Internet/Entertainment Golden age for platforms and intellectual property
Internet: Going mobile in 2016 Overweight (Maintain) In 2015, major domestic internet stocks were sluggish but global peers rallied: The 2016 Outlook Report rallies of global internet stocks were driven mainly by growth in mobile ad revenue (Facebook) and continuous earnings surprises (Google, Amazon). November 25, 2015 The domestic mobile ad market has been expanding: We expect NAVER to deliver earnings improvement on the back of its stronger market positions. Daewoo Securities CCCo.,Co., Ltd. On-demand services extending to online-to-offline (O2O) business: In particular, we [Internet/Game/Entertainment] note Kakao’s innovative O2O business model.
Chang-kwean Kim +822-768-4321 Intellectual property (IP) was a buzzword of the global game market in 2015: The [email protected] market has been led by Nintendo ( Super Mario IP) and Electronic Arts (sports IP related to FIFA and the NBA). Jeong-yeob Park +822-768-4124 Top picks: [email protected] 1) NAVER (035420 KS, TP: W820,000): A winner in the mobile ad/e-commerce markets
2) Kakao (035720 KQ, TP: W170,000): A pioneer in O2O with further growth potential 3) NCSOFT (036570 KS, TP: W270,000): Benefiting from aging Lineage users; Note the value of multiple domestic IPs
Entertainment: Industry to prevail in Asia over the next decade Entertainment market has expanded alongside income and growing economy : Key areas have shifted over time: Broadcasting ‰ movies ‰ concerts ‰ paid content
Growth trends vary by country, providing related companies with opportunities: US, Europe, Korea: Concerts ‰ paid content China: Movies ‰ concerts Southeast Asia (Vietnam, Indonesia, etc.): Broadcasting ‰ movies
Top picks: 1) CJ CGV (079160 KS, TP: W150,000): Expanding into Indonesia and Vietnam; Building theaters around the world 2) SM Entertainment (041510 KQ, TP: W59,000): Full-swing expansion into China
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.
November 25, 2015 Internet/Entertainment
C O N T E N T S
I. 2015 review 3 Domestic internet stocks sluggish, in contrast to rallying global peers
II. 2016 outlook 5 1. Internet sector 5 2. Entertainment sector 18
III. Valuation and investment strategy 23 1. LINE 23 2. Kakao 25 3. Global peer valuation 27
IV. Top picks NAVER (035420 KS) 30 Kakao (035720 KQ) 32 NCSOFT (036570 KS) 34 CJ CGV (079160 KS) 36 SM Entertainment (041510 KQ) 38 YG Entertainment (122870 KQ) 40
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November 25, 2015 Internet/Entertainment
I. 2015 review
Domestic internet stocks sluggish, in contrast to rallying global peers
In the US, four internet stocks—i.e., Apple, Amazon, Facebook, and Google—account for approximately 40% of the Nasdaq 100 Index. On October 23 rd , Facebook’s market cap reached W327tr, with share price exceeding the US$100 mark for the first time in the company’s history. Since falling to US$17 in September 2012, Facebook shares have risen more than five-fold to US$107. In 2015, its market cap has expanded more than 50% compared to its lowest point this year. This stock rally seems attributable to the robust growth of mobile ad revenue
Since February 2012, Facebook has been aggressive in its mobile ad strategy (which includes ads on users’ “timeline” space). While mobile ad revenue accounted for just 3.6% of overall ad revenue in 1Q12, the figure soared to 78% in 3Q15. At the same time, the company’s PC ad revenue has remained solid.
While Twitter has struggled with slow growth, Amazon and Google shares hit historic highs on the back of 3Q earnings surprises. Amazon’s market cap surpassed that of US-based retail giant Walmart in September 2015.
In contrast to global internet stocks, domestic internet/game stocks (e.g., NAVER, Kakao, NCSOFT, Com2uS, and Gamevil) were sluggish this year, largely due to tepid margins.
For domestic entertainment companies, share performances this year were largely determined by progress in overseas markets. In 1H15, Chinese box-office sales surged, amounting to 66% of the US market. In three years, we expect China to become the world’s largest movie market.
CJ CGV was the only entertainment stock to soar in 2015, having risen 153% since early this year on the back of the growing Chinese movie market. As of November this year, the company has increased its theater sites in China to 56 from 38 at end-2014. The Chinese subsidiary suffered an operating loss of W1.1bn in 1Q, but swung to operating profits of W1.5bn in 2Q and W2.3bn in 3Q.
Figure 111.1. Facebook sharesharess have risen in tandem with growth of mobile ad revenuerevenue
(US$bn) Mobile ad revenue share in 3Q15: (US$, %) 5 Facebook revenue (L) 78% for FB vs. 40% for NAVER 120 Facebook mobile ad revenue (L) 100 4 Facebook share price (R) Share of mobile ad revenue in Facebook revenue (R) Share of mobile ad revenue in NAVER revenue (R) 80 3 NAVER's mobile ad revenue in 1Q13: 60 19.8% share of revenue 2 FB's mobile ad revenuein 1Q12: 3.6% share of revenue 40
1 20
0 0 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 Source: Company data, Thomson Reuters, KDB Daewoo Securities Research
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Figure 333.3. Asian iiinternetinternet companiescompanies’’’’ relative share Figure 222.2. US iiinternetinternet companiescompanies’’’’ relative share performances performances
(-1Y=100p) (-1Y=100p) Tencent Alibaba Baidu 220 Alphabet Amazon 150 Yahoo JPN Rakuten NAVER Ebay Facebook Kakao Twitter LinkedIn 180 Groupon 125
140 100 100
75 60
20 50 11/14 1/15 3/15 5/15 7/15 9/15 11/15 11/14 1/15 3/15 5/15 7/15 9/15 11/15
Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 444.4. PC/console game developerdeveloperssss’’’’ relative share Figure 555.5. MMMobileMobile game developerdeveloperssss’’’’ relative share performances performances
(-1Y=100p) (-1Y=100p) Gamevil Com2uS 200 NCSOFT 200 Wemade Zynga Activision Blizzard DeNA GungHo Online Netease EA Nintendo Namco Bandai 150 150 Tencent
100 100
50 50 11/14 1/15 3/15 5/15 7/15 9/15 11/15 11/14 1/15 3/15 5/15 7/15 9/15 11/15
Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 666.6. Chinese film industryindustry----relaterelaterelatedd companies’ relative Figure 777.7. GGGlobalGlobal concertconcert----relatedrelated companiescompanies’’’’ relative share share performances performances
(1/1/2015=100p) (1/1/2013=100p) 800 CJ CGV 300 SM Ent. Wanda Cinema Line YG Ent. Huayi Brothers Live Nation Ent. MSG Networks 600 Zhejiang Huace Shanghai Media 200
400
100 200
0 0 1/15 3/15 5/15 7/15 9/15 11/15 1/13 7/13 1/14 7/14 1/15 7/15 Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research
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II. 2016 outlook
1. Internet sector
In 2016, we expect to see a more detailed picture of mobile monetization emerge in domestic and overseas markets. The monetization model is evolving from simply exposing mobile users to ads/e-commerce to targeting users based on immediate location, personal data, etc.
As of 3Q15, NAVER’s mobile ad revenue was 67% of PC ad revenue, compared to 350% for Facebook. However, NAVER’s revenue from mobile ads and e-commerce is growing sharply. In 3Q, the company’s mobile display ad revenue jumped 100% YoY.
We expect on-demand services to be the key word of the internet industry in 2016. Such services, for which consumer demand is a key driver, will continue to extend to the O2O area, enabling consumers to use mobile devices to obtain various services related to everyday life (e.g., delivery, transport, household chores, laundry, and car washing).
On-demand services should be most easily applied to the e-commerce segment. Whereas mobile commerce is just an extension of online commerce into mobile channels, on-demand services are likely to incorporate more diverse aspects; for example, applying on-demand services to e- commerce will give customers flexibility in terms of types of services, the times and places services can be accessed, the ability to see order status information, and payment options.
Figure 888.8. Mobile transformation of internet business model
Source: KDB Daewoo Securities Research
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(1) NAVER to enjoy accelerating mobile momentum
Since early 2015, NAVER’s mobile revenue as a percentage of overall revenue has shown sharp growth, with mobile commerce revenue showing the strongest growth. In 3Q, we estimate the company’s mobile commerce revenue jumped 58.0% YoY to W37.2bn, accounting for 46.1% of overall e-commerce revenue (up 33.5%p from the figure in 1Q13, 12.6%). In just two years (3Q15 vs. 3Q13), mobile commerce revenue has leaped 259%.
NAVER’s e-commerce business contributes directly to profits, given its fee-based model. For online shopping malls housed within or sharing their database with NAVER, NAVER collects a certain portion of sales revenues as a commission (e-commerce revenue for NAVER).
We believe NAVER’s mobile ad revenue growth has just begun. In 3Q, mobile revenues accounted for 36% of overall search ad revenue, up 8%p from a year ago and up 16%p from two years ago. Out of display ad revenue, mobile revenue took up 23.0% in 3Q, up 10%p YoY. In 3Q, mobile search ad revenue jumped 44.3% YoY to W154bn, while display ad revenue leaped 95.4% YoY.
NAVER’s mobile-specific ad products expose users to information such as advertisers’ phone numbers, locations (on a map), and product prices. Since these ads lead to direct purchases, they yield higher ROI than PC ad products.
As shown in
Table 111.1. NAVERNAVER’’’’ss quarterly ee----commercecommerce revenue scenarios ((estimatedestimated based on 3Q153Q15)))) (Wmn) CCCommissionCommission 1.00%1.00%1.00% 1.25%1.25%1.25% 1.50%1.50%1.50% 1.75%1.75%1.75% 2.00%2.00%2.00% (assumption ))) NAVERNAVER’’’’ss shareshareshare ofofof eee-e---commercecommerce
market (assumption) 20%20%20% 26,906 33,633 40,359 47,086 53,813 25%25%25% 33,633 42,041 50,449 58,858 67,266 30%30%30% 40,359 50,449 60,539 70,629 80,719 35%35%35% 47,086 58,858 70,629 82,401 94,172 40%40%40% 53,813 67,266 80,719 94,172 107,625 Source: KDB Daewoo Securities Research
Figure 999.9. Quarterly eee-e---commercecommerce tttradingtrading volume Figure 101010.10 . Monthly ee----commercecommerce trading volume
(Wtr) (Wtr) 14 Mobile internet 5 Mobile internet PC internet PC internet 12 4 10
3 8
6 2
4 1 2
0 0 1Q13 3Q13 1Q14 3Q14 1Q15 1/13 7/13 1/14 7/14 1/15 7/15
Source: Statistics Korea, KDB Daewoo Securities Research Source: Statistics Korea, KDB Daewoo Securities Research
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Table 222.2. Quarterly eee-e---commercecommerce trading volume and NAVERNAVER’s’s’s’s eee-e---commercecommerce revenue estimatestimateseseses (Wbn, %) PC internet Mobile internet NAVER eee-e---commercecommerce NAVER eee-e---commercecommerce EEE-E---commercecommerce PC internet share Mobile share commerce commerce GMVGMVGMV (estimates) revenue (estimates ))) 1Q13 8,976 7,848 1,127 87.4 12.6 2,693 40 2Q13 9,255 7,907 1,348 85.4 14.6 2,777 42 3Q13 9,662 7,933 1,729 82.1 17.9 2,899 43 4Q13 10,605 8,250 2,355 77.8 22.2 3,182 48 1Q14 10,482 7,659 2,822 73.1 26.9 3,145 47 2Q14 10,593 7,385 3,208 69.7 30.3 3,178 48 3Q14 11,482 7,553 3,930 65.8 34.2 3,445 52 4Q14 12,746 7,836 4,910 61.5 38.5 3,824 57 1Q15 12,445 7,351 5,094 59.1 40.9 3,733 56 2Q15 12,886 7,173 5,713 55.7 44.3 3,866 58 3Q15 13,453 7,245 6,208 53.9 46.1 4,036 61 Source: Statistics Korea, KDB Daewoo Securities Research
Table 333.3. Monthly eee-e---commercecommerce trading volume (Wtr, %) PC internet Mobile internet EEE-E---commercecommerce PC internet share Mobile share commerce commerce Jan. 2013 3.2 2.8 0.4 88.3 11.7 Feb. 2.8 2.4 0.3 87.4 12.6 Mar. 3.0 2.6 0.4 86.6 13.4 Apr. 3.0 2.6 0.4 86.5 13.5 May 3.2 2.7 0.5 85.7 14.3 Jun. 3.1 2.6 0.5 84.1 15.9 Jul. 3.4 2.8 0.5 84.0 16.0 Aug. 3.2 2.6 0.6 81.6 18.4 Sep. 3.1 2.5 0.6 80.5 19.5 Oct. 3.4 2.7 0.7 80.1 19.9 Nov. 3.5 2.7 0.8 77.8 22.2 Dec. 3.7 2.8 0.9 75.7 24.3 Jan. 2014 3.5 2.6 0.9 74.3 25.7 Feb. 3.4 2.5 0.9 73.7 26.3 Mar. 3.6 2.6 1.0 71.3 28.7 Apr. 3.5 2.5 1.0 71.0 29.0 May 3.6 2.5 1.1 69.6 30.4 Jun. 3.5 2.4 1.1 68.6 31.4 Jul. 3.9 2.6 1.3 67.0 33.0 Aug. 3.9 2.6 1.3 65.9 34.1 Sep. 3.7 2.3 1.3 64.3 35.7 Oct. 4.0 2.5 1.4 63.7 36.3 Nov. 4.2 2.6 1.6 61.4 38.6 Dec. 4.6 2.8 1.9 59.6 40.4 Jan. 2015 4.3 2.5 1.8 59.1 40.9 Feb. 3.8 2.3 1.6 59.5 40.5 Mar. 4.3 2.5 1.8 58.7 41.3 Apr. 4.3 2.4 1.8 57.0 43.0 May 4.2 2.3 1.9 55.1 44.9 Jun. 4.4 2.4 2.0 54.9 45.1 Jul. 4.7 2.6 2.1 54.9 45.1 Aug. 4.4 2.4 2.0 53.8 46.2 Sep. 4.3 2.3 2.0 52.8 47.2 Source: Statistics Korea, KDB Daewoo Securities Research
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Figure 111111.11 . NAVERNAVER’’’’ssss ad revenue trends
(Wbn) Display ads (L) (%, YoY) 2,500 Search ads (L) 15 Ad revenue growth (R)
2,000 12
1,500 9
1,000 6
500 3
0 0 2012 2013 2014 2015F 2016F
Source: Company data, KDB Daewoo Securities Research
Figure 121212.12 . NAVERNAVER’’’’ssss mobile ad revenue Figure 131313.13 . NAVERNAVER’’’’ssss PC ad revenue
(Wbn) (Wbn) 300 Mobile display ads 500 PC display ads Mobile search ads PC search ads
400
200 300
200 100
100
0 0 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16F 3Q16F 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16F
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Figure 141414.14 . NAVERNAVER’’’’ssss mobile ee----commercecommerce revenue estimates Figure 151515.15 . NAVERNAVER’’’’ssss PC ePC e-e ---commercecommerce rrevenueevenue estimates
(Wbn) (Wbn) 30 Mobile e-commerce 50 PC e-commerce
40
20 30
20 10
10
0 0 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
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November 25, 2015 Internet/Entertainment
(2) Game: Rediscovery of Lineage
Along with the mobile game Anipang 2 for Kakao , Lineage I has among the oldest gamer bases. For Lineage I , 87% of players are in their 30s or older, and 28% are in their 50s or older. For Anipang 2 , 92% of players are in their 30s or older.
We estimate Lineage I generates a monthly ARPU of W53,300, higher than that of Lineage II . At the same time, the title’s revenue per time spent per user (W3,448) is lower than that of Lineage II (and similar to that of Blade & Soul ). This suggests there is strong upside to Lineage I ARPU, as game revenues tend to rise in tandem with the time spent . Our ARPU estimates in
Lineage I has a monthly fixed-rate scheme. Considering that the free-to-paid conversion rate for ordinary games is normally around 5-10%, the value of one Lineage I gamer is worth noting. In the absence of competing games, we do not see any significant user defection following the October 14 th game update.
In addition, IP is an important part of Lineage I’s value. Game companies that produced strong excess returns this year were US-based Electronic Arts (which holds major sports IP rights related to FIFA and the NBA) and Japan-based Nintendo (well-known for its Super Mario characters). In particular, Nintendo’s P/E has exceeded 60x since the company announced its expansion into the mobile game business in March 2015.
Among the many games being released, those that feature familiar characters and storylines are tending to find the most success. Indeed, the importance of IP has long been recognized in the movie industry. Three sequels to 2009’s Avatar are simultaneously in the making, and production costs for The Avengers: Infinity War (Part 1 and Part 2) are reported to be in excess of W1tr.
NCSOFT plans to release a mobile version of Blade & Soul in China (to be published by Tencent) in early 2016. Also in 2016, the company is expected to release MXM (PC game; Korea and China), Lineage mobile (in-house developed), Lineage II mobile (developed by Netmarble in Korea; developed by Snail in China), and Aion mobile (in-house developed). Also, the company plans to start beta testing Lineage Eternal .
Table 444.4. Lineage I ARPUARPUARPU estimation (based on time spent) Blade & Lineage I Lineage II AionAionAion Remarks SoulSoulSoul Quarterly revenue (Wmn) 78,211 15,619 16,775 24,919 A Based on 3Q15 revenue Monthly revenue (Wmn) 26,070 5,206 5,592 8,306 A’=A/3 Portion of revenue from 10% 15% 20% 30% B PC café s Revenue not from PC 23,463 4,425 4,473 5,814 C=A ’x(1-B) cafés ( Wmn) Monthly average unique 102 29 26 60 D Koreanclick data users (‘000 persons) Concurrent users Users of Lineage are based on company data; other data are our 220 62 55 129 E=DxF (‘000 persons) estimates Calculated the no. of concurrent users for four games assuming the 2.2 F=E/D ratio of monthly average unique users to concurrent users at 1 (Koreanclick ): 2.2 (company data) Concurrent users are based on historical data Total users/concurrent 2.0 2.0 2.0 2.0 F users Total users (‘000 persons) 440 125 110 258 G=ExF Monthly average revenue 53.3 35.5 40.5 22.6 H=C/G per user (W ‘000) Monthly time spent (‘000 408,309 52,982 166,239 91,245 mins) Monthly time spent (‘000 6,805 883 2,771 1,521 I hours) Monthly time spent per 15.5 7.1 25.1 5.9 J=I/H person (hours) Revenue per hour per 3,448 5,011 1,615 3,823 K=H/J person (W) Note: Due to small sample size and resulting low level of confidence, we used our estimates (based on the above statistics) for comparison purposes only. Source: Company data, Koreanclick, KDB Daewoo Securities Research
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Figure 161616.16 . Annual revenue of Lineage I
(Wbn) 420
Lineage I revenue growing continuously thanks to 350 335.3 345.4 1) Increasing ARPU 2) Activation of dormant accounts due to events 280
210
140
70
0 98 00 02 04 06 08 10 12 14 16F
Source: Company data, KDB Daewoo Securities Research
Figure 171717.17 ... Lineage I concurrent users and revenue trends
('000 persons) Quarterly revenue (R) (Wbn) 350 Monthly sumn of daily concurrent users (L) 100
90 300 80
250 70
60 200
50 150 40
100 30 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 Source: Company data, Gametrics, KDB Daewoo Securities Research
Figure 181818.18 . Monthly average revenue per user Figure 191919.19 . Average revenue per hour per user
(W'000) Monthly average revenue per user (W'000) 60 6 Revenue per hour per person 53 5.0 50 5 40 40 4 3.8 35 3.4
30 3 23 20 2 1.6
10 1
0 0 Lineage I Lineage II Aion Blade & Soul Lineage I Lineage II Aion Blade & Soul
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
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Figure 202020.20 . ARPU trends by game Figure 212121.21 . Relative changes in ARPU by game
(W) (p) 180,000 Lineage I 1,600 Lineage I Lineage II Lineage II 160,000 Aion 1,400 Aion 140,000 Blade & Soul Blade & Soul 1,200 120,000 1,000 100,000 800 80,000 600 60,000
40,000 400
20,000 200
0 0 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15
Notes: Monthly revenue (quarterly revenue divided by three) divided by the sum Note: As of January 2011; B&S revenue includes revenue from Japan and Taiwan of daily average concurrent users for each month; this calculation Source: Gametrics, company data, KDB Daewoo Securities Research provides a good measure of changes in per-user revenue Source: Gametrics, company data, KDB Daewoo Securities Research
Figure 222222.22 . Relative share performances of global game developedevelopersrs with powerful IP
(-1Y=100p) 200 NCSOFT Activision Blizzard 180 EA Nintendo 160
140
120
100
80 11/14 1/15 3/15 5/15 7/15 9/15 11/15
Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 232323.23 . Expected release schedule GameGameGame PeriodPeriodPeriod PCPCPC Lineage Eternal Jun. 15 Focus group test (1st) 4Q15F Focus group test (2nd) 1H16F Closed beta test 1H17F Global commercialization Guild Wars 2 expansion pack Jun. 15- Pre-sale in US/EU Oct. 15- Launch in US/EU MXM 1Q16F Commercialization after beta test in Korea, Japan, and Taiwan 2H16F Commercialization after tests in China Mobile Blade & Soule mobile Jun. 15 2nd technical test 1Q16F Final test Lineage I mobile 1H16F Commercialization in Korea Lineage II Mobile 1Q16F Closed beta test Source: Company data, KDB Daewoo Securities Research
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Figure 252525.25 ... League of Legends (PC, Figure 242424.24 . Figure 10. Lineage I Figure 262626.26 . StarCraft (PC, simulation) simulation)
Under 50s and 50s and 20 over over Under 50s and 7% 20s 10% Under 8% 20 over 6% 20 19% 28% 34% 40s 40s 20% 14% 30s 4%
40s 16% 20s 30s 20s 30s 38% 16% 43% 37%
Figure 272727.27 . FIFA Online 3 (PC, sports) Figure 282828.28 ... Diablo 3 (PC, RPG) Figure 292929.29 ... Anipang 2 (mobile, puzzle)
50s and 50s and Under Under over 20 20 over 20s 10% Under 17% 2% 16% 6% 20 50s and 40s 37% over 16% 40s 37% 7% 30s 21%
30s 30s 9% 17% 20s 43% 20s 40s 28% 34%
Figure 313131.31 ... Let’s Get Rich (mobile, Figure 323232.32 . FIFA Online 3M (mobile, Figure 303030.30 . Clash of Clans (mobile, RPG) puzzle) sports)
50s and 50s and 50s and over over over 40s 4% 6% 2% Under 40s 9% 20 13% Under 40s 26% 20 30s Under 20% 42% 11% 20 44%
30s 16%
20s 20s 30s 21% 34% 29% 20s 23%
Source: Koreanclick, KDB Daewoo Securities Research
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Figure 333333.33 ... Proportion of players in their 20s and younger
(%) 90 20s and under
75
60
45
30
12.5 15 8.9
0 Lineage I League of Starcraft FIFA Online 3 Diablo 3 Anipang 2 Clash of ClansLet's Get Rich FIFA Online Legends 3M
Note: Monthly average during 3Q15 Source: Koreanclick, KDB Daewoo Securities Research
Figure 343434.34 . Proportion of players in their 30s and older
(%) 30s and over 100 91.1 87.5
80
60
40
20
0 Lineage I League of Starcraft FIFA Online 3 Diablo 3 Anipang 2 Clash of ClansLet's Get Rich FIFA Online Legends 3M
Note: Monthly average during 3Q15 Source: Koreanclick, KDB Daewoo Securities Research
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(3) O2O: Future of the internet industry
The O2O business enables potential customers in the offline space to buy local products or services online (e.g., connecting online uses with local businesses like clothing shops and restaurants). O2O has also given rise to a new model by interconnecting the online and offline spaces and expanding the domain of existing services. Well-known O2O services include food delivery services (Baedal Minjok and Yogiyo) and taxi hailing services (Kakao Taxi and T Map Taxi).
In the internet industry, O2O is the area currently attracting the most attention. However, the concept of connecting the online and offline spaces is nothing new; the two have been connected ever since the advent of the internet, in spheres such as online shopping and online ticket purchases (where tickets are retrieved offline after ordering and paying for them online). What has changed is that advances in internet technology now permit always-on connectivity, reducing the limits of time and place and strengthening the connection between the online and offline spaces; in this environment, O2O businesses are able to take off.
The global O2O business is currently being led by the US and China, which is unsurprising given 1) the US’ superior IT technology, which allows it to be at the forefront in launching new O2O services, and 2) China’s fast-growing consumer market. Aided by the advent of social commerce, a range of O2O services—including transportation, food, beauty care, and home care—are now available. We think it will not be long before nearly all offline commercial services are available online. In addition, O2O services have helped introduce the concept of the sharing economy, putting idle resources to economic use and sharply lowering transaction costs. As such, efficiency has been increasing across the economy.
Of note, the corporate value of O2O ventures has climbed significantly. Based on the value of investments, Uber is valued at around W50tr, Airbnb at W30tr, and Didi Kuaidi at W15tr; these are comparable to listed internet firms such as NAVER (market cap of around W20tr). Although they are still generating minimal profits, O2O ventures are displaying robust growth potential, which explains their high value.
The competitive environment has already begun to change. In China, the top two location-based taxi service providers recently merged into one dominant player. Changes in the competitive environment have an inevitable impact on revenue models and commission structures, and second-tier markets typically follow in the footsteps of the leading market. This has been the case with the evolution of Kakao Taxi; Kakao recently launched a premium taxi-hailing service (Kakao Taxi Black) and unveiled plans to launch a designated driver service, a path similar to that already taken by China’s Didi Kuaidi (which also attracts drivers/users via subsidies and creates new business model through service launches). As such, investors should pay keen attention to the competitive environment and business models, which can change overnight due to M&As or investments.
The O2O industry is still small in size, but has significant room for expansion. The domestic O2O market is estimated at W4-5tr (based on 12-month transaction value). Assuming that all potential O2O services become available, the ultimate potential for the domestic O2O market is estimated at more than W450tr, which includes retail (W320tr; excluding car sales), food delivery (W10tr), accommodations (W11tr), taxi services (W12tr), non-delivery restaurants (W70tr), sports services (W12tr), and educational services (W24tr).
The retail segment (potential value of W320tr), which currently takes the lion’s share of the O2O market, is likely to be utilized mainly for marketing purposes. Even excluding the retail segment to be conservative, the potential O2O market is estimated at W140tr, which would translate into annual revenue of W14-15tr considering delivery apps’ current commission and ad revenues (which account for around 10% of transaction value).
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Figure 353535.35 . Potential size of O2O market
Source: KT Economic Research Institute, KDB Daewoo Securities Research
After the introduction of fixed-line internet, it took 10 years for fixed-line internet transactions to reach 10% of offline retail transaction value. Now, five years into the launch of smartphones, fixed-line internet and mobile transactions represent 17% and 7% of offline retail transaction value, respectively. Delivery apps, cited as the most successful O2O service, control 10% of the total delivery food market four years after their release.
Whereas fixed-line internet shopping appears to have taken 10 years to take root, claiming 10% of total retail transaction value 10 years after its launch, it has taken mobile shopping only five years to reach 45% of total online shopping transactions. If this pace continues, we conservatively expect the O2O market to grow to W40-50tr (based on transaction value), or 10% of the ultimate potential O2O market, in five years.
Figure 363636.36 . EEE-E---commercecommerce vs. offline commerce Figure 373737.37 . Mobile share in eee-e---commercecommerce
(%) (%) 18 Fixed-line internet/offline retail transaction value 50 Mobile/offline retail transaction value 15 40
12 30 9 20 6
10 3
0 0 2009 2010 2011 2012 2013 2014 1H 2015 1Q13 3Q13 1Q14 3Q14 1Q15
Source: Statistics Korea, KDB Daewoo Securities Research Source: Statistics Korea, KDB Daewoo Securities Research
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Offline retail stores benefit from O2O services via 1) partnership with online firms or their in- house developed apps, or 2) platforms that connect offline business operators with customers. In the early stage, the first model was prevalent, but O2O services have more recently been evolving to the second model. We expect the platform-oriented model to continue to prevail, as: 1) it can be applied to a variety of businesses; and 2) it can be used for commission revenue models, not just for marketing purposes.
A successful platform is one that gathers a massive number of customers and business operators. A platform with ample information stemming from heavy customer traffic is seen as trustworthy, and thus attracts more customers. Customer acquisition is the key to this virtuous cycle, and leads to abundant information and transactions. Therefore, the areas most suitable for the platform business are those with 1) many business operators, 2) high demand, and 3) large market size. As a market gets more fragmented, both customers and business operators begin to recognize the need for a platform, and as platform usage rises, information sharing and transactions increase.
Among domestic service sectors, those with a massive number of operators include beauty care, sports leisure services, real estate, healthcare, repair services, social welfare, car repair/wash services, and laundry. And in the wholesale/retail sector, restaurants, textile accessories, food and beverage, and tourist accommodation have an above-average number of operators. Many small, individual business owners operate in these sectors, and their services are consumed frequently. Of note, it is somewhat difficult for consumers to compare different operators in these sectors, as consumption tends to be subject to spatial/regional limits. The fact that these markets are fragmented and have insufficient information sharing provides a rationale for the existence of a platform. Therefore, we think these are suitable sectors for an O2O platform to advance into.
Figure 3338 3888.. Top subsectors wwwithin within servicservicee & wholesale/retail in Figure 393939. 39 . Top subsectors wwithinithin service & wholesale/retail in terms of revenue size terms of number of operators
(Wbn) ('000) 60 400
300 40 200
20 100
0 0
Source: Korea Statistics, KDB Daewoo Securities Research Source: Korea Statistics, KDB Daewoo Securities Research
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Not all business operators would adopt an external O2O platform. For example, a large franchise store would likely prefer to create economies of scale by forging a partnership with an IT firm at the headquarters level, rather than paying a fee for an external platform. On the other hand, smaller business operators would likely make use of an external platform specialized for their business area.
Indeed, while McDonald's offers “McDelivery” services via its own app, small restaurants rely on multiple apps specialized in food delivery. The same trend is likely to occur with other business operators going forward, e.g., Starbucks (which introduced “Siren Order) vs. non-franchise cafes and Cleantopia vs. small individual laundries. Of note, Kakao and NAVER have launched Yellow ID and LINE@ services, respectively, as ad/O2O platforms targeting small business owners.
Figure 404040.40 . McDeliveryMcDelivery:: InInIn-In ---househousehouse----developeddeveloped O2O application Figure 414141.41 . Third partypartyparty-party ---developeddeveloped O2O application
Source: McDonald’s, KDB Daewoo Securities Research Source: Baemin, KDB Daewoo Securities Research
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2. Entertainment sector
(1) Robust growth of the Chinese movie market
As of 2014, the Chinese movie market (box-office revenue) was equivalent to 47% of the US market. In February, Chinese box-office revenue exceeded that of the US, with strong demand stemming from the Chinese New Year holidays. And in April, Chinese box-office revenue from Furious 7 was 14% stronger than in the US.
In 2014, the Chinese movie market expanded 34% YoY to US$4.8bn, and in 2015 is forecast to grow 54% YoY to US$7.3bn. We anticipate that the rapidly growing Chinese movie market will outstrip the US market in three years. At the fifth plenary session of the 18 th Communist Party of China (CPC), held from October 26 th to 29 th , the Chinese government announced plans to pursue economic growth strategies suitable for the “new normal” period over the next five years. The culture business, of which the film market is a major driver, lies at the center of the “new normal” policy.
In China, local multiplexes operated by real estimate developers and state-owned movie studios take strong market shares. The number of cinema admissions per person is on the rise in Thailand and Singapore, where overseas giants or local conglomerates are already dominant. CJ CGV, Korea’s leading multiplex operator, expanded its sites in China and Vietnam in 2015, and plans to continue the expansion through 2017.
CJ CGV is also working to expand into emerging nations such as Myanmar, Indonesia, and Cambodia. We expect the Asian movie market (including China) to grow to 5.3x the Korean market in 2018. According to research institutions (e.g., PwC), the Chinese movie market is projected to show the fastest growth over the next five years (13.5%), while Vietnam and Indonesia will also likely grow rapidly (5% each). Even these upbeat estimates are beginning to look conservative in light of robust actual growth.
Figure 424242.42 . EEEntertainmentEntertainment industry growth trends
Broadcast Film Concert & performance Paid content
High production cost Mass production of low-cost Relatively cheap for Beginswith eradication of Mainfeatures High involvement content consumers illegal reproduction Highrepeat purchases
ARPU Free W6,000-20,000 W60,000-200,000 W4,000-100,000
Moving beyond in-house Copyright regulations 70% that of US market YTD Chinese market status production stage to massive Start of full-fledged growth published; Digital music & in 2015 imports of overseas content video growth just starting
Growthtrend by Myanmar, Indonesia, China Korea US/EU country Vietnam
CJ CGV SM Ent.
° 3Q15: 128 domestic sitesvs. 52 Chinasites ‰ 2016F: 95 sites in China ° Accelerating establishment of a Chinese subsidiary ° Plans to expand presencein Southeast Asia (Indonesia, Myanmar, etc.), ° Producing video content via SM C&C based on Vietnam (25 sites) ° Opened SM TOWN at Coex Artium in 2015 (hologram performances and goods for sale)
Source: KDB Daewoo Securities Research
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Figure 434343.43 . Film market (based on box office) vs. GDPGDPGDP
(2014 movie market, US$bn) 12 US 10
8 y = 0.427x + 30.037
6 Korea, France, UK, Germany, Japan, Canada, Italy, Spain China 4
2 Malaysia, Philippines, Indonesia Thailand, Vietnam, Singapore (PPP-based GDP, US$tr) 0 0 2 4 6 8 10 12 14 16 18 20
Source: IMF, CBOO, PwC, KDB Daewoo Securities Research
Figure 444444.44 . Box office revenue in 2014: US vs. China Figure 454545.45 . Box office revenue YTD in 2015: US vs. China
(US$bn) (US$mn) 12 10,000
10 8,000
8 6,000 6 4,000 4
2,000 2
0 0 US China US China
Source: CBOO, KDB Daewoo Securities Research Source: CBOO, KDB Daewoo Securities Research
Figure 464646.46 . Box office revenue from Aug. 181818 ththth to Nov. 15 ththth : US Figure 474747.47 . Box office revenue from Nov. 9 ththth to 15to 15 ththth : US vs. vs. China China
(US$bn) (US$mn) 2.5 210
180 2.0 150
1.5 120
1.0 90
60 0.5 30
0.0 0 US China US China
Source: CBOO, KDB Daewoo Securities Research Source: CBOO, KDB Daewoo Securities Research
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Figure 484848.48 . Timeline of CJ CGV site openings in China Figure 494949.49 . Expected number of Indonesian sites
(sites) (sites) 60 Sites operated by consolidated subsidiaries 90 Sites in Indonesia JV sites 80 80 50 70
40 60
50 30 40
20 30
20 13 15 10 10
0 0 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 Aug. 2015 Oct. 2015 End-2020
Source: CJ CGV, KDB Daewoo Securities Research Source: CJ CGV, KDB Daewoo Securities Research
Figure 505050.50 . Number of 4DX screens worldwide Figure 515151.51 . Number of CJ CGV IMAX screens in China
(screens) 1,000 (screens) 400 4DX screens 24 CGV's IMAX screens in China 21 20 300 38countries 41countries 16 225 14 212 200 12 140 8 7 100 87 40 27 4 3 13 1 0 2009 2010 2011 2012 2013 2014 Jan. End- 2020 0 2015 2015 2012 2013 2014 Nov. 2015
Source: CJ CGV, KDB Daewoo Securities Research Source: CJ CGV, KDB Daewoo Securities Research
Figure 525252.52 . IMAX share price trend
(US$) 50 IMAX
40
Avatar release 30
20
10
0 94 96 98 00 02 04 06 08 10 12 14
Source: Thomson Reuters, KDB Daewoo Securities Research
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(2) Rise of the Chinese music market
The Asian entertainment market is expected to grow steadily over the next several decades. Of note, a country’s music industry tends to develop rapidly once income and GDP reach certain levels. Given Asia’s increasing contribution to the global economy, its music industry is expected to show strong growth going forward.
In most Asian countries, excluding Japan, the CD and digital music markets are still small in size, as per-capita income is not high enough to comfortably purchase music content. For Korean music labels, concert income is the major source of revenue in Asia. As of this year, Japan’s concert market is 3.3 times larger than Korea’s, while the combined concert markets of major Asian countries excluding Korean and Japan (namely China, Taiwan, Thailand, and Indonesia) is just 1.63 times larger than Korea’s.
Japan’s concert market is projected to grow at a CAGR of 5.4% over the next five years, while China’s and Taiwan’s concert markets are projected at 7.4% and 9.0% growth, respectively. The concert markets of Thailand, Indonesia, and Vietnam are projected to grow at five-year CAGRs of 6.2%, 8.0%, and 4.2%, respectively.
In Japan, YG Entertainment and SM Entertainment receive royalties per attendee from local agents. In other Asian countries, they receive fixed guarantees per concert from local agents. Due to the yen’s depreciation, the gap in per-attendee revenue between Japan and other Asian countries has been narrowing. Nevertheless, Japan is still the most attractive market in light of its advanced infrastructure and profitable merchandise market.
In China, the annual number of concertgoers is estimated at just 6mn (0.004 times per person vs. 0.24 in the US and 0.34 in Japan). However, China’s concert infrastructure is improving thanks to an increase in investments by large companies and online systems provided by Alibaba and Tencent for reserving tickets and making purchases. Market watchers expect that starting in 2016, it will be feasible for artists to go on concert tours in 20-30 major Chinese cities.
Meanwhile, the Chinese government is conducting an aggressive crackdown on music copyright infringement. Since announcing a ban on illegal distribution of copyrighted music in July, Chinese authorities have removed 2.2mn songs from digital music outlets. Accordingly, Chinese Internet firms are increasingly requesting permission from Korean music labels to use copyrighted content. Korean music is estimated to account for 30% of the content on Chinese music services popular among the younger generation.
Figure 535353.53 . Concert market vs. GDPGDPGDP
(2014 concert market, US$bn) 10 US
8
6
y = 0.2448x + 241.17 4 UK Germany 2 France Japan Vietnam, Malaysia, Philippines, Canada Singapore, Thailand, Italy South Korea,Indonesia, Spain (PPP-based GDP, US$tr) China 0 0 4 8 12 16 20
Source: IMF, IFPI, PwC, KDB Daewoo Securities Research
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Figure 545454.54 . LongLongLong-Long ---termterm growth trendtrendtrend of US concert market
(US$bn) US concert revenue (L) (%) 7 YoY (R) 60
6 40 5
20 4
3 0
2 -20 1
0 -40 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: Statista, KDB Daewoo Securities Research
Figure 555555.55 . Concert revenue bybyby country (2014) Figure 565656.56 . Concert visits per person bybyby country (2014)
(Wtr) (times) 8 Concert revenue 0.4 Concert visits per person
6 0.3
4 0.2
2 0.1
0 0.0 China Japan US China Japan US
Source: PwC, IFPI, KDB Daewoo Securities Research Source: PwC, IFPI, KDB Daewoo Securities Research
Figure 575757.57 . Concert/digital music/box office market comparisoncomparison Figure 585858.58 . ConcertConcert----relaterelaterelatedddd indices bybyby country
(US$bn) 12 China US 10
8
6
4
2
0 Concert Digital music Box office
Source: PwC, IFPI, KDB Daewoo Securities Research Source: PwC, IFPI, KDB Daewoo Securities Research
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III. Valuation and investment strategy
1. LINE
Currently, NAVER shares are trading at a 2016F P/E of around 30x (on a consolidated basis), which is 36% higher than Google and similar to Tencent. The value of NAVER’s wholly-owned subsidiary LINE should be reflected in the valuation, as an IPO of the subsidiary is planned for 2016. However, it is hard to estimate the value of NAVER as major wholly-owned subsidiaries, including LINE and MixRadio, are making losses or just breaking even.
To assess the value of LINE, we compared its P/S ratio and value per user with those of major competitors, including Facebook, WhatsApp, and Twitter. Based on the average P/S of Facebook and Twitter, LINE’s value comes in at US$11.4bn. Applying the average value per user of WhatsApp, Snapchat, Facebook, and Twitter, the company’s value is estimated at US$22.4bn
Meanwhile, NAVER is expected to display stronger-than-expected earnings growth in 2016 on the back of a surge in mobile internet revenue. In light of low expectations for domestic internet portals, unexpected earnings growth will likely boost valuation.
Table 555.5. LINE valuation (US$mn) Fair value RevenueRevenue----basedbasedbasedbased Account valuevalue----basedbasedbasedbased LINE value 14,724 11,420 22,434 Weight 70% 30% Source: KDB Daewoo Securities Research
Figure 595959.59 . LINE revenue forecasts
(Wbn) 300 Other Ads 250 Stickers Games 200
150
100
50
0 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 Source: NAVER, KDB Daewoo Securities Research
Table 666.6. LINE vvvaluationvaluation based on revenue multiple (US$mn, x) Market cap. Revenue P/SP/SP/S Facebook 305,674 17,418 17.5 Twitter 17,845 2,221 8.0 Average 12.8 LINE 11,420 893 Applied avg. P/S Source: Company data, KDB Daewoo Securities Research
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Table 777.7. LINE valuation based on account value (US$, US$mn, mn persons) VVValueValue per MAU Market cap. MAUsMAUsMAUs WhatsApp 33 30,150 900 Snapchat 109 16,344 150 Facebook 198 305,674 1,545 Twitter 83 26,550 320 Average 106 LINE Applied avg. value 22,434 212 Notes: MAU = monthly active user Source: Company data, KDB Daewoo Securities Research
Figure 606060.60 . Value per MAU comparison Figure 616161.61 . MAU comparison
(US$bn) (mnpersons) 200 1,600
160 1,200
120 800 80
400 40
0 0 LINE WhatsApp Snapchat Facebook Twitter LINE WhatsApp Snapchat Facebook Twitter Note: Value per MAU of LINE calculated based on our estimate of LINE’s value Source: Company data, KDB Daewoo Securities Research (Table 5) Source: Company data, KDB Daewoo Securities Research
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2. Kakao
We believe the current valuation of Kakao is undemanding. Among mobile firms in Korea, Kakao is the one that has shown the highest growth potential since the beginning of the mobile internet era in 2009. In our view, the company is likely to once again change how we live in 2016.
KakaoTalk and KakaoGame are two major examples of how mobile internet services can dramatically change how people live. Even global competitors like Tencent, Facebook, and LINE swiftly benchmarked these Kakao services.
With the taxi-hailing app Kakao Taxi, launched in March, Kakao has also changed the behaviors of taxi drivers and passengers. And more changes can be expected with the launch of a designated driver service, planned for 1H16. Also deserving of attention is whether the company obtains approval for its internet-only bank business in December this year.
Over the past decade, major global internet firms have shown sharply different valuations (P/Es of 100x for Amazon, 20-40x for Google, and around 10x for Yahoo), based on their different levels of ability to create new markets.
For the valuation of Kakao, we think the firm Uber is suitable for comparison. Uber, founded in the US in 2009, has expanded into around 60 countries and is currently valued at around US$50bn (W56tr). Like Kakao, Uber has often found itself at the center of controversy, as its services conflict with transportation/traffic laws in many countries.
Although Uber started its business in many countries with taxi services, its core strategy in the future will likely revolve around on-demand services. In addition, Uber has recently launched delivery services for IT products, apparel, and furniture in some countries.
Didi Kuaidi (created via the merger of China's two largest taxi-hailing firms in February) is China’s leading carpooling service provider. It is estimated at W15bn (W18tr).
In addition to the designated driver and parcel delivery services, Kakao will likely launch a variety of other on-demand or O2O services, including food delivery, supermarket product delivery, household chores, and financial transactions, and at least one of these is likely to have a major impact on people’s daily lives.
At this point, attempts to estimate the value of Kakao are largely meaningless. It should be noted that competitive on-demand or O2O service firms are currently highly valued in the global capital market.
Figure 626262.62 . Kakao revenue breakdown Figure 636363.63 . Quarterly Kakao revenue breakdown
(Wbn) (Wbn) 400 380.4 120 351.5 Other Commerce 100 Other 300 Commerce 80 Ads 210.8 200 60 Ads 40 100 Games 45.8 20 Games 1.8 0 0 2011 2012 2013 2014 2015F 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15
Note: K-IFRS parent basis Note: K-IFRS parent basis Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
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Figure 646464.64 . KakaoKakao’’’’ss 12s 12-12 ---monthmonth forward P/E band
(W'000) 600 Share price High growth expectations based on Kakao mobile platform, which is able to expand toward broad O2O market 500 Search ad market growth expectations 400
300 Lost M/S in core ad business amid fierce competition 66.0x 200 52.0x 38.0x 100 24.0x 10.0x 0 02 04 06 08 10 12 14 16 F
Note: EPS estimates based on KDB Daewoo Securities Research estimates Source: Bloomberg, KDB Daewoo Securities Research
Figure 656565.65 . AmazonAmazon’’’’ssss 121212-12 ---monthmonth forward P/E band
(US$) 1,400 Share price 140.0x Continuous expansion in business areas: 1,200 Internet retail channel ▶ e-reader ▶ content distribution channel; Premium reflected growth potential 110.0x 1,000
800 80.0x Valuation gradually increased from 50x, the level before 600 launch of e-reader Kindle; Kakao appears to be in a similar position now 50.0x 400
200 20.0x
0 02 04 06 08 10 12 1416F 16
Note: EPS estimates based on Bloomberg consensus Source: Bloomberg, KDB Daewoo Securities Research
Figure 666666.66 . Yahoo JapanJapan’’’’ss 12s 12-12 ---monthmonth forward P/E band
(JPY) Search ad market growth expectations Share price 900
Weakened edge in core ad business and outdated monetization strategy 28.0x
600 24.0x 20.0x
16.0x
300 12.0x
0 02 04 06 08 10 12 1416F 16
Note: EPS estimates based on Bloomberg consensus Source: Bloomberg, KDB Daewoo Securities Research
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3. Global peer valuation
(1) Global internet sector
Table 888.8. Earnings forecasts for global internet companies (US$mn, %) Market Revenue Operating profit OP margin Net profit NetNetNet margin EPSEPSEPS
cap.cap.cap. 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F NAVER 17,727 2,621 2,807 3,237 720 680 892 27.5 24.2 27.6 432 467 625 16.5 16.6 19.3 15.5 14.5 19.4 Kakao 5,864 474 827 994 168 97 182 35.4 11.7 18.3 143 84 143 30.1 10.2 14.4 5.3 1.4 2.4 Interpark 667 387 350 385 16 23 30 4.2 6.4 7.9 10 17 24 2.7 4.8 6.2 0.3 0.5 0.7 Alphabet 526,470 66,001 60,665 70,760 16,496 24,405 29,059 25.0 40.2 41.1 14,444 15,906 19,402 21.9 26.2 27.4 - 29.0 34.3 Yahoo 31,504 4,618 4,042 3,841 143 318 250 3.1 7.9 6.5 7,522 122 167 162.9 3.0 4.3 0.4 0.6 0.5 Amazon 318,285 88,988 107,144 129,399 178 2,284 4,191 0.2 2.1 3.2 -241 891 2,682 -0.3 0.8 2.1 0.7 5.6 9.8 Facebook 302,454 12,466 17,431 24,071 4,994 9,488 12,943 40.1 54.4 53.8 2,925 3,316 5,227 23.5 19.0 21.7 1.0 2.2 2.9 Twitter 17,210 1,403 2,218 3,118 -539 273 468 -38.4 12.3 15.0 -578 -553 -454 -41.2 -24.9 -14.6 -0.9 0.4 0.6 LinkedIn 32,915 2,219 2,986 3,893 36 482 613 1.6 16.1 15.7 -16 -199 -113 -0.7 -6.7 -2.9 -1.0 2.7 3.8 Groupon 1,720 3,192 3,049 2,957 -15 8 -104 -0.5 0.3 -3.5 -73 -16 -187 -2.3 -0.5 -6.3 -0.1 0.1 -0.1 Yahoo 24,234 3,917 4,698 5,732 1,803 1,794 1,800 46.0 38.2 31.4 1,216 1,315 1,164 31.1 28.0 20.3 0.3 0.2 0.2 Japan Rakuten 19,027 5,668 5,786 6,643 1,008 1,006 1,278 17.8 17.4 19.2 669 571 767 11.8 9.9 11.5 0.4 0.4 0.5 Alibaba 201,316 12,302 15,365 19,936 3,735 4,544 6,315 30.4 29.6 31.7 3,917 10,971 6,296 31.8 71.4 31.6 1.3 2.6 3.4 Baidu 71,704 7,962 10,386 13,001 2,078 1,580 2,254 26.1 15.2 17.3 2,140 1,759 2,293 26.9 16.9 17.6 5.6 5.5 7.1 Sohu 2,062 1,673 1,928 2,136 -205 66 141 -12.3 3.4 6.6 -167 -59 -11 -10.0 -3.1 -0.5 0.9 -0.7 1.0 Sina 2,903 768 860 1,008 -26 21 66 -3.4 2.4 6.5 177 18 49 23.0 2.1 4.8 0.4 0.8 1.6 Youku 5,260 685 1,004 1,395 -137 -255 -189 -20.0 -25.4 -13.6 -136 -247 -175 -19.8 -24.6 -12.5 -1.3 -1.0 -0.7 Tencent 189,362 12,811 15,641 20,082 4,662 5,971 7,592 36.4 38.2 37.8 3,865 4,640 5,983 30.2 29.7 29.8 0.5 0.5 0.7 Average 12.2 16.4 17.9 18.8 9.9 9.7 Notes: Based on Bloomberg consensus as of Nov. 24 th Source: Bloomberg, KDB Daewoo Securities Research
Table 999.9. Valuation comparison of global internet companiescompanies (x, %) Market PPP/P///EEEE PPP/P///BBBB PPP/P///SSSS EV/EBITDA ROEROEROE ROAROAROA
cap.cap.cap. 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F NAVER 17,727 36.1 37.2 27.8 8.1 8.4 6.5 5.9 6.3 5.5 15.4 20.3 16.2 24.4 26.4 27.0 13.5 14.3 15.8 Kakao 5,864 19.0 69.1 40.6 2.7 2.6 2.5 7.6 7.1 5.9 - 34.4 22.4 14.6 4.0 6.4 12.4 3.3 5.4 Interpark 667 69.0 40.1 28.3 5.0 4.5 4.0 1.8 1.9 1.7 26.9 20.7 16.4 8.5 11.9 15.1 2.7 4.8 6.4 Alphabet 526,470 - 26.1 22.0 - 4.1 3.5 - 8.7 7.4 15.7 15.5 13.1 14.6 16.5 16.6 12.0 13.6 14.3 Yahoo 31,504 82.5 56.6 61.3 1.1 1.1 1.1 6.4 7.8 8.2 51.2 28.0 30.9 0.7 1.7 2.0 0.5 1.0 1.2 Amazon 318,285 120.3 69.0 25.6 25.6 19.6 3.1 3.0 2.5 30.8 29.6 23.3 2.9 13.2 22.9 0.7 2.6 5.4 Facebook 302,454 108.0 49.4 37.4 7.3 7.1 5.9 18.7 17.4 12.6 35.9 26.3 19.3 9.0 12.0 14.3 8.0 12.6 14.7 Twitter 17,210 - 71.8 45.3 4.0 4.0 3.9 8.2 7.8 5.5 - 28.3 18.9 -14.3 -0.6 0.9 -9.5 -2.6 -1.0 LinkedIn 32,915 - 94.1 66.5 7.7 8.7 8.3 11.5 11.0 8.5 95.3 41.3 30.2 -4.1 9.3 13.7 -2.8 6.7 9.2 Groupon 1,720 - 30.8 - 2.9 2.9 3.9 0.6 0.6 0.6 16.1 4.2 8.9 11.4 9.9 -1.5 3.7 0.4 -4.0 Yahoo Japan 24,234 15.5 18.3 20.7 3.7 3.5 3.2 6.3 5.1 4.2 7.7 10.0 10.2 26.2 20.9 16.1 17.9 15.8 12.3 Rakuten 19,027 30.8 32.2 24.5 3.5 3.8 3.3 3.2 3.3 2.9 5.3 6.3 5.1 14.1 14.0 14.3 1.9 2.1 2.5 Alibaba 201,316 65.1 30.9 23.7 6.8 5.8 4.7 14.9 13.1 10.1 30.7 24.9 19.7 39.5 31.3 19.1 22.3 17.5 13.2 Baidu 71,704 38.3 37.7 29.4 8.2 7.3 5.9 7.5 6.9 5.5 20.2 29.9 22.8 23.3 19.8 21.2 11.3 9.6 11.2 Sohu 2,062 59.5 - 55.0 1.6 1.6 1.4 1.1 1.1 1.0 3.9 7.0 5.5 -3.1 -0.8 2.6 -1.3 3.1 3.5 Sina 2,903 129.6 60.1 32.1 1.4 1.2 1.2 3.5 3.4 2.9 58.5 39.6 17.5 3.3 1.6 3.5 1.9 1.4 2.5 Youku 5,260 - - - 2.5 2.5 2.7 5.7 5.3 3.8 41.4 - - -11.4 -10.7 -11.8 -9.4 -8.9 -5.6 Tencent 189,362 43.4 39.1 30.3 11.2 10.9 8.2 12.8 12.1 9.5 24.2 27.6 21.8 30.0 31.1 30.5 13.2 16.2 17.1 Average 58.1 50.9 38.4 6.1 5.8 5.0 7.0 6.8 5.5 29.9 23.2 17.8 10.5 11.7 11.8 5.5 6.3 6.9 Notes: Based on Bloomberg consensus as of Nov. 24 th Source: Bloomberg, KDB Daewoo Securities Research
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(2) Valuations of global game developers/publishers
Table 101010.10 . Earnings forecasts for global game developers/publishersdevelopers/publishers (US$mn, %) Market Revenue Operating profit OP margin Net profitprofitprofit NetNetNet margin EPSEPSEPS
cap.cap.cap. 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F NCSOFT 4,083 797 739 849 264 222 288 33.2 30.1 33.9 218 177 237 27.4 24.0 27.9 7.9 8.1 10.8 Neowiz Games 315 191 170 196 28 24 38 14.7 13.9 19.6 -7 11 26 -3.8 6.4 13.2 -0.5 0.5 1.2 NHN Ent. 961 529 500 590 11 -57 -22 2.1 -11.3 -3.7 48 81 -4 9.1 16.3 -0.6 7.9 3.9 -0.1 Gamevil 438 138 128 156 11 1 9 7.8 0.4 5.9 22 19 28 16.0 14.5 18.1 3.1 2.8 4.2 Com2us 1,168 223 371 418 96 138 157 43.1 37.2 37.6 75 107 124 33.8 28.8 29.6 8.7 8.8 9.4 Wemade 545 155 115 162 -30 -4 47 -19.3 -3.3 28.8 201 1 36 130.2 1.0 22.0 11.9 0.0 2.1 NEXON 6,914 1,638 1,525 1,635 431 498 551 26.3 32.6 33.7 278 426 455 17.0 28.0 27.8 0.9 1.0 1.1 Activision 27,310 4,408 4,717 5,165 1,183 1,532 1,807 26.8 32.5 35.0 835 910 1,013 18.9 19.3 19.6 1.5 1.4 1.6 Blizzard Electronic Arts 21,440 4,515 4,560 4,877 948 1,276 1,485 21.0 28.0 30.5 875 838 1,101 19.4 18.4 22.6 2.6 3.1 3.6 Take-Two 2,954 1,083 1,427 1,742 -258 161 277 -23.9 11.3 15.9 -279 77 62 -25.8 5.4 -2.8 1.2 1.8 Zynga 2,370 690 752 776 -245 -30 30 -35.4 -4.0 3.8 -226 -123 -53 -32.7 -16.3 -6.8 -0.1 0.0 0.0 Nintendo 22,360 5,026 4,655 5,406 226 419 690 4.5 9.0 12.8 383 313 462 7.6 6.7 8.6 2.8 2.6 3.8 Sega Sammy 2,905 3,245 2,997 3,139 161 172 241 5.0 5.7 7.7 -103 114 159 -3.2 3.8 5.1 -0.3 0.5 0.7 Namco Bandai 5,099 5,170 4,623 4,763 515 477 515 10.0 10.3 10.8 344 315 342 6.6 6.8 7.2 1.5 1.4 1.6 Konami 3,616 1,994 2,059 2,005 140 244 246 7.0 11.8 12.3 91 151 153 4.5 7.4 7.6 0.9 1.1 1.1 DeNA 2,423 1,302 1,207 1,462 226 183 283 17.4 15.1 19.4 137 107 170 10.5 8.8 11.6 0.8 0.8 1.2 GREE 1,195 810 634 607 177 114 102 21.9 17.9 16.8 -90 72 65 -11.2 11.3 10.7 -0.4 0.3 0.3 Gungho Online 3,482 1,639 1,288 1,194 893 628 573 54.5 48.8 48.0 587 387 354 35.8 30.0 29.7 0.4 0.4 0.3 Netease.com 21,545 1,888 3,464 4,941 768 1,066 1,301 40.7 30.8 26.3 767 1,003 1,196 40.6 29.0 24.2 7.1 8.3 9.9 Tencent 189,362 12,811 15,641 20,082 4,662 5,971 7,592 36.4 38.2 37.8 3,865 4,640 5,983 30.2 29.7 29.8 0.5 0.5 0.7 Kingsoft 3,479 544 865 1,320 84 69 179 15.4 7.9 13.5 125 60 153 22.9 6.9 11.6 0.1 0.1 0.1 Average 14.7 17.3 21.3 16.9 13.6 16.0 Notes: Based on Bloomberg consensus as of Nov. 24 th Source: Bloomberg, KDB Daewoo Securities Research
Table 111111.11 . Valuation comparison of global game developers/publisdevelopers/publishersdevelopers/publis hershershers (US$mn, %) Market P/EP/EP/E P/BP/BP/B P/SP/SP/S EV/EBITDA ROEROEROE ROAROAROA
cap.cap.cap. 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F NCSOFT 4,083 24.3 23.0 17.2 2.7 2.9 2.5 5.4 5.5 4.8 11.2 13.0 10.2 12.2 13.6 15.8 9.8 11.0 12.8 Neowiz Games 315 - 29.1 12.1 1.2 1.2 1.1 1.9 1.8 1.6 12.5 8.6 5.7 -4.0 5.3 10.3 -2.6 3.5 7.5 NHN Ent. 961 6.5 12.6 - 0.8 0.8 0.8 1.7 1.9 1.6 - - 54.7 13.6 6.9 -0.3 10.8 4.0 -0.8 Gamevil 438 22.2 23.7 15.6 2.4 2.4 2.1 3.3 3.4 2.8 71.6 136.7 42.1 11.4 10.6 14.2 9.2 9.1 11.8 Com2us 1,168 10.9 10.3 9.6 2.8 3.3 2.5 2.9 3.1 2.8 6.8 5.9 5.3 32.2 40.0 29.9 30.4 38.0 30.2 Wemade 545 2.8 2,456 15.4 1.6 1.5 1.4 4.7 4.7 3.3 - 97.4 9.2 67.5 0.0 9.3 49.6 -0.9 7.4 NEXON 6,914 18.2 16.1 15.0 2.3 2.2 1.9 4.5 4.5 4.2 7.4 8.3 8.0 13.6 14.5 14.2 11.1 9.5 8.7 Activision Blizzard 27,310 25.2 27.4 22.8 3.4 3.3 3.0 5.5 5.8 5.3 10.9 16.6 14.0 14.5 12.9 12.8 7.8 8.7 8.9 Electronic Arts 21,440 26.1 22.3 19.4 6.8 6.1 4.8 5.0 4.7 4.4 16.3 12.8 11.6 28.8 25.8 27.8 13.9 16.8 17.4 Take-Two 2,954 - 29.4 19.2 5.4 9.1 5.6 2.0 2.1 1.7 112.8 12.8 7.9 -33.4 17.2 10.9 -10.5 3.6 6.6 Zynga 2,370 - - 65.1 1.2 1.2 1.2 3.0 3.1 3.1 - 55.6 14.1 -6.0 -1.6 2.9 -5.0 -1.8 2.2 Nintendo 22,360 58.9 60.7 41.0 2.0 1.9 1.9 3.9 4.8 4.1 - 31.8 20.8 3.4 3.3 4.5 2.9 3.1 4.4 Sega Sammy 2,905 - 21.4 15.4 1.0 1.0 1.0 0.9 1.0 0.9 4.8 6.9 5.6 -2.5 4.3 5.8 -1.5 2.2 3.9 Namco Bandai 5,099 15.8 15.9 14.7 2.0 1.9 1.7 1.1 1.1 1.1 - 5.9 5.6 13.1 12.2 12.2 9.4 8.3 8.9 Konami 3,616 30.4 23.0 22.8 1.9 1.8 1.7 1.9 1.7 1.8 9.6 9.3 9.5 6.2 8.0 7.5 4.2 6.6 6.2 DeNA 2,423 21.6 20.9 13.4 1.5 1.6 1.4 1.8 2.0 1.7 8.0 7.5 5.2 7.4 8.1 11.3 5.4 7.1 8.3 GREE 1,195 - 16.1 17.8 1.5 1.3 1.2 1.7 1.9 2.0 2.4 4.7 5.2 -10.9 8.8 7.2 -9.0 7.9 6.7 Gungho Online 3,482 8.9 9.0 9.7 4.7 3.6 3.0 2.8 2.7 2.9 3.3 4.5 4.4 49.9 40.9 34.8 42.5 42.2 41.3 Netease.com 21,545 23.8 20.0 16.8 5.1 4.8 3.8 7.5 6.2 4.4 9.3 15.6 12.6 23.6 25.5 25.1 17.8 19.6 19.7 189,36 Tencent 43.4 39.1 30.3 11.2 10.9 8.2 12.8 12.1 9.5 24.2 27.6 21.8 30.0 31.1 30.5 13.2 16.2 17.1 2 Kingsoft 3,479 47.4 43.2 21.6 3.0 3.3 2.8 4.3 4.0 2.6 - 27.8 12.4 7.1 9.7 18.3 3.5 4.0 7.2 Average 24.2 146.0 20.7 3.1 3.1 2.6 3.7 3.7 3.2 20.7 25.5 13.6 13.2 14.2 14.5 10.1 10.4 11.3 Notes: Based on Bloomberg consensus as of Nov. 24 th Source: Bloomberg, KDB Daewoo Securities Research
KDB Daewoo Securities Research 28
November 25, 2015 Internet/Entertainment
(3) Valuations of global entertainment firms
Table 121212.12 . Earnings forecasts for global entertainment companiescompanies (US$mn, %) Market Revenue Operating profit OP margin Net profit NetNetNet marginmarginmargin EPSEPSEPS cap.cap.cap. 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F SM Entertainment 790 273 267 290 33 38 44 12.0 14.3 15.3 6 27 33 2.1 10.1 11.5 1.3 1.3 1.6 YG Entertainment 589 149 164 203 21 22 28 14.0 13.2 14.0 18 25 25 12.3 15.5 12.2 1.3 1.6 1.6 CJ CGV 2,162 987 1,041 1,218 49 62 84 5.0 6.0 6.9 16 51 62 1.6 4.9 5.1 1.9 2.4 2.9 CJ E&M 2,707 1,171 1,153 1,229 -12 58 79 -1.0 5.0 6.5 213 125 88 18.2 10.9 7.2 2.6 3.0 2.3 Live music/management/content production and distribution (US/Japan/China) Live Nation Ent. 5,107 6,867 7,176 7,555 7 138 190 0.1 1.9 2.5 -91 -9 48 -1.3 -0.1 0.6 -0.3 -0.1 0.2 MSG Networks 4,181 1,133 1,113 1,197 13 21 60 1.1 1.8 5.0 -29 8 24 -2.6 0.7 2.0 - 0.7 1.4 Walt Disney 531 1,547 1,226 1,230 79 34 49 5.1 2.8 4.0 55 5 19 3.5 0.4 1.5 1.0 0.1 0.4 Time Warner 445 358 363 347 36 41 37 10.0 11.3 10.6 24 27 23 6.8 7.3 6.7 4.2 3.1 2.7 Discovery Holdings 8,925 386 505 645 138 194 253 35.9 38.5 39.2 146 166 206 37.8 32.8 32.0 0.1 0.1 0.2 Netflix 5,543 309 395 510 69 92 129 22.4 23.3 25.2 63 80 113 20.5 20.3 22.1 0.1 0.1 0.1 Pandora Media 2,809 100 237 316 24 62 85 24.2 26.1 27.0 20 48 67 19.6 20.2 21.1 0.1 0.1 0.1 Avex Group 201,564 52,465 56,021 59,398 13,171 14,950 16,091 25.1 26.7 27.1 8,382 9,336 10,065 16.0 16.7 16.9 5.2 5.6 6.2 Amuse 56,379 27,359 28,466 30,019 5,975 7,056 7,701 21.8 24.8 25.7 3,827 3,761 4,203 14.0 13.2 14.0 4.7 4.7 5.3 Huayi Brothers Media 19,559 6,265 6,426 6,739 2,061 2,066 2,160 32.9 32.1 32.0 1,139 1,080 1,231 18.2 16.8 18.3 1.8 1.8 2.1 Zhejiang Huace Film & TV 53,436 5,505 6,783 8,700 403 294 354 7.3 4.3 4.1 267 94 138 4.8 1.4 1.6 0.4 0.4 0.5 Shanghai New Culture Media 2,759 921 1,156 1,389 -30 -19 51 -3.3 -1.7 3.6 -30 -152 -54 -3.3 -13.1 -3.9 -0.4 0.1 0.2 Group Multiplex (China/US/Canada/Europe) Wanda Cinema Line 18,667 825 1,251 1,876 153 247 383 18.6 19.8 20.4 130 193 290 15.8 15.4 15.5 0.2 0.2 0.3 Cinemark 4,047 2,627 2,872 2,965 363 442 468 13.8 15.4 15.8 193 224 252 7.3 7.8 8.5 1.9 1.9 2.1 Regal Ent. 2,913 2,990 3,133 3,179 306 342 367 10.2 10.9 11.5 106 157 179 3.5 5.0 5.6 1.0 1.1 1.1 Cineplex 2,384 1,118 1,015 1,100 105 114 142 9.4 11.2 12.9 69 73 93 6.2 7.2 8.4 1.2 1.2 1.5 Kinepolis 1,100 349 306 327 67 65 76 19.3 21.3 23.3 47 41 47 13.4 13.3 14.5 1.6 1.5 1.7 Average 13.5 14.7 15.8 10.2 9.8 10.5 Notes: Based on Bloomberg consensus as of Nov. 24 th Source: Bloomberg, KDB Daewoo Securities Research
Table 131313.13 . Valuation comparison of global entertainment companiescompanies (US$mn, %) Market P/EP/EP/E P/BP/BP/B P/SP/SP/S EV/EBITDA ROEROEROE ROAROAROA cap.cap.cap. 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F 141414 15F15F15F 16F16F16F SM Entertainment 790 30.7 28.8 23.2 3.2 3.2 2.8 2.9 2.9 2.7 12.3 14.1 12.6 11.2 12.4 12.5 6.5 8.2 8.3 YG Entertainment 589 34.0 23.8 24.2 3.8 3.7 3.3 4.2 3.5 2.9 22.3 20.5 15.6 13.4 15.5 13.5 8.2 7.8 7.1 CJ CGV 2,162 56.7 42.8 35.0 5.7 5.8 5.1 2.2 2.1 1.8 16.3 16.8 13.7 10.6 14.1 15.0 3.5 4.6 5.0 CJ E&M 2,707 28.2 23.2 30.4 1.9 1.9 1.8 2.4 2.3 2.2 9.4 9.1 8.0 5.3 8.5 6.0 4.0 5.4 4.0 Live music/management/content production and distribution (US/Japan/China) Live Nation Ent. 5,107 - - 118.5 3.8 4.0 3.7 0.7 0.7 0.7 17.1 11.6 10.1 -10.5 -1.4 4.6 -2.3 1.8 3.5 MSG Networks 4,181 - 241.2 118.2 1.2 1.6 1.6 - 3.8 3.5 - 20.7 16.8 - 1.2 1.1 - 2.0 1.7 Walt Disney 531 11.8 103.1 26.9 1.3 - - 0.4 0.4 0.4 4.7 - - 11.3 1.3 - 5.1 - - Time Warner 445 11.7 15.5 17.7 2.3 2.2 2.0 1.0 1.2 1.3 - 6.3 7.6 21.3 17.5 11.6 12.8 - - Discovery Holdings 8,925 48.0 50.5 40.2 6.2 6.8 5.9 15.1 17.7 13.9 - 46.4 33.6 15.3 15.5 15.3 9.5 9.7 9.7 Netflix 5,543 78.6 54.6 40.4 9.4 6.3 5.6 16.1 14.1 10.9 36.9 56.6 41.7 15.3 12.9 14.8 10.9 8.0 9.7 Pandora Media 2,809 93.0 54.7 40.8 13.6 6.8 4.6 18.3 11.9 8.9 32.4 53.8 42.5 12.4 13.2 14.2 9.4 6.2 10.7 Avex Group 201,564 23.2 21.2 19.3 4.6 4.3 4.1 3.9 3.6 3.4 12.4 12.7 11.8 18.7 19.9 20.4 9.7 12.4 12.7 Amuse 56,379 15 15 13 2 2 2 2.0 2.0 1.9 10 10 9 15.1 15.8 18.2 5.9 6.3 6.8 Huayi Brothers Media 19,559 18 17 15 2 3 3 2.1 3.0 2.9 8 11 11 12.3 19.5 21.3 6.6 7.9 8.4 Zhejiang Huace Film & TV 53,436 332 344 268 25 25 23 8.2 7.9 6.1 118 110 89 8.4 5.9 7.1 2.0 2.0 1.8 Shanghai New Culture Media 2,759 - 115 56 5 5 5 2.5 2.4 2.0 - 44 23 -25.9 4.3 2.4 -18.1 -1.8 6.1 MultiplexGroup (China/US/Canada/Europe) Wanda Cinema Line 18,667 112 98 66 27 23 16 18.5 14.9 10.0 - 62 39 28.8 27.2 27.2 20.2 19.6 19.2 Cinemark 4,047 18 18 16 4 3 3 1.4 1.4 1.4 9 9 8 18.7 20.0 19.2 5.1 7.4 7.6 Regal Ent. 2,913 18 17 17 - - - 0.9 0.9 0.9 10 9 8 - -18.5 -20.0 5.8 6.7 6.3 Cineplex 2,384 34 33 25 4 4 4 2.5 2.4 2.2 15 15 13 12.5 15.7 21.0 5.7 - - Kinepolis 1,100 28 28 24 10 8 7 3.6 3.6 3.4 14 15 13 35.2 30.5 31.7 10.8 - - Average 55.0 67.2 49.3 6.8 6.4 5.5 5.4 4.9 4.0 21.8 27.6 21.4 12.1 12.0 12.8 6.1 6.7 7.6 Notes: Based on Bloomberg consensus as of Nov. 24 th Source: Bloomberg, KDB Daewoo Securities Research
KDB Daewoo Securities Research 29
November 25, 2015 Internet/Entertainment
NAVER (035420 KS) 2016 earnings momentum
Internet 3Q results confirm domestic mobile growth
NAVER’s 3Q results reaffirmed the strong growth of both the domestic (search portal) (Maintain) Buy and overseas (LINE) businesses. At the domestic business, 3Q revenue and operating profit expanded 19.1% and 13.8% YoY, respectively. Search ad revenue and display ad Target Price (12M, 820,000 revenue increased 13% and 10% YoY, respectively, boosted by the rollout of mobile ad W) offerings and robust e-commerce sales. Share Price (11/24/15, 621,000 W) LINE’s 3Q consolidated revenue jumped 35.3% YoY and 15.8% QoQ in yen terms, or 21.4% QoQ to W281.5bn in won terms. LINE’s ad revenue expanded 40% QoQ, driven by Expected Return 32% a sharp rise in sales from Free Coin video ads.
OP (15F, Wbn) 797 The domestic business should continue its robust performance in 4Q on the back of Consensus OP (15F, Wbn) 783 seasonally strong ad demand and mobile ad growth. Meanwhile, LINE is set to release more than 10 new games in 4Q (vs. seven in 3Q). All in all, we forecast NAVER’s 4Q EPS Growth (15F, %) 20.1 consolidated revenue and operating profit to grow 18.7% and 24.9% YoY, respectively. Market EPS Growth (15F, %) 22.3 P/E (15F, x) 37.5 Joining the global internet rally Market P/E (15F, x) 11.4 KOSPI 2,016.29 Foreign ownership in NAVER has been increasing after falling for a year, recently rising to 57.4% (from 51.7% in February 2015). In the US, several internet stocks, most notably Market Cap (Wbn) 20,470 Amazon, have continued to climb higher this year, regardless of broader market Shares Outstanding (mn) 33 movements. Free Float (%) 78.2 Foreign Ownership (%) 57.7 In Asia, sector leaders like NAVER, Alibaba, and Rakuten have also been rebounding from Beta (12M) 0.66 their lows since September. What’s worth noting is that this time the global internet 52-Week Low 461,500 rally is being accompanied by improving earnings. Many internet leaders with dominant 52-Week High 790,000 positions in the mobile commerce and ad space are showing strong earnings
(%)(%)(%) 1M1M1M 6M6M6M 12M12M12M momentum. Absolute 8.8 -1.0 -17.2 Reiterate Buy and TP of W820,000; LINE to be revalued higher in 2016 Relative 10.1 5.4 -18.8 We see robust earnings ahead in 2016, driven by mobile revenue growth domestically 130 NAVER KOSPI and overseas, and easing spending pressures (which were heavily concentrated in 2015 110 due to stock-based compensations and new initiatives like MixRadio). 90 The market has heavily discounted the value of LINE in NAVER’s stock after LINE’s new 70 delivery (WOW), taxi, payment, and music services failed to take off in 2015. However,
50 we see several upside catalysts that could drive up LINE’s value in 2016, including 1) an 11.14 3.15 7.15 11.15 IPO in the US and Japan, 2) potential business partnerships with Japanese companies (e.g., Rakuten, Yahoo Japan, or SoftBank) and 3) the development of new profit models (e.g., targeted ad services). We maintain our Buy call on NAVER with a target price of W820,000.
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 1,799 2,312 2,758 3,242 3,744 4,106 OP (Wbn) 521 524 758 797 1,063 1,301 OP margin (%) 29.0 22.7 27.5 24.6 28.4 31.7 NP (Wbn) 546 1,897 454 546 741 900 EPS (W) 11,346 45,425 13,787 16,558 22,468 27,315 ROE (%) 31.4 112.7 27.8 26.5 27.7 26.0 P/E (x) 19.9 15.9 51.6 37.5 27.6 22.7 P/B (x) 3.8 11.3 8.7 6.4 5.2 4.3 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
KDB Daewoo Securities Research 30
November 25, 2015 Internet/Entertainment
NAVER (035420 KS/Buy/TP: W820,000)
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 2,7582,7582,758 3,2423,2423,242 3,7443,7443,744 4,1064,1064,106 Current Assets 1,9461,9461,946 2,7352,7352,735 3,7033,7033,703 4,7624,7624,762 Cost of Sales 000 000 000 000 Cash and Cash Equivalents 723 1,305 2,051 2,951 Gross Profit 2,7582,7582,758 3,2423,2423,242 3,7443,7443,744 4,1064,1064,106 AR & Other Receivables 414 479 554 607 SG&A Expenses 2,0002,0002,000 2,4452,4452,445 2,6822,6822,682 2,8052,8052,805 Inventories 17 19 22 25 Operating Profit (Adj) 758758758 797797797 1,0631,0631,063 1,3011,3011,301 Other Current Assets 792 932 1,076 1,179 Operating Profit 758758758 797797797 1,0631,0631,063 1,3011,3011,301 NonNonNon-Non ---CurrentCurrent Assets 1,4491,4491,449 1,3741,3741,374 1,3211,3211,321 1,2711,2711,271 NonNonNon-Non ---OperatingOperating Profit ---99 -999999 232323 ---12-121212 303030 Investments in Associates 36 42 49 54 Net Financial Income 17 27 42 59 Property, Plant and Equipment 901 791 700 623 Net Gain from Inv in Associates -1 0 0 0 Intangible Assets 121 110 101 93 Pretax Profit 659 820 1,051 1,331 Total Assets 3,3943,3943,394 4,1104,1104,110 5,0245,0245,024 6,0336,0336,033 Income Tax 237 278 314 436 Current Liabilities 1,0811,0811,081 1,2281,2281,228 1,3861,3861,386 1,5001,5001,500 Profit from Continuing Operations 422 543 736 895 AP & Other Payables 315 370 427 468 Profit from Discontinued Operations 30 0 0 0 Short-Term Financial Liabilities 213 209 209 209 Net Profit 452452452 543543543 736736736 895895895 Other Current Liabilities 553 649 750 823 Controlling Interests 454 546 741 900 NonNonNon-Non ---CurrentCurrent Liabilities 516516516 564564564 614614614 650650650 Non-Controlling Interests -3 -3 -4 -5 Long-Term Financial Liabilities 243 243 243 243 Total Comprehensive Profit 563563563 543543543 736736736 895895895 Other Non-Current Liabilities 273 321 371 407 Controlling Interests 565 545 740 899 Total Liabilities 1,5971,5971,597 1,7931,7931,793 2,0002,0002,000 2,1502,1502,150 Non-Controlling Interests -3 -3 -4 -4 Controlling Interests 1,7961,7961,796 2,3192,3192,319 3,0303,0303,030 3,8953,8953,895 EBITDA 902 918 1,164 1,386 Capital Stock 16 16 16 16 FCF (Free Cash Flow) 508 800 972 1,081 Capital Surplus 133 133 133 133 EBITDA Margin (%) 32.7 28.3 31.1 33.8 Retained Earnings 2,584 3,106 3,817 4,683 Operating Profit Margin (%) 27.5 24.6 28.4 31.7 NonNonNon-Non ---ControllingControlling Interests 111 ---2-222 ---6-666 ---12-121212 Net Profit Margin (%) 16.5 16.8 19.8 21.9 Stockholders' Equity 1,7971,7971,797 2,3172,3172,317 3,0243,0243,024 3,8833,8833,883
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1412/1412/14 12/15F 12/16F 12/17F 12/1412/1412/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 779 800 972 1,081 P/E (x) 51.6 37.5 27.6 22.7 Net Profit 452 543 736 895 P/CF (x) 24.6 22.3 18.4 15.0 Non-Cash Income and Expense 503 376 378 466 P/B (x) 8.7 6.4 5.2 4.3 Depreciation 132 110 92 76 EV/EBITDA (x) 24.9 20.4 15.3 12.2 Amortization 12 11 9 8 EPS (W) 13,787 16,558 22,468 27,315 Others 359 255 277 382 CFPS (W) 28,959 27,872 33,809 41,285 Chg in Working Capital 35 123 121 87 BPS (W) 81,551 97,411 118,985 145,227 Chg in AR & Other Receivables -107 -55 -57 -41 DPS (W) 782 1,000 1,200 1,400 Chg in Inventories -17 -3 -3 -2 Payout ratio (%) 5.1 5.4 4.8 4.6 Chg in AP & Other Payables 206 0 0 0 Dividend Yield (%) 0.1 0.2 0.2 0.2 Income Tax Paid ---234 -234234234 ---278-278278278 ---314-314314314 ---436-436436436 Revenue Growth (%) 19.3 17.5 15.5 9.7 Cash Flows from Inv Activities -379 -170 -176 -127 EBITDA Growth (%) 37.5 1.8 26.8 19.1 Chg in PP&E -260 0 0 0 Operating Profit Growth (%) 44.7 5.1 33.4 22.4 Chg in Intangible Assets -6 0 0 0 EPS Growth (%) -69.6 20.1 35.7 21.6 Chg in Financial Assets -178 -170 -176 -127 Accounts Receivable Turnover (x) 10.1 9.5 9.4 9.2 Others 656565 000 000 000 Inventory Turnover (x) Cash Flows from Fin Activities -112 -28 -29 -35 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities 104 -5 0 0 ROA (%) 14.8 14.5 16.1 16.2 Chg in Equity 0 0 0 0 ROE (%) 27.8 26.5 27.7 26.0 Dividends Paid -22 -23 -29 -35 ROIC (%) 68.3 89.8 184.7 350.6 Others ---194 -194194194 000 000 000 Liability to Equity Ratio (%) 88.9 77.4 66.2 55.4 Increase (Decrease) in Cash 287 583 746 900 Current Ratio (%) 180.0 222.7 267.1 317.5 Beginning Balance 435 723 1,305 2,051 Net Debt to Equity Ratio (%) Ending Balance 723723723 1,3051,3051,305 2,0512,0512,051 2,9512,9512,951 Interest Coverage Ratio (x) Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 31
November 25, 2015 Internet/Entertainment
Kakao (035720 KQ) O2O services are the future
Internet 3Q15 review: Results in line with expectations
Kakao reported 3Q consolidated revenue of W229.6bn (+1.4% QoQ) and operating (Maintain) Buy profit of W16.2bn (+42% QoQ). Net profit, however, declined 31% QoQ to W14.8bn due to higher taxes. Target Price (12M, 170,000 W) The biggest earnings driver in 3Q was e-commerce sales, which expanded 12% QoQ to Share Price (11/24/15, W15.3bn, helped by 1) the addition of a “special offer” tab for KakaoTalk gifting, and 2) 112,800 W) an expanded product offering.
Expected Return 51% Revenue from KakaoGame remained flat QoQ at W43.2bn, accounting for 84% of overall game revenue. Kakao ad revenue fell 16% QoQ to W22.9bn due to unfavorable OP (15F, Wbn) 95 seasonality. Consensus OP (15F, Wbn) 95 KakaoGame’s October unique visitors up 71% compared to August lows EPS Growth (15F, %) -75.7 Market EPS Growth (15F, %) 22.3 “For Kakao” games, which were largely to blame for the company’s earnings decline in P/E (15F, x) 75.9 2015, have been showing a sharp increase in traffic since September. In October, Market P/E (15F, x) 11.4 KakaoGame’s unique visitors and session length jumped 71% and 91%, respectively, KOSDAQ 687.86 compared to the August lows.
Market Cap (Wbn) 6,771 We expect user metrics to be even more positive in November and December. Game Shares Outstanding (mn) 60 developers SundayToz, PATI Games, NZIN, and Joymax are currently taking pre-orders Free Float (%) 59.2 for their go-stop games that are set to be launched on Kakao (the first of which will be Foreign Ownership (%) 18.4 SundayToz’s Anypang Matgo in November). Beta (12M) 1.00 52-Week Low 100,400 Maintain Buy and TP of W170,000; O2O expectations still intact 52-Week High 157,400 We expect earnings to more meaningfully improve in 4Q, boosted by 1) the peak-season (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M of the e-commerce and ad markets, and 2) the revenue contribution of new titles (go- Absolute -1.4 -0.2 -21.9 stop games and a second mobile game based on Kakao Friends characters). Relative -2.2 3.5 -38.5 The company’s integrated ad selling system is expected to officially come online by the 160 Kakao KOSDAQ end of the year, which should help boost ad revenue in 2016. 140
120 Meanwhile, the company is planning to roll out a new O2O service every quarter for the next year or two, including a driver-for-hire (designated driver) service called Kakao 100 Driver in 1H16. We believe O2O, which allows people to buy whatever they want, 80 whenever and wherever they need it, is where the future of the internet lies. 60 11.14 3.15 7.15 11.15 In December, the government is expected to announce the winners of the Internet bank
bid. We think the Kakao Bank consortium, which consists of 11 participants across the finance, e-commerce, content, and ICT sectors, stands a good chance of winning. We reiterate our Buy rating on Kakao with a target price of W170,000.
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 453 211 499 949 1,095 1,244 OP (Wbn) 102 66 176 95 182 252 OP margin (%) 22.5 31.3 35.3 10.0 16.6 20.3 NP (Wbn) 76 61 150 89 157 221 EPS (W) 5,656 4,532 6,116 1,486 2,619 3,687 ROE (%) 15.7 17.7 11.4 3.6 6.0 7.9 P/E (x) 16.1 18.5 20.2 75.9 43.1 30.6 P/B (x) 2.4 6.4 2.9 2.6 2.5 2.3 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
KDB Daewoo Securities Research 32
November 25, 2015 Internet/Entertainment
Kakao (035720 KQ/Buy/TP: W170,000)
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 499499499 949949949 1,0951,0951,095 1,2441,2441,244 Current Assets 798798798 1,1031,1031,103 1,3351,3351,335 1,6321,6321,632 Cost of Sales 000 000 000 000 Cash and Cash Equivalents 451 459 592 787 Gross Profit 499499499 949949949 1,0951,0951,095 1,2441,2441,244 AR & Other Receivables 130 230 266 302 SG&A Expenses 322322322 854854854 912912912 992992992 Inventories 2 4 4 5 Operating Profit (Adj) 176176176 959595 182182182 252252252 Other Current Assets 215 410 473 538 Operating Profit 176176176 959595 182182182 252252252 NonNonNon-Non ---CurrentCurrent Assets 1,9701,9701,970 2,0192,0192,019 2,0222,0222,022 2,0272,0272,027 NonNonNon-Non ---OperatingOperating Profit ---7 -777 171717 151515 222222 Investments in Associates 19 36 41 47 Net Financial Income 6 11 14 18 Property, Plant and Equipment 197 181 167 155 Net Gain from Inv in Associates -3 3 3 3 Intangible Assets 1,689 1,683 1,678 1,672 Pretax Profit 169 112 197 274 Total Assets 2,7682,7682,768 3,1213,1213,121 3,3573,3573,357 3,6593,6593,659 Income Tax 19 23 40 53 Current Liabilities 227227227 433433433 499499499 567567567 Profit from Continuing Operations 150 88 157 221 AP & Other Payables 109 208 239 272 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 150150150 888888 157157157 221221221 Other Current Liabilities 118 225 260 295 Controlling Interests 150 89 157 221 NonNonNon-Non ---CurrentCurrent Liabilities 777777 147147147 169169169 192192192 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 155155155 888888 157157157 221221221 Other Non-Current Liabilities 77 147 169 192 Controlling Interests 155 89 157 221 Total Liabilities 305305305 580580580 669669669 760760760 Non-Controlling Interests 0 0 0 0 Controlling Interests 2,4542,4542,454 2,5342,5342,534 2,6802,6802,680 2,8912,8912,891 EBITDA 199 116 202 270 Capital Stock 29 29 29 29 FCF (Free Cash Flow) 208 255 219 283 Capital Surplus 2,259 2,259 2,259 2,259 EBITDA Margin (%) 39.9 12.2 18.4 21.7 Retained Earnings 191 269 416 627 Operating Profit Margin (%) 35.3 10.0 16.6 20.3 NonNonNon-Non ---ControllingControlling Interests 999 888 888 888 Net Profit Margin (%) 30.1 9.4 14.3 17.8 Stockholders' Equity 2,4632,4632,463 2,5422,5422,542 2,6882,6882,688 2,8992,8992,899
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1412/1412/14 12/15F 12/16F 12/17F 12/1412/1412/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 220 255 219 283 P/E (x) 20.2 75.9 43.1 30.6 Net Profit 150 88 157 221 P/CF (x) 16.1 56.7 34.0 24.9 Non-Cash Income and Expense 39 30 42 51 P/B (x) 2.9 2.6 2.5 2.3 Depreciation 17 15 14 13 EV/EBITDA (x) 32.6 51.3 28.6 20.4 Amortization 6 6 6 6 EPS (W) 6,116 1,486 2,619 3,687 Others 16 9 22 32 CFPS (W) 7,694 1,991 3,319 4,525 Chg in Working Capital 6 149 45 47 BPS (W) 42,651 42,618 45,065 48,579 Chg in AR & Other Receivables -18 -98 -32 -33 DPS (W) 173 173 173 173 Chg in Inventories -2 -2 -1 -1 Payout ratio (%) 6.7 11.7 6.6 4.7 Chg in AP & Other Payables 31 0 0 0 Dividend Yield (%) 0.1 0.2 0.2 0.2 Income Tax Paid ---1 -111 ---23-232323 ---40-404040 ---53-535353 Revenue Growth (%) 136.5 90.2 15.4 13.6 Cash Flows from Inv Activities 173 -224 -72 -74 EBITDA Growth (%) 172.6 -41.7 74.1 33.7 Chg in PP&E -13 0 0 0 Operating Profit Growth (%) 166.7 -46.0 91.6 38.5 Chg in Intangible Assets -10 0 0 0 EPS Growth (%) 35.0 -75.7 76.2 40.8 Chg in Financial Assets -142 -224 -72 -74 Accounts Receivable Turnover (x) 6.5 6.0 4.9 4.9 Others 338338338 000 000 000 Inventory Turnover (x) Cash Flows from Fin Activities 35 -10 -10 -10 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities 0 0 0 0 ROA (%) 10.0 3.0 4.8 6.3 Chg in Equity 2,155 0 0 0 ROE (%) 11.4 3.6 6.0 7.9 Dividends Paid 0 -10 -10 -10 ROIC (%) 16.8 4.2 8.6 12.3 Others ---2,120 -2,1202,1202,120 000 000 000 Liability to Equity Ratio (%) 12.4 22.8 24.9 26.2 Increase (Decrease) in Cash 428 7 134 195 Current Ratio (%) 350.9 254.8 267.4 287.6 Beginning Balance 23 451 459 592 Net Debt to Equity Ratio (%) Ending Balance 451451451 459459459 592592592 787787787 Interest Coverage Ratio (x) Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 33
November 25, 2015 Internet/Entertainment
NCSOFT (036570 KS) Lineage : A beneficiary of “kidult” culture
Game Lineage I update to fuel strong growth in 2016
Lineage I has shown a meaningful increase in its number of players and playtime since its (Maintain) Buy content update on October 14 th , its first in seven years. According to Gametrics, which collects data on internet café games, Lineage I accounts for 4.1% of internet café Target Price (12M, 270,000 playtime as of November 17 th, almost double its pre-update level of 2.07% between W) October 1 st and October 14 th . Share Price (11/24/15, 215,000 W) Lineage I internet café playtime is up 63.2% to a daily average of 187,000 hours as of November 17 th from 115,000 hours between October 1 st and October 14 th . Given that Expected Return 26% the November daily average is 178,000 hours, this suggests that the title’s playtime in internet cafés has more recently increased. OP (15F, Wbn) 242 Consensus OP (15F, Wbn) 253 We estimate the title generated ARPU of W51,000 from 440,000 players in 3Q. Given the recent increase in user metrics, we believe the company will continue to see a steady EPS Growth (15F, %) -15.9 cash flow for quite some time. Market EPS Growth (15F, %) 22.3 P/E (15F, x) 24.4 Mobile titles, global service, and blockbuster momentum in 2016 Market P/E (15F, x) 11.4 KOSPI 2,016.29 NCSOFT plans to release a number of mobile titles based on its original intellectual property, starting with Blade & Soul China mobile, which will be published by Tencent in Market Cap (Wbn) 4,715 early 2016. There are currently two mobile titles based on Lineage I and another two Shares Outstanding (mn) 22 based on Lineage II (developed by Netmarble for Korea and Snail for China) in the works. Free Float (%) 87.8 Foreign Ownership (%) 32.5 At this year’s G-Star trade show, the company provided more details on its planned Beta (12M) 0.89 release of the shooting game Master X Master (MXM ). The company said additional beta 52-Week Low 159,500 tests will be conducted in February 2016 in Korea, Japan, and Taiwan using a single 52-Week High 244,000 server, and added that it is also developing a mobile version of the title.
(%)(%)(%) 1M1M1M 6M6M6M 12M12M12M The company is also set to reveal Lineage Eternal , its first blockbuster title in five years Absolute 14.1 2.4 31.1 since the 2012 launch of Blade & Soul . A large-scale beta test for Lineage Eternal is Relative 15.4 9.0 28.6 scheduled to begin in 1H16.
160 NCSOFT KOSPI Maintain Buy and TP of W270,000 140 Game stocks tend to swing wildly whenever the release of a highly anticipated game is 120 delayed or a new title fails to deliver. 100 Nevertheless, we think now is a good time to Buy NCSOFT for the following reasons: 1) 80 11.14 3.15 7.15 11.15 Lineage I , the company’s cash cow, has been performing strongly following its recent update, and should continue to support stable earnings in 2016. 2) The market has yet to price in expectations on the forthcoming events in 2016. We maintain our Buy rating on NCSOFT with a target price of W270,000.
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 754 757 839 843 964 1,110 OP (Wbn) 151 205 278 242 314 382 OP margin (%) 20.0 27.1 33.1 28.7 32.6 34.4 NP (Wbn) 156 159 230 193 260 325 EPS (W) 7,120 7,245 10,487 8,824 11,863 14,817 ROE (%) 16.8 14.8 18.4 13.6 16.5 18.1 P/E (x) 21.1 34.3 17.4 24.4 18.1 14.5 P/B (x) 3.0 4.4 2.7 3.0 2.7 2.3 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
KDB Daewoo Securities Research 34
November 25, 2015 Internet/Entertainment
NCSOFT (036570 KS/Buy/TP: W270,000)
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 839839839 843843843 964964964 1,1101,1101,110 Current Assets 1,0201,0201,020 1,1761,1761,176 1,4231,4231,423 1,7311,7311,731 Cost of Sales 220220220 219219219 250250250 288288288 Cash and Cash Equivalents 203 354 484 649 Gross Profit 619619619 624624624 714714714 822822822 AR & Other Receivables 90 91 104 120 SG&A Expenses 340340340 382382382 400400400 440440440 Inventories 1 1 1 1 Operating Profit (Adj) 278278278 242242242 314314314 382382382 Other Current Assets 726 730 834 961 Operating Profit 278278278 242242242 314314314 382382382 NonNonNon-Non ---CurrentCurrent Assets 679679679 648648648 629629629 615615615 NonNonNon-Non ---OperatingOperating Profit 111111 ---6-666 171717 242424 Investments in Associates 29 29 34 39 Net Financial Income 17 22 26 31 Property, Plant and Equipment 241 215 192 172 Net Gain from Inv in Associates -2 -1 -1 -1 Intangible Assets 95 89 85 81 Pretax Profit 289 236 331 406 Total Assets 1,6991,6991,699 1,8231,8231,823 2,0522,0522,052 2,3462,3462,346 Income Tax 61 45 74 85 Current Liabilities 245245245 247247247 282282282 325325325 Profit from Continuing Operations 228 191 257 321 AP & Other Payables 25 26 29 34 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 228228228 191191191 257257257 321321321 Other Current Liabilities 220 221 253 291 Controlling Interests 230 193 260 325 NonNonNon-Non ---CurrentCurrent Liabilities 787878 787878 898989 103103103 Non-Controlling Interests -2 -2 -3 -3 Long-Term Financial Liabilities 1 1 1 1 Total Comprehensive Profit 224224224 191191191 257257257 321321321 Other Non-Current Liabilities 77 77 88 102 Controlling Interests 228 195 262 327 Total Liabilities 323323323 325325325 371371371 428428428 Non-Controlling Interests -4 -3 -4 -5 Controlling Interests 1,3611,3611,361 1,4861,4861,486 1,6711,6711,671 1,9111,9111,911 EBITDA 315 274 341 406 Capital Stock 11 11 11 11 FCF (Free Cash Flow) 244 224 314 380 Capital Surplus 222 222 222 222 EBITDA Margin (%) 37.5 32.5 35.4 36.6 Retained Earnings 1,234 1,359 1,544 1,785 Operating Profit Margin (%) 33.1 28.7 32.6 34.4 NonNonNon-Non ---ControllingControlling Interests 151515 131313 101010 777 Net Profit Margin (%) 27.4 22.9 27.0 29.3 Stockholders' Equity 1,3761,3761,376 1,4991,4991,499 1,6811,6811,681 1,9181,9181,918
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1412/1412/14 12/15F 12/16F 12/17F 12/1412/1412/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 264 224 314 380 P/E (x) 17.4 24.4 18.1 14.5 Net Profit 228 191 257 321 P/CF (x) 11.9 19.3 14.3 11.9 Non-Cash Income and Expense 109 53 73 75 P/B (x) 2.7 3.0 2.7 2.3 Depreciation 30 26 23 20 EV/EBITDA (x) 9.9 13.4 10.1 7.8 Amortization 6 5 4 4 EPS (W) 10,487 8,824 11,863 14,817 Others 73 22 46 51 CFPS (W) 15,336 11,151 15,085 18,073 Chg in Working Capital -21 1 29 35 BPS (W) 66,702 72,402 80,836 91,824 Chg in AR & Other Receivables -11 0 -13 -16 DPS (W) 3,430 3,430 3,830 4,830 Chg in Inventories 0 0 0 0 Payout ratio (%) 30.1 39.3 32.6 32.9 Chg in AP & Other Payables 1 0 1 1 Dividend Yield (%) 1.9 1.6 1.8 2.2 Income Tax Paid ---69 -696969 ---45-454545 ---74-747474 ---85-858585 Revenue Growth (%) 10.8 0.5 14.4 15.1 Cash Flows from Inv Activities -176 -4 -104 -126 EBITDA Growth (%) 30.7 -13.0 24.5 19.1 Chg in PP&E -19 0 0 0 Operating Profit Growth (%) 35.6 -12.9 29.8 21.7 Chg in Intangible Assets -2 0 0 0 EPS Growth (%) 44.7 -15.9 34.4 24.9 Chg in Financial Assets -146 -4 -104 -126 Accounts Receivable Turnover (x) 9.8 9.4 10.0 10.0 Others ---9 -999 000 000 000 Inventory Turnover (x) Cash Flows from Fin Activities -12 -68 -75 -84 Accounts Payable Turnover (x) 27.7 26.0 27.7 27.8 Chg in Financial Liabilities -8 0 0 0 ROA (%) 14.3 10.9 13.3 14.6 Chg in Equity 1 0 0 0 ROE (%) 18.4 13.6 16.5 18.1 Dividends Paid -12 -68 -75 -84 ROIC (%) 93.7 91.8 139.1 232.3 Others 777 000 000 000 Liability to Equity Ratio (%) 23.5 21.7 22.1 22.3 Increase (Decrease) in Cash 79 151 130 165 Current Ratio (%) 415.5 476.6 504.6 532.7 Beginning Balance 123 203 354 484 Net Debt to Equity Ratio (%) Ending Balance 203203203 354354354 484484484 649649649 Interest Coverage Ratio (x) Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 35
November 25, 2015 Internet/Entertainment
CJ CGV (079160 KS) China, Indonesia, and 4DX to drive growth
Entertainment 3Q15 review: CGV China remains in the black
For 3Q, CJ CGV announced consolidated revenue of W358bn (+16.3% YoY) and (Maintain) Buy operating profit of W38.9bn (+15% YoY). CGV China posted a profit (W2.3bn) for the second straight quarter, while subsidiary CJ 4DPLEX also recorded a profit (W1.6bn). Target Price (12M, 150,000 Based on a simple sum of all local sites, CGV China’s 3Q revenue jumped 84% YoY. The W) company currently has a total of 56 sites in China and is expected to open eight more by Share Price (11/24/15, 118,000 year-end. Non-consolidated domestic revenue grew 4% YoY, but operating profit fell 1% W) YoY, weighed down by MERS-related sterilization expenses and higher marketing spend.
Expected Return 27% Indonesia- and 4DPLEX-driven growth story to begin in 2016
OP (15F, Wbn) 77 CJ CGV acquired a stake in Indonesia’s Blitzmegaplex (renamed CGV Blitz) in 2014, with Consensus OP (15F, Wbn) 76 the option to buy additional shares through 2017. CGV Blitz has 15 sites and is expected to increase that number to 80 by 2020. EPS Growth (15F, %) 93.6 Market EPS Growth (15F, %) 22.3 The entertainment technology firm IMAX Corporation owns 934 theater systems (828 P/E (15F, x) 38.8 commercial) in 62 countries. The company’s stock has been moving upward since 2000, Market P/E (15F, x) 11.4 and showed strong rallies in 2009 and 2010 following the release of the movie Avatar . KOSPI 2,016.29 CJ 4DPLEX (93.6% stake) has lately been attracting increasing attention. CJ 4DPLEX has Market Cap (Wbn) 2,497 a profile similar to that of IMAX, in the sense that both companies specialize in supplying Shares Outstanding (mn) 21 systems and services to theater operators around the world. Established in 2010, Free Float (%) 60.9 4DPLEX is aiming to operate 225 4DX screens in 41 countries by the end of 2015 and Foreign Ownership (%) 15.6 1,000 4DX screens by 2020. We see several events on the horizon that could boost 4DX Beta (12M) 1.08 demand, including the simultaneous production of the next three installments of the 52-Week Low 51,600 Avatar series and the release of the third Avengers movie. 52-Week High 131,000
(%)(%)(%) 1M1M1M 6M6M6M 12M12M12M Retain Buy and TP of W150,000 Absolute 12.9 7.8 126.1 We reiterate our Buy rating and target price of W150,000, which represents the sum of Relative 14.3 14.7 121.8 the values of Korea, China, and Vietnam operations. We estimate the value of CGV Korea
280 CJ CGV KOSPI at W1.1tr (17.2x our 2016F EPS) and CGV Vietnam (which has high earnings visibility) at
230 W178.5bn.
180 Stripping away the value of the domestic and Vietnam businesses from the company’s current market cap, we believe the market is pricing the China business at roughly W1tr. 130 In comparison, China’s leading cinema operator, Wanda Cinema Line, has seen its market 80 cap recover to W19.9tr on the back of China’s strong box-office market in 3Q. We note 11.14 3.15 7.15 11.15 that we have not yet reflected 4DPLEX (which has eked out a profit for the second
quarter in a row) and the Indonesia subsidiary (which is in the early stages of the integration process) in our valuation.
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 665 773 865 904 957 1,009 OP (Wbn) 72 68 71 77 88 100 OP margin (%) 10.8 8.8 8.2 8.5 9.2 9.9 NP (Wbn) 73 43 33 64 73 81 EPS (W) 3,528 2,062 1,572 3,044 3,430 3,844 ROE (%) 20.4 10.3 7.2 12.8 12.9 12.9 P/E (x) 9.1 21.1 34.3 38.8 34.4 30.7 P/B (x) 1.7 2.0 2.4 4.7 4.2 3.7 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
KDB Daewoo Securities Research 36
November 25, 2015 Internet/Entertainment
CJ CGV (079160 KS/Buy/TP: W150,000)
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 904904904 957957957 1,0091,0091,009 Current Assets 189189189 195195195 295295295 397397397 Cost of Sales 424424424 442442442 464464464 489489489 Cash and Cash Equivalents 62 66 158 252 Gross Profit 441441441 462462462 493493493 520520520 AR & Other Receivables 97 98 104 110 SG&A Expenses 369369369 385385385 405405405 420420420 Inventories 3 3 4 4 Operating Profit (Adj) 717171 777777 888888 100100100 Other Current Assets 27 28 29 31 Operating Profit 717171 777777 888888 100100100 NonNonNon-Non ---CurrentCurrent Assets 961961961 931931931 917917917 908908908 NonNonNon-Non ---OperatingOperating Profit ---19 -191919 888 101010 141414 Investments in Associates 382 400 423 446 Net Financial Income -15 -12 -8 -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 85 98 114 Total Assets 1,1501,1501,150 1,1261,1261,126 1,2121,2121,212 1,3051,3051,305 Income Tax 18 21 25 33 Current Liabilities 350350350 266266266 282282282 297297297 Profit from Continuing Operations 33 64 73 81 AP & Other Payables 147 153 162 171 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 102 7 7 7 Net Profit 333333 646464 737373 818181 Other Current Liabilities 101 106 113 119 Controlling Interests 33 64 73 81 NonNonNon-Non ---CurrentCurrent Liabilities 327327327 330330330 335335335 339339339 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 255 255 255 255 Total Comprehensive Profit 313131 646464 737373 818181 Other Non-Current Liabilities 72 75 80 84 Controlling Interests 31 64 73 81 Total Liabilities 677677677 596596596 617617617 636636636 Non-Controlling Interests 0 0 0 0 Controlling Interests 473473473 530530530 595595595 669669669 EBITDA 133 127 129 134 Capital Stock 11 11 11 11 FCF (Free Cash Flow) 76 126 126 128 Capital Surplus 89 89 89 89 EBITDA Margin (%) 15.4 14.0 13.5 13.3 Retained Earnings 378 435 500 574 Operating Profit Margin (%) 8.2 8.5 9.2 9.9 NonNonNon-Non ---ControllingControlling Interests 000 000 000 000 Net Profit Margin (%) 3.8 7.1 7.6 8.0 Stockholders' Equity 473473473 530530530 595595595 669669669
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1412/1412/14 12/15F 12/16F 12/17F 12/1412/1412/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 146 126 126 128 P/E (x) 34.3 38.8 34.4 30.7 Net Profit 33 64 73 81 P/CF (x) 7.4 17.0 17.1 16.6 Non-Cash Income and Expense 121 82 73 69 P/B (x) 2.4 4.7 4.2 3.7 Depreciation 49 42 36 32 EV/EBITDA (x) 10.7 21.2 20.1 18.7 Amortization 13 8 4 3 EPS (W) 1,572 3,044 3,430 3,844 Others 59 32 33 34 CFPS (W) 7,300 6,922 6,883 7,117 Chg in Working Capital 10 12 13 12 BPS (W) 22,344 25,038 28,117 31,611 Chg in AR & Other Receivables -13 -3 -5 -4 DPS (W) 350 350 350 350 Chg in Inventories -1 0 0 0 Payout ratio (%) 22.3 11.5 10.2 9.1 Chg in AP & Other Payables 15 3 4 4 Dividend Yield (%) 0.6 0.3 0.3 0.3 Income Tax Paid ---9 -999 ---21-212121 ---25-252525 ---33-333333 Revenue Growth (%) 11.9 4.5 5.9 5.4 Cash Flows from Inv Activities -152 -3 -3 -3 EBITDA Growth (%) 10.8 -4.5 1.6 3.9 Chg in PP&E -69 0 0 0 Operating Profit Growth (%) 4.4 8.5 14.3 13.6 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) -23.8 93.6 12.7 12.1 Chg in Financial Assets 28 -3 -3 -3 Accounts Receivable Turnover (x) 12.5 11.7 11.8 11.8 Others ---111 -111111111 000 000 000 Inventory Turnover (x) Cash Flows from Fin Activities 22 -103 -7 -7 Accounts Payable Turnover (x) 6.5 6.0 6.0 5.9 Chg in Financial Liabilities 33 -96 0 0 ROA (%) 3.0 5.7 6.2 6.5 Chg in Equity 0 0 0 0 ROE (%) 7.2 12.8 12.9 12.9 Dividends Paid -7 -7 -7 -7 ROIC (%) 11.6 16.4 21.7 27.9 Others ---4 -444 000 000 000 Liability to Equity Ratio (%) 143.3 112.5 103.6 95.1 Increase (Decrease) in Cash 16 3 92 94 Current Ratio (%) 54.0 73.5 104.8 133.8 Beginning Balance 46 62 66 158 Net Debt to Equity Ratio (%) Ending Balance 626262 666666 158158158 252252252 Interest Coverage Ratio (x) Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 37
November 25, 2015 Internet/Entertainment
SM Entertainment (041510 KQ) Local production to start in 2016
Entertainment 1Q-3Q OP already equivalent to full-year 2014 figure
For 3Q, SM Entertainment reported consolidated revenue of W94.4bn (+20.1% YoY) and (Maintain) Buy operating profit of W18.7bn (+32.6% YoY). This brings the combined operating profit for the first three quarters of 2015 to W34.3bn, which is already equivalent to the 2014 Target Price (12M, 59,000 full-year figure. W) Share Price (11/24/15, By business, 3Q operating profit was W11.5bn at the parent company, W4.6bn at SM 43,800 W) Japan, and W3bn at DreamMaker. SM C&C also swung to a profit of W0.2bn, helped by stronger revenue from films and drama programs. Expected Return 35% SM China: Local production likely OP (15F, Wbn) 48 As the leader of the domestic entertainment market, SM Entertainment has been Consensus OP (15F, Wbn) 44 creating new music business models. Until the late 1990s, the company’s business scope EPS Growth (15F, %) 642.0 was confined to the domestic market. Starting in 2000, however, the company focused Market EPS Growth (15F, %) 22.3 on exporting its artists through localization; for example, BoA and TVXQ members P/E (15F, x) 20.3 learned Japanese to advance into Japan. Market P/E (15F, x) 11.4 KOSDAQ 687.86 SM Entertainment also adopted a localization strategy when its flagship idol group EXO advanced into China. For performances in China, the company divided the group into Market Cap (Wbn) 912 two sub-groups, including EXO-M, which had four Chinese members singing in Chinese. Shares Outstanding (mn) 21 Free Float (%) 78.6 Starting in 2016, SM Entertainment plans to pursue local production in order to better Foreign Ownership (%) 10.2 respond to the increasingly diversified, fast-growing Asian music market. A new artist Beta (12M) 0.74 group that includes a Japanese member is expected to debut by the end of the year, and 52-Week Low 30,500 a new artist group composed totally of Chinese or Southeast Asian members should be 52-Week High 49,000 launched in 2016.
(%)(%)(%) 1M1M1M 6M6M6M 12M12M12M Maintain Buy and TP of W59,000 Absolute -1.4 33.9 29.2 Relative -2.2 38.9 1.8 We expect solid earnings to continue through 4Q. On top of earnings, several other positive share catalysts lie ahead in 4Q. 160 SM Entertainment KOSDAQ
140 1) New artists (including SM Rookies) are expected to debut before the end of the year. 2) In 4Q, SM C&C is set to produce one Chinese variety show under a profit-sharing deal. 120 3) The establishment of SM China looks likely to take place by the end of the year. 100 In addition to Japan, we believe new markets—most notably China—will contribute to 80 11.14 3.15 7.15 11.15 revenue in the coming years. We reiterate our Buy rating and target price of W59,000.
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 241 269 287 322 348 391 OP (Wbn) 61 41 34 48 56 69 OP margin (%) 25.3 15.2 11.8 14.9 16.1 17.6 NP (Wbn) 40 19 6 45 49 59 EPS (W) 1,994 913 290 2,155 2,337 2,811 ROE (%) 24.7 8.5 2.5 16.9 15.7 16.1 P/E (x) 22.8 48.4 117.1 20.3 18.7 15.6 P/B (x) 4.4 3.9 2.9 3.2 2.7 2.3 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
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November 25, 2015 Internet/Entertainment
SM Entertainment (041510 KQ/Buy/TP: W59,000)
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 287287287 322322322 348348348 391391391 Current Assets 197197197 256256256 316316316 388388388 Cost of Sales 185185185 202202202 214214214 235235235 Cash and Cash Equivalents 92 139 190 245 Gross Profit 102102102 120120120 134134134 156156156 AR & Other Receivables 47 53 57 64 SG&A Expenses 686868 737373 787878 878787 Inventories 9 10 10 12 Operating Profit (Adj) 343434 484848 565656 696969 Other Current Assets 49 54 59 67 Operating Profit 343434 484848 565656 696969 NonNonNon-Non ---CurrentCurrent Assets 186186186 181181181 176176176 176176176 NonNonNon-Non ---OperatingOperating Profit ---5 -555 888 777 777 Investments in Associates 3 4 4 4 Net Financial Income 1 1 2 3 Property, Plant and Equipment 81 78 75 72 Net Gain from Inv in Associates -1 0 0 0 Intangible Assets 51 44 38 33 Pretax Profit 29 56 63 76 Total Assets 383383383 437437437 493493493 564564564 Income Tax 28 12 15 19 Current Liabilities 858585 959595 102102102 114114114 Profit from Continuing Operations 2 44 48 58 AP & Other Payables 48 54 58 65 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 3 3 3 3 Net Profit 222 444444 484848 585858 Other Current Liabilities 34 38 41 46 Controlling Interests 6 45 49 59 NonNonNon-Non ---CurrentCurrent Liabilities 161616 171717 171717 181818 Non-Controlling Interests -4 0 0 -1 Long-Term Financial Liabilities 12 12 12 12 Total Comprehensive Profit 444 444444 484848 585858 Other Non-Current Liabilities 4 5 5 6 Controlling Interests 8 98 107 129 Total Liabilities 101101101 111111111 119119119 132132132 Non-Controlling Interests -4 -54 -59 -71 Controlling Interests 242242242 286286286 335335335 393393393 EBITDA 47 58 65 76 Capital Stock 10 10 10 10 FCF (Free Cash Flow) -35 53 56 63 Capital Surplus 121 121 121 121 EBITDA Margin (%) 16.4 18.0 18.7 19.4 Retained Earnings 108 153 202 260 Operating Profit Margin (%) 11.8 14.9 16.1 17.6 NonNonNon-Non ---ControllingControlling Interests 404040 404040 393939 393939 Net Profit Margin (%) 2.1 14.0 14.1 15.1 Stockholders' Equity 282282282 326326326 374374374 432432432
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1412/1412/14 12/15F 12/16F 12/17F 12/1412/1412/14 12/15F 12/16F 12/17F Cash Flows from Op Activities -9 53 56 63 P/E (x) 117.1 20.3 18.7 15.6 Net Profit 2 44 48 58 P/CF (x) 13.5 13.7 13.0 11.2 Non-Cash Income and Expense 50 22 22 23 P/B (x) 2.9 3.2 2.7 2.3 Depreciation 4 3 3 3 EV/EBITDA (x) 14.0 14.1 11.9 9.4 Amortization 9 7 6 5 EPS (W) 290 2,155 2,337 2,811 Others 37 12 13 15 CFPS (W) 2,510 3,194 3,369 3,894 Chg in Working Capital -37 -2 -1 -2 BPS (W) 11,837 13,881 16,218 19,029 Chg in AR & Other Receivables -6 -6 -4 -7 DPS (W) 0 0 0 0 Chg in Inventories -1 -1 -1 -1 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -21 4 3 5 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid ---24 -242424 ---12-121212 ---15-151515 ---19-191919 Revenue Growth (%) 6.7 12.2 8.1 12.4 Cash Flows from Inv Activities -8 -6 -4 -7 EBITDA Growth (%) -6.0 23.4 12.1 16.9 Chg in PP&E -26 0 0 0 Operating Profit Growth (%) -17.1 41.2 16.7 23.2 Chg in Intangible Assets -8 0 0 0 EPS Growth (%) -68.2 643.1 8.4 20.3 Chg in Financial Assets 25 -6 -4 -7 Accounts Receivable Turnover (x) 6.2 6.4 6.3 6.4 Others 111 000 000 000 Inventory Turnover (x) Cash Flows from Fin Activities 7 0 0 0 Accounts Payable Turnover (x) 3.9 5.6 5.4 5.4 Chg in Financial Liabilities 2 0 0 0 ROA (%) 0.5 10.8 10.4 11.0 Chg in Equity 0 0 0 0 ROE (%) 2.5 16.9 15.7 16.1 Dividends Paid 0 0 0 0 ROIC (%) 1.6 24.4 29.4 37.2 Others 555 000 000 000 Liability to Equity Ratio (%) 35.9 34.1 31.8 30.5 Increase (Decrease) in Cash -14 46 51 55 Current Ratio (%) 231.5 270.7 310.4 339.1 Beginning Balance 106 92 139 190 Net Debt to Equity Ratio (%) Ending Balance 929292 139139139 190190190 245245245 Interest Coverage Ratio (x) Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 39
November 25, 2015 Internet/Entertainment
YG Entertainment (122870 KQ) Digital royalties from Tencent to boost margins starting in 4Q
Entertainment Subsidiary losses widened in 3Q
YG Entertainment announced 3Q consolidated revenue of W47.7bn (+23.5% YoY) and (Maintain) Buy operating profit of W5.5bn (+19.9% YoY). Despite strong top-line growth, profit margins were weaker than anticipated due to increased losses from recently launched businesses Target Price (12M, 56,000 (restaurants, etc.). W) Share Price (11/24/15, As part of its 2015 world tour, Big Bang performed in China (six cities) and several 45,200 W) Southeast Asian countries in 3Q. Meanwhile, iKON’s new album release, which we originally anticipated to occur in 3Q, was pushed back to 4Q. Big Bang’s new album is Expected Return 24% expected to come out in 1Q16.
OP (15F, Wbn) 24 Consolidated subsidiary YG Plus posted a 3Q operating loss of W2bn (up from W1bn in Consensus OP (15F, Wbn) 26 1Q and 2Q), weighed down by a W670mn loss from its pork barbecue restaurant venture. EPS Growth (15F, %) 39.6 Market EPS Growth (15F, %) 22.3 New business to gain traction in 2016 P/E (15F, x) 25.1 Market P/E (15F, x) 11.4 YG Plus’s losses are unlikely to narrow in 4Q, but margins should begin to stabilize after KOSDAQ 687.86 additional restaurant locations are rolled out in 1H16. Meanwhile, the company’s launch of its cosmetics brand Moonshot in China is being delayed, as regulatory approval is now Market Cap (Wbn) 680 expected to take place in 2H16. The company plans to launch aggressive marketing Shares Outstanding (mn) 16 activities in 1H16 to promote the brand. Free Float (%) 65.7 Foreign Ownership (%) 6.5 In 4Q, we expect digital royalties from China’s Tencent to positively contribute to Beta (12M) 0.82 margins. The company is likely to recognize royalties for around 3.6mn downloads, as 52-Week Low 40,550 well as the online streaming of Big Bang concerts on Tencent’s music website. 52-Week High 59,800 In 2016, Big Bang is likely to hold larger concerts in Japan and China compared to 2015. (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M Ticket sales should get a boost in 2016, given that two of the group’s members are Absolute -3.8 -12.7 0.2 expected to temporarily drop out in 2017 due to military enlistment. We also expect Relative -4.7 -9.5 -21.0 earnings contribution from new artists in 2016, including Winner and iKON (which has
160 YG Entertainment KOSDAQ an arena tour in Japan scheduled for 1Q16).
140 Reiterate Buy and TP of W56,000 120 We reiterate our Buy recommendation on YG Entertainment with a TP of W56,000. 100 Delays in new businesses are stalling overall earnings growth. In 2016, however, we look
80 for meaningful progress on the company’s China operations, including a potential joint 11.14 3.15 7.15 11.15 venture with a local Chinese firm.
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 107 116 156 192 253 297 OP (Wbn) 21 22 22 24 30 35 OP margin (%) 19.6 19.0 14.1 12.5 11.9 11.8 NP (Wbn) 19 15 19 30 28 30 EPS (W) 1,381 1,116 1,290 1,801 1,723 1,818 ROE (%) 21.6 14.8 13.4 15.6 13.2 12.4 P/E (x) 33.3 34.9 34.3 25.1 26.2 24.9 P/B (x) 6.5 4.9 4.1 3.7 3.3 2.9 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
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November 25, 2015 Internet/Entertainment
YG Entertainment (122870 KQ/Buy/TP: W56,000)
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 156156156 192192192 253253253 297297297 Current Assets 252252252 278278278 303303303 329329329 Cost of Sales 103103103 128128128 179179179 210210210 Cash and Cash Equivalents 142 147 129 124 Gross Profit 535353 646464 747474 878787 AR & Other Receivables 14 15 19 23 SG&A Expenses 323232 393939 444444 525252 Inventories 11 13 17 20 Operating Profit (Adj) 222222 242424 303030 353535 Other Current Assets 85 103 138 162 Operating Profit 222222 242424 303030 353535 NonNonNon-Non ---CurrentCurrent Assets 888888 949494 106106106 114114114 NonNonNon-Non ---OperatingOperating Profit 555 151515 888 666 Investments in Associates 12 15 19 23 Net Financial Income 2 3 4 4 Property, Plant and Equipment 28 27 26 25 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 21 19 18 17 Pretax Profit 27 39 38 41 Total Assets 340340340 372372372 408408408 442442442 Income Tax 9 11 11 12 Current Liabilities 323232 404040 535353 626262 Profit from Continuing Operations 18 28 27 28 AP & Other Payables 16 19 26 30 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 181818 282828 272727 282828 Other Current Liabilities 16 21 27 32 Controlling Interests 19 30 28 30 NonNonNon-Non ---CurrentCurrent Liabilities 626262 626262 636363 636363 Non-Controlling Interests -1 -2 -1 -2 Long-Term Financial Liabilities 60 60 60 60 Total Comprehensive Profit 171717 282828 272727 282828 Other Non-Current Liabilities 2 2 3 3 Controlling Interests 18 30 28 30 Total Liabilities 949494 102102102 115115115 125125125 Non-Controlling Interests -1 -2 -2 -2 Controlling Interests 177177177 203203203 227227227 254254254 EBITDA 26 27 33 37 Capital Stock 8 8 8 8 FCF (Free Cash Flow) 18 29 32 32 Capital Surplus 96 96 96 96 EBITDA Margin (%) 16.7 14.1 13.0 12.5 Retained Earnings 73 99 123 149 Operating Profit Margin (%) 14.1 12.5 11.9 11.8 NonNonNon-Non ---ControllingControlling Interests 696969 676767 666666 646464 Net Profit Margin (%) 12.2 15.6 11.1 10.1 Stockholders' Equity 246246246 270270270 293293293 318318318
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1412/1412/14 12/15F 12/16F 12/17F 12/1412/1412/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 34 29 32 32 P/E (x) 34.3 25.1 26.2 24.9 Net Profit 18 28 27 28 P/CF (x) 33.3 22.8 20.2 19.2 Non-Cash Income and Expense 2 4 10 10 P/B (x) 4.1 3.7 3.3 2.9 Depreciation 2 1 1 1 EV/EBITDA (x) 22.3 20.6 17.0 14.4 Amortization 2 2 1 1 EPS (W) 1,290 1,801 1,723 1,818 Others -2 1 8 8 CFPS (W) 1,327 1,981 2,243 2,359 Chg in Working Capital 13 3 2 1 BPS (W) 10,830 12,381 13,875 15,464 Chg in AR & Other Receivables 10 -2 -4 -3 DPS (W) 250 250 250 250 Chg in Inventories -1 -2 -4 -3 Payout ratio (%) 20.6 13.4 14.0 13.3 Chg in AP & Other Payables 1 1 2 1 Dividend Yield (%) 0.6 0.6 0.6 0.6 Income Tax Paid ---9 -999 ---11-111111 ---11-111111 ---12-121212 Revenue Growth (%) 34.5 23.1 31.8 17.4 Cash Flows from Inv Activities -21 -23 -41 -29 EBITDA Growth (%) 4.0 3.8 22.2 12.1 Chg in PP&E -17 0 0 0 Operating Profit Growth (%) 0.0 9.1 25.0 16.7 Chg in Intangible Assets -3 0 0 0 EPS Growth (%) 15.6 39.6 -4.3 5.5 Chg in Financial Assets -49 -23 -41 -29 Accounts Receivable Turnover (x) 12.6 18.2 18.8 17.8 Others 484848 000 000 000 Inventory Turnover (x) Cash Flows from Fin Activities 105 -5 -4 -4 Accounts Payable Turnover (x) 19.7 21.9 23.9 22.7 Chg in Financial Liabilities 60 0 0 0 ROA (%) 7.7 7.9 6.9 6.7 Chg in Equity 51 0 0 0 ROE (%) 13.4 15.6 13.2 12.4 Dividends Paid -3 -4 -4 -4 ROIC (%) 35.9 38.2 51.7 64.3 Others ---3 -333 ---1-111 000 000 Liability to Equity Ratio (%) 38.3 37.7 39.3 39.2 Increase (Decrease) in Cash 120 5 -18 -4 Current Ratio (%) 777.8 701.1 576.7 533.9 Beginning Balance 22 142 147 129 Net Debt to Equity Ratio (%) Ending Balance 142142142 147147147 129129129 124124124 Interest Coverage Ratio (x) Source: Company data, KDB Daewoo Securities Research estimates
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November 25, 2015 Internet/Entertainment
APPENDIX 1
Important Disclosures & Disclaimers 222-2---YearYear Rating and Target Price History
Company (Code) DateDateDate RatingRatingRating Target Price Company (Code) DateDateDate RatingRatingRating Target Price NAVER(035420) 07/30/2015 Buy 820,000 04/28/2015 Buy 100,000 05/04/2015 Buy 890,000 02/05/2015 Buy 80,000 03/06/2014 Buy 1,050,000 11/14/2014 Buy 59,000 01/13/2014 Buy 920,000 08/07/2014 Buy 56,000 11/27/2013 Buy 870,000 05/11/2014 Buy 57,000 Kakao(035720) 08/16/2015 Buy 170,000 11/11/2013 Buy 63,000 05/14/2015 Buy 130,000 SM Entertainment(041510) 08/10/2015 Buy 59,000 03/31/2015 Buy 138,000 03/04/2015 Buy 46,000 01/25/2015 Buy 210,000 01/15/2015 Buy 50,000 11/09/2014 Buy 172,000 11/23/2014 Buy 46,000 10/06/2014 Buy 211,000 09/01/2014 Buy 53,000 06/22/2014 Buy 144,000 03/03/2014 Buy 58,000 02/16/2014 Buy 93,000 12/01/2013 Buy 60,000 11/27/2013 Buy 108,000 YG Entertainment(122870) 11/15/2015 Buy 56,000 NCSOFT(036570) 05/13/2015 Buy 270,000 08/16/2015 Buy 72,000 01/07/2015 Buy 240,000 04/28/2015 Buy 60,000 07/16/2014 Buy 220,000 03/01/2015 Buy 56,000 05/18/2014 Buy 280,000 11/14/2014 Buy 52,000 11/27/2013 Buy 310,000 05/18/2014 Buy 58,000 CJ CGV(079160) 07/16/2015 Buy 150,000 03/03/2014 Buy 70,000 05/26/2015 Buy 180,000 12/01/2013 Buy 57,000 05/11/2015 Buy 112,000
(W) (W) Kakao (W) NAVER NCSOFT (W) CJ CGV 250,000 1,200,000 350,000 200,000 1,000,000 200,000 300,000 150,000 800,000 250,000 150,000 200,000 600,000 100,000 100,000 150,000 400,000 50,000 100,000 50,000 200,000 50,000 0 0 0 Nov 13 Nov 14 Nov 15 Nov 13 Nov 14 Nov 15 0 Nov 13 Nov 14 Nov 15 Nov 13 Nov 14 Nov 15
(W) SM Entertainment (W) YG Entertainment 70,000 80,000 60,000 50,000 60,000 40,000 30,000 40,000 20,000 20,000 10,000 0 Nov 13 Nov 14 Nov 15 0 Nov 13 Nov 14 Nov 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.
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November 25, 2015 Internet/Entertainment
Equity Ratings Distribution BuyBuyBuy Trading Buy HoldHoldHold SellSellSell 72.77% 13.86% 13.37% 0.00% * Based on recommendations in the last 12-months (as of September 30, 2015)
Disclosures As of the publication date, Daewoo Securities Co., Ltd. has been acting as a financial advisor to SM Entertainment for its treasury stock trust, and other than this, Daewoo Securities has no other special interests in the companies covered in this report.
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 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.
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November 25, 2015 Internet/Entertainment
KDB Daewoo Securities International Network
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