CJ CGV (079160 KS) Taking on the Vietnamese Market

CJ CGV (079160 KS) Taking on the Vietnamese market

Entertainment Overview of Vietnam business CJ CGV entered the Vietnamese market in 2011 with the acquisition of the country’s Company Update largest multiplex chain, Megastar. In early 2014, the company completed rebranding all of its local theaters to CGV. The Vietnam business recorded a loss in 2H11 right after April 20, 2015 the acquisition, but quickly swung to a profit in 1Q1 2 and has seen steady growth in both admissions and revenue since then. In Vietnam, CJ CGV enjoys a competitive advantage over rivals in terms of theater (Maintain) Buy numbers and locations. The company has been ramping up the number of theater sites, taking advantage of the country’s foreigner-friendly business environment and strong Target Price (12M, W) 80,000 financing capabilities. Given Vietnam’s under-penetrated market (based on number of movie viewings per capita), we see plenty of room for growth, supported by economic Share Price (04/17/15, W) 72,500 expansion and infrastructure development. Furthermore, we believe CJ CGV’s shopping mall-oriented location strategy makes it better positioned to expand market share. Expected Return 10% Why CGV is likely to dominate the Vietnamese market in the long term We recently visited CJ CGV’s thea ter sites in Vietnam and came away with a more OP (15F, Wbn) 87 positive outlook on the country’s market potential as well as the company’s prospects. Consensus OP (15F, Wbn) 82 1) CJ CGV has established a presence in major commercial areas early on thanks to its timely market entry and aggressive expansion. The company has secured 15- to 20-year EPS Growth (15F, %) 106.9 leases for many of its theaters and is planning to do the same for its upcoming sites. Market EPS Growth (15F, %) 37.2 P/E (15F, x) 22.3 2) The company also enjoys a dominant position in film content as the country’s Market P/E (15F, x) 11.1 exclusive distributor for four of the six largest Hollywood studios. We think these KOSPI 2,143.50 arrangements will remain in place until the Vietnamese film market begins to mature.

Market Cap (Wbn) 1,534 3) The company boasts a solid reputation in the country. CJ CGV’s theaters in Vietnam are differentiated by their consistent interior designs, convenient facilities, diverse Shares Outstanding (mn) 21 concession offerings, and specialized theaters. Many shopping mall developers are Free Float (%) 60.9 showing a strong preference for CGV theaters because of the brand’s well-established Foreign Ownership (%) 16.5 image. Beta (12M) 0.19 52-Week Low 43,200 Value of China and Vietnam theater operations to be priced in 52-Week High 72,600 We expect 2015 to be a critical year for CJ CGV, with all eyes focused on the profitability of the China business. If the company fails to break even in China this year, (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M this would bode ill for future profitability given the company’s expansion schedule. Absolute 22.1 50.4 46.8 Conversely, if the business turns profitable, this may signal the beginning of a prolonged Relative 15.6 33.4 36.4 period of China earnings momentum, similar to what domestic cosmetics firms are enjoying today. The Vietnamese market, though smaller, could begin to deliver margin

170 CJ CGV KOSPI expansion once the initial investment phase is over and growth settles in. 150

130 In April, there have been a number of days during which CJ CGV’s admissions in China outpaced its admissions in Korea (due to weak seasonality in the domestic market). We 110 believe investors are starting to reflect the value of overseas operations. In our view, CJ 90 CGV offers a compelling long-term growth story, supported by a combination of steady 70 domestic growth and strong potential overse as. We maintain our Buy rating and target 4.14 8.14 12.14 4.15 price of W80,000.

Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 665 773 865 909 945 990 [Internet/Game/Entertainment] OP (Wbn) 72 68 71 87 99 112

Chang-kwean Kim OP margin (%) 10.8 8.8 8.2 9.6 10.5 11.3 +822-768-4321 NP (Wbn) 73 43 33 69 78 87 [email protected] EPS (W) 3,528 2,062 1,572 3,253 3,678 4,128 ROE (%) 20.4 10.3 7.2 13.7 13.7 13.6 Jeong-yeob Park +822-768-4124 P/E (x) 9.1 21.1 34.3 22.3 19.7 17.6 [email protected] P/B (x) 1.7 2.0 2.4 2.9 2.5 2.2 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

April 20, 2015 CJ CGV

Figure 111.1. Market cap of Vincom (Vietnam(Vietnam’’’’ss leading real estate development groupgroup)))) vs.vs.vs. market cap ofofof Vietnam stockstockstock indexindexindex

(Wtr) (%) 60 Vietnam stock index (L) 14 Vincom (L) Vietnam stock index/Vincom (R) 50 12

10 40 8 30 6 20 4

10 2

0 0 07 08 09 10 11 12 13 14 15

Source: Bloomberg, KDB Daewoo Securities Research

Figure 222.2. Number of theater sitessitessites in VietnamVietnam:: CJ CGV vs. total Vietnamese market

(no. of sites) (%) 100 CJ CGV sites (L) 60 Theater sites in Vietnam (L) Share of CJ CGV (R) 55 80

50 60 45 40 40

20 35

0 30 2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F

Source: Company data, KDB Daewoo Securities Research

Figure 333.3. Estimated per capita annual movie theater attendance bybyby country

(times) 5 Estimated per capita annual theater attendance

Avg. of Malaysia, Philippines, and Thailand 1

0 Vietnam Malaysia Philippines Thailand China India Japan South Korea Singapore

Source: Company data, KDB Daewoo Securities Research

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Figure 444.4. SSShareSharehareharessss ofofof VietnamVietnam’’’’ssss cinema operators in terms of Figure 555.5. Average screens per site number of sites

BHD NCC 2% (screens) 6% 12 Galaxy 9% 10

8 Platinum 10% CJ CGV 43% 6

Lotte 30% 0 CJ CGV Lotte Platinum Galaxy BHD NCC

Notes: Shares of top six cinema operators Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

Figure 666.6. Earnings of major cinema operators in Vietnam

(US$mn) (%) 60 Revenue (L) 14.0 OP margin (R)

50 12.0

10.0 40 8.0 30 6.0 20 4.0

10 2.0

0 0.0 CJ CGV Lotte Platinum Galaxy BHD NCC

Source: Company data, KDB Daewoo Securities Research

Figure 777.7. Timeline of CJ CGV site openings in China Figure 888.8. Earnings of CJ CGV sites in China

(sites) (Wbn) 40 Sites operated by consolidated subsidiaries 70 2012 JV sites 2013 2014

30 50

30 20 Three years after establishment of HongKong CGI Holdings, sites operated by CJ CGV consolidated subsidiaries began operation 10 10

-10 0 Revenue (JV) Revenue Operating profit (JV) Operating profit 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 (consolidated) (consolidated)

Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

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CJ CGV (079160 KS/Buy/TP: W80,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 865865865 909909909 945945945 990990990 Current Assets 189189189 199199199 306306306 415415415 Cost of Sales 424424424 457457457 470470470 493493493 Cash and Cash Equivalents 62 69 170 273 Gross Profit 441441441 452452452 475475475 497497497 AR & Other Receivables 97 99 103 108 SG&A Expenses 369369369 365365365 375375375 385385385 Inventories 3 4 4 4 Operating Profit (Adj) 717171 878787 999999 112112112 Other Current Assets 27 27 29 30 Operating Profit 717171 878787 999999 112112112 NonNonNon-Non ---CurrentCurrent Assets 961961961 934934934 910910910 899899899 NonNonNon-Non ---OperatingOperating Profit ---19 -191919 444 666 111111 Investments in Associates 382 402 418 438 Net Financial Income -15 -12 -7 -3 Property, Plant and Equipment 412 370 333 302 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 23 16 11 9 Pretax Profit 52 91 105 123 Total Assets 1,1501,1501,150 1,1331,1331,133 1,2171,2171,217 1,3131,3131,313 Income Tax 18 22 27 35 Current Liabilities 350350350 267267267 278278278 291291291 Profit from Continuing Operations 33 69 78 87 AP & Other Payables 147 154 160 168 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 102 7 7 7 Net Profit 33 69 78 87 Other Current Liabilities 101 106 111 116 Controlling Interests 33 69 78 87 NonNonNon-Non ---CurrentCurrent Liabilities 327327327 331331331 334334334 338338338 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 255 255 255 255 Total Comprehensive Profit 313131 696969 787878 878787 Other Non-Current Liabilities 72 76 79 83 Controlling Interests 31 69 78 87 Total Liabilities 677677677 598598598 612612612 629629629 Non-Controlling Interests 0 0 0 0 Controlling Interests 473473473 534534534 605605605 685685685 EBITDA 133 137 140 146 Capital Stock 11 11 11 11 FCF (Free Cash Flow) 76 132 127 132 Capital Surplus 89 89 89 89 EBITDA Margin (%) 15.4 15.1 14.8 14.7 Retained Earnings 378 439 510 589 Operating Profit Margin (%) 8.2 9.6 10.5 11.3 NonNonNon-Non ---ControllingControlling Interests 000 000 000 000 Net Profit Margin (%) 3.8 7.6 8.3 8.8 Stockholders' Equity 473473473 534534534 605605605 685685685

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 146 132 127 132 P/E (x) 34.3 22.3 19.7 17.6 Net Profit 33 69 78 87 P/CF (x) 7.4 10.1 10.1 9.7 Non-Cash Income and Expense 121 83 75 71 P/B (x) 2.4 2.9 2.5 2.2 Depreciation 49 42 36 32 EV/EBITDA (x) 10.7 12.5 11.5 10.4 Amortization 13 8 4 3 EPS (W) 1,572 3,253 3,678 4,128 Others 59 33 35 36 CFPS (W) 7,300 7,197 7,201 7,479 Chg in Working Capital 10 13 8 11 BPS (W) 22,344 25,247 28,575 32,353 Chg in AR & Other Receivables -13 -4 -3 -4 DPS (W) 350 350 350 350 Chg in Inventories -1 0 0 0 Payout ratio (%) 22.3 10.8 9.5 8.5 Chg in AP & Other Payables 15 4 3 4 Dividend Yield (%) 0.6 0.5 0.5 0.5 Income Tax Paid ---9 -999 ---22-222222 ---27-272727 ---35-353535 Revenue Growth (%) 11.9 5.1 4.0 4.8 Cash Flows from Inv Activities -152 -3 -2 -3 EBITDA Growth (%) 10.8 3.0 2.2 4.3 Chg in PP&E -69 0 0 0 Operating Profit Growth (%) 4.4 22.5 13.8 13.1 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) -23.8 106.9 13.1 12.2 Chg in Financial Assets 28 -3 -2 -3 Accounts Receivable Turnover (x) 12.5 11.8 11.7 11.7 Others ---111 -111111111 000 000 000 Inventory Turnover (x) 297.0 265.9 264.4 265.4 Cash Flows from Fin Activities 22 -103 -7 -7 Accounts Payable Turnover (x) 6.5 6.2 6.1 6.1 Chg in Financial Liabilities 33 -96 0 0 ROA (%) 3.0 6.0 6.6 6.9 Chg in Equity 0 0 0 0 ROE (%) 7.2 13.7 13.7 13.6 Dividends Paid -7 -7 -7 -7 ROIC (%) 11.6 18.6 24.4 31.1 Others ---4 -444 000 000 000 Liability to Equity Ratio (%) 143.3 112.0 101.2 91.8 Increase (Decrease) in Cash 16 6 102 102 Current Ratio (%) 54.0 74.4 110.1 142.5 Beginning Balance 46 62 69 170 Net Debt to Equity Ratio (%) 60.5 34.5 13.6 -3.0 Ending Balance 626262 696969 170170170 273273273 Interest Coverage Ratio (x) 4.1 5.6 7.5 8.4 Source: Company data, KDB Daewoo Securities Research estimates

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APPENDIX 1

Important Disclosures & Disclaimers 222-2---YearYear Rating and Target Price History

Company (Code) DateDateDate RatingRatingRating Target Price (W) CJ CGV CJ CGV(079160) 02/05/2015 Buy 80,000 100,000 11/14/2014 Buy 59,000 80,000 08/07/2014 Buy 56,000 05/11/2014 Buy 57,000 60,000 08/11/2013 Buy 63,000 40,000 05/12/2013 Buy 70,000 02/26/2013 Buy 48,000 20,000

0 Apr 13 Apr 14 Apr 15

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ─), Target price ( ▬), Not covered ( ■), Buy ( ▲), Trading Buy ( ■), Hold (●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Disclosures Daewoo Securities Co., Ltd.`s analyst attended the IR meeting held by CJ CGV within recent one month. Expenses related to the meeting were covered by CJ CGV

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.

Disclaimers This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.

Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within

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April 20, 2015 CJ CGV

Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

KDB Daewoo Securities International Network

Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 320 Park Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 31st Floor

Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong, China United States Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower 42 Six Battery Road #11-01 7th Floor, Yusen Building 25 Old Broad St. Singapore, 049909 2-3-2 Marunouchi, Chiyoda-ku London EC2N 1HQ Tokyo 100-0005 United Kingdom Japan Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 81-3- 3211-5511

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Chaoyang District, Beijing 100022 Pudong New Area, Shanghai 200120 Dist. 1, Ho Chi Minh City, China China Vietnam Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000 Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Securities (Mongolia) LLC PT. Daewoo Securities Indonesia 2401B, 24th Floor, East Tower, Twin Towers #406, Blue Sky Tower, Peace Avenue 17 Equity Tower Building Lt.50 B-12 Jianguomenwai Avenue, 1 Khoroo, Sukhbaatar District Sudirman Central Business District Jl.

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