CFA Institute Research Challenge

hosted by CFA Society of Korea Sogang University

1

Student Research Media Industry, Contents Sector

This report is published for educational p urposes only by students competing in the CFA Institute Research Challenge. Jcontentree (KQ 036420)

Date: 30 Dec, 2013 Recommendation: Buy

Price: KRW 4,125 Target Price: KRW 5,430 (2015F) USD/KRW: 1,055.6 Upside: 31.64%

Executive summary

Market Profile With Industry and JTBC ready, the time to harvest profit is coming! 52-Week Price Range (KRW) 3,815-5,650 We initiate coverage of Jcontentree with a BUY and target price of KRW 5,430 (Upside is Average Daily Volume 929,874 32%) because the company has constructed an effective ‘Business portfolio’, and the company Shares Outstanding 65.50mn is now entering a ‘success sequence’. Jcontentree has two business sectors: platform and Main Shareholders 22.29mn content. Platform sector plays a role like a ‘root’ of the tree. Also, based on this ‘root’, the

Joongang Ilbo 7.36mn company is now reaping ‘fruit’ in their content sector.

Joongang Media Network 7.44mn The period of content has finally arrived. Seok-hyun, Hong 6.56mn The Korean media industry is now in the transitional period from the platform stage to content Jung-do, Hong 0.93mn stage. Accordingly, Korea media industry has lots of potential for revenue growth. First, the Market Capitalization (KRW) 270.2bn price of content is rising. Second, the quantity of content is increasing. This potential is ROE 2015E 10.38% prominent especially in cable channels. Content of cable channels gets competitiveness

Debt to Equity 2015F 142.58% because it can make more attractive content without any regulation seen in terrestrial channels.

EPS (KRW) 2015F 289 FRUITS (Broadcasting); main powerful driver of Jcontentree BPS (KRW) 2015F 2,116 The company provides drama to JTBC (one of the cable channels) and distributes the content P/E Ratio 2015F 14.26x aired on JTBC. First the company will sell more drama because JTBC will schedule more P/B Ratio 2015F 1.95x drama based on their capital strength. Second the company gets more profit from distribution Source: Korea exchange, team estimates because of increasing price and quantity. Moreover the OPM of broadcasting sector will be improved from around 2% to 9% in 2015F.

ROOTS (Platform); providing energy for Jcontentree Platform sector including movie and magazine businesses is a strong cashcow for Jcontentree. Both of them have low risk but also stable profit. Movie market has grown 14% annually Figure 1. Jcontentree’s price history compared based on increase of price and quantity. Movie business also has stable cash flow through with KOSDAQ last five years. operational efficiency. With magazine business its market share ranks the top in the magazine (Unit: KRW, point). industry. Moreover fashion, male, and luxury magazines which the company publishes are all 7,000 600 in growing trend.

Valuation SOTP valuation suggests 31.64% upside potential with implied P/E ratio 18.92x in 2015F 3,500 500 (including dilution effect of 8.09% and reduction in interest expenses). This multiple is appropriate because it is still undervalued compared with the average of peer’s P/E ratio 23.2x. Therefore, target price KRW 5,430 calculated from SOTP valuation is favorable. CJ E&M which is a representative peer company of Jcontentree shows a P/E ratio 48.4x. Now, 0 400 Jcontentree is ready to grow structurally and shows an undervalued P/E multiple of 14.26x. It is reasonable for Jcontentree to reach 18.92x.

Price(L) KOSDAQ(R ) Investment risks Source: Korea exchange, team research Jcontentree issued a convertible bond with zero-coupon on Oct 17, 2013. Dilution effect will be 6.75% in 2015F and it can be 8.09% if stock price falls below KRW 3,395. However, by repayment of debt and refinancing, the company reduced interest expenses. Because interest effect covers dilution effect, CB will have a limited impact on the company.

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Business Description

Jcontentree is a content company based on media platforms. The company which started from Figure 2. Sale structure of Jcontentree a newspaper company, IS Daily Sports, now belongs to a media company, Joongang Media Network. (Appendix 1) 2012 Figure 3. Management structure of Jcontentree

27%

73%

2015F Source: Company report (2013)

Platform: ‘Root’ of Jconten‘tree’ Platform part plays a role of cashcow for the company. The platform sector comprises movie 36% (Megabox) and magazine (Joongang M&B) parts. Megabox manages multiplex theaters and currently has 20% of the entire movie market. (Appendix 2) Also, Joongang M&B publishes 64% magazines which have high awareness in Korea. The number of platforms in mass media industry is rare because of enormous initial cost. It also has entry barrier by being selected with awareness. Therefore, having famous platforms means that the company generates profit continuously.

Content Platform Content: ‘Fruit’ of Jconten‘tree’ Content part, especially broadcasting, has grown up over the market because of their superiority in making content. Dramahouse&JcontentHub, which is a subsidiary of the Source: Company data, team estimates company, is in charge of broadcasting channel (JTBC) from production to distribution. In other words, Jcontentree provides and distributes TV programs for JTBC simultaneously. Therefore, it is expected that Jcontentree has a chance to make double profit for one TV program of JTBC. In case of Q channel, it is aired on various TV program by purchasing 2nd copyright of the TV program.

There is no tasty ‘Fruit’ without strong ‘Root’ Jcontentree draw up growth strategy led by effective business portfolio. The company is to maximize profitability by entering the content industry that generates infinite added value, based on earnings from stable platform. By having strong platforms, Jcontentree has been secured steady revenue. In addition, the company has raised profitability by investing on their content which has an infinite value. To make good content, it is necessary to invest in infrastructure for content. In case of Jcontentree, it is possible to make great content because of huge investment based on strong cashcow. Therefore, short-term goal of the company is to secure the growth potential and stability at the same time. And final goal of the company is becoming a comprehensive media company based on stable cashflow in platform sector. (Appendix 3)

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Figure 5. Worldwide content sales. Industry Overview and Competitive Positioning (Unit: KRW billion ) 1,994 2,100 1,890 Industry overview; the period of content has finally arrived. 1,782 The Korea media industry is now the transitional period from platform stage to content stage. (Figure 4) In the past, the main part of the media industry was the platform industry. However, 1,400 the future of the media industry is expected to be driven by the content industry. According to the diversification of the platforms (Smartphone and Tablet PC), consumers could actively choose content regardless of time and location. So, quality of content ‘itself’ (not platforms) is 700 the main factor for consumers to choose content. Therefore, further media industry will be led by the content industry. (Figure 5) - 2010 2011 2012 2013F2014F2015F Figure 4. Change in media industry Platform is main Content is main Source: Korea Creative Content Agency (KOCCA)

Platform’s Variance of Convergence Age of high- golden age Platform of Media quality content

One way, collective consumption of Content Duplex, individual consumption of Content Source: Team research Figure 6. Average revenue per unit (Unit: KRW) High potential in Korea content market Edited ARPU First, the price of content is rising. In broadcasting market, average revenue per user in Korea (by GDP level and viewing time) is KRW 9,000 compared to that of USA, KRW 21,196, considering both GDP level and USA 21,196 viewing time (Figure 6, Appendix 4). Thus, there is much possibility for a price rise of content Korea 9,000 as the media industry develops. Second, the quantity of content is increasing. As broadcasting is converted from analogue to digital in 2013, the compatibility of VOD (Video on demand) is Multiples 2.36x improved. Therefore, more platforms can distribute content easily, and it leads to an increase Source: IMF, emarketer, Korea Communications Commission in sales of VOD. With Japan, VOD sales increased 123% after broadcasting converted to team estimates digital in 2011. (Appendix 5)

Figure 7. Change of viewer ratings in USA Cable channel is main fruit (Unit: % ) This potential is prominent especially in cable channels. Nowadays, content of cable channel 60 gets competitiveness because it can make more attractive content without regulations seen in 55.3 terrestrial channels. Cable channels can produce violent and sexually suggestive content which fill viewer’s need. Therefore, the border between cable channels and terrestrial channels 50 49.5 becomes vague as viewer ratings of cable channels rise. In USA, viewer ratings of cable 44.4 channels outdid that of terrestrial channels in 2002. (Figure 7) And Korean broadcasting market is also showing the signs of this trend. For example, viewer ratings of “Answering 40 38.9 1994” aired on tvn (cable channel) got first place for the same time. Thus, it’s not far in the 35 future that cable channels can compete evenly with terrestrial channels. (Appendix 6)

30 Figure 8. Competitors of Jcontentree

Total terrestrial channels Total CA channels Source: Neilson research

Source: Each company, team research

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Platforms: Movie and magazine already in mature period CJ CGV is the main competitor of Jcontentree in movie sector, which accounts for 41% of the market. (Appendix 2) Movie market is now in oligopoly situation by three major companies, CJCGV, Lotte Cinema and Megabox. Megabox occupies third place in market, accounting for 20%. (Appendix 7) Oricom is the main competitor in magazine sector which publishes Vogue, allure and GQ. Jcontentree has first place in the market and Oricom is second.

Content: Broadcasting now in growth period CJ E&M has the most similar structure with Jcontentree. It runs distribution, PP (program provider) and production together with making vertical integration. Therefore, CJ E&M is the first channel which competes with terrestrial channels. And Jcontentree is a second mover which is now following the path of CJ E&M

Investment Summary

Figure 9. Viewer rating of JTBC. FRUITS (Broadcasting); Main powerful driver of Jcontentree (Unit: %) Broadcasting sector is main driver for Jcontentree. Jcontentree is affiliate with JTBC and 1.6 forms vertical integration in broadcasting. In the value-chain Jcontentree does in-house 1.531 production and is also sole distributor of JTBC. Therefore the power of JTBC is an important issue. They established a broadcasting station in Dec 2011. Therefore they are in the early 1.2 stage but grow faster compared to other start-up channels. (TV Chosun, Channel A, MBN) Moreover they make popular programs which capture the audience, and also their viewer 0.8 rating will be increased 0.5% to 1.53% in 2014F. (Figure 9)

0.49 Figure 10. Vertical integration of broadcasting sector 0.4 Production Broadcast Distribution

0 2011 2012 2013 2014F Jcontentree JTBC Jcontentree

Source: Nielson Korea, team estimates Source: Team research

Production; Fruitful regardless of any weather Jcontentree provides at least half of the dramas aired on JTBC and this will be maintained. (Appendix 8) Thus compared to other productions, the company can generate relatively stable sales. As for outstanding productions, they don’t have a fixed customer. They have to get contracts with broadcasting. (Appendix 9) Moreover Jcontentree will sell more dramas because JTBC have high possibility to schedule more episodes. It is because JTBC has enough capital (Appendix 10) and drama is the most profitable content. TV news just generates the profit from advertisement but the drama can get the profit from advertisement, OST, export and merchandise. Thus the trend is televising more drama and cable channel grow faster than Figure 11. The joiner of IPTV terrestrial. (Appendix 11) Therefore the sales from production will increase 14% in 2015F. (Unit: Million) Furthermore the company makes popular and high quality drama like “Painter of the wind” which received the grand prize. 15

12 Distribution; Low investment, high profit JTBC continuously make popular content and the company has the right to sell all the content 10 aired on the channel. As price and quantity will be increased, the company gets more profit from distribution. The price of VOD was increased and it will reach a reasonable price. Currently the VOD price of terrestrial channels is KRW 1,000 and they can set the price 5 3 differently based on their popularity. However the VOD price of JTBC is KRW 700. As the demand of the VOD is increased, the price will be raised at least to the level of its terrestrial channels. Thus if they make good content, they can generate an enormous profit. Obviously 1) 0 2010 2011 2012 2013 2014F 2015F the number of the content will be raised and also 2) the number of distribution channels will be increased. In the past the company could just distribute to other cable channels, but now they can sell more VOD through the new platforms according to the trend in the industry. Source: Korea Communication Commission

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Especially CAGR of Internet Protocol Television (IPTV) joiner is 62% and the growth trend will be maintained. (Figure 11) 3) Moreover Jcontentree has bestselling VOD. (Appendix 12)

ROOTS (Platform); providing energy for Jcontentree. Figure 12. Comparison of OPM Platform sector including movie and magazine businesses is strong cashcow for Jcontentree. 24% These two businesses will make stable profit based on operational efficiency and brand’s competitiveness. Broadcasting business can grow more rapidly by means of the strong cash flow. Platform and content sectors create a synergy effect in terms of finance. 16% Movie business; deep roots based on operational efficiency. The two factors that make business financially powerful are 1) high OPM, and 2) maintaining 20% 8% 16% market share. Thanks to these things, Jcontentree has a great ability to create cash in domestic 13% 11% movie market. In Korea movie theater market, Jcontentree’s OPM is 20.1% in 2012, which is about twice as high as CJ CGV’s (10.9%). (Figure 12, Appendix 13~16) It means that the 0% company can secure lots of cash stably compared to the competitor. Furthermore, the company 2011 2012 will maintain its market share (20%) in domestic movie market because of more efficient CJ CGV Jcontentree investment. The company is investing in direct management theater rather than foreign theater. The operational efficiency increases through this investment strategy. And the major Source: Each company data competitor cannot take Jcontentree’s share because the market share is restricted to less than 50% by the government. (Appendix 2)

Magazine business; small but strong roots coming from popular brands. Figure 13. Market Share of Magazine business Magazine business is affected by brand awareness and competitiveness. The company’s magazines such as ‘ELLE’, ‘Cosmopolitan’, and ‘Instyle’ are the top brands in domestic 18% 17% 17% magazine market. Through these variable and popular brands, market share of Jcontentree is 16% recording No.1 in domestic market. And the company will not lose dominance over the competitor. (Figure 13) Although the growth rate of printing industry is decreasing, Jcontentree’s magazine business can keep growing. The reason is that 80% of the brands, 12% 12% whose genres are fashion, male, and luxury magazines, are showing upward trend. These markets are expected to increase by 5.7% until 2015F. It is based on the growth of male and 9% 8% 8% 8% female fashion industry and consumption of luxury items. (Appendix 17)

6% 2011 2012 2013F 2014F

Jcontentree Oricom Valuation

Source: Cheil worldwide Inc., team estimates To calculate the price of Jcontentree, we selected SOTP valuation method because each business sector has independent characteristics. We applied DCF valuation, EV/EBITDA valuation and P/E ratio valuation for the movie sector, the magazine sector and broadcasting sector respectively.

Figure 14. SOTP valuation table with target year 2015F. (Unit: KRW billion) Valuation Target Target Business Field Sales OP OPM NI Method Multiplier Price Broadcasting sector 166 15 8.8% 15 P/E Ratio 21.4x KRW 2,250 Movie sector 249 44 18% 30 DCF Valuation - KRW 3,400

Magazine sector 116 6 5% -2 EV/EBITDA 5.35x KRW -120 Total 531 65 12.2% 43 KRW 5,430 Source: Team estimates

SOTP valuation suggests 31.64% upside potential with implied P/E ratio 18.92x in 2015F (including dilution effect of 8.09% and reduction in interest expenses). This multiple is appropriate because it is still undervalued compared with the average of peer’s P/E ratio 23.2x. (Figure 15) Therefore, target price KRW 5,430 calculated from SOTP valuation is favorable. CJ E&M which is representative peer company of Jcontentree shows P/E ratio 48.4x. Now, Jcontentree is ready to grow structurally and shows undervalued P/E multiple of 14.26x. It is reasonable for Jcontentree to reach 18.92x. Details of valuations are as follows.

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Figure 15. Financial informations of peer companies in 2013F (Unit: KRW billion, x, %) Company Sales OP OPM NI PER PBR ROE iMBC 51 3 6.5% 3 29.4x 2.0x 14.4% SBS Contentshub 189 31 16.3% 26 13.5x 2.3x 18.4% CJ E&M 1,702 60 3.5% 27 48.4x 1.1x 2.2% Chorokbaem 36 4 11.7% 4 15.6x 1.8x 12.4% iHQ 57 2 2.7% 3 21.7x 2.7x 8.0% CJ CGV 951 62 6.6% 38 27.2x 2.8x 10.6% ORICOM 109 6 5.3% 4 6.2x 0.6x 10.5% Source: Each company data, team estimates

1) Broadcasting Sector –P/E ratio In regard to valuation of broadcasting sector, we used P/E ratio. And the price is KRW 2,250. We applied target P/E ratio 21.4x and expected EPS KRW 105 in 2015F. Broadcasting Sector is the most powerful driver of high growth in the company. The sales of this sector are KRW 166 billion in 2015F. This is 69% growth compared to 2012.

Figure 16. Profit structure of broadcasting sector

Source: Team research

Broadcasting sector generates profit through production and distribution. And major factors are the number of selling dramas and the profit from the platform. First, based on the capital strength of JTBC (Appendix 18), we estimate the number of dramas. Moreover in 2015F the Figure 17. DCF Valuation & Assumptions profit from product placement advertisement (PPL) will increase to 25%. Second we apply the (Unit: KRW) growth rate of SBS contentsHub which is representative distribution. The most attractive point Cost of debt 7.00% of this part is that Jcontentree gets 30% profit purely without any extra costs. Furthermore the Tax rate 22.58% commission to JTBC is decreased from 76% to 70% in 2014F. Therefore the OPM will After tax cost of debt 5.42% increase 2% to 9% in 2015F. (Appendix 19) Risk free rate 3.53% E(Rm) 10.78% We pick the peer group based on their business. (Appendix 20) And we calculate the weighted Beta 0.7732 average P/E ratio based on the profit structure of Jcontentree. Cost of equity 9.14% Weight of debt 0.65 2) Movie sector - DCF Valuation Weight of equity 0.35 To calculate the value of Megabox, we used a DCF valuation model. Because Megabox WACC 6.73% generates stable cash flow and capital structure is not changed in the estimation period.

Perpetual growth rate 1.00% Sales WACC 6.73% We anticipated that sales in 2013F is about KRW 214 billion. It will show growth rate of 11% Continuing Value 455,615mn more than the previous year. Up to 2017F, we estimated sales by using the linear regression PV of continuing value 330,501mn analysis method. We placed sales of Megabox as the dependent variable, and placed average PV of FCFF 97,883mn ticket price (P) and admission per capita (Q) as the independent variables. (Appendix 21~23) Operating Asset 428,383mn Non-Operating Asset 52,515mn Perpetual growth rate Firm Value 480,899mn To obtain continuing value, we put 1% of permanent growth rate. The amount of household Net debt 99,400mn consumption in cultural industry has increased steadily, and the number of annual admissions Value of equity 381,499mn per capita is lower than OECD countries’ (OECD = 5 times, Korea = 3.3 times). From these Source: Team estimates reasons, it is determined that the amount of consumption in movie will increase up to 4.5 and it will maintain this level.

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CAPEX In regard to the characteristics of movie industry, capital expenditure scarcely occurs, and it seems to maintain the current level. However, we estimated that the additional capital expenditure of about KRW 1.5 billion will be generated annually. Because remodeling expenditure of about KRW 700 million is generated when consignment theater switches to direct management. We assumed this switching will occur to two theaters annually.

WACC In order to estimate the cost of equity of 9.14%, we used CAPM. We applied 10-year government bond risk-free rate of 3.53% and 10-year rate of return on KOSPI of 10.78% for expected rate of market return. From CJ CGV's beta, we calculated adjusted beta of 0.7732 by using pure-play method. The after-tax cost of debt was calculated by using value of 5.42% for Megabox because of cost of debt of 7% and marginal tax rate of 22.58%. As a result, we obtained the weighted average cost of capital of 6.73%. (Appendix 24)

3) Magazine business - EV/EBITDA Valuation Jcontentree runs JoongangM&B as its magazine business. Its OP has been constantly positive. However, because of the interest cost, net income is negative. We used EV/EBITDA for valuating since it can consider both OP and interest cost. According to pro-forma income statement, OP will be about KRW 6 billion in 2015F. Considering expected OP, depreciation, and net liabilities, we estimated the target price of this business to be KRW -120 in 2015F.

Sales and Debt The estimated sales of this business are KRW 116 billion in 2015F. It is decreased by 1.25% compared to that of in 2012. Firstly, the sales of magazine are comprised of advertisement sales (70%) and product sales (30%). Advertisement sales increase in accordance with the growth rate of the magazine advertisement market. In estimating product sales, comprehensive female magazine sales has decreased but the sales of fashion, male, and luxury magazines have increased. For depreciation, we assumed that the depreciation rate is stable because magazine’s depreciation comprises just 2% of SG&A, which is quite small. For the net liabilities, we applied the company’s repayment plan, which reduces the short-term debt by KRW 1 billion each year.

Target EV/EBITDA We estimated the market capitalization of magazine business by considering the trend of peer’s EV/EBITDA multipliers in the last four years. Peer groups of the company include Samsungbooks, Yearimdang, and Oricom. EV/EBITDA multiples of the three peers have maintained four to seven in the last four years. Therefore, we applied averaged EV/EBITDA multiplier of 5.35 to evaluate the market capitalization. We assumed that 5.35 will remain the same for three forward years, because printing media is generally in downtrend but advertisement sales is increasing. As a result of applying this multiplier of 5.35, the target price of magazine business is KRW -120 in 2015F. Even though the present price is minus, it will improve by repaying the short-term debt constantly. (Appendix 25)

Financial Analysis

Figure 18. Annual operating profit margin of Improvement in operating profit after merger with JoongangM&B Jcontentree (Separate basis). Jcontentree that had run sports newspaper business showed vulnerable operating margin (Unit: KRW billion, %) around -10% until 2010. However, after Jcontentree merged JoongangM&B which had 2010 2011 2012 2013F improved operating profitability in May 2011, the firm's operating margin improved to around Sales 18.3 60.2 86.1 86.4 6% in 2011 and 2012. There seems to be a negative effect on making operating profit better EBIT -2.5 3.9 5.4 5.2 than before because advertisement market is shrinking followed by the overall economic EBIT -13.6% 6.4% 6.2% 4.6% recession. However, favorable operating profitability is expected to come based on a Margin sustainable business in magazine sector. (Figure 18) Source: Company data, team estimates

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Complement to volatility of other business from excellence in the movie business Figure 19. Sales, EBIT margin, and NI margin of Jcontentree (Unit: KRW billion) earnings Under the consolidation basis, movie business is generating most of operating profit and 600 15% 13% 14% magazine business is also making small but steady profit, too. In the first half of 2013, due to 11% 12% 9% 6% 6% 7% seasonality of the advertisement market, magazine and broadcasting business marked 400 1% 479 0% operating loss. However, as the profit derived from the movie business offsets this loss, entire 429 profitability is maintained. (Figure 19) 393

200 -15% Heavy debt caused by large-scale acquisitions -18% Due to debt from large equity investments such as the Cinus stake acquisition, business area -25% expansion and increased loans to affiliates, debt scale is heavy and short-term repayment 0 -30% burden is high compared to company's size and cash flow. Under separate basis, annual interest expense of debt is more than KRW 5 billion. However, Megabox and HearstJoongang, which have good earnings, alleviate some of this burden with their stable dividend income of Sales(L) EBIT margin(R) NI margin(R) about KRW 3 billion. (Figure 20)

Source: Company data, team estimates Figure 20: Debt condition of Jcontentree(separate basis) (Unit: KRW million) Category 2010.12 2011.12 2012.12 2013.03 2013.06 2013.09 St. Debt 41,000 60,368 68,523 68,501 67,389 72,000 Current Portion of Lt. Debt 23,000 25,036 25,256 25,143 25,614

Current Portion of Bond 22,206 - - - - - Lt. Debt - 5,876 3,657 2,673 2,009 1,293 Bonds ------Total Debt 63,206 89,244 97,216 96,430 94,541 98,907 Cashable Assets 3,146 5,162 5,299 3,813 577 2,069 Net Debt 60,060 84,082 91,917 92,617 93,964 96,838 Payment Guarantees 25,150 62,892 68,653 66,881 71,870 82,251 Total Financial Burden 85,210 146,974 160,570 159,498 165,834 179,089 Lt. and St. Loans 11,885 7,975 12,491 13,663 10,299 9,775 Debt to Equity Ratio 700.0% 134.3% 144.0% 136.0% 131.7% 141.0% Level of Dependence on Debt 76.1% 43.9% 45.6% 44.3% 44.2% 45.5% Total Debt/EBITDA 19.80 15.45

Consolidated Total Debt 93,545 116,929 219,787 220,350 206,613 207,631 Consolidated Net Debt 79,757 102,732 149,896 166,738 166,281 159,760 Source: Company data

Reduced financial flexibility due to payment guarantees In the process of taking over Megabox in 2011, Jcontentree made an agreement that provides payment guarantee of KRW 39 billion with Korea Multiplex Investment Corporation (KMIC) which owns 50% stake of Megabox. As a result, at the end of Jun 2013, long-term and short- term loans for subsidiaries and affiliates are KRW 10.3 billion and payment guarantees approach KRW 78.1 billion. These loans and guarantees are reducing the company's financial flexibility. However, in consideration of the credibility of the Joongang Ilbo and the value of KMIC's stockholding, there is a low possibility that the payment guarantees (KRW 57.6 billion) of the Joongang Ilbo (KRW 18.6 billion) and KMIC (KRW 39 billion) become contingent liabilities. Therefore, actual burden is not too heavy. (Appendix 26)

Other Headings

Magazine Publication Mobile publication is growing quickly because Korea has a super-high penetration rate of smartphone, 67.6%. Nowadays, Jcontentree publishes some mobile magazines already, and it is going to invest more on mobilization.

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Musicals Figure 21: The musical industry of Korea. (Unit: KRW billion) The growth rate of Korea musicals market is high. However, it relies on purchasing popular foreign musicals or performances. However, buying foreign musicals is absolutely 450 400 disadvantageous to distribution in Korea. Recently, people’s perception of musicals changes 300 from high-level culture to popular culture. Thus, despite relatively high price, some musicals 280 300 had good results. (Ex. The phantom of the Opera, and Wicked). Therefore, the growth rate of the local-made musicals can also be noticeable if high-quality musicals are performed. (Figure 180 21) 150 100 JTBC’s additional support for content production costs 3 The company can receive about KRW 18.5 billion from JTBC by 2013F’s. According to 0 KCC’s (Korea Communications Commission) correction order in 2013, JTBC must fulfill the 2001 2002 2006 2012 2013F2015F Source: Korea musical theater association amount of KRW 91.5 billion which JTBC planned to invest first but not performed. Considering that half of JTBC dramas are produced by the company, the company gets 20.2% of all investment. (Appendix 27, 28) Also, we expect that 3 dramas produced during the second half of the year can be supported by additional KRW 6.1 billion in average.

JTBC’s new cable channels, positive for Jcontentree JTBC plans to run drama, entertainment, and sports cable channels in a similar way to those of terrestrial competitors, SBS and MBC. Though all these channels’ proprietor is JTBC, Jcontentree is going to distribute all the content aired on three channels. Assuming the company distributes them exclusively, we expect the sales from distribution sector will be increased. With terrestrial already running cable channels, their in-house distribution company’s sales increased by 79.3% in the second year. (Appendix 29)

Investment Risks

Issuing convertible bond Jcontentree issued a convertible bond with zero-coupon on October 17, 2013. Conversion price was KRW 4,850, the scale was KRW 18 billion, and maturity was five years. Based on 2015 when early redemption is started, dilution effect from issuing CB will be 6.27%. The company used this bond to repay debt. In addition, the company refinanced KRW 22 billion of debt at the same time. As a result, the company reduced about KRW 2 billion of interest expenses. Diluted EPS which includes the interest effect increases by 1.35%. Therefore, effect from issuing CB does not have a significant effect on the company. According to the indenture, however, this bond is re-evaluated every month. This provision may become a problem when stock price falls continuously. The bottom of conversion price is KRW 3,395 and dilution effect of that is 8.09%. Then, because interest effect compensates dilution effect, EPS can be reduced by 0.69%. However, considering the growth potential in the future and limitary dilution effect, convertible bond is not a major risk for this company.

Financial burden with acquisition of additional shares of Megabox Under the agreement signed with Korea Multiplex Investment Corporation (KMIC) which holds shares of 50% of the Megabox, Jcontentree has a call option which allows the company to purchase shares of the Megabox that are held by KMIC. If Jcontentree acquires additional shares of Megabox, there exists the burden of funding associated with it. Also, it is notable that KMIC has a right to force sale of shares held by KMIC if the value of total share of Megabox exceeds KRW 650 billion.

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Adjusting ticket revenue sharing rate of Megabox. June 2013, CJ CGV adjusted ticket revenue sharing rate which had been applied to the Korean film from ‘theater 50%, distribution 50%’ to ‘theater 45%, distribution 55%’. Followed by CJ CGV, Lotte Cinema also participated in adjusting the rate in September 2013. It can be expected that Megabox also participates in this adjustment. Even if the revenue obtained from the screening of Korean films is reduced 10% by the adjustment, the target area is limited only to Seoul and the adjustment is preceded with direct management theater. In consideration of these points, the impact of the adjustment on the company's sales seems to be insignificant.

Re-approval of comprehensive channels KCC is going to carry out the re-approval of four start-up channels including JTBC in the first half of 2014. JTBC is the principal source of profit on the company’s broadcasting sector. Therefore, the fact whether JTBC is re-approved or not can have a decisive effect. Considering the standard of re-approval, it focuses on broadcasting fairness and balance of programs. JTBC has the most similar programming with terrestrial channels among the four start-up channels. It means that if JTBC is re- approved, it is expected that this re-approval event is not a heavy risk for Jcontentree.

Figure 22: Fluctuation of the advertisement Sensitivity of advertisement market to GDP industry In magazine sector, advertisement revenue accounts for 70%. Advertisement market of 20% 17.13% magazine makes up around 5% of the total advertisement market. Currently, advertisement market for new media such as internet, mobile and e-books is expanding. However, the 15% attractiveness of magazine advertisement market is decreasing. Other sectors are also affected by the cycle of advertisement market because they make profit from advertisement, too. 10% 10.16% 5.50% Correlation between GDP and sales of advertisement market which are related to company’s 3.76% 5% 4.84% business sector shows strong positive correlation of 0.97. It can be interpreted that this 3.02% 2.80% company reacts to the economic cycle sensitively. According to Bank of Korea, GDP growth 0% rate in 2013F will be about 2.80%, advertisement market will be expected to grow up to 4.84%. This rate is lower by about 0.66%p than previous year's advertisement market sales. -5% -3.39% (Figure 22) Advertisement expenses growth rate GDP growth rate Possibility of lowering the support of JTBC Source: Cheil worldwide Inc., JTBC provides 90% to Jcontentree for drama production cost. But terrestrial channels provide korea economic research institute, only 60% for production cost, and the production company complements the rest by PPL. It is team estimates because of the awareness difference between channels. Therefore, with high awareness, terrestrial channels can be sponsored by lots of PPL compared to start-up channels. But recently, the awareness of start-up channels, especially JTBC, is increasing through popular entertainment programs and dramas. Thus, there is a high possibility that JTBC can also lower the rate of production cost of dramas. If it is realized, Jcontentree should get more PPL, making the risk of success and failure of dramas large.

Uncertainty of content’s success Broadcasting production business has instability because content before it is aired is uncertain to succeed. Generally, when the cast and staff are popular, the possibility of the success is raised. Also, programs aired on other channels at the same time are also able to affect its success. If content in process finishes early due to low viewer ratings, production companies have more burden. In case of “The end of the world”, JTBC shortened the broadcasting period from 20 to 12 episodes due to unexpected low viewer ratings (highest 0.89%). Even though Jcontentree had invested KRW 2 billion in the drama in the initial stages, the company could withdraw only KRW 1.2 billion from JTBC. Thus it could not avoid heavy deficit. It is possible to think the uncertainty is the company’s operational risk because it cannot completely exclude the possibility of content’s early finish.

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Appendix 1. Joongang media group management structure

Joongang Media Network

Joongang Daily JTBC

Dramahouse& Megabox Jcontentree JcontentHub

Joongang Joongang IS Plus Corp. Seol & Company Culture Media Media Q Channel

Jcontentree can utilize their affiliated company, especially JTBC. Jcontentree is affiliated with Joongang Media Network. Joongang Media Network is a media company that managed one of the most famous newspaper companies in Korea (Joongang Daily). And also the company which started from newspaper company founded the Cable TV channel (JTBC) in Dec 2011. Therefore, Jcontentree is also affiliated with JTBC, and their broadcasting sector is closely related to JTBC. With the power of these relationships, the broadcasting sector has stability and growth potential by using their Cable Channel.

Appendix 2. Shares of theater (Multiplex) market in Korea (2012).

10%

CJ CGV 41% Megabox 28% Lotte Cinema Others

20%

Source: Korean film council

Oligopoly movie market in Korea In theater market, Jcontentree (Megabox) is 3rd place of entire movie market (20%). In Korea, three major companies possess 90% of entire theater market.

Market Share will not be invaded It is expected that their market share will not invaded at all because of Korean law. According to Fair Trade Commission in Korea, it is prohibited that a sole company has market share over the 50%. CJ CGV, which is the 1st place of the market, has 41% market share in Korea, and also Lotte cinema has 28% market share. The Fair Trade Commission restricted that CJ CGV or Lotte Cinema invaded another movie market. In fact, their competitors gave up expand market share in Korea, and then entered another market, China and Vietnam. Therefore, their movie sector, Megabox, has strong stability with this law.

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Appendix 3. Business Field of Jcontentree with BCG Matrix

Source: Team estimates, company data

The ‘Success Sequence’ of Jcontentree There is a famous theory called ‘Success Sequence’ in BCG Matrix. The theory claimed that it is necessary to construct effective business portfolio. In this theory, a ‘Successful’ company must have five processes as follows: 1) A part of the company started ‘Question Mark’ would move to ‘Star’, and as the market entered age of saturation, they would move to ‘Cashcow’ slowly. 2) A goal of ‘Cashcow’ sector is to generate enormous and stable cash inflow. 3) By having a cashcow, a company should support another part that placed in ‘Question Mark’ or ‘Young Star’. 4) ‘Question Mark’ or ‘Young Star’ part would grow up ‘Star’ supported by cashflow. 5) Therefore, a company must have plenty of ‘Cashcow’, and a little of ‘Question Mark’ or ‘Young Star’ but they didn’t have ‘Dog’.

Jcontentree is going to follow their ‘Success Sequence’. 1) The company already has strong ‘Cashcow’ as movie (Megabox), magazine (Joongang M&B). 2) Two parts of the company generates cash flow enormously and stable. 3) By having movie part and magazine part, the company is going to support ‘Broadcasting’ sector, which are placed in ‘Question Mark’ or ‘Young Star’ 4) With this cashflow, broadcasting sector (Dramahouse&JcontentHub) would grow up to ‘Star’. 5) In other words, Jcontentree already have plenty of ‘Cashcow’ and ‘Young Star’.

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Appendix 4. Calculating edited ARPU

Unit: million Unit: KRW digital TV subscriber ARPU USA 100 60,000 Korea 24 9,000 Multiples 4.2 6.1 Source: KCC (Korea communications commission)

GDP per person Unit: KRW USA 49,601 Korea 23,679 Multiples 0.47 Source: IMF(International Monetary Fund)

TV viewing time Unit: Hour USA 4.5 Korea 3.3 Multiples 0.74 Source: Emarketer

Edited ARPU Unit: KRW (by price level and viewing time) USA 21,196 Korea 9,000 Multiple 2.36

To calculate edited ARPU, we searched original ARPU of USA and Korea. And to compare it on the same condition, we consider two major factors, GDP for price level and viewing time. The GDP per person in USA is 0.47 times of Korea. And TV viewing time of USA is 0.74 times of Korea. Therefore, we multiplied 0.47 and 0.74 to the original ARPU of USA, KRW 60,000. Finally, we derived edited ARPU of USA, KRW 21,196.

Appendix 5. VOD sales in Japan Appendix 6. Viewer ratings of answering 1994 (Unit: JPY (Unit: %)

120 12 11.9% 101.3

82.6 76.2 80 8

40 4 2.6%

0 0 2010 2011 2012 1 3 5 7 9 11 13 15 17 19 21

Source: Association of digital content Source: Neilson Korea

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Appendix 7. Number of movie screen in Korea (Unit: Screen) 2,500 2,150 1,975 2,000

1,500 1,132 1,000

500

- 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Korea Film Council The mature period in Korea movie market The theater market is expected to enter the mature period. Number of screen in Korea grew up annually 18.6% from 2003 to 2007. In other words, movie companies in Korea invested aggressively to expand their theaters, or screen numbers. However, after 2007, the number of screens grew slowly while growth of the movie consumer is high. It means that the theater companies have a strategy that maintain the same level, not invest aggressively.

Appendix 8. Composition of production of JTBC’s

DRAMAHOUSE DRM L.G.H Production 56% SamHwa networks LOGOS FILM

Source: Team research

Appendix 9. The number of drama produced by PAN entertainment (Unit: Program) 6

4

2

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F Source: Team research

PAN entertainment which is one of the famous production companies just recorded half the sales compared to last year.

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Appendix 10. The Production cost of Start-up Channels Appendix 11. The trend of televising dramas (Unit: KRW billion) (Unit: Program) 180 90 161 82

74 76

120 60 93 80 83

30 60 24 15 9

0 0 2009 2011 2012 MBN TV Chosun Channel A JTBC Terrestrial Cable Source: KCC Source: KOCCA

Appendix 12. Top 10 VOD among start-up channel

NO Tittle Broadcast

1 Witch Hunt JTBC

2 Hidden Singer 2 JTBC 3 Ssuljeon JTBC

4 Your Neighbor’s Wife JTBC

5 Heartless City JTBC

6 Can We get married JTBC

7 Hidden Singer 1 JTBC

8 Better Off With Kids JTBC

9 Oldest JTBC

10 Now we are going Channel A Source: Tving

Appendix 13. Operational Margin of Movie sector Appendix 14. Personnel Expenses / Sales in Movie ((d(d((2010~2012) sector 9% 25% 8.0% 20.1% 20% 6.7% 16.3% 6% 5.5% 15% 11.5%

10% 3%

5%

0% 0% 2010 2011 2012 2010 2011 2012

Source: Company data Source: Company data

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Appendix 15. Sharing ticket revenue / Sales in Movie Appendix 16. Rent cost / Sales in Movie sector sector 36% 35.7% 25%

35% 34.4% 20.1% 20% 19.0% 34% 33.1% 33% 15.1% 15%

32%

31% 10% 2010 2011 2012 2010 2011 2012

Source: Company data Source: Company data

Appendix 15-1. Profit structure of movie ticket

100% 3% 3% 10% 10% 80% Korea Film Council 43.5% 39.2% 60% VAT

40% Revenue to theater

47.8% 20% 43.5% Revenue to investment, distribution company 0% Korean Movie Foreign Movie Source: Korea Film council

Appendix 15-2. Korean movie vs Foreign movie in Korea market

70%

58.8% 60%

50% Korean Movie 46.6% Foreign Movie 40%

30% 2010 2011 2012

Source: Korea Film council

From 2010 to 2012, the movie sector of Jcontentree, Megabox, has been enormously changed in financial area. The operational margin of Megabox was increased by 9% from 2010 to 2012. (Appendix 13) The reason that OPM was higher is due to three things: 1) Personnel Expenses, 2) Rent cost, 3) Sharing ticket revenue.

First, Megabox cut off the rate of personnel expenses by 2.5%p in this period. For this reason, Megabox could increase OPM by 2.5%p. (Appendix 14)

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Second, sharing ticket revenue was cut off by 2.6%p in this period (Appendix 15). The reason why sharing ticket revenue decreased is a market factor. Rate of Korean made movie (Korean made, not imported foreign movie) has increased in this period from 46.6% to 58.8%. (Appendix 15-2) Also, Korean made movie is favorable to theater because Korean made movie share more revenue compared to foreign movie by about 4%p. (Appendix 15-1) It means that if Korean made movie market has increased, the theater could get more revenue.

Third, Rent cost was decreased by 5%p from 2010 to 2012 because Megabox has been overweighting in consignment theaters. (Appendix 16)

For these reasons, Megabox cut off the expenses by 10%p, and the effect is that the OPM has increased about 9%p. We expected that their OPM will slow down slightly (Appendix 30), but not rapidly decrease because 1) Korean made movie market has still increased, 2) Korea movie market is in the mature period. Therefore, their OPM risk is not significant.

Appendix 17. Growth of fashion, male and luxury magazines (Unit: KRW billion)

160 153 138 143 120 97 84 80 76 79

40 47 32 34 36 19 0 2009 2010 2011 2012 2013F 2014F 2015F

Fashion Male Luxury

Source: Cheil worldwide Inc., team estimates

80% of Jcontentree’s magazines belong to fashion, male, and luxury genres. While women’s magazine is in down trend of growth, other genres (fashion, male, luxury) are growing rapidly. Sales from the three magazines had CAGR 10.2% in last five years. Such a high growth rate will be maintained continuously. The growth rate is expected to be 4.07% in 2014F and 6.64% in 2015F. Thanks to these magazines, Jcontentree’s magazine business can get enough cash flow to invest in broadcasting business.

Appendix 18. Net income of JTBC (Unit: KRW billion) 100

59

50 30

(3) - 2011 2012 2013F 2014F 2015F 2016F 2017F (28) (50) (60)

(109) (100) (133)

(150) Source: KCC, team estimates

Currently JTBC is in an early stage. Therefore they have to invest a lot of money and their net income is negative. But they can bear it because of strong capital. Based on our estimation JTBC will turn-around in 2015F. Thus they can invest more which means the production cost will be increased and they will schedule more dramas. In the case of terrestrial, the number of drama was increased form 72 in 2009 to 82 in 2012.

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Appendix 19. The valuation of broadcasting sector (Unit: KRW million, KRW)

2012 2013F 2014F 2015F 2016F 2017F

Sales 98,113 115,515 141,933 165,800 185,509 198,874 Cost 96,601 116,621 136,178 151,213 165,488 174,723 EBIT 1,512 -1,107 5,755 14,587 20,021 24,150 Taxable income 850 5,236 11,513 19,795 24,693 28,271 Net income 2,351 4,084 8,980 15,440 19,261 22,051 EPS 36 62 137 236 294 337 Source: Company data, team estimates

In 2012net income is higher because of the deferred income tax. And in 2013F because of early finishing of they showed the negative profit.

Appendix 20. Peer groups of broadcasting sector

Production Distribution Program Provider

SBS WOW IHQ Chorokbaem iMBC CJ E&M KNN YTN KMH TBC SBS ContentsHub TV

EPS 107 57 1,076 142 975 1,973 118 192 839 428 1,508 P/E ratio 21.70 15.6 13.5 29.4 48.4 3.69 27.36 10.13 10.25 13.1 27.89 Source: Company data, team estimates

The peer group of production is PAN Entertainment, IHQ, Samwha Networks and Chorokbaem. But PAN Ent. is too overvalued and Samwha Networks showed negative net income. Therefore both of them are not appropriate for comparison. And the peer group of distribution is SBS contentsHub and iMBC. JTBC is inferior to major channels. But in consideration of growth, it will be fair. The peer group of PP (program provider) is CJ E&M, KNN, YTN, WOW TV, KMH and SBS. All of them run broadcasting stations.

Appendix 21. Multiple linear regression analysis data for estimate Appendix 22. Trends of Average Ticket Price, Admission per Megabox sales. capita in US, Canada box office (Unit: USD (L), Person(R))

Dependent Variable: Megabox Sales 9 6 Method: Least Squares

Sample: 2005-2013 Mean of ATP is 4.5

Variable Coefficient(million) t-Statistic Prob. 6 4 C - 364,000 -11.56 0.00 Average Ticket Price 43.75 7.27 0.00 Admission per Capita 64,700 8.19 0.00

R-squared 0.94 3 2

Adjusted R-squared 0.92

F-statistic 46.85 ATP(L)

Prob(F-statistic) 0.00 Admissions per Capita(R) Durbin-Watson stat 2.07 0 0 Source: Team research 1980 1995 2002 2007 2012 Source: Motion Picture Association of America, team research

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Appendix 23. Estimated Sales & View per capita in Korea (Unit: KRW Billion, times)

300 5 US & Canada VPC = 4.5 Times Sales 4 View Per Capita 200 3

2 100 1

0 0 2010 2011 2012 2013F 2014F 2015F 2016F 2017F

Source: Team estimates

The result of multiple regression analysis shows that t-statistics of every independent variable are significant because the absolute values of them are more than 2. In addition, F-statistics of 46.85 also explains the adequacy of the model and R-squared of 0.94 describes the high fitness of linear regression line which accounts for the sales of Megabox. In the United States, average ticket price has grown 2.80% per year and average of admission per capita has been about 4.5 times since 2004. So, based on the US, we estimated that ATP (Average Ticket Price) growth rate will be CAGR 1.79% and admission per capita approaches 4.5 during the estimation period.

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Appendix24. Assumption of Weighted Average Cost of Capital (WACC)

Description

Cost of Debt 7.00% Weighted average interest rate of Jcontentree Tax rate 22.58% Tax rate of Megabox in 2012 (Source: Company report in 2012) After tax cost of debt 5.42% = Cost of Debt (1 - Tax Rate) Risk Free Rate 3.53% Yield on the KOR National bond 10Y in 2013/12/27 E(Rm) 10.78% 10-year rate of return on KOSPI for expected rate of market return Beta 0.7732 **see below Cost of Equity 9.14% Using CAPM = Rf + B ( E(Rm) - Rf ) Weight of Debt 0.65 = Net Debt / (Net Debt + Equity) (Source: Company report in 2012) Weight of Equity 0.35 = 1 – Weight of Debt WACC 6.73% = {COD * (1 – Tax rate) * Weight of Debt} + (COE * Weight of Equity)

Beta – Pure Play Method (Unlevering CJ CGV)

We calculated adjusted beta of 0.7732 by using pure-play method from CJ CGV’s beta. The reason why we use the beta of CGV is as follows:

1) We cannot get the flow of stock price of Megabox because Megabox is not a listed company. For this reason, we could not obtain beta. 2) Therefore, we calculated by using the beta of CJ CGV which is listed on KOSPI, not KOSDAQ.

Calculating unlevered beta formula is as follows:

Unlevered beta = Levered beta /(1+(1-t)D/E)

CGV’s Debt to equity ratio in 2012 was 0.99 and tax rate was 0.23 The beta of CGV in last 2 years is 0.47, according to the formula, the unlevered beta of CGV is 0.27.

And then, calculating a beta of company formula is as follows:

B company = B unlevered(1+(1-t)D/E)

Megabox’s debt to equity ratio in 2012 was 1.84 and tax rate is 0.23. And it is possible to apply the unlevered beta of CGV, 0.27. According to this formula, the beta of Megabox is 0.6598.

To avoid instability problem of beta, we used adjusted beta. The formula for adjusted beta of Megabox can be presented as follows:

Adjusted beta B = 1/3 + (2/3 * 0.6598) = 0.7732

Appendix 25. Valuation of printing media section

(Unit KRW million, x)

2013F 2014F 2015F

Sales 114,993 115,933 116,729

OP 5,051 5,503 6,097 EBITDA 10,437 10,886 11,455

Target EV/EBITDA 5.35 5.35 5.35 EV 55,838 58,241 61,288

Market Value -15,593 -12,190 -8,143 Total number of shares 66 66 66

Target Price -230 -180 -120 Source: Team estimates

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Appendix 26. Offer and benefit details for affiliate and relative (Unit: KRW million) Relation Corporate Name 2012 2013F Joongang Ilbo 21,834 18,590

Joongang Books 3,318 8,939 Joongang Entertainment and Sports 1,680 1,200 Affiliate Joongang Ilbo Sisamedia 1,200 1,200

Offer Joongang Animation 1,622 1,662 JTBC 3,900 Clip Service 5,200 2,600

Relative Korea Multiplex Investment Corporation 39,000 39,000 Total offer 74,053 82,251 Benefit Affiliate Joongang Ilbo 20,700 17,069

Source: Company Report

Appendix 27. 2013 JTBC program portion by genres

7.8%

11.8%

59.1% 21.3%

Report Culture Drama Entertainment

Source: JTBC

Appendix 28. Subsidy difference between in-house and outsourced production from the channel. (Unit: KRW million)

20,000 17,495

15,000

10,000 95 : 5

5,000 915 0 In-house Outsource Source: KCC

To calculate 20.2% we consider program portion of JTBC and subsidy to in-house and outsourced production from the channel. From all JTBC program, drama accounts for 21.3%. Among that portion, in-house production gets 95% of subsidy on average. So we multiplied 0.95 to the portion of drama and derived 20.2%.

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Appendix 29. Increase of sales after new cable channels’ opening (terrestrial channel SBS) (Unit: KRW billion) 120

90

60 openingOpening

openingOpening 30 87.4 % 71.2% 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Company data

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Appendix 30. Financial statement of Jcontentree

Balance Sheet (Unit: KRW billion) 2012A 2013F 2014F 2015F 2016F 2017F Current assets 209 223 273 291 341 370 Cash & cash equivalents 70 77 85 93 99 104 Account receivable 68 74 82 89 96 101 Inventory 6 9 9 10 11 12 Other current assets 65 63 97 99 135 153 Non-current asset 306 306 348 342 370 370 Tangible assets 84 86 87 89 90 91 Intangible assets 48 50 50 51 51 52 Other financial assets 77 77 76 75 75 74 Other non-current assets 96 94 135 127 154 153 Total assets 515 529 621 633 711 740 Current liabilities 247 251 288 286 313 314 Account payable 93 99 111 127 131 138 St. debt 90 93 92 91 90 88 Current portion of Lt. debt 32 36 36 37 37 38 Other current liabilities 33 23 48 31 55 50 Non-current liabilities 135 130 147 144 156 160 Lt. debt 98 77 93 89 75 89 Bond 0 18 18 18 18 18 Other non-current liabilities 37 35 36 38 63 53 Total liabilities 382 381 435 430 469 474 Controlling interest 94 105 120 139 160 185 Paid-in capital 33 33 33 33 33 33 Capital surplus 43 43 43 43 43 43 Retained earning 23 34 49 68 90 114 Other changes in equity -5 -5 -5 -5 -5 -5 Non-controlling interest 38 43 67 64 81 82 Total stockholders' equity 132 148 186 202 242 266 Total liabilities and equity 515 529 621 633 711 740

Income Statement (Unit: KRW billion) 2012A 2013F 2014F 2015F 2016F 2017F Sales 393 428 472 514 551 581 Broadcasting 98 116 142 166 186 199 Movie 192 214 232 251 269 286 Magazine Media* 118 115 116 117 117 118 Etc -15 -16 -18 - 20 -21 -22 CGS 209 224 246 271 289 304 Gross profit 184 204 226 243 262 276 Gross profit margin 46.8% 47.6% 47.9% 47.3% 47.6% 47.6% SG&A 141 165 176 181 191 198 EBIT 43 39 50 62 71 78 EBIT margin 10.8% 9.1% 10.5% 12.1% 12.9% 13.4% Non-operating income -13 -6 -6 -8 -10 -11 Interest Income 9 5 6 6 6 6 Interest Expenses -18 -12 -12 -12 -13 -12 Others -3 1 0 -2 -4 -6 EBT 29 33 43 54 61 67 Tax 5 8 10 13 15 16 NI 24 23 31 40 46 51 NI margin 6.2% 5.4% 6.5% 7.7% 8.3% 8.7% *This sector contains Joongang M&B, IS daily sports and some of other sectors.

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Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society of Korea, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challenge

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