Yuanta Securities Source: Yuanta Securities

Company Report Aug 10, 2018 CJ ENM (035760 KS)

Media/entertainment Media and music good

2Q18 review  Based on CJ O Shopping’s pre-merger earnings, consolidated sales came to W585.2bn (+4% YoY), OP W49.6bn (-23% YoY), and net profit from controlling interest (NPCI) W23.9bn (-27% YoY). The drop (YoY) in OP is due to base effect (parent CJ O Shopping saw a W9.0bn reversal of VAT in 2Q17), operating loss at the consolidated home shopping company, and lower OP at CJ Hello. When converted to a post-merger basis, consolidated sales came to W1.05tn (+7% YoY), OP W79.2bn (-10% YoY), and NPCI W72.5bn (-83% YoY). NP nosedived YoY, as the former CJ ENM enjoyed W500.0bn in asset valuation gains Rating BUY (U) after Netmarble’s rights offering in 2Q17. By division, media OP came to W29.2bn (Studio Target price W291,000 (U) Dragon W7.3bn, other W21.9bn), commerce W33.9bn, film -W3.9bn, music W4.2bn, and CJ Hello W15.7bn. Media and music OP rose, while commerce, film, and CJ Hello OP Current price (Aug 8) W236,200 fell. From 3Q18, the company will report consolidated earnings on a post-merger basis. Upside potential 23%

 The media division (formerly broadcasting, and key business of the new entity) generated strong earnings, despite lower earnings at Studio Dragon. 1) TV ad revenue Market cap (Wbn) 5,179 came to W141.9bn (+10% YoY), growing in the double-digits (YoY) for a second quarter Shares outstanding 21,926,384 straight, as prime time ad prices of its key TV channels continued to rise and the rebranding Avg daily T/O (2M, Wbn) 18 of its second-tier channels generated some results. 2) Digital ad sales grew 38% YoY. 3) CJ Avg daily volume (2M, shrs) 76,069 Blue of Vietnam suffered an operating loss of W3.0bn, worsening slightly YoY. 4) Media OP, 52-week high (won) 286,400 excluding Studio Dragon, rose 45% YoY from W15.1bn in 2Q17 to W21.9bn in 2Q18. It 52-week low (won) 191,100 is the highest since 1Q17, when Studio Dragon’s quarterly earnings became available.

Foreign ownership (%) 20.9  Music earnings were robust on stronger in-house music sales. With sales of Wanna Major shareholders (%) One’s album, launched in Jun 2018, exceeded 640,000 units, sales of in-house CJ Corp and 5 others 42.7 album/digital music soared to W29.0bn (+83% YoY) and music OPM came to 6.3%.

Stock performance Lift to BUY (%) 1M 3M 12M  We lift our rating from HOLD to BUY and revise up our target price from W289,000 to Absolute (15.9) 9.9 12.4 291,000. Our new target price of W291,000, based on sum-of-the-parts, implies a 2019E Relative (13.2) 15.9 (6.5) P/E of 18.5x. We upgrade our rating, as shares have corrected since new shares were Abs (US$) (16.2) 5.6 12.9 listed in Jul 2018 after the merger. Thus, there is now a wide gap between the current and target prices. Our new target price does not factor in potential synergies from the merger and the disposal of CJ Hello and other key assets. Music earnings are likely to be revised up later, as new TV shows “Produce 48” and “Show Me The Money 777” will air, and Wanna One is holding its world tour in 2H18. In addition, idol groups deserve constant attention, as they are emerging as a pillar of the company’s in-house IP-based music business.

Quarterly earnings Forecasts and valuations (K-IFRS, consolidated) (Wbn)

(Wbn) 2Q18E % YoY % QoQ Consens vs consens (%) FY ends Dec 2016A 2017A 2018E 2019E

Sales 585 3.9 3.6 - - Sales 2,209 2,260 3,428 4,774

OP 50 -23.3 -10.5 - - OP 179 224 269 431 Net profit, CI 23 131 187 344 Pre-tax net profit 42 -24.0 -44.3 - - P/E (x) 46.3 9.4 27.7 15.1 Net profit, CI 24 -26.7 -59.7 - - P/B (x) 1.2 1.2 3.4 3.0 OPM (%) 8.5 -3.0 %pt -1.3 %pt - - EV/EBITDA 4.5 4.6 4.4 10.0 NPM (%) 4.1 -1.7 %pt -6.4 %pt - - ROE (%) 2.6 13.5 15.7 23.5 Source: Yuanta Securities Source: Yuanta Securities

CJ ENM (035760 KS)

New entity: consolidated earnings (pro-forma basis) (Wbn)

2017 2018 Full-year

1Q 2Q 3Q 4Q 1QP 2QP 3QE 4QE 2017 2018E 2019E 2020E

Sales 933.0 977.6 972.5 1,090.2 1,031.7 1,049.0 1,083.9 1,194.4 3,973.4 4,359.0 4,773.9 5,112.1

- Media 278.6 323.1 309.7 350.5 332.5 361.9 362.6 411.1 1,261.9 1,468.1 1,710.6 1,881.6 - Commerce 285.6 300.0 276.2 331.4 290.9 307.5 291.6 341.1 1,193.3 1,231.0 1,355.9 1,518.6

- Film 61.1 46.1 56.5 61.5 80.0 36.0 76.5 77.3 225.2 269.7 275.8 275.8

- Music 47.4 47.1 66.3 69.8 56.2 66.5 59.7 71.2 230.7 253.6 266.3 279.6

- CJ Hello 260.3 261.2 263.8 276.9 272.1 277.2 293.6 293.6 1,062.3 1,136.5 1,165.3 1,156.5

COGS 516.1 539.9 566.7 638.6 625.6 639.0 668.3 748.2 2,261.3 2,681.0 2,909.8 3,081.4

SG&A expense 340.0 349.4 343.9 391.1 316.2 330.8 329.1 368.5 1,424.4 1,344.7 1,433.2 1,517.7

Op profit 76.9 88.3 61.9 60.5 89.9 79.2 86.5 77.7 287.6 333.3 431.0 513.1

- Media 20.1 24.0 9.2 8.6 24.6 29.2 26.0 26.6 61.8 106.3 172.4 238.5

- Commerce 35.9 45.6 30.7 39.5 42.3 33.9 34.3 44.2 151.6 154.8 173.4 194.2

- Film 0.9 -2.3 -3.3 -5.8 7.2 -3.9 3.5 -1.5 -10.4 5.3 12.6 12.6

- Music 2.4 2.0 6.8 0.6 2.7 4.2 5.5 1.2 11.8 13.6 14.9 14.9

- CJ Hello 17.6 19.1 18.5 17.6 13.1 15.7 17.3 7.2 72.9 53.4 57.7 52.9

Op margin (%) 8 9 6 6 9 8 8 7 7 8 9 10

- Media 7 7 3 2 7 8 7 6 5 7 10 13

- Commerce 13 15 11 12 15 11 12 13 13 13 13 13

- Film 1 -5 -6 -9 9 -11 5 -2 -5 2 5 5

- Music 5 4 10 1 5 6 9 2 5 5 6 5

- CJ Hello 7 7 7 6 5 6 6 2 7 5 5 5

Pre-tax profit 92.2 592.4 59.9 32.1 120.2 97.8 91.9 64.5 776.6 374.4 509.1 581.2

Pre-tax margin (%) 10 65 7 3 12 10 9 5 21 9 11 11

Net profit, CI 62.0 437.5 37.4 22.5 91.8 72.5 59.9 44.0 559.4 268.2 344.1 396.9

Net margin (%) 7 45 4 2 9 8 6 4 14 7 8 9

Growth (% YoY)

Sales 10 8 7 4 11 7 11 10 7 10 10 7

Op profit 13 29 20 221 17 -10 40 28 39 16 29 19

Net profit 35 548 32 -140 48 -83 60 96 554 -52 28 15

Source: Yuanta Securities

2 Company Report

Media earnings breakdown (Wbn)

2016 2017 2018 Full-year

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1QP 2QP 3QE 4QE 2017 2018E 2019E

Media sales 225.4 268.4 268.6 366.1 285.7 332.1 317.2 359.1 340.4 361.9 362.6 411.1 1294.2 1468.1 1710.6

- Ad 109.6 132.2 111.1 135.3 108.3 128.8 117.4 141.2 119.7 141.9 128.0 155.3 495.7 544.9 572.1 - Subscription fee 47.2 47.0 46.6 56.0 48.9 49.3 51.2 54.3 50.1 50.1 51.2 54.3 203.8 205.8 205.8

- Other 68.6 89.1 110.8 174.8 128.5 154.0 148.6 163.6 170.6 169.8 183.3 201.5 594.6 717.4 932.6

Media sales (% YoY) 27 20 18 31 27 24 18 -2 19 12 17 17 15 16 17

- Ad 20 7 -5 0 -1 -3 6 4 11 10 9 10 2 10 5

- Subscription fee 0 0 -4 0 4 5 10 -3 2 2 0 0 4 1 0

- Other 74 68 79 95 87 73 34 -6 33 17 30 30 34 28 30

Media OP 5.1 20.5 8.7 12.1 20.1 24.0 9.2 8.6 24.6 29.2 26.0 26.6 61.8 106.3 172.4

Ad sales 109.6 132.3 111.1 135.3 108.3 128.8 117.4 141.2 119.7 141.9 128.0 155.3 495.7 544.9 572.1

- Premium package - - - - 62.2 72.2 59.0 60.3 74.0 84.0 - - 247.1 - -

- Other - - - - 46.1 56.6 58.4 80.9 45.7 57.9 - - 248.6 - -

- Premium package (% YoY) ------19 16 - - 7 - -

- Other (% YoY) ------1 2 - - -3 - -

Other sales 68.6 89.1 110.8 174.8 121.4 145.0 141.0 155.0 162.7 169.8 - - 594.6 - -

- Content sales - - - - 63.1 53.7 55.3 60.3 77.4 53.9 - - 210.4 - -

- Other - - - - 58.3 91.3 85.7 94.7 85.3 115.9 - - 384.2 - -

- Content sales (% YoY) - - - - 145 30 15 -33 23 0 - - 16 - -

- Other (% YoY) - - - - 53 100 44 17 46 27 - - 47 - -

Source: Yuanta Securities

3 CJ ENM (035760 KS)

CJ ENM: target price (based on sum-of-the-parts)

Value Note

(A) Value of former CJ O Shopping W1.75tn (B) + (C)

(B) Value of CJOS parent operations W1.39tn Target P/E 11x parent net profit W126.0bn

2018E CJOS parent net profit W126.0bn

Home shopping target P/E 11x

Value of stake in CJ Hello W0.29tn Stake 53.9%

Enterprise value of CJ Hello W0.53tn Applied 25% discount to 6-mo average market cap of W705.3bn

Value of stake in Samsung Life Insurance W0.08tn Stake 0.5%

Enterprise value of Samsung Life Insurance W16.37tn Applied 25% discount to 6-mo average market cap of W21.8tn

(D) Value of former CJ E&M W4.61tn (E) + (F) – (G)

(E) Value of media business W1.53tn Target P/E 30x media NOPAT

2018E media OP W67.3bn 2018E consolidated OP of W125.2bn – Studio Dragon’s 2018E OP of W57.9bn

2018E media NOPAT W51.0bn

Target P/E for media biz 30x

(F) Value of stakes in key CJ E&M subsidiaries W3.53tn Value of stake in Studio Dragon and Netmarble

Value of stake in Studio Dragon W1.45tn Stake 71.3%

Enterprise value of Studio Dragon W2.04tn Applied 30% discount to Studio Dragon’s 1-mo avg market cap W2.72tn

Value of stake in Netmarble W.07tn Stake 22.1%

Enterprise value of Netmarble W9.38tn Applied 20% discount to Netmarble Games’ 1-mo avg market cap W12.51tn

(G) Net debt W445.2bn 1Q18 consolidated net debt W315.2bn– (Studio Dragon’s net cash of W182.3bn x 71.3%)

(H) Enterprise value of new CJ ENM W6.37tn (A) + (D)

(I) Shares out of new entity 21.93mn CJOS 6.22mn – treasury share cancellation 190k + new shares 15.9mn

Target price of new entity W291,000 (H) / (I)

Source: Yuanta Securities

4 Company Report

CJ ENM (035760 KS) pro forma financial statements (K-IFRS, consolidated)

Statement of comprehensive income Statement of financial position FY ends Dec (Wbn) 2016A 2017A 2018E 2019E 2020E FY ends Dec (Wbn) 2016A 2017A 2018E 2019E 2020E Sales 2,209 2,260 3,428 4,774 5,112 Current assets 689 664 1,923 2,217 2,435 Cost of sales 1,000 988 1,976 2,910 3,081 Cash & cash equivalents 103 114 934 1,154 1,309 Gross profit 1,209 1,272 1,452 1,864 2,031 Accts rec & other 354 372 696 755 804 SG&A 1,030 1,047 1,183 1,433 1,518 Inventory 62 76 168 184 197 Operating profit 179 224 269 431 513 Non-current assets 2,065 2,138 1,426 1,456 1,613 EBITDA 446 469 1,251 532 598 Tangible assets 815 816 0 0 0 Non-op profit/loss -117 -40 4 78 68 Investment in affiliates 112 96 225 357 599 Forex gain/loss 0 0 0 0 0 Other non-current 143 192 175 175 175 Net interest income -18 -14 -14 -22 -22 Total assets 2,754 2,802 3,349 3,674 4,048 Equity-meth gain/loss -11 6 27 120 110 Current liabilities 1,017 732 795 803 887 Other -88 -33 -9 -20 -20 Accts payable & other 510 462 478 486 569 Net prof before income tax 62 184 274 509 581 ST financial liabilities 157 22 24 24 24 Income tax 30 41 65 123 141 Liquid LT liabilities 268 152 151 151 151 Net profit from continuing ops 33 143 209 386 441 Non-current liabilities 373 586 597 597 597 Net profit from discontinued ops 0 0 0 0 0 LT financial liabilities 2 0 0 0 0 Net profit 33 143 209 386 441 Debentures 300 511 511 511 511 NP for controlling interest 23 131 187 344 397 Total liabilities 1,391 1,318 1,392 1,400 1,484 Total comprehensive income 31 142 190 366 421 Equity, controlling interest 917 1,028 1,353 1,571 1,861 Total comprehensive income, CI 22 131 178 344 396 Paid-in capital 31 31 189 189 189 Note: Operating profit calculation same as K-GAAP (sales - COGS - SG&A exp) Capital surplus 85 80 80 80 80 Retained earnings 812 924 1,112 1,349 1,639 Equity, non-controlling interest 446 456 603 703 703 Total equity 1,363 1,484 1,956 2,273 2,564 Net debt 473 489 -335 -555 -710 Total debt 727 686 687 687 687

Cash flow statement Valuation FY ends Dec (Wbn) 2016A 2017A 2018E 2019E 2020E FY ends Dec 2016A 2017A 2018E 2019E 2020E Operating cash flow 416 330 699 197 334 EPS (won) 3,769 21,054 8,538 15,693 18,101 Net profit 33 143 209 386 441 BPS (won) 147,596 165,443 68,874 79,972 94,749 Depreciation & amortization 169 166 867 0 0 EBITDA/shr (won) 71,726 75,472 33,068 14,077 15,814 Forex gain/loss -1 0 -1 0 0 SPS (won) 355,336 363,607 156,352 217,723 233,149 Affiliate invest gain/loss 11 -6 -27 -120 -110 DPS (won) 2,500 3,000 3,000 3,000 3,000 Inc (dec) in net working cap 16 -94 -469 -178 -89 P/E (x) 46.3 9.4 27.7 15.1 13.0 Other 188 121 120 110 93 P/B (x) 1.2 1.2 3.4 3.0 2.5 Investing cash flow -329 -256 -224 -136 -136 EV/EBITDA (x) 4.5 4.6 4.4 10.0 8.6 Investment -22 -55 -122 -122 -122 P/S (x) 0.5 0.5 1.5 1.1 1.0 Inc in tangible assets -128 -183 -55 0 0 Dec in tangible assets 10 1 0 0 0 Key financial data Other -190 -19 -47 -14 -14 FY ends Dec 2016A 2017A 2018E 2019E 2020E Financing cash flow -298 -62 135 -109 -109 Sales (% YoY) -4.3 2.3 51.7 39.3 7.1 Inc (dec) in ST fin liab 144 -137 -1 0 0 Operating profit (%YoY) -14.7 25.5 20.0 60.0 19.1 Inc (dec) in LT fin liab -424 93 -1 0 0 Net profit, CI (%YoY) -72.4 458.6 43.1 83.8 15.3 Inc (dec) in equity 0 0 158 0 0 Gross margin (%) 54.7 56.3 42.4 39.0 39.7 Cash dividend -18 -18 -21 -109 -109 Operating margin (%) 8.1 9.9 7.9 9.0 10.0 Other 0 0 0 0 0 Net margin, CI (%) 1.1 5.8 5.5 7.2 7.8 Other cash flow 0 -1 210 267 66 EBITDA margin (%) 20.2 20.8 36.5 11.2 11.7 Inc (dec) in cash & equivalents -211 11 820 220 155 ROIC (%) 5.6 10.7 14.1 26.9 34.0 Beginning cash & equivalents 314 103 114 934 1,154 ROA (%) 0.8 4.7 6.1 9.8 10.3 Ending cash & equivalents 103 114 934 1,154 1,309 ROE (%) 2.6 13.5 15.7 23.5 23.1 NOPLAT 179 224 269 431 513 Debt-to-equity (%) 102.0 88.8 71.2 61.6 57.9 FCF 249 142 663 250 385 Net debt-to-equity (%) 51.6 47.6 -24.8 -35.3 -38.2 OP/financing cost (x) 7.0 11.1 11.3 11.3 13.0 Note: CI = controlling interest EPS, BPS, P/E and P/B are based on controlling interest For valuation metrics such as P/E, historical figures are based on annual average prices and estimates, on current price For ROA or ROE, assets and equity are averages of end-of-year figures for the given year and the year prior Source: Yuanta Securities

5 CJ ENM (035760 KS)

CJ ENM (035760 KS) ratings and target price history Difference (%) (won) TP time Date Rating TP (won) 350,000 Current Price frame vs avg vs high price (low) Target Price 300,000 2018/08/09 BUY 291,000 1 yr

250,000 2018/07/02 HOLD 289,000 1 yr -13.10 - Analyst changed 200,000 2017/08/30 BUY 237,000 1 yr -8.07 17.97 150,000 Analyst changed 100,000 2017/07/18 After 1yr 1 yr -11.48 -5.17 50,000 2016/07/18 BUY 230,000 1 yr -22.32 -5.17

0 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18

Note: Difference = (actual price* - target price) / target price x 100 * 1) The average price until the day target price was suggested 2) The highest (lowest) price until the day target price was suggested Source: Yuanta Securities

Current distribution of Yuanta Securities Korea ratings

Rating Share (%) STRONG BUY 1.7 BUY 85.5 HOLD 12.8 SELL 0.0 Total 100.0 Note: As of Aug 6 Excluding reports written or published by overseas affiliates

6 Company Report

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As of the publication date of this report, Yuanta Securities Korea Co., Ltd. does not own a stake in excess of 1%, nor does it have any interest whatsoever, in the subject company (ies). The material contained herein was not disclosed by Yuanta Securities Korea Co., Ltd. to any institutional investors or third parties prior to its publication. The analyst (s) of this report or the analyst (s)’ spouse does not have any financial interest in the securities of the subject company (ies) mentioned herein, nor financial interest of any nature related to the subject company (ies) (including without limitation, whether it consists of any option, right, warrant, future, long or short position), as of the publication date of this report.

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Stock and sector ratings  Stock ratings include an Investment Rating (Strong Buy, Buy, Hold, Sell) based on the expected absolute return of a stock over the next 6 -12 months.  - Strong Buy: Expected to return 30% or more - Buy: Expected to return between 10% and 30% - Hold: Expected to return between -10 and +10% - Sell: Expected to return -10% or less  Sector ratings suggest 6 to 12 - month forward investment weighting of a given sector compared to its market capitalization weighting. - Overweight: Investment weighting is higher than the market capitalization weighting - Neutral: Investment weighting is equal to the market capitalization weighting

- Underweight: Investment weighting is lower than the market capitalization weighting

7 CJ ENM (035760 KS)

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