscape was evolving, Emtek set up KMK Online to focus on new digital and online platforms. KMK’s activities serve two purposes. First, it allows Emtek to reallocate surplus free cash flow from its traditional media business towards new and attractive opportunities in the Southeast Asian media space. Second, it allows the company to create an ecosystem that leverages their expertise in content creation, deep understanding of the media customer and know-how of scaling a business. This gives Emtek a significant advantage over other regional investment firms in terms of both reputation and access to deal flow. 

Current areas of focus for KMK include online media, e-commerce, online-to-offline platforms and classified & directory services. The company also has a team of in-house engineers and developers that work with portfolio companies. For reference, below is a sub-set of their current investment portfolio (I don’t think the stake in Plan B is actually held through KMK but I have just included below it for ease of reference):

Based on the data in the table above, just this sub-set of investments is worth ~US$280m+. Apart from the listed Plan B Media, however, I am always sceptical of the early-stage valuations thrown around by both the media and venture capital firms. It is not yet clear which of these companies have sustainable business models or how they will fare in the face of growing competition from global players that are now entering the region. I do not know who the eventual winners will be and, as an investor, I do not really want to pay up for future value that may or may not materialise. The purpose of the above data, therefore, is simply to highlight that there is clearly a large and addressable opportunity to go after in the online & digital space in Southeast Asia and that Emtek is (at very least) reasonably well positioned to capture some of that value.

Solutions Division:
Emtek’s solutions business provides a variety of infrastructure and services to clients across the IT, telecom and financial services sectors. The segment is growing and profitable, but contribution to the overall group is relatively small and it doesn’t move the needle much from a valuation perspective.

Below is a snapshot of the five year summary financials:

I have conservatively valued the solutions business at ~5x earnings, so based on expected net income of ~US$4m in 2016, that’s an incremental ~US$20m (at least) in equity value.

Other:
This segment is a hodge-podge of investments and operating subsidiaries. It includes a pay-TV business (Nexmedia), an e-commerce platform (O Shop), various property management services and a healthcare business (EMC). The latter was set up in 2013 with the support of Standard Chartered Private Equity, who agreed to invest up to US$50m in the venture. EMC aims to improve access to healthcare services across Indonesia by building a chain of hospitals. Their current portfolio consists of two hospitals with a combined capacity of 420 beds.

To be conservative, I have ascribed zero equity value to this segment.

Risks:
1) Lack of liquidity – this arguably should be, and is certainly managed like, a private company.
2) Deterioration of the core business (higher content costs, weaker advertising spend, cord cutting). 
3) Management gets the capital allocation wrong (e.g. recent bet on BBM).
4) Too early to evaluate the capabilities of the next generation of family involved in the business.