Media/Entertainment the Golden Age of Video Content

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Media/Entertainment The golden age of video content

The increasing search for content Overweight (Maintain) In just a short period of time, over-the-top (OTT) services have emerged as a key platform for the global media industry. In response, both traditional media companies, Industry Report such as Walt Disney (NYSE: DIS, CP: US$97.06) and Time Warner (NYSE: TWX, CP : US$100.47), and new media companies, such as Netflix (NASDAQ: NFLX, CP : September 5, 2017 US$179.00) and Amazon (NASDAQ: AMZN, CP: US$979.47), are now battling to source large amounts of content from outside providers. As media companies broaden their geographical footprint and turn to content to differentiate their platforms, licensed content, in addition to self-produc ed content, are becoming increasingly important. For example, Netflix is planning to spend W8tr on content alone next year. In our view, Mirae Asset Daewoo Co., Ltd. global competition to license content will play out for quite some time.

[Media /Entertainment/Leisure ] We believe the battle for content will benefit video content producers. The proliferation of accessible OTT platforms has created new sources of content demand, Jeong -yeob Park presenting opportunities across different formats, sizes, and targets. We expect +822 -3774 -1652 content licensing to grow and a more diverse range of conten t to attract traffic. We [email protected] view this as another positive change for Korean content producers, which saw increased bargaining power following the introduction of general programming cable

channels and the beginning of content exports.

We believe some paralle ls can be drawn between the current situation and the 1990s, when the programming of externally-produced dramas was institutionalized in Korea.

At the time, demand for content soared alongside the advent of cable TV channels, spawning numerous independent studios. Similarly, we think the current OTT-driven market changes will breathe renewed life into the production industry. Opportunities for channel operators, independent studios, and entertainment agencies We think exports via global OTT services have the potential to become a new revenue stream. OTT services represent a potentially significant market, as they target international audiences. There are also different types of demand and licensing methods available on OTT services, which allow for more predictable and steadier sales. Two Korean dramas ( Secret Forest and Man to Man ) recently grabbed headlines after Netflix bought the licensing rights to the shows for huge sums (W3-6bn). We believe OTT services will be a major boon for the Korean media indu stry, which has been plagued by uncertainties surrounding exports to China. We believe participants in the drama (video) production and programming value chain can take advantage of OTT services’ two profit models (subscription fees and digital adverti sing). First, we look for exports to global premium platforms (based on subscription models). These platforms mostly seek high-quality, genre-oriented content with big budgets. Domestically, we think companies like CJ E&M and J Contentree are better positioned because of their platform-production integration, which makes it easier for them to secure funding and recognition. Second, we see benefits from the growth of the digital advertising market. A greater variety of content formats—such as broadcasting clips, user-generated content (UGC), and web/mobile-only content—are springing up for digital ads, providing producers with additional opportunities. Among multi-channel network (MCN) operators, we believe CJ E&M deserves attention. Meanwhile, entertain ment agencies, which enjoy deep ties with celebrities and directors/writers, are now joining hands with online platform providers. We think their strength in human capital, a critical component of video content, makes them well-positioned to expand their s cope of business and ensure stable demand.

Our top picks are CJ E&M (130960 KQ) and SM Entertainment (041510 KQ) We present a Buy rating on CJ E&M with a target price of W97,000, and recommend the stock as our top pick. CJ E& M’s content offerings are strongly positioned not only in the TV segment, but also in digital platforms, and are highly competitive in terms of both advertising and licensing. We also expect drama licensing to gain further steam following the listing of subsidiary Studio Dragon.

We present a Buy rating on SM Entertainment with a target price of W37,000. Among entertainment agencies expanding their business scope, we are most optimistic on SM Entertainment, given the earnings visibility of its core business , the addition of the new advertising division, and synergies between existing and new businesses.

September 5, 2017 Media/Entertainment

C O N T E N T S

Key charts 3

1. Full-fledged competition across platforms 6 Changes in overall content value chain 6 Competition among new platforms to gain dominance 10

II. Media content: New opportunities 13 Exports via global OTT services to be new revenue stream 13 Global OTT services to present greater opportunities 15 Content producers facing newfound opportunities amid platform shift 21

III. TV ads: Targeting also holds the key 25 Internet ads > TV ads 25 Competitiveness of media and channels hinges on targeting capabilities 28

IV. Entertainment agencies: Promising new businesses 31 Platform-content (artists) integration is expanding 31 Synergies with main businesses 32

V. Investment strategy and valuation 35

Key Recommendations 38 CJ E&M (130960 KQ) 39 J Contentree (036420 KQ) 55 SM Entertainment (041510 KQ) 61 YG Entertainment Inc. (122870 KQ) 68

Mirae Asset Daewoo Research 2 September 5, 2017 Media/Entertainment

Key charts

Figure 1. OTT services that have changed the conventional media value chain

Source: Mirae Asset Daewoo Research

Figure 2. Vertical integration increasing in content production

Source: Mirae Asset Daewoo Research

Figure 4. Demand for outsourced content to continue to Figure 3. Fragmented competition by revenue model expand, amid shift to integrated competition

Competition Competition for for fees advertisers (subscriptions) (ratings)

Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 September 5, 2017 Media/Entertainment

Figure 5. Big market is emerging

(US$mn) 700

600

500

400

300

200 Variety 15% 100 Drama 75% 0 2005 broadcasting 2010 broadcasting 2014 broadcasting 2015 broadcasting Breakdown by Netflix's potential exports exports exports exports genre investments in Asia

Note: Netflix’s potential investments in Asia are based on our conservative estimate; Source: KOCCA, Netflix, Mirae Asset Daewoo Research

Figure 6. Outsourced content programming act boosted production industry in the past

(No.) Increased global OTT (%) 700 No. of active businesses (L) Multi-content demand expected 42 Minimum % of outsourced programs (R) channels established 600 40

500 38 Korean Wave 400 in Japan (2002: Winter Sonata) 36 300 34 200

100 32

0 30 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Note: Active businesses refers to businesses that have supplied at least one product to broadcasters over previous three years Source: KOCCA, Mirae Asset Daewoo Research

Figure 7. Emergence of new platform (smartphones) drove up Figure 8. Only a few production companies can afford high content-related stocks steadily production costs

(p) Telco Mobile Mobile Mobile (Wbn) 12 100 infrastructure devices platforms content

80 10 Average: W8.8bn

60 8

40 Alcatel-Lucent 6 Apple 20 Alphabet Tencent

0 10 11 12 13 14 15

Source: Thomson Reuters, Mirae Asset Daewoo Research Source: Media reports, Mirae Asset Daewoo Research

Table 1. Netflix’s external investments in Asia (Wtr)) Asian investments as a Asian investments as a % of overseas Netflix’s external licensing budget percentage of overseas percentage of external investments (a) investments (b) investments: (a)*(b) 60% 65% 70% 75% 80% 85% 30% 40% 12% 0.6 0.6 0.7 0.7 0.8 0.8 40% 50% 20% 1 1 1.1 1.2 1.3 1.4 45% 55% 25% 1.2 1.3 1.4 1.5 1.6 1.7 50% 60% 30% 1.4 1.6 1.7 1.8 1.9 2 60% 70% 42% 2 2.2 2.4 2.5 2.7 2.9 Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 4 September 5, 2017 Media/Entertainment

Figure 9. Impact of increase in digital video content Figure 10. Expansion of global OTT market consumption

(EB) (US$bn) 80 Other 100 PC internet video ads CAGR: 25.3% File sharing 70 Mobile video ads Video 80 On-demand content 60 Music Subscription content Web surfing 50 SNS 60 40 Software downloads

30 CAGR: 46.1% 40

20 20 10

0 0 2017 2022F 2012 2017F 2021F Source: Ericsson, Mirae Asset Daewoo Research Source: PwC, Mirae Asset Daewoo Research

Figure 12. tvN, Mnet, and JTBC produce popular digital Figure 11. Rapid growth of digital ad market content (%) (mn plays) 12 Average growth in most recent three years 30 Views during the fourth week of August 9 25 6 Overall market growth: 2.9%

3 20 0 15 -3

-6 10

-9 5 Print Radio Digital prod. Pay TV Outdoor/ (total) Terrestrial 0 Broadcasting tvN Mnet JTBC YouTube MBC KBS SBS

Source: Cheil Worldwide, KOBACO, Mirae Asset Daewoo Research Note: Based on NAVER TV’s Top 100 content; Source: NAVER, Mirae Asset Daewoo

Research

Figure 13. Targeting capability also important in broadcasting channels

(%) 2) Qualitative gap: Audience share - TV ad share (pay TV) 20 1) Narrowing the gap (quantitative): Ad market share reflects Audience share - TV ad share (terrestrial) Ad market share converging with media competiveness 15 audience share (targeting)

-5

-10

-15 2011 2012 2013 2014 2015 2016

Source: AGB Nielson, Cheil Worldwide, KOBACO, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 September 5, 2017 Media/Entertainment

1. Full-fledged competition across platforms

Changes in overall content value chain

Emergence of OTT services leads to diversification of distribution channels

Over-the-top (OTT) services have emerged as a key platform for the global media industry. Now, the conventional content-offering platform, in which content produced by broadcasting/production companies is distributed via channel operators (terrestrial/cable program providers), has become only one of the content distribution options for content providers.

Recent changes in the media industry environment have been weakening the market dominance of the conventional media platform (terrestrial and cable TV channels), which has been enjoying competitive edge in platform, rather than content. This has led to the emergence of new platform operators that are positioned to continue to invest lavishly in content, thanks to their platform-production integration. For example, internet-based web streaming service providers have been expanding their market presence, thanks to their strong content power and platform convenience.

In the US, the ecosystem for the media industry is already complicated, with a variety of players, like nationwide terrestrial TV, regional cable TV, web-based streaming services (e.g. Netflix, Amazon, Hulu), pay-download services (e.g., Apple iTunes) competing in the market. Similar market developments are witnessed in Korea; the conventional broadcasting industry value chain consisting of content, platform, network and device providers no longer applies. A variety of players are moving beyond their respective boundaries to achieve scale advantages in content production; OTT services are now at the center of this trend.

Figure 14. OTT services led to changes in existing media value chain

Services Services

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 6 September 5, 2017 Media/Entertainment

Robust growth of global OTT market

The global OTT market is expanding sharply, in line with growth in video data traffic. Currently, subscription-video-on-demand (SVOD) services are driving the growth of the market, based on 250mn subscribers globally (as of 2016). Growth in the Asia-Pacific region is particularly noteworthy; the region’s subscribers have surpassed 40mn, and are increasing faster than the global average. Advertisement-based services are also seeing a rapid increase in subscribers. The percentage of video ads out of total digital ads is projected to climb from 5.5% in 2012 to 10.8% in 2016 and 16.2% in 2021.

Online video services are classified as ad-based or content sales-based. Each service can be further divided into devices or charging schemes. OTT services encompass PC/mobile-based video ads and on-demand/subscription-based content services. PricewaterhouseCoopers (PwC) estimates the value of the global online video market at US$41.8bn, as of 2016, and projects it will grow to US$85.8bn in 2020 (CAGR of 15.5%).

The US has been the driver of the global OTT market; the US OTT market has grown at a CAGR of 31% over the past five years, and currently accounts for 40% of the overall market. Going forward, Asia is expected to serve as the major driving force, expanding at a CAGR of 18.4% over the next five years. We see huge growth potential for the region, in light of its relatively low subscriber levels and advanced network infrastructure. Meanwhile, subscriber growth is weakening in the US. By revenue model, the Asian market is expected to grow based on content, while advertisement-based services will likely support the US market’s growth.

Figure 15. Global online video content market growth by Figure 16. US online video content market growth by segment segment

(US$bn) PC online video ads (L) (%) (US$bn) PC internet video ads (L) (%) 100 Mobile video ads (L) 50 60 Mobile video ads (L) 50 On-demand content (L) On-demand content (L) Subscription content (L) Subscription content (L) 80 Global OTT market (R) 40 40 American OTT market (R) 40 60 30 30

40 20 20 20

20 10 10

0 0 0 0 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F

Source: PwC, Mirae Asset Daewoo Research Source: PwC, Mirae Asset Daewoo Research

Figure 17. Asian online video content market growth by Figure 18. Korean online video content market growth by segment segment

(US$bn) PC internet video ad (L) (%) (US$bn) PC internet video ad (L) (%) Mobile video ad (L) 25 70 0.6 Mobile video ad (L) 50 On demand content (L) On demand content (L) Subscription content (L) 60 Subscription content (L) Asian OTT market (R) 0.5 20 Korean OTT market 40 50 0.4 15 40 30 0.3 30 10 20 0.2 20 5 10 10 0.1

0 0 0.0 0 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F

Source: PwC, Mirae Asset Daewoo Research Source: PwC, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 7 September 5, 2017 Media/Entertainment

Figure 19. Global OTT market breakdown Figure 20. OTT market growth outlook by region

(%) r 20 2016-21F CAGR

18 Other US 32% 40%

Korea 14 0% Japan China 3% 12% UK 5% Canada Italy 12 3% 1% France Germany North Europe Asia US Korea China UK 2% 2% America

Source: PwC, Mirae Asset Daewoo Research Source: PwC, Mirae Asset Daewoo Research

Figure 21. Global mobile data traffic by content format Figure 22. Korea data traffic by content format

(EB) (TB) 80 Other 7,000 Other File sharing Market downloads Video CAGR: 67.8% 70 6,000 Video SNS 60 Music Web portal 5,000 Web surfing Multimedia 50 SNS 4,000 Video 40 Software downloads 3,000 30 CAGR = 46.1% 2,000 20

10 1,000

0 0 2017 2022F 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 Note: Global monthly average Note: CAGR is based on 2Q14-2Q17 data Source: Ericsson, Mirae Asset Daewoo Research Source: Ministry of Science and ICT, Mirae Asset Daewoo Research

Figure 24. Monthly net users of major mobile video platforms Figure 23. Time share of major online video platforms in US in Korea

(%) (mn persons) r 40 Market share (based on time) 23.1 5 Monthly unique users 4.1 4 3.5 30 3

2 20 1.4 1.0 1 0.8 0.7 0.7 0.3 0.2 0.2 0.1 10 0

0 Netflix YouTube Hulu Amazon Video Other

Source: comScore, Mirae Asset Daewoo Research Source: Koreanclick, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 8 September 5, 2017 Media/Entertainment

OTT players can be categorized based on: 1) pricing (ads vs. monthly fixed-rate plans); and 2) the nature of main content (length of video content: less than 20 minutes or more than one hour; format: real-time live content, web-only content, theater films, and TV dramas, etc.).

Ads-based services offer short video content in web-only or real-time live formats. These services include YouTube, Facebook, NAVER TV Cast, and Daum TV Pot. Monthly fixed-rate services typically offer one-hour-or-longer video content with high production costs. These premium-video-oriented services include Netflix and Amazon Prime.

The OTT market is being driven by ad-based services in Korea, and by premium-content- oriented services overseas. In the Korean market, users enjoy video clips of broadcast content and new content produced for the mobile platform via OTT services. Of note, the number of subscribers to premium services, including Netflix, is increasing steadily. Overseas, OTT services have replaced cable TV and premium pay-per-view (PPV) services, offering quality content based on ample budgets.

Figure 25. Global OTT players by revenue model and content format

Note: Business models on which services are based are in parentheses Source: Mirae Asset Daewoo Research

Table 2. Characteristics of OTT revenue models Revenue model Fee-based, subscription services Video ads Major content Premium content, including TV series, films, etc. User-generated content, broadcast video clips, etc. Target viewers Premium video content viewers Internet users Major services Netflix, Amazon Prime, YouTube Red YouTube, Facebook, AfreecaTV, NAVER TVcast, V LIVE Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 9 September 5, 2017 Media/Entertainment

Competition among new platforms to gain dominance

Vertical integration also underway in OTT market Economies of scale also plays out in content, as: 1) distribution costs after production are modest; and 2) added valued can be created steadily across regions and revenue models. In addition, broadcast content has been offered via PC-online/mobile platforms, diversifying distribution channels. Under the new value chain that has made economies of scale easier to achieve, vertical integration between media firms and platform operators is expanding Integration is proceeding in the three following ways: 1) Vertical integration between production and distribution: Terrestrial TV networks produce content in-house and hold copyrights. They also engage in the programming and broadcasting of their content. In addition, they distribute the content to the cable TV market via their subsidiaries (program providers, or PPs) and digital content to the OTT market via Content Alliance Platform’s (a joint venture of terrestrial TV networks) Pooq. CJ E&M has Tving, which is equivalent to terrestrial TV networks’ Pooq. 2) Integration between pay-TV platforms and other distribution platform s: Although SK Telecom (017670 KS, CP: W251,500)’s attempt to acquire CJ Hellovision (037560 KS, CP: W8,370) fell apart in 2016, this type of integration has been expanding overseas, as broadcasters (SOs) are striving to reduce the cost of content acquisition/distribution by operating the PP business. Indeed, AT&T (NYSE: T, CP: US$35.60) acquired DirecTV, a satellite broadcaster, in 2014, while Netflix forged an alliance with Dish, a satellite broadcaster, in 2015. 3) Content production by distribution platforms : Korean internet portals have jointly produced web content (entertainment shows and dramas) with channel operators and released it online first. New Journey to The West , which was produced by NAVER (035420 KS, CP: W730,000) and CJ E&M and first broadcast in 2015, has continued into its fourth season, recording 160mn views on a cumulative basis (62mn views for the season 1, 53mn views for Season 2, and 31mn views for Season 3, and 18mn views for Season 4). Furthermore, Korean internet portals have invested directly in entertainment management firms. The recent investments by NAVER in YG Entertainment, and by SK in the SM Group, represent their shared determination to produce content. Meanwhile, global leading platform operators, including Netflix, Amazon, and YouTube, are also increasing their content investments.

Table 3. Expansion of broadcast business areas Region Type Company Existing roles Expanded roles Services Domestic Terrestrial KBS, MBC, SBS Production/programming /broadcast Online distribution Content Alliance Platform, SMR PP CJ E&M Production/programming /distribution Online distribution Tving, SMR

IPTV Three telcos Broadcast Online distribution Mobile IPTV, Oksusu

Content production, fixed -line Online portal NAVER, Kakao Online distribution NAVER TV cast distribution US Terrestrial CBS Production/programming /broadcast Online distribution ALL Access, Showtime PP 21CFOX Production/programming /film distribution Online distribution To be released PP HBO(Time Warner) Production/programming Online distribution HBO Now IPTV Verizon, AT&T Broadcast Online distribution GO90, DirecTV

Content production, fixed -line OTT(S-VOD) Netflix, Amazon Online distribution Netflix, Amazon Prime distribution Content production, fixed -line OTT (Ads) YouTube, Twitch Online distribution YouTube Red distribution Source: KISDI, KOCCA, Mirae Asset Daewoo Research

Figure 26. Hulu’s major shareholders are traditional media firms Figure 27. New Journey to the West on NAVER TV

Source: Bloomberg, Mirae Asset Daewoo Research Source: NAVER, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 10 September 5, 2017 Media/Entertainment

Competition ‰‰‰ Vertical integration of value chain + larger demand for content outsourcing

Currently, non-traditional media firms, like Netflix, Google, Amazon, and Facebook, are leading the global OTT market. Based on expectations for a surge in demand for mobile video content, various internet-based firms – namely, internet portals, social media firms, and e-commerce platforms - have concentrated their resources to reposition themselves as video platforms by utilizing their subscriber bases to secure traffic.

In addition, traditional media outlets are also aggressively making forays into the internet video platform businesses. For example, Time Warner acquired DramaFever, purchased a 10% stake in Hulu, and launched its own OTT services via HBO (a subsidiary) in 2016. The Walt Disney Company, which has reportedly been looking to acquire Netflix, is now preparing to launch OTT services in 2019. DirecTV, a satellite TV service provider and subsidiary of AT&T, has also introduced in-house OTT services.

Amid the ongoing shift to OTT in the overall media space, competition for market leadership will likely proceed for a longer-than-expected period. Traditional media firms are still trading at more than twice the valuation of Netflix (2.1 times for Disney and 2.6 times for Comcast (NASDAQ CMCSA, CP: US$38.60)). They are well-positioned to expand content investment, based on solid cash flow from existing businesses (PP and SO) and vertically- integrated value chains, ranging from production to distribution.

In the past, competition occurred in each segment in the value chain. Going forward, however, we will likely see competition between brands that engage in the entire value chain, from production to programming, transmission, and distribution. As a result, the current categorization of media services, based on charging schemes or content types, will likely become irrelevant.

In our view, the competitive landscape in the media industry should be determined by platforms’ content investments. At present, we do not see the emergence of any dominant platforms or players. While new media are aggressively entering the market, traditional media are making intense efforts to expand their footholds. As a result, content producers now wield immense bargaining power.

Figure 28. Traditional media’s entry into OTT market to change overall competitive landscape

Competition Competition for for fees advertisers (subscriptions) (ratings)

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 11 September 5, 2017 Media/Entertainment

Major market players’ recently launched services suggest the possibility of integrated competition.

First, most media firms are strengthening their original content lineups and expanding live streaming services. Second, some companies have introduced services based on a revenue model that combines those of SVOD and ad-based content, like Amazon Video Direct. We believe that media firms should provide content in increasingly diversified formats, and apply various charging schemes.

Facebook (NASDAQ: FB, CP: US$173.21) is attempting to transform itself into a video platform, directly participating in investment and production and providing content via collaboration with TV broadcasters. The company’s efforts are aimed at preventing subscriber losses to competitors (Snapchat, etc.) and expanding its ad revenue base. The company is scheduled to introduce Facebook TV within this year.

YouTube launched YouTube TV, which streams live TV from ABC, CBS, FOX, NBC, ESPN, and popular cable networks, and can also be watched on a Chromecast. The company also provides premium content via YouTube Red, a paid streaming subscription service. Despite relatively weaker content lineup, YouTube Red differentiates itself by offering a vast pool of ad-free content.

Netflix is expanding investment in original content. Amid a slowing inflow of subscribers from pay-TV channels in the US, the company has turned its eyes to overseas markets. Amazon is also following in the footsteps of Netflix, pursuing subscriber growth based on content investment to establish premium brand positions.

Competition to remain intense for prolonged period of time

We expect competition in the OTT service market to remain strong for a considerable period of time for the following reasons: First, it is easier to cancel subscriptions for OTT than for pay-TV services. While pay-TV operators had retained subscribers via set-top box rental contracts, internet-based streaming services can be cancelled more easily.

Second, the market has low barriers to entry. The services do not require dedicated devices. In addition, the provision of the services is relatively simple. Accordingly, an increasing number of media firms, including traditional media outlets, are aggressively making forays into the market. Currently, countless OTT service providers are operating in the market.

Third, customers tend to use multiple numbers of OTT services, due to the high quality of their original content and relatively lower subscription fees, compared with pay-TV.

Figure 29. Netflix scored second-most nominations, following HBO, at this year’s Emmy awards.

(Wbn) 120 2016 2017

100

0 HBO Netflix NBC FX ABC CBS Fox Amazon Showtime National Geographic

Note: Based on the number of nominations Source: Academy of TV Arts & Sciences, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 12 September 5, 2017 Media/Entertainment

II. Media content: New opportunities

Exports via global OTT services to be new revenue stream

We expect the emergence of global OTT services to be a major boon for Korean content providers which have been plagued by uncertainties surrounding exports to China. Moreover, growing competition between platforms will likely drive up investments in content, and thus benefit content producers, going forward.

Rising uncertainties over content exports to China (used to be the biggest growth driver for the Korean media content industry) amid the THAAD impact, have sharply lowered expectations for China-related Korean media companies. Against this backdrop, content exports via global OTT players could present a new opportunity to Korean content producers.

We take note of the OTT service-driven changes in the industry’s value chain, and, specifically, the emergence of global OTT players with strong financing capabilities; global OTT services should help boost the value of Korean content. Portal-based domestic OTT services have allowed Korean media content providers to expand into digital content; however, their fresh digital content revenue has offset the decline in the revenue from terrestrial TV ads. In order to expand the size of the industry as a whole, media content makers would need steadier overseas export channels.

Figure 30. Post-smartphone focus of the market: Infrastructure, devices, platform, and content (descending order)

Mobile Mobile Mobile (p) Teclco infrastructure 100 devices platforms content

40 Alcatel-Lucent Apple 20 Alphabet Tencent

0 1/10 7/10 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15

Note: Infrastructure (~end-2012), devices (~end-2013), platform/content (~end-2015); 100p refers to the historical peak in the respective periods Source : Thomson Reuters, Mirae Asset Daewoo Research

Figure 31. Content export value by media operator Figure 32. Content export value by genre

(US$mn) Education, 0% News, 0% Sports, 4% 300 Culture, 3% 2013 2014 2015 Other, 0% Music, 0% 250

200 Animation, 2% Variety/ent., 15% 150 Documentary, 0% 100 Drama, 76%

0 Terrestrial PP Independent producer

Source: Korea Creative Content Agency, Mirae Asset Daewoo Research Note: Combined value of terrestrial TV and broadcasting channels Source : Korea Creative Content Agency , Mirae Asset Daewoo Research Mirae Asset Daewoo Research 13 September 5, 2017 Media/Entertainment

Current status of content exports: Focus on markets in US and Southeast Asia Looking at the classification of Korea’s content exports by contract type, copyright sales represent the biggest portion of its total exports, at 72%, followed by sales of time block* and formats. Overseas copyright sales have recently been growing at a fast pace, due to sharp increases in the overseas sales of OTT/VOD transmission rights. For reference, the emergence of the digital platform has broadened the definition of copyrights (which used to refer to only broadcast rights) to include OTT/VOD transmission rights. Time block sales of content have remained nearly unchanged over the past years, but their portion of total content exports has recently been declining amid increasing sales of copyrights. The portion of video/DVDs has also been decreasing gradually, due to the emergence of new digital platforms, amid increasing online content distribution. Meanwhile, format exports have been growing, with some Korean shows gaining increasing popularity mainly in Asia. *Time block : To purchase specific time slots of foreign broadcasters for the airing of Korean content By destination, exports to Japan, China, and the US currently represent roughly 96% of Korea’s total content exports. Japan (33%) remains a key export market for Korean content producers, but its contribution to total exports has been declining since 2012. Sales of broadcast rights account for nearly 90% of total Japan-bound content exports, due to the marginal presence of VOD and online content platforms in Japan. Indeed, with China-bound content exports rising sharply since 2012, China replaced Japan as Korea’s largest content export destination in 2014. However, regulations on Korean content and strained diplomatic relations amid the THAAD impact should limit upside to growth in China-bound exports going forward. For reference, most China-bound content exports take the form of sales of transmission rights, due to regulations on broadcasting of foreign content in China. Meanwhile, US-bound content exports have been growing, with the focus shifting to OTT transmission rights (from DVD/broadcast rights). Southeast Asia’s contribution to Korea’s total content exports has remained steady. For Southeast Asia-bound exports, however, we are positive on the recent sharp increase in the mix of OTT transmission right sales, as it points to strong upside to export volume going forward. We thus see strong growth potential for US- and China-bound exports of Korean content companies. Figure 33. Exports by distribution channel

(US$mn) Other (L) Programs (L) (%) 350 Format sales (L) Time block (L) 90 Video/DVD sales (L) % of programs (R)

280 80

210 70 140

60 70

0 50 2000 2005 2010 2012 2013 2014 2015

Source: Korea Information Society Development Institute, Mirae Asset Daewoo Research

Figure 34. Exports by destination: Upside to export growth via OTT services suggest strong growth potential of exports to Southeast Asia and North America

(US$ mn) (%) 300 Other (L) 40 US/Canada (L) 250 Southeast Asia (L) 35 China/Hong Kong (L) 200 Japan (L) % of Southeast Asia (R) 30 150 25 100

20 50

0 15 2000 2005 2010 2012 2013 2014 2015 Source: Korea Information Society Development Institute, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 14 September 5, 2017 Media/Entertainment

Global OTT services to present greater opportunities

1) Global OTT players’ growing investments in content should have greater implications for Korea’s content industry than did strong content exports to China in the past. In light of the unpredictable nature of the content industry and uncertainty over content exports, we believe Korean content producers will find greater advantage in exporting via global OTT players than direct exports, as global OTT players tend to source content based on their existing content lineups, budgeting by region and clear investment roadmaps (which are somewhat predictable).

In the past, when China-bound content exports were a key growth driver for content companies, they often suffered sharp increases in share price volatility, due to uncertainty over their export prospects. Although a number of programs made smash hits and some content companies (e.g., CJ E&M, Showbox [086980 KQ, CP: W5,180], and NEW [160550 KQ, CP: W7,040]) even established local subsidiaries or JVs, their success was not sustainable, due to the sizable impact of external factors (e.g. diplomatic relations) on their businesses.

2) Meanwhile, we believe OTT services will represent a potentially more significant market, as they target international audiences. In efforts to secure quality content, global No.1 OTT player Netflix invested W5.5tr in 2016 and is looking to invest W6.8tr in 2017 and W8tr in 2018, figures unveiled by the firm’s Chief Content Officer, Ted Sarandos, in December 2016. The firm plans to offer differentiated services in global markets by continuing to secure killer content.

For Netflix, investments in original content production reportedly represent 20-30% of total investments. Assuming that the remainder (70-80%) is used to secure content from external sources, we estimate that investments by Netflix will create W5-6tr-worth of new market every year for global channel operators and content producers (e.g., independent production studios).

If we conservatively assume that Netflix will allocate 30% of its total content investments to source overseas content, and uses 40% of its overseas content investments for Asian content, the firm’s investment in Asian content comes in at W600bn. Meanwhile, under a more bullish scenario whereby the firm allocates 60% of its content investments for overseas content sourcing and 70% of its overseas content investments for Asian content sourcing, its investments in Asian content sourcing would rise to W2.9tr.

Given the leading position of Korean content in Asia, we expect investments by Netflix alone to create an over-W1tr market for Korean content producers. Over the longer term, intensifying competition with other OTT platform providers and the potential launch of OTT services by conventional cable TV operators should help fuel further expansion in the content market.

Table 4. Our estimates of Netflix’s investments in Asian content sourcing (Wtr ) Asian investments as a Asian investments as a % of overseas Netflix’s external licensing budget percentage of overseas percentage of external investments (a) investments (b) investments: (a)*(b) 60% 65% 70% 75% 80% 85% 30% 40% 12% 0.6 0.6 0.7 0.7 0.8 0.8 40% 50% 20% 1 1 1.1 1.2 1.3 1.4 45% 55% 25% 1.2 1.3 1.4 1.5 1.6 1.7 50% 60% 30% 1.4 1.6 1.7 1.8 1.9 2 60% 70% 42% 2 2.2 2.4 2.5 2.7 2.9 Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 15 September 5, 2017 Media/Entertainment

3) The proliferation of OTT services should allow Korean content firms to expand into new markets through copyright sales. Korean content has been well received by global audiences. The preference for Korea’s cultural exports in major Southeast Asian countries (e.g., Thailand, Malaysia, Indonesia) exceeds that of other global markets. This should make Korean content more appealing to global OTT players, which have been endeavoring to gain an early lead in new markets other than Americas. Moreover, in Southeast Asian countries, unlike China, governments have refrained from intervening in the content market.

Moreover, Korean content firms’ move into Southeast Asian markets should help further improve the recognition of Korean content in these markets, and thus create new business opportunities (e.g., ads, channels) for a few players that have already secured a footprint in those markets. Notably, Korean content companies should also find growing opportunities in the Southeast Asian pay-TV market. With regard to the channel business, MBC exports its content to Singapore and Malaysia via the Oh!K channel, based on annual contracts, while SBS shares ad profits from the operation of the Sony(S)-One channel with local broadcasters in seven Southeast Asian countries. Meanwhile, CJ E&M provides content to the tvN Asia channel, and is engaged in the production of both ads and content in Vietnam through the acquisition of Blue Group, a local advertising and communication service provider. The firm is also looking to launch its own channel in Southeast Asia.

Figure 35. Interest in Korean content to rise in Southeast Asia

(%) 60

40 Average : 30% 30

Source: Korea Foundation for International Culture Exchange, Mirae Asset Daewoo Research

Figure 36. Korean content consumption to increase in Southeast Asia

(%) 60

40 Average: 31% 30

Source: Korea Foundation for International Culture Exchange, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 16 September 5, 2017 Media/Entertainment

Netflix secures content in three ways

In the subscription-based OTT market, which is likely to drive the overall media industry, Netflix boasts an unparalleled market share, thanks to its aggressive efforts to secure content. Netflix secures content in the following three ways, which are likely to take root as content trading standards in the market:

1) Self-produced Netflix Original : Under these contracts, Netflix holds all intellectual property rights to content, including broadcasting rights and copyrights, as the company engages in planning and production staff selection, as well as shouldering most of the production costs. Cases in point include Okja, Stranger Things , and Kingdom (to be released in 2018). In addition, the cases of purchasing copyrights to content produced by external production companies (such as The Irishman ) can also be categorized into this type, as this content is not released on other platforms.

2) Licensed Netflix Original: Under these deals, Netflix secures exclusive broadcasting rights to content in certain areas by paying licensing fees to individual production companies. The exclusive broadcasting rights are effective only in those areas, and production companies hold copyrights. The value of a broadcasting right is estimated at half of the production cost. Orange is the New Black and House of Cards belong to this category. House of Cards was produced by MRC, an individual production company, and Netflix has secured an exclusive broadcasting right to it for the US and Canada, but is not allowed to broadcast it in Europe and India. Among Korean drama content, Netflix purchased joint (domestic) and exclusive (overseas) broadcasting rights to Man to Man and Stranger for W6bn and W3.5bn, respectively.

3) Licensed Content: Netflix also secures general broadcasting rights to all or some of a production company’s content, typically based on a time-based contact. Licensing fees are lower than those of the second category. For example, Netflix clinched a W220bn deal with EPIX, a TV drama PP and film distributor, in 2010, allowing the company to broadcast EPIX movies 90 days after they become available on premium cable channels. EPIX also signed a similar contract with Amazon Prime. In addition, Netflix has recently signed a W340bn deal with The Walt Disney Company. This deal includes the exclusive US broadcasting rights to Disney/Marvel/ Lucasfilm/ Pixar movies released in 2016 or later and joint broadcasting rights to those released before 2016. For domestic content, Netflix made a 600-hour content supply contract with JTBC. Under this contract, JTBC has supplied a variety of content, including Can We Get Married? (drama), Begin Again (entertainment show), and Abnormal Summit (entertainment show).

Figure 37. Netflix’s ways to secure content

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 17 September 5, 2017 Media/Entertainment

Table 5. Netflix’s global partnerships Country Partnerships UK - Virgin Media in Sept; 2013, Vodafone in May 2014; BT in Oct. 2014 Belgium - Belgacom in Sept. 2014 France - Bouygues in Sept. 2014; SFR and 'Orange in Oct. 2014 Sweden - Com Hem' with Sept. 2013 Denmark - Wow' in Nov. 2013 Germany - DT in Oct. 2014; Vodafone DE in Nov. 2014 Japan - Softbank in Aug. 2015 US - 'Verizon in Oct. 2014; Dish in Dec. 2014 Korea - D'Live in May 2016 Year Country 2010 Canada 2011 43 South American countries 2012 UK, Ireland, and Northern Europe 2013 Netherlands 2014 Austria, Belgium, France, Germany, Switzerland 2015 Australia, Japan, China, Italy, Portugal, Spain 2016 Korea Source: Media reports, Mirae Asset Daewoo Research

Figure 38. Netflix’s overseas revenue contribution on steady rise

(US$bn) (%)

10 US DVD (L) 40 Overseas streaming (L) US streaming (L) 8 % of overseas streaming (R) 30

6 20 4

10 2

0 0 2012 2013 2014 2015 2016 Source: Netflix, Media reports, Mirae Asset Daewoo Research

Figure 39. Growth in Netflix’s content investments continues

(US$ bn) 8 Netflix's content investments +18.3% YoY 7.0 7 6.0 6 5.0 5 4.6

4 3.2 3 2.4 2 1.8 0.9 1 0.1 0.2 0 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F Source: Netflix, Media reports, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 18 September 5, 2017 Media/Entertainment

OTT players aim to achieve economies of scale via regional expansion

In September 2016, Netflix’s CFO David Wells stated that the company would focus more on original content productions and localization. Of note, major OTT players are making massive investments in content and striving to expand their regional subscriber bases to achieve economies of scale.

Starting with Canada in 2010, Netflix has expanded overseas rapidly, currently offering its services in 190 countries. The number of the company’s subscribers stand at 97.91mn (as of end-2016), with overseas subscribers accounting for 45%. The pace of subscriber growth is faster overseas than in the US where cord cutting has progressed significantly. We expect overseas subscribers to outnumber US subscribers in 3Q17. In particular, Asian subscriber growth has been picking up speed since the stabilization of the subscriber bases in South America and Europe.

As regional expansion could generate massive benefits, other OTT and media companies have plans similar to those of Netflix. Although regional breakdowns by revenue and subscriber are not usually disclosed, commitments to regional expansion are often insinuated during interviews or earnings calls.

Figure 41. Facebook’s revenue growth trend: US-driven ‰‰‰ Figure 40. Netflix’s annual revenue overseas-driven ‰‰‰ US- and overseas-driven growth

(US$bn) (%) Other (L) Asia (L) Europe (L) 10 US DVD (L) 40 (US$ bn) North America (L) Ex-US US growth (R) (%) Overseas streaming (L) growth (R) US streaming (L) 30 80 8 % of overseas streaming (R) 30 25 70

6 20 60 20 15 50 4 10 40 10 2 5 30

0 0 0 20 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

Source: Netflix, Mirae Asset Daewoo Research Source: Facebook, Mirae Asset Daewoo Research

Figure 42. Netflix’s cumulative subscriber base by region Figure 43. Facebook’s MAU by region

(mn persons) (%) (bn persons) (%) 120 US DVD subscribers (L) 50 2.0 North America (L) 38 Overseas streaming subscribers (L) Europe (L) 100 40 1.6 Other (L) US streaming subscribers (L) Asia (L) 80 % of overseas % of Asia (R) 32 streaming subscribers (R) 30 1.2 60 20 0.8 40 26

10 0.4 20

0 0 0.0 20 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

Source: Netflix, Mirae Asset Daewoo Research Note: MAU refers to monthly active users who use services at least once a month. Source: Facebook, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 19 September 5, 2017 Media/Entertainment

Korean content to help subscriber acquisition in Asia

Securing a pool of popular local content will be essential for OTT service providers to expand their overseas subscribers. Thus, we believe that demand for Korean content will increase going forward. Korea is one of the major content markets in Asia, in terms of size and infrastructure. In particular, amid ongoing uncertainties over content policy in China, Korea serves as the core market in the region. Accordingly, the provision of localized services in Korea should be strategically important for OTT service providers.

In addition, Korea is one of only a few countries that are capable of supplying high-quality content. Since the mega hit Winter Sonata, a number of Korean dramas have enjoyed global popularity over the past 20 years, displaying the potential of becoming strong ad revenue generators. Recently, iQiyi, one of China's biggest OTT streaming service providers, saw a sharp increase in subscribers, thanks to the huge success of Descendants of the Sun. Given that the accelerating penetration of local OTT services like Hooq and iFlix in Southeast Asia and the popularity of Korean content in the region, Korean content should be useful for OTT service providers to expand their footholds in Asia.

The revenue contribution of Korean dramas at DramaFever, a video streaming and on- demand services website based in the US, also suggests the value of Korean content for OTT platforms. Korean content is now believed to be capable of generating revenue in the global market, as well as in Asia.

Figure 44. DramaFever the top Korean drama and film streaming site in US

Netflix, 2% Other, 8% YouTube, 2% Korean TV channels, 3% Hulu, 4%

DramaFever Viki, 26% 56%

Source: KISDI, Mirae Asset Daewoo Research

Figure 45. DramaFever’s user interface and subscription fees

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 20 September 5, 2017 Media/Entertainment

Content producers facing newfound opportunities amid platform shift

The Korean TV content market sees the potential of expanding distribution channels driving up the natural growth of the market, as well as growing demand for content from new channels leading to the growth of dedicated content producers. We believe some parallels can be drawn between the current situation and the 1990s, when the programming of externally-produced dramas was institutionalized in Korea.

With the launch of cable TV channels in March 1995, demand for diversified content has increased. To proactively prepare for potential growth in content demand and weaken the dominance of terrestrial channels, the government mandated the programming of outsourced programs in 1991. The mandatory proportion of externally-produced programs was initially 3%, but rose steadily to 35% in 2015, leading to a gradual increase in the number of independent content producers. The growth of specialized content producers has boosted the quality of TV content.

As of 2015, terrestrial broadcasters spent about 50% of their total production costs (about W512.1bn) in outsourcing programs, while cable program providers spent 17% (about W253bn). The content production market, which was formed driven by mandatory regulations, is now facing newfound opportunities amid the platform shift.

Figure 46. Steady increase in drama producers amid demand growth

(No.) Increased global OTT 700 No. of active businesses Multi-content demand expected channels established 600

500 Korean Wave 400 in Japan (2002: Winter Sonata) 300

200

100

0 01 03 05 07 09 11 13 15 17

Note: Companies that have provided at least one drama to broadcasters in the prior three years each year. Source: Broadcasting I ndustry White Paper, Mirae Asset Daewoo Research

Figure 47. # of drama producers by revenue

(No.) 700 Multi-content Increased global OTT channels established demand expected 600 in 2011 after 2017

500

400 Over W10bn W1-10bn 300 W0.1-1bn 200 Less than W0.1bn

100

0 08 10 12 14 16 18

Source: Broadcasting Industry White Paper, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 21 September 5, 2017 Media/Entertainment

We still see an upside to external content producers’ sales to existing TV broadcasters, as the government will likely raise the minimum threshold of outsourced programs for pay-TV channels. Currently, the government is asymmetrically applying regulations to program providers and terrestrial broadcasters, in light of the superior advantages terrestrial players enjoy in content transmission. However, the business environment for terrestrial broadcasters have continued to deteriorate over the past several years, giving rise to calls for providing a level playing field for all TV channels. A potential rise in the mandatory proportion of outsourced programs for program providers should benefit independent content providers.

Figure 48. Drivers for drama content demand in each period

Source: Mirae Asset Daewoo Research

Figure 49. Trend of minimum threshold of outsourced Figure 50. Terrestrial broadcasters’ content composition programs at terrestrial broadcasters

(%) Full-swing increase (%) 40 % of outsourced in production activity 70 KBS1 KBS2 MBC SBS programs during this period 60 30 50 3%p annual average increase 40 20 30

20 10 10

0 0 In-house Pure outsourcing Outsourcing to Content purchases 1991 1993 2001 2015 2016 affiliates

Source: KCC, Mirae Asset Daewoo Research Source: KCC, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 22 September 5, 2017 Media/Entertainment

Conclusion: Focus on production staff and historical records

Potential beneficiaries of the platform shift should be companies with: 1) competent human resources; and 2) significant market influence appealing to new platforms.

In particular, the companies that are able to proactively respond to the global market changes should be best-positioned to enjoy benefits. As intangible broadcasting content can be created only by humans for now, human resources are critical for the competitiveness of content firms. Unlike other resources, human resources take longer to redistribute. Thus, content producers have difficulties in swiftly responding to sharp increases in demand. Even if the content market booms, content firms are not able to sharply expand a pool of talented production staff in a short period of time.

Over the long term, the growth of the content market should lead to strategic shift of companies and facilitate the structural shift of capital and human resources. During the platform shift, however, demand for talented human resources engaging in content production should grow sharply. Some nimble companies have already secured renowned program producers and writers from terrestrial broadcasters, which should enhance the appeal of their content to new platforms.

Studio Dragon, which was spun off from CJ E&M (130960 KQ) in May 2016, acquired CultureDepot, KPJ, and Hwa & Dam Pictures in January 2016, and now includes them as subsidiaries under its umbrella. Based on the strong lineup of writers and actors/actresses, the subsidiaries boast superior content competitiveness.

In addition to content producers, entertainment firms are also aggressively hiring program producers and writers. In 2017 alone, YG Entertainment (122870 KQ) attracted nine producers from terrestrial broadcasters and program providers.

Table 6. Producers and writers who recently joined CJ E&M Time Staff Previous company Major content Apr. 2011 Rhee Myung-han (producer) KBS 2 Days & 1 Night, Reply 1997/1994, SNL Korea, Grandpas Over Flowers, Misaeng Mar. 2011 Kim Seok-hyun (producer) KBS Gag Concert, Comedy Big League 2 Days & 1 Night , Youth Over Flowers / Grandpas Over Flowers / Sisters Over Flowers , Dec. 2012 Na Young-seok (producer) KBS Three Meals a Day May 2011 Shin Won-ho (producer) KBS Qualifications of Men, Reply 1997&1994 N/A Koh Min-goo (producer) KBS Immortal Song 2, First Day of Work Jan. 2014 Shin Hyo-jeong (producer) SBS Strong Heart, Youth Over Flowers, New Journey to the West Mar. 2011 Kwon Ik-joon (chief producer) MBC We Got Married The Heirs , Secret Garden , Lovers in Paris , Guardian: The Lonely and Great God , Jan. 2016 Kim Eun-sook (writer) Hwa & Dam Pictures Desc endants of the Sun My Love from the Star , The Producers , My Husband Got a Family , The Legend of the Jan. 2016 Park Ji-eun (writer) CultureDepot Blue Sea Sep. 2016 Kim Young-hyun (writer) KPJ Jewel in the Palace, Six Flying Dragons, Deep Rooted Tree Source: Media reports, CJ E&M, Mirae Asset Daewoo Research

Table 7. Producers and writers who recently joined YG Entertainment Time Staff Previous company Major content

Feb. 2017 Cho Seo-yoon (chief producer) MBC Radio Star, The Capable Ones Feb. 2017 Che Yeong-je (producer) MBC Indefinite challenge Feb. 2017 Kim Min-jong (producer) MBC Real Men Feb. 2017 Park Joon-su (producer) Mnet (CJ E&M) The God of Music Feb. 2017 Yoo Seong-mo (producer) tvN (CJ E&M) SNL Korea Season 4 Apr. 2017 Lee Sang-yoon (producer) Mnet (CJ E&M) Show Me the Money 4, Produce 101 Apr. 2017 Choi Hyo-jin (producer) Mnet (CJ E&M) MUST Era Of The Band, Superstar K4, Show Me the Money 4/5 May 2017 Han Dong-cheol (producer) Mnet (CJ E&M) Produce 101, Show Me the Money, Unpretty Rapstar Apr. 2017 Park Hong-gyun (producer) MBC The Greatest Love, Queen Seondeok Jun. 2015 Yoo Byeong-jae (writer) tvN SNL Korea, The Superman Age Source: Media reports, YG Entertainment, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 23 September 5, 2017 Media/Entertainment

Even under the new-platform-driven media market environment, TV-program–related content will likely remain dominant in the long term, as: 1) users’ content preferences are unlikely to change in a short period of time; and 2) current TV programming is the result of adaptation to a changing media environment over a long period of time.

Until a complete shift to new media platforms occurs, content that is immediately useful and marketable would be favorable for new media platform operators. Useful content means content that attracts subscribers in the both domestic and overseas markets. Netflix, the most aggressive content buyer, takes this aspect into account in its purchase decisions, in our view.

Since its penetration into the Korean market, Netflix has purchased copyrights to three Korean dramas —Night Light (MBC), Man to Man (JTBC), and Strange r (tvN). These dramas have three common aspects: 1) they incurred far-higher-than-average production costs; 2) they acquired time slots from influential channels; and 3) they ranked high (at more than 200p) on the Content Power Index (CPI) during broadcasting. Given that the CPI is impossible to predict, production budget and accessibility to popular channels are the major determinants to judge whether content will make a success. We believe that CJ E&M (which has tvN and OCN channels), JTBC Content Hub (which has JTBC as a group affiliate), and Monster Union (a drama production unit spun off from KBS) have ample production budgets and high channel accessibility. In addition, IHQ also deserves attention, despite its relatively low channel competitiveness, as the company displays stable supply/demand dynamics. We believe these companies are at an advantage over other independent production companies.

Figure 51. Average production cost by production company

(Wbn) 12

Average: W8.8bn

6 Studio Dragon JTBC IHQ SM C&C KeyEast FNC Add Samwha Pan Content Hub Culture Networks Entertainment

Note: Based on the titles for which production costs can be identified among those that have been released since 2010 Source: Each company’s data, Media reports, FSS, Mirae Asset Daewoo Research

Figure 52. Ratings by production company

(%) 20

12 Average: 11.3%

Note: Based on the titles for which ratings can be identified among those that have been released since 2010 Source: Each company’s data, Media reports, FSS, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 24 September 5, 2017 Media/Entertainment

III. TV ads: Targeting also holds the key

Internet ad era has arrived

Digital ad market delivers strong growth as anticipated

Digital ads replaced TV ads as the most popular ad platform in 2016, only four years after they overtook terrestrial TV ads in 2012. The digital platform market continued its stellar growth in 1H17, supported by growing content consumption via the platform.

According to MezzoMedia (the CJ Group’s media representative), the value of Korea’s digital ad (excluding search ads) market grew 19% YoY to W608.6bn in 1H, driven by increased VOD consumption by mobile and PC users. Indeed, in 1H, the VOD ad market expanded 40% YoY to W200.8bn, with VOD ads’ share of the digital ad market rising 5%p to 33%. The robust growth of the market was driven by increased ad revenues of global OTT players, including YouTube (W74.2bn; market share of 37%), Facebook (W62.3bn; 31%), as well as Korean portal-based OTT players, including Naver (W23.9bn; 12%), and Kakao (035720 KS, CP: W127,000) (W16.9bn; 8%).

Figure 53. Past three-year average ad revenue growth by platform

(%) 12

6 Overall market growth: 2.9% 3

-3

-6

-9 Broadcasting Terrestrial Pay TV Radio Print Digital Outdoor/prod. (total)

Source: Cheil Worldwide, KOBACO, Mirae Asset Daewoo Research

Figure 54. Digital ads replaced TV ads as most popular ad Figure 55. Digital ad market displays strong growth platform in 2016 supported by mobile ads

(Wtr) Terrestrial (Wtr) 4 Terrestrial + pay TV 4 Mobile ads Digital PC display ads PC search ads 3 3

2 2

1 1

0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F

Source: Cheil Worldwide, KOBACO, Mirae Asset Daewoo Research Source: Cheil Worldwide, KOBACO, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 25 September 5, 2017 Media/Entertainment

Strong digital ad market prospects

Korea’s internet ad market has been growing at an accelerated pace over the past 20 years, but strong growth of the market is highly likely to remain intact for some time. In Korea, growth of the internet ad market is still likely to exceed that of the ad market as a whole.

1) Current internet ad exposure (the number of times a user will see the ad) still suggests some upside to the growth of the digital ad market going forward. The young generation, in particular, has increasingly been opting to view content via non-TV platforms (e.g. new platforms). Despite the persistent stagnation of the TV ad market and robust growth of the digital ad market, growth in companies’ spending on digital ads has not kept pace with growth in total time spent viewing content through non-TV platforms.

2) Digital ads are more efficient than conventional ads. For conventional media platforms (e.g. TV, print), quantitative metrics, such as viewership and subscription, were the important measures of ad exposure. Meanwhile, in the mid-2000s, internet ads (e.g., data- based Google search ads) began to grab attention, thanks to their competitive edge in the effective targeting of audiences. In the 2010s, Facebook’s programmatic ads emerged as the mainstream ads for advertisers, amid the exponential growth of mobile data traffic. In light of the growing importance of refined ad targeting ability (delivery of the right content to the right audience at the right time), we expect digital ads to solidify their competitiveness over conventional ads going forward.

Figure 56. Changes in ad market growth by platform: Double-digit growth for digital ads; single-digit growth for pay TV ads; and negative growth for terrestrial TV ads

(Wtr) 12 Outdoor/prod. Digital 10 Print Radio 8 Pay TV Terrestrial 6

0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017F

Source: Advertising Yearbook, Cheil Worldwide, KOBACO, Mirae Asset Daewoo Research

Figure 57. For mobile ad platform, gap between growth in total time spent viewing content and total ad spending to narrow

(%) 50 % of total time spent % of total ad spending 40

0 Print Radio TV PC Mobile Print Radio TV PC Mobile Print Radio TV PC Mobile 2010 2014 2017F

Source: KPBC, eMarketer, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 26 September 5, 2017 Media/Entertainment

Korea’s ad market to grow steadily

We expect Korea’s domestic ad market growth to be in line with its GDP growth (2.9%) in 2017. Due to the cyclical nature of the ad industry, Korea’s total ad spending growth usually exceeds its GDP growth. However, in the event of marginal changes in GDP growth, ad spending growth should remain limited. For example, during the past five-year period when Korea’s GDP growth ranged from 2.3% to 3.3%, its annual ad spending as a percentage of total GDP was in the 0.6%-0.7% range. Given Korea’s 2017F GDP growth of 2.9%, we expect its total ad spending as a percentage of GDP to remain at the 0.6%-0.7% level.

Figure 58. Korean ad market growth trend (range-bound excluding periods of sporting events, and economic upswing/downswing

(Wtr) Domestic ad market size (L) 2002 PyeongChang (%) 14 Domestic ad market growth (R) Korea-Japan Economic recovery; Winter Olympics 40 World Cup South Africa 12 Global IMF bailout 20 10 financial crisis

8 0 6

4 -20 2

0 -40 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017F

Figure 59. Ad spending as % of GDP remains in 0.65%-0.72% range

(Wtr) Domestic ad spending (L) (%) 12 1.2 Contribution to GDP (R)

8 1.0

4 GDP contribution ranges 0.8 between 0.65% and 0.72% 2

0 0.6 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: Advertising Yearbook , Cheil Worldwide, KOBACO, Statistics Korea, Mirae Asset Daewoo Research

Figure 60. Korean ad market’s sensitivity to economic cycle Figure 61. Global ad market’s sensitivity to economic cycle changes changes

(%) (%) 40 Domestic ad market growth 20 Global ad market growth GDP growth Global GDP growth 15

20 10

5 0 0

-5 -20

-10

-40 -15 1992 1996 2000 2004 2008 2012 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Statistics Korea, Mirae Asset Daewoo Research Source: Statista, IMF, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 27 September 5, 2017 Media/Entertainment

Competitiveness of media and channels hinges on targeting capabilities

In 2016, NAVER’s Korean ad revenue reached W1.95tr, which is larger than the combined ad revenue (W1.91tr) of three terrestrial broadcasters in Korea. In the US, Alphabet’s ad revenue (US$89.5bn) exceeds the total ad revenue (US$81.2bn) of major traditional media players, including the Walt Disney Company, Time Warner, and News Corporation (NASDAQ: NWSA, CP: US$13.53). In our view, the rise of new media and fall of old media in the global market are attributable to differences in: 1) exposure to users; and 2) targeting strategies (the quality of ads).

In the Korean TV ad market, pay-TV channels have eroded the market shares of terrestrial broadcasters. We believe the shift in market power has been driven by pay-TV operators’ sophisticated targeting strategies, as well as the increase in their viewership ratings. TV channels’ viewership ratings and ad rates tend to move generally in the same direction, but not in direct proportion to each other.

In this regard, we believe that channels with clear targeting strategies will likely see a rise in ad rates going forward. Channels that provide unique high quality content should be able to form differentiated images and to further develop targeting strategies. In our view, CJ E&M and IHQ (003560 KS, CP: W2,010) are implementing the most effective targeting strategies, based on a variety of channels.

Figure 62. Narrowing gap between viewership rating and TV ad market share

(%) 1) Narrowing the gap (quantitative): Audience share - TV ad share (pay TV) 20 Ad market share converging with 2) Qualitative gap: Audience share - TV ad share (terrestrial) audience share Ad market share reflects 15 media competiveness (targeting) 10

-5

-10

-15 2011 2012 2013 2014 2015 2016

Source: AGB Nielson, Cheil Worldwide, KOBACO, Mirae Asset Daewoo Research

Figure 64. TV ad market shares of pay-TV channels and Figure 63. Pay-TV channels’ viewership rating on the rise terrestrial broadcasters

(%) (%) 65 Pay TV 65 Pay TV Terrestrial Terrestrial 60 60

55 55

50 50

45 45

40 40

35 35 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 Source: AGB Nielson, Mirae Asset Daewoo Research Source: Cheil Worldwide, KOBACO, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 28 September 5, 2017 Media/Entertainment

Table 8. Characteristics of major channels: CJ E&M has advantage in terms of ad targeting Channel Company Type Genre Main target Characteristics SBS SBS Terrestrial All All age groups Main channel for Koreans aged 18 - KBS1 KBS Terrestrial All Public channel; focused on fairness and credibility 49yrs KBS2 KBS Terrestrial All Younger viewers and housewives Younger, feminine image; focused on family and informative shows MBC MBC Terrestrial All All age groups Focused on fairness and credibility EBS EBS Terrestrial Education Students, children and parents Focused on lifelong education, children, documentaries YTN KEPCO Cable News Professionals in their 30~50s

CBS CBS Cable Christian All age groups Korea’s first private channel; offers Christian views on historical events jArirang TV Arirang Cable Korea info English -speaking/overseas viewers Focused on becoming the main global network representing Asia SBS ESPN SBS Cable Sports Males in their 20 -50s Covers overseas sports events KBS N Sports KBS Cable Sports Males in their 20 -50s Covers less popular overseas sports events as part of public service Covers pro -basketball, MLB, little league baseball, and ssireum MBC Sports Plus MBC Plus Cable Sports Males in their 20-50s (Korean traditional wrestling) events Drama, MBC Dramanet MBC Plus Cable Females in their 30-50s Terrestrial TV program reruns ent ertainment MBC every1 MBC Plus Cable Entertainment Viewers in their 20 -30s Terrestrial TV program reruns EBSu EBS Cable Children Children (3~14yrs) and parents KBS Drama KBS Cable Drama KBS drama reruns SBS Plus SBS Cable Drama SBS drama reruns SUPER ACTION CJ E&M Cable Movies, US series Viewers aged 19 -39yrs old XTM CJ E&M Cable Lifestyle Males Drama, tvN CJ E&M Cable Trendsetters aged 20-49yrs old High ratings for proprietary programs and new/experimental content ent ertainment OCN CJ E&M Cable Movies, drama Younger viewers aged 25 -49yrs old Slogan: Korea's No. 1 channel Olive CJ E&M Cable Lifestyle Females Mnet CJ E&M Cable Music Younger viewers in their 20s. Focused on music and entertainment content Cartoons, Tooniverse CJ E&M Cable Children Slogan: “Kids’ No.1 channel” ani mation OnStyle CJ E&M Cable Fashion, lifestyle Females in their 20~35s Strong market positioning for female viewers in their 20 -30s ZHTV CJ E&M Cable Chinese content Chinese viewers over 15yrs old Also influences Koreans interested in Chinese content Channel CGV CJ E&M Cable Movies All age groups Focused on movies Catch On 1, 2 CJ E&M Cable Movies All age groups Life, O tvN CJ E&M Cable Middle-aged viewers ent ertainment Personal DIATV CJ E&M Cable Younger viewers in their 10-30s Content producer network; MCN brand DIA TV channel channels AXN IHQ/SONY Cable US series, movies Younger viewers in their 10 -30s Ent ertainment , Comedy TV IHQ Cable Younger viewers in their 10-30s drama Dramax IHQ Cable Drama Younger viewers in their 15 -30s Younger (20 -30s) vs other general JTBC JTBC General All channels MBN MBN General All age groups TV Chosun Chosun General All age groups Channel A Donga General All age groups Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 29 September 5, 2017 Media/Entertainment

Ad targeting gaining ground in conventional platforms

In Korea, the combined VOD market share of Facebook and YouTube is a hefty 68%. They generate most of their revenue from short video clips (e.g. personal channels), rather than TV program content. In Korea, the TV program content offered by eight major broadcasters (three terrestrial TV channels, four comprehensive program channels, CJ E&M) is distributed solely via Smart Media Holdings (jointly invested by SBS Media Holdings and MBC).

On a positive note, SMR should allow Korean content providers to benefit from a growing digital ad market in Korea; TV program VODs viewed across all platforms are provided through the SMR server.

We think that refined ad targeting capabilities hold the key to success for the conventional media platform, while differentiated content competitiveness is key for the digital media platform. In this light, we focus on: 1) CJ E&M, with its relatively refined ad targeting capabilities, in the conventional media category; and 2) entertainment firms with competitive digital content production capabilities in the digital media category.

Figure 66. Ad revenue generation for TV program content Figure 65. VOD ad revenue by channel in 1H (PIP)

(Wbn) 80

50% 50% 60 Billings = 100 Rep fees= 10%

Billings Platform fees 10% 40 Rep fees 25% Video ad platform

20 Content Content fees clips 55%

Source: MezzoMedia, Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

Figure 67. SMR’s revenue rising sharply Figure 68. Korea’s ad M/S breakdown by platform

(Wbn) (%) (%) 50 50 Revenue (L) 228x 2014 revenue 40 2010 OP margin (R) 2.5x 2015 revenue 2014 20 40 40 2017F

0 30 30 -20 20 20 -40

10 10 -60

0 -80 0 14 15 16 Print Radio TV PC Mobile Source: FSS, Mirae Asset Daewoo Research Source: Cheil Worldwide, KOBACO, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 30 September 5, 2017 Media/Entertainment

IV. Entertainment agencies: Promising new businesses

Platform-content (artists) integration is expanding

Content and artists-based intellectual property (IP) are similar in terms of economies of scale, as: 1) the costs of distribution and product diversification after production are modest; and 2) added value can be created steadily across regions and revenue models. Of note, large platform operators have recently made investments in entertainment agencies, due to an OTT-driven content-platform integration and rising demand for artist IP.

YG Entertainment and YG Investment (YG PLUS’s subsidiary) received a W100bn investment from NAVER in March 2017. We expect to see synergies from joint content planning for PC online and mobile platforms (NAVER TV, V LIVE etc.). The partnership will likely give YG Entertainment easy access to the rapidly growing online ad market, worth W4tr, while allowing NAVER to secure content customized to its platforms. In particular, V LIVE should bolster the two companies’ overseas competitiveness, as it specializes in the personal, real- time broadcast videos of celebrities.

SM Entertainment has sealed a cross-shareholding investment deal with SK Telecom (July 17 th ). Key points of the deal include SM C&C's acquisition of SK Planet's ad business (SK M&C) and SK Telecom's acquisition of a 23% stake in SM C&C. As a result of the partnership, we expect to see: 1) collaboration related to original content for Oksusu (an OTT platform) in the short term; and 2) the combination of AI/VR technology and artist IP-based content.

Kakao has also started to link its platform to LOEN Entertainment’s (acquired by Kakao in March 2016) content. Cooperative marketing activities between Kakao Talk and MelOn (LOEN’s music platform), including account linkage, are contributing to subscriber growth and retention. Going forward, LOEN’s video content is likely to become available on KakaoTV, given that: 1) the entertainment company has ample in-house video content, including music videos and concert recording; and 2) the company is well positioned to create new content, thanks to its artists and production staff.

Figure 69. Vertical integration in content production

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 31 September 5, 2017 Media/Entertainment

Synergies with main businesses

Entertainment agencies, which engage mainly in the sale of CDs, digital music, and concert tickets, have strived to steadily diversify their revenue models. First, they tried to increase management revenue from appearances of their artists on TV ads and shows, and created a new revenue source by selling K-pop-related promotional items using artist IP. The management and promotional item businesses have now taken root as stable ancillary revenue sources, as: 1) they leverage artist awareness - created via a long period of investment - by generating high margins with no further costs; and 2) they are mostly the extension of the main businesses (artists’ music albums and concerts, etc.).

Starting in 2015, entertainment agencies expanded into F&B, fashion, and cosmetics businesses. However, entertainment agencies have not yet generated tangible results from these businesses, as: 1) their utilization of artist IP has been limited; and 2) they lack expertise and efficiency in those businesses. Both SM Entertainment and YG Entertainment have failed to create synergies with their main businesses, while related costs have expanded, weighing on earnings.

However, entertainment agencies are heading in the right direction with their new business —the distribution of their in-house content on digital platforms with heavy domestic and overseas traffic. Entertainment agencies can leverage their artists significantly for these businesses, and the related market is far greater than the market for their main businesses. In addition, the new businesses will likely increase the exposure of new artists, thus raising the possibility of success in the main businesses.

Figure 70. Entertainment agencies’ new businesses

Concert 1996- 2001- 2006- 2011- 2014- Business Company Artist attendance 1H16 2H16 1H17 2H17 1H18 2H18 2019 2000 2005 2010 2013 2015 (2011~) H.O.T. -

S.E.S. -

BoA 0.01

TVXQ 3.2

Album sales SM Super Junior 0.7 Girls’ 1.6 Digital sales Generation Record Concert SHINee 1.5 and revenue Management f(x) 0.01 Commercial EXO 1.2

broadcasts BIGBANG 5.5

2NE1 0.3

YG WINNER 0.01

iKON 0.8

Black Pink -

MD sales Travel packages SM F&B Content production Ad agency Other businesses MD sales

Fashion/beauty

YG F&B Content production Ad agency

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 32 September 5, 2017 Media/Entertainment

1) Vertical integration (artists-producers) in content production leads to OTT opportunities

In an effort to produce quality content, Korean entertainment firms have been scouting renowned producers and writers. For example, in 2017 alone, YG Entertainment has scouted nearly 10 popular TV show/drama directors from terrestrial/cable networks (e.g., MBC, CJ E7m) since early 2017. Mystic Entertainment, in which SM Entertainment acquired a 28% stake in March 2017, recently scouted a director of popular shows (e.g., The Knee-Drop Guru , Battle of Tongues ). Earlier, SM C&C and FNC (173940 KQ, CP: W7,200) also recruited new drama/show producers and writers.

Korean entertainment firms have also been stepping up content production efforts. SM Entertainment and Mystic Entertainment co-produced a variety music show, Snowball Project , and released it online (on both Naver TV and V LIVE) first. As of August 31 st , the show has recorded 9.4mn views on a cumulative basis. After receiving some investments from dominant platform players NAVER and Tencent (HKG: 0700, CP: HK$321.00), YG Entertainment has been jointly producing web content with them by utilizing its own artists.

Although details about profit sharing ratios for co-produced content are not available, we expect entertainment firms’ share to be equivalent to or even greater than that from the existing SMR-led content distribution, given that its own artists were used to produce such content. A prime example was New Journey to The West , which was jointly produced by NAVER and CJ E&M, and has continued into its fourth season. With this content, CJ E&M applied a variety of profit models, including early release via the online platform, simultaneous offerings on web and TV and product placement (PPL). We estimate that profit from the show broke down to 10% for platform players; 25% for media representatives/agencies; and 55% for content producers.

Figure 71. Size of digital ad market far exceeds that of album/digital/concert market

(Wtr) 4

2 3.7

Other, 0.0 1 Albums, 0.1 Digital, 0.4 Concerts, 0.5 YG Ent., 0.2 0 SM Ent., 0.1 Korean music Domestic revenue of Domestic digital market SM Ent. & YG Ent. ad market Source: Company data,, PwC, Cheil Worldwide, KOBACO, Mirae Asset Daewoo Research

Figure 72. Cost structure by revenue source

(%) Domestic Japan 100 Gross Gross Gross Gross margin margin margin margin Artists' Share Share Gross 80 share Artists' Gross Avex & margin share margin local Gross sub. margin 60 Costs Share Avex & local Avex & 40 Artists' sub. local Costs Costs share sub.

20 Artists' share Costs

Costs Costs 0 Albums Digital Performance Management Albums/digital performance Merchandise

Note: Actual cost varies depending on sales volume and contract types. Source : Media reports, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 33 September 5, 2017 Media/Entertainment

2) Increased possibility of success in core business A fast-paced increase in the recognition of new artists holds the key to success in the entertainment industry. Over the past 20 years, entertainment firms have been making all- out efforts to improve the possibility of success for new artists, for example by introducing the training system. As part of the efforts, in the late 2000s, they implemented a strategy of exposing their new artists to media even prior to their official debuts. For example, Korea’s popular boy bands Big Bang and Winner, which were formed at survival audition programs, built fan bases even before their debuts. Recently, a number of artists have utilized Mnet’s audition programs as an opportunity to gain recognition. In all, we believe that the integration of platform, production and content (artists) will allow new artists to gain recognition in the early phase after their debuts. Meanwhile, amid lingering skepticism over the sustainability of the Chinese business, prominent idol groups (TVXQ, Super Junior) will resume activities in September, with key members back from military service. Album/concert and other management activities for such comeback idol groups are highly likely to focus on improving profitability, rather than expanding into new markets. TVXQ's film concert held during the duo’s hiatus recorded total attendance of 150,000, and plans have been finalized for an arena tour (attendance upwards of 650,000). This has convinced investors that for seasoned artists, fan bases will remain intact even when they go on a long hiatus. Accordingly, for entertainment firms, investors will likely focus more on their ability to expand the pool of artists capable of offering large-scale concerts/performances. Despite growing skepticism over the competitiveness of the core business, we are positive on entertainment companies, given their expected synergy with new businesses. Figure 73. Concert attendance in Japan for SM Entertainment and YG Entertainment’s major groups

(mn persons) 4

3 Big Bang iKON 2 Winner SM Town EXO Super Junior 1 SHINee

TVXQ 0 2012 2013 2014 2015 2016 2017F 2018F

Note: Figures are based on our estimation based on the size of concert halls. Source : Media reports, Mirae Asset Daewoo Research

Figure 74. Success of Wanna One created through Mnet audition show suggests importance of platform competitiveness

Note: Wanna One’s debut concert held at Gocheok Sky Dome (attendance: 20,000) Source : Media reports, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 34 September 5, 2017 Media/Entertainment

V. Investment strategy and valuation

The media industry’s value chain is long and complicated. Recently, we have seen many cases of vertical integration of components in the value chain. In addition, due to the strong mutual influence between upstream and downstream players, it is virtually impossible to separately value each segment of the industry. Indeed, most global media companies operate as corporate groups. Furthermore, the market sizes and degree of competition vary by revenue source; thus, we cannot apply uniform standards for the valuation of media stocks. Accordingly, we will focus on only several factors in the valuation of each company. First, we gave more weight to business models than to the value of platform assets. As the creation of platforms is expected to become easier and the number of platforms is projected to increase going forward, we believe the value of individual platforms will decline going forward. We also simplified the revenue models of media content firms into ads (TV/digital) and direct content sales (domestic/overseas). Based on the market share and competitiveness of each company, we derived the fair value of each business model relative to earnings value. By revenue model, we see greater upside to the model that depends on the direct sales of content than the on the Korean ad-oriented model. We also factored into valuation our forecast that the uptrend in digital ad rates and corresponding downtrend in TV ad rates will not be reversed. However, we also reflected potential resistance to or momentum of such a market trend. We value content sales more highly than earnings, in light of the strong upside potential of content sales and outlook for an increase in content distribution volume. In particular, the market environment is expected to become increasingly favorable to premium content than to user-generated content (UGC), or so-called “snack content”, thanks to higher barriers to market entry and a larger demand base. Premium content could generate ad revenue overseas ( Descendant of the Sun ) or help service operators to attract subscribers ( Okja ). We can also take a hint from the valuation of overseas media firms. Content producers are generally trading at higher valuation multiples than cable program providers and film makers. Terrestrial broadcasters subject to stricter regulations receive lower valuations, while internet-based new platforms have the highest valuation multiples, due to their perceived high growth potential. Meanwhile, Korean entertainment firms do not have directly comparable peers and are operating in a rapidly changing market. Accordingly, we believe the averages of the two largest entertainment firms in Korea – SM Entertainment and YG Entertainment – should serve as benchmarks for the industry, reflecting factors contributing to market growth or slowdown, including Chinese expansion, repercussions from the THAAD deployment, and risks related artists’ contracts. In this regard, the recent rebound of the valuations of both companies is believed to be driven by: 1) weakened investors’ sensitivity to the risks arising from the military conscription of artists; and 2) favorable outlook on their new businesses. Meanwhile, factors unique to each company, like the resilience of earnings, should contribute to the divergence of the performance of each stock. Table 9. Media/Entertainment coverage

Based on target price & estimates Based on current price & estimates Based on current price & consensus Ratings Target price 12MF P/E 18F P/E 18F P/E 18F P/B 18F P/E 18F P/B CJ E&M Buy W 97,000 17.4 29.9 23.2 1.3 18.7 1.4 J Contentree Buy W 5,800 33.1 31.2 21.2 3.5 11.4 2.8 CJ CGV Buy W 96,000 33.6 26.8 17.7 3.3 22.4 3.5 SBS Hold - - - 22.4 0.8 - - Showbox Hold - - - 34.7 2.4 23.8 2.5 SM Entertainment Buy W 37,000 29.3 25.0 19.6 1.7 21.5 1.8 YG Entertainment Buy W 35,000 23.5 24.0 19.8 1.4 18.2 1.6 Note: Based on Bloomberg consensus of August 31 st ; revenue for SBS has been replaced by 2017F, as loss is expected in 2018 Source: Bloomberg, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 35 September 5, 2017 Media/Entertainment

Table 10. Earnings of global media content companies (%, Wbn ) Revenue Operating profit OP margin Net profit EPSG Company 16 17F 18F 16 17F 18F 16 17F 18F 16 17F 18F 16 17F 18F CJ E&M 1,538 1,784 1,944 28 92 112 1.8 5.2 5.7 62 433 157 14.3 - -57.0 SBS 829 - - -8 - - -0.9 - - -1 - - - - - J Contentree 335 405 439 29 48 59 8.6 11.9 13.5 19 31 39 48.9 58.5 24.3 Showbox 126 108 137 15 12 18 12.1 10.9 13.3 13 10 15 16.3 - 53.5 NEW 126 103 104 7 7 5 5.3 6.8 4.8 4 6 5 220.0 - -14.4 IHQ 109 117 134 11 16 19 10.3 13.8 13.9 4 11 14 -20.5 - 31.2 WALT DISNEY (US 64,551 64,043 67,941 16,479 16,980 18,245 25.5 26.5 26.9 10,897 10,533 11,288 16.4 3.3 11.1 COMCAST 93,328 94,857 101,093 19,569 20,271 21,868 21.0 21.4 21.6 10,093 10,976 11,918 10.1 17.2 10.4 TIME WARNER 34,031 34,711 36,439 8,760 9,027 9,583 25.7 26.0 26.3 4,557 5,629 5,869 7.8 4.3 7.1 21CFOX 32,510 33,557 36,176 7,118 7,764 8,541 21.9 23.1 23.6 3,367 4,034 4,666 14.1 5.0 14.0 VIACOM 14,491 14,781 15,033 2,931 3,127 3,363 20.2 21.2 22.4 1,669 1,744 1,835 -24.3 4.5 4.7 NETFLIX 10,250 12,944 15,825 441 934 1,692 4.3 7.2 10.7 217 585 1,010 51.7 94.4 49.7 FUJI MEDIA HOLDINGS (JP) 6,944 6,689 6,749 237 224 232 3.4 3.3 3.4 291 206 212 20.0 -26.8 2.8 NIPPON TV. NETWORK 4,425 4,375 4,481 558 534 557 12.6 12.2 12.4 433 400 417 10.6 -4.9 4.4 ALIBABA PICTURES (CN) 158 - - -271 - - -171.6 - - -168 - - - - - DMG ENT. AND MEDIA 432 - - 142 - - 32.8 - - 128 - - 27.1 - - BEIJING ENLIGHT MEDIA 302 372 465 93 152 190 30.7 40.9 40.9 130 149 172 78.6 14.0 26.3 HUAYI BROTHERS MEDIA 609 678 803 59 177 211 9.7 26.1 26.2 141 147 168 -23.7 3.8 18.3 ZHEJIANG HUACE FILM & TV 774 912 1,088 87 117 145 11.2 12.9 13.4 84 106 128 -10.0 34.1 25.4 Averages 4.5 16.8 17.4 26.9 17.3 13.2 Note: Based on August 31 st Bloomberg consensus Source: Bloomberg, Mirae Asset Daewoo Research

Table 11. Stock prices of global media content companies (%, Wbn , x) Growth Market ROE PER PSR EV/EBITDA Company potential capital -1M -3M 16 17F 18F 16 17F 18F 16 17F 18F 16 17F 18F CJ E&M 1.7 -3.3 2,944 24.8 22.5 7.5 6.6 8.0 18.7 1.7 1.6 1.5 5.4 4.9 5.3 SBS -11.8 -6.1 478 3.0 - - 29.1 - - 0.6 - - 7.4 - - J Contentree -10.0 -4.8 440 18.3 31.2 28.6 16.8 14.2 11.4 1.3 1.1 1.0 14.2 9.4 7.9 Showbox -12.0 -8.8 350 3.8 7.5 10.7 75.5 36.6 23.8 3.6 3.2 2.6 5.6 5.5 4.6 NEW -10.8 -21.5 197 7.2 4.1 3.4 21.2 34.5 40.3 1.4 1.9 1.9 12.9 15.9 21.2 IHQ -6.2 5.7 282 2.9 4.9 6.1 42.6 25.6 19.5 2.5 2.4 2.1 4.1 4.9 5.5 WALT DISNEY (US) -6.4 -4.7 178,862 20.8 21.7 23.6 17.9 17.4 15.7 2.9 2.8 2.7 11.4 10.2 9.6 COMCAST 0.9 -2.1 216,737 17.8 17.3 18.0 20.8 20.0 18.1 2.3 2.3 2.1 8.9 9.0 8.5 TIME WARNER -1.1 1.9 88,793 17.0 18.6 17.4 16.0 16.6 15.5 2.6 2.6 2.4 12.2 11.4 10.7 21CFOX -5.7 1.2 56,843 20.1 22.3 20.9 14.5 13.5 11.9 1.8 1.7 1.6 9.7 8.8 8.0 VIACOM -6.5 -1.4 13,682 30.6 31.1 25.4 10.3 9.8 9.4 1.1 0.9 0.9 10.5 7.7 7.2 NETFLIX -3.8 7.1 84,963 13.1 14.9 19.2 213.0 109.4 73.1 7.4 6.6 5.4 95.0 75.1 44.4 FUJI MEDIA HOLDINGS (JP) 3.1 10.0 3,963 3.8 3.0 2.9 15.3 19.0 18.4 0.6 0.6 0.6 11.1 10.5 9.7 NIPPON TV. NETWORK 5.8 15.0 5,369 6.3 5.9 5.8 12.8 13.1 12.5 1.2 1.2 1.2 5.6 5.9 5.7 ALIBABA PICTURES (CN) 3.8 1.5 4,977 -6.1 - - - - - 17.1 - - - - - DMG ENT. AND MEDIA 0.0 -0.3 4,692 35.0 - - 37.2 - - 12.0 - - - - - BEIJING ENLIGHT MEDIA -2.8 7.7 4,392 10.2 11.2 12.4 31.6 30.8 24.4 12.7 11.7 9.4 - 30.7 23.6 HUAYI BROTHERS MEDIA -3.1 14.6 4,338 9.9 8.9 8.8 27.2 30.4 25.7 7.5 6.4 5.4 - 28.0 23.0 ZHEJIANG HUACE FILM & TV 7.5 13.2 3,752 7.6 9.0 10.0 45.4 34.3 27.4 4.7 4.1 3.4 - 32.0 25.6 Averages -3.0 1.3 13.0 14.6 13.8 36.3 27.1 22.9 4.5 3.2 2.8 15.3 16.9 13.8 Note: Based on August 31 st Bloomberg consensus Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 36 September 5, 2017 Media/Entertainment

Table 12. Earnings of global music distribution & management companies (%, Wbn ) Revenue Operating profit OP margin Net profit EPSG Company 16 17F 18F 16 17F 18F 16 17F 18F 16 17F 18F 16 17F 18F SM Entertainment 350 340 534 21 21 51 5.9 6.2 9.5 4 9 31 -81.1 - 222.2 YG Entertainment 322 355 326 32 38 33 9.9 10.6 10.2 19 28 28 -35.4 - -3.9 Loen Entertainment 451 577 663 80 106 128 17.7 18.3 19.3 63 83 101 24.9 33.0 21.6 NHN Bugs 73 110 145 -4 5 16 -5.7 4.2 11.3 -4 3 13 - - 335.1 Gini Music 111 - - 5 - - 4.5 - - 8 - - - - - LIVE NATION ENT. (US) 9,698 10,852 11,522 226 491 663 2.3 4.5 5.8 3 75 143 30.3 210.7 145.4 MADISON SQUARE GARDEN 1,504 1,720 1,788 -69 46 60 -4.6 2.7 3.3 -83 15 40 2.2 131.9 41.6 AVEX GROUP (JP) 1,716 1,631 1,711 61 73 89 3.5 4.5 5.2 1 28 52 -97.2 2,263.6 83.8 AMUSE INC 538 471 481 57 47 50 10.6 10.0 10.3 21 30 32 -42.9 43.3 6.6 Averages 4.9 7.6 9.4 -28.5 536.5 106.6 Note: Based on August 31 st Bloomberg consensus Source: Bloomberg, Mirae Asset Daewoo Research

Figure 75. Rebound of 12MF P/E of SM Entertain ment and YG Figure 76. Recently, SM’s 12MF P/E outpaced YG’s Entertainment

(x) (x) 30 Average P/E of SME and YGE 20 P/E of SME - P/E of YGE

20 0

-10

10 -20 1/12 5/12 9/12 1/13 5/13 9/13 1/14 5/14 9/14 1/15 5/15 9/15 1/16 5/16 9/16 1/17 5/17 9/17 1/12 5/12 9/12 1/13 5/13 9/13 1/14 5/14 9/14 1/15 5/15 9/15 1/16 5/16 9/16 1/17 5/17 9/17

Source: WISEfn, Mirae Asset Daewoo Research Source: WISEfn, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 37 September 5, 2017 Media/Entertainment

Key Recommendations

CJ E&M (130960 KQ/Buy/TP: W97,000) At the forefront of the changing media industry

ò Initiate coverage with Buy rating and TP of W97,000 ò Global content licensing presents lucrative opportunity ò Further room for growth in digital ads and TV ads

J Contentree (036420 KQ/Buy/TP: W5,800) Focus on growth of content investment business

ò Maintain TP of W5,800; watch for additional opportunities in broadcasting ò Tailwind from JTBC’s consecutive successes and increased drama programming ò Global content licensing presents lucrative opportunity

SM Entertainment (041510 KQ/Buy/TP: W37,000) Clear improvement in main businesses and positive new business direction

ò Initiate coverage with Buy rating and TP of W37,000 ò Focus on accumulation, not replacement, of artists ò Rise in value of performers and producers in the shift toward new platforms ò Synergy expected from newly-added ad agency and content business

YG Entertainment Inc. (122870 KQ/Buy/TP: W35,000) Revenue sources to be diversified

ò Initiate coverage with Buy rating and TP of W35,000 ò Artist lineup to expand over time ò Synergy expected from newly-added ad agency and content business

Mirae Asset Daewoo Research 38 September 5, 2017 Media/Entertainment

CJ E&M (130960 KQ) At the forefront of the changing media industry

Media Initiate coverage with Buy rating and TP of W97,000 We initiate our coverage on CJ E&M with a Buy rating and target price of W97,000. Our investment recommendation is based on our view that 1) digital advertising and content (Initiate) Buy revenues will grow strongly thanks to the company’s quick adaptation to media digitalization, and 2) TV ads still have room for growth, given the strong targeting capabilities of the company’s channels. By business, we value broadcasting at W1.8tr, Target Price(12M, W) 97,000 film at W49.7bn, and music at W110.6bn. We estimate the value of the company’s stake in Netmarble Games at W2.3tr, applying a 20% discount to the game company’s market Share Price (09/04/17, W) 75,000 value in light of its high share price volatility and the low likelihood of CJ E&M’s stake disposal. Expected Return 29% Looking ahead, we believe the two most important drivers of CJ E&M’s value will be 1) the pace of growth of the broadcasting business and 2) the share price of Netmarble Games. We see upside potential to the value of the broadcasting business, driven by 1) OP (17F, Wbn) 100 growing content revenue from outside platforms in the near term and 2) the high Consensus OP (17F, Wbn) 91 visibility of the global platform business in the long term. In particular, we view 1) intensifying content competition among global OTT services (led by Netflix) and 2) the EPS Growth (17F, %) 685.7 planned listing of Studio Dragon (90.8% owned by CJ E&M) in 2H17 as strong upside Market EPS Growth (17F, %) 43.7 catalysts. P/E (17F, x) 5.9 Global content licensing presents lucrative opportunity Market P/E (17F, x) 9.8 KOSDAQ 650.89 In addition to vertically integrating production and platforms, media companies, traditional and new alike, are looking to expand their geographical footprints. As such, Market Cap (Wbn) 2,905 the battle to license content is likely to continue for quite some time, presenting opportunities for many content providers. We expect CJ E&M’s drama production Shares Outstanding (mn) 39 subsidiary studio to see increasing licensing revenue from global OTT services, as Free Float (%) 56.7 suggested by the recent Netflix deal for the company’s drama Secret Forest . We think Foreign Ownership (%) 26.9 Studio Dragon’s content can widely appeal to global platforms because of its production Beta (12M) 1.61 scale, genre-oriented elements, and strong leverage in Asia. Exports to global OTT services have significant market potential and are easier to predict, making them a more 52-Week Low 53,800 compelling market than China. 52-Week High 88,700 To be sure, CJ E&M’s aim to become a regional platform in Asia may not fully align with (%) 1M 6M 12M the short-term interests of its production business; a similar issue led to Walt Disney’s decision to halt licensing its content to Netflix from 2019. Still, we expect content Absolute 3.3 -2.8 7.6 production to become more independent from distribution following Studio Dragon’s Relative 1.8 -10.3 11.9 IPO, leading to new export opportunities.

140 CJ E&M KOSDAQ Further room for growth in digital ads and TV ads 120 The Internet was able to replace traditional media formats in the advertising industry because of 1) its growing share in user time and 2) the recognition of its value in ad 100 targeting. Based on the same rationale, we believe CJ E&M’s TV ads still have room for growth. 80 1) We see plenty of upside to viewership in the company’s cable channels, aside from 60 tvN. Popular, season-based shows now make up a significant portion of programming of 8.16 12.16 4.17 8.17 its core channels, meaning the company has more wiggling room for budgeting and programming. We believe the reallocation of resources will bolster the competitiveness (i.e., ratings) of the company’s other channels. 2) CJ E&M’s channels also allow for more refined ad targeting compared to rivals. The wide differentials in pricing per rating unit among TV channels are proof that ad targeting is gaining ground in TV ads. We expect CJ E&M’s ad prices to rise faster than its ratings and see tvN commanding higher ad rates than broadcast networks.

[Media /Entertainment/Leisure] FY (12) 12/13 12/14 12/15 12/16 12/17F 12/18F

Jeong -yeob Park Revenue (Wbn) 1,188 1,233 1,347 1,538 1,796 2,068 +822 -3774 -1652 OP (Wbn) -8 -13 53 28 100 134 [email protected] OP margin (%) -0.7 -1.1 3.9 1.8 5.6 6.5

NP (Wbn) 5 225 54 62 488 125 EPS (W) 133 5,796 1,403 1,605 12,608 3,234 ROE (%) 0.4 16.4 3.6 4.0 27.3 6.0

P/E (x) 229.0 6.6 57.4 44.2 5.9 23.2 P/B (x) 1.0 1.0 2.0 1.8 1.4 1.3 메일 @ miraeasset.com Dividend yield (%) 0.0 0.0 0.2 0.3 0.3 0.3 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 39 September 5, 2017 Media/Entertainment

Valuation We initiate our coverage on CJ E&M with a Buy rating and target price of W97,000. We applied the sum-of-the-parts (SOTP) method, given that CJ E&M directly and indirectly runs a wide range of cultural content businesses across broadcasting, film, music, concert and games (Netmarble Games). We reflected differences in growth potential, competitive landscapes, and opportunities by business unit. 1) For the broadcasting unit, we applied a 20% premium to the peer average valuation. The peer group consists of three major US media companies, which we think have been making efforts to restore competitiveness through quality content in the face of changing market conditions (e.g., the ‘cord-cutting’ trend). We view the valuation premium as being justified by CJ E&M’s rapid adaptation to media digitalization. We see upside risks to the fair multiple as regards the pace of growth in content revenue from outside platforms and the visibility of the global platform business. 2) For the film and music units, the peer group comprises major Korean companies that share the Korean market environment with CJ E&M. We adjusted fair multiples reflecting growth outlook and market leadership by company. We value the concert business at zero. 3) We applied a 20% discount to the value of the company’s stake in Netmarble Games. CJ E&M is unlikely to dispose of its stake in the game company any time soon. Since the IPO, shares of Netmarble Games have hinged on the revenue outlook for its major games. We applied a discount to the game company’s market value, in light of its high share price volatility and the low likelihood of CJ E&M’s stake disposal.

Table 13. CJ E&M price valuation (Wbn , x, %) (%) Valuation - EV/EBIT (18F) Details Optimal broadcasting EV (a) 1,770 EBIT 123 20% discount on average multiples of 3 US media/content Target EV/EBIT 14.4 compan ies Optimal movie EV (b) 50 EBIT 3 Target EV/EBIT 15.4 Multiple of Showbox is applied Optimal music EV (c) 111 EBIT 9 Target EV/EBIT 11.7 20% discounted multiple of Loen Entertainment is applied Stock value of Netmarble Games (d) 2,322 Market capital 13,135 Applied % of ownership & discounts 2,322.3 22.1% & 20% discount is applied on owning shares Total optimal EV (e) 4,253 (a)+(b)+(c)+(d) Consolidated net debts (f) 501 Total share value (g) 3,752 (e)-(f) Target share price (W) 97,000 (g) / Number of shares Growth potential (%) 29.3 Source: Mirae Asset Daewoo Research

Figure 77. EV by business

(Wtr) 5 W1.8tr 41.6% 4 2Q17 net debt 0.5 Growth potential 2Q17 net debt +29.3% W49.7bn 3 0.5 W110.6bn W2.3tr 1.2% 2.6% 54.6% Target 2 market cap Market 3.8 cap 1 2.9

0 Current EV Target EV Broadcasting Film Music Netmarble Games

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 40 September 5, 2017 Media/Entertainment

Earnings outlook For 2017, we expect CJ E&M to report consolidated revenue of W1.8tr (+16.8% YoY) and operating profit of W99.9bn (+257.1% YoY) in line with the full-year guidance released early this year (revenue of W1.8-2.0tr, operating profit of W90bn-W110bn). The broadcasting unit is the driver for CJ E&M’s earnings growth. For 2017, we estimate the broadcasting unit’s revenue at W1.36tr (+20.3% YoY) and operating profit W87.9bn. We believe the broadcasting unit is well positioned to display top- and bottom-line growth. Although broadcasting ads are losing ground to digital ads, we expect CJ E&M to be able to overcome unfavorable market conditions, given its significant exposure to the digital ad market and ability to meet content demand from new media outlets. We advise a conservative approach to the film business for the time being. The film business has inherently high earnings volatility according to a film’s success or failure. Moreover, the market conditions look challenging, with increasingly demanding audiences and lackluster box-office performances. However, we are encouraged that CJ E&M has made continuous efforts to improve profitability, such as the acquisition of production studios and tighter profit/loss management on a project basis. If the market recovers, we expect CJ E&M to display profitability improvement.

Table 14. Quarterly and annual earnings forecast of CJ E&M (Wbn , %, mn persons, %p) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17F 4Q17F 2015 2016 2017F Revenue 314 357 379 489 394 425 440 536 1,347 1,538 1,796 Broadcast 225 268 269 366 286 332 336 410 909 1,128 1,364 Advertisement 110 132 111 135 108 129 113 135 467 488 485 License fee 47 47 47 56 49 49 48 56 199 197 202 Contents sales & others 69 89 111 175 128 154 175 219 244 443 677 Movie 40 41 56 52 57 45 52 56 238 190 209 Theater 28 26 39 34 47 19 34 40 146 127 140 Residual copyrights 6 7 8 6 4 10 7 4 33 27 25 Others(export) 7 8 9 12 6 16 11 12 59 36 45 Music 45 47 46 61 47 47 48 64 184 199 206 Performance 3 1 8 9 5 2 4 7 15 21 17 Operating cost 305 343 376 487 371 402 424 499 1,295 1,510 1,696 Operating profit 9 14 3 2 23 24 16 37 53 28 100 OP margin 2.8 4.0 0.8 0.4 5.9 5.6 3.6 6.9 3.9 1.8 5.6 Broadcast 5 20 9 12 20 24 17 27 46 46 88 Movie 4 -7 -7 -14 2 -2 -2 7 6 -24 6 Music 0 1 2 4 2 2 2 4 1 7 10 Performance 0 -1 -1 0 -1 -1 -1 -1 0 -2 -4 Pretax profit 15 48 9 -4 45 537 22 42 59 68 647 Net profit 12 43 2 3 33 405 17 33 53 61 488 Net margin 4.0 12.0 0.6 0.6 8.5 95.1 3.9 6.1 3.9 4.0 27.2 YoY Revenue 7.0 19.4 2.4 27.0 25.7 19.1 16.3 9.7 -12.4 14.2 16.8 Broadcast 26.7 20.1 18.0 30.5 26.8 23.7 25.3 11.9 10.1 24.1 20.9 Movie -38.9 28.9 -39.6 9.7 40.2 9.6 -6.8 6.8 12.8 -20.5 10.5 Music 6.3 9.4 -4.8 21.6 6.4 -0.2 2.9 3.8 1.9 8.3 3.2 Performance -55.7 3.0 935.9 44.0 39.8 50.7 -48.2 -25.0 4.4 36.8 -19.6 OP margin -2.9 -20.8 -77.5 -84.4 162.3 67.2 424.6 1,859.5 TTB -46.9 257.1 Net margin -86.2 240.9 -91.3 TTB 168.1 845.1 613.8 937.3 -77.3 15.0 701.9 Key assumptions Broadcasting ad market 697 863 797 963 701 867 801 967 3,641 3,319 3,336 Cable 229 284 262 317 228 282 260 315 1,174 1,092 1,085 Terrestrial 291 360 333 402 293 363 335 405 1,662 1,386 1,395 Multiplex attendance 49 45 72 50 52 45 67 51 217 217 215 CJ E&M market share 16.1 16.2 16.7 19.7 26.0 11.7 16.0 23.8 22.7 17.1 19.4 Notes: All figures are based on consolidated K-IFRS; Source: CJ E&M, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 41 September 5, 2017 Media/Entertainment

Expectations for content distribution to global OTT service providers Content sales to global OTT services are increasing sharply. After entering Korea in 2016, Netflix has been investing in Korean content in earnest since early 2017. Following Night Light (MBC), which ended in January, Netflix bought licensing rights to Secret Forest (Studio Dragon) and Man to Man (JTBC Content Hub) for W3.6bn and W6.4bn, respectively. As such, we believe it is time to assess OTT-bound content sales in terms of sustainability as a revenue source and the scale of opportunities.

With the advent of OTT services, the media environment is undergoing a structural evolution, rather than temporary changes. Given ongoing changes to decades-old content distribution channels, we expect OTT-related content sales to become a new revenue source and enhance CJ E&M’s value as a drama and broadcast program producer, due to the following reasons:

1) Content demand will likely remain high for quite some time, with media companies, traditional, and new alike, competing to secure quality content. The OTT market is highly competitive, due to low entry barriers, easy cancellation of subscriptions, and the availability of multiple services. Traditional media companies (cable companies) have begun to challenge the dominance of new media companies (internet-based service providers) for a share of the OTT market, reshaping the overall competitive landscape. Media companies are vertically integrating production and platforms in a new market environment to maximize their leverage over content, and the scale of competition is ever increasing.

2) Korean content provides global platforms with high accessibility and great market opportunities. Various global platforms are looking to maximize their leverage over content by geographically expanding subscriber bases. Popular local content is key to attracting local audiences. Among Asian countries, Korea is a marketplace with well-established infrastructure and economies of scale, as well as a producer of content, which is instrumental to Asian market penetration. Korea can play a key role in building subscriber bases in Asia. In our view, Netflix’s purchase of licensing rights to Korean content is strategically aligned with its Asian market expansion.

Figure 78. Media value chain: Traditional media vs. OTT service

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 42 September 5, 2017 Media/Entertainment

In an effort to secure quality content, global No.1 OTT player Netflix is looking to invest W7.97tr in 2018. For Netflix, investments in original content production reportedly represent 20-30% of total investments. Assuming that the remainder (70-80%) is used to secure content from external sources, we estimate that investments by Netflix will create W6tr-worth of new market every year for global channel operators and content producers (e.g., independent production studios). If we conservatively assume that Netflix will allocate 30% of its total content investments to source overseas content, and uses 40% of its overseas content investments for Asian content, the firm’s investment in Asian content comes in at roughly W600bn. Meanwhile, under a more bullish scenario, whereby the firm allocates 60% of its content investments for overseas content sourcing and 70% of its overseas content investments for Asian content sourcing, its investments in Asian content sourcing would rise to W2.9tr.

Taking other platforms (e.g., Amazon) and traditional media outlets (Walt Disney) into consideration, the market potential is even larger. Given the popularity of Korean pop culture, we expect Korean content producers to be among the largest beneficiaries. Given its pool of top-notch, commercially viable producers and appealing market position, CJ E&M will likely benefit from ongoing changes in the market environment. Studio Dragon, spun off from CJ E&M in May 2016, has Culture Depot, KPJ, and Hwa & Dam Pictures as subsidiaries, all of which have contracts with renowned writers, actors and actresses. We believe CJ E&M is an attractive content producer, as its content has access to trend-setting popular channels, such as tvN and Mnet, and ranks high on the Content Power Index (CPI).

Figure 79. Content sales: VOD ‰‰‰ global OTT service Figure 80. CJ E&M’s drama production subsidiaries providers

(Wbn) 90 Content sales

75 90.8% 70% 60

30 100% 100% 100%

Writer: Park Ji Eun Writer: Writers: 0 Actress: Gianna Jun Kim Eun Sook Kim Young-hyun, 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17F1Q18F3Q18F Park Sang Yeon

Source: CJ E&M, Mirae Asset Daewoo Research Source: CJ E&M, Mirae Asset Daewoo Research

Figure 81. CJ E&M’s programs ranked among top 50 of Figure 82. CJ E&M’s programs ranked among top 50 of

CPI (2017) CPI (2014-2017)

(numbers) (No.) 18 No. of CJ E&M programs within top 50 20 No. of CJ E&M programs within top 50 15

12 16

9 12 6

3 8 0 4

0 2014 2015 2016 2017

Note: CPI includes various rankings, including issues, search, and buzz Note: As of the third week of every August Source: AGB Nielsen, CJ E&M, Mirae Asset Daewoo Research Source: AGB Nielsen, CJ E&M, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 43 September 5, 2017 Media/Entertainment

Currently, CJ E&M is considering selling broadcasting and movie content to various platforms other than Netflix, such as Amazon Prime and Apple. The expansion of content distribution facilitates revenue diversification and bolsters margins, as it does not incur additional expenses. In addition, the sale of licensing rights gives access to underrepresented markets, raising awareness about K-pop culture and CJ E&M. Wider content distribution should prove favorable for CJ E&M, given its long-term business plans across advertising/channel/online platforms (e.g., the acquisition of Blue Group, a Vietnam- based agency in 3Q16, content supply to tvN Asia). We expect CJ E&M’s strength as a content producer to be highlighted after Studio Dragon’s listing (scheduled for 2H17). Currently, CJ E&M’s broadcasting unit is engaged in both platform (PP, OTT) and content production businesses, which raises a conflict of interest. As a platform operator, CJ E&M is unlikely to build its revenue model around content sales to outside platforms, as global OTT services are not only content customers, but also potential competitors, over the long term. A similar issue led to Walt Disney’s decision to end its distribution agreement with Netflix in 2019. However, we believe new opportunities will arise when Studio Dragon completes IPO and operates as a separate entity independent from CJ E&M. While CJ E&M focuses on expanding the global platform business beyond Korea to include Asia, Studio Dragon will be able to serve as a content producer and distributor. Once CJ E&M’s global business is on track, we believe it is possible over the long term that CJ E&M would support Studio Dragon on a selective basis. Table 15. Studio Dragon’s drama production Br oadcasting Peak Schedule Title Genre channel rating (%) 15.11~16.01 Reply 1988 tvN Period drama, romance, comedy, family 18.8 16.01~16.03 Signal tvN Crime 12.5 16.05~16.06 Another Ms. Oh tvN Romance, comedy 10.0 16.05~16.07 Dear My Friends tvN Drama 8.1 16.06~16.08 Task Force 38 OCN Crime 4.6 16.07~16.08 The Good Wife tvN Drama 6.2 16.09~16.11 On the Way to the Airport KBS 2 Romance 9.3 16.09~16.11 Woman with a Suitcase MBC Comedy, legal drama 10.0 16.11~17.01 The Legend of the Blue Sea SBS Fantasy, romance, comedy, drama 21.0 16.12~17.01 Goblin tvN Fantasy, romance, comedy, drama 20.5 17.03~17.05 Tunnel OCN Crime 6.5 15.08~15.10 Twenty Again tvN Drama 7.2 15.01~15.06 Enchanting Neighbor tvN Drama, soap opera 13.3 17.05~17.06 Circle tvN Fantasy, mystery 2.9 17.06~17.07 Secret Forest tvN Fantasy, mystery 6.6 Source: AGB Nielson, Mirae Asset Daewoo Research

Figure 83. Average drama production cost by studio Figure 84. Average drama viewer rating by studio

(Wbn) (%) 12 20

10 12 Average: 11.3% Average: W 88bn

8 8 4

0 6

Note: Programs aired since 2010, for which ratings were identifiable (not Note: Programs aired since 2010, for which ratings were identifiable (not suitable for accurate measurements); Source: Company data, media suitable for accurate measurements); Source: Company data, media reports, FSS, Mirae Asset Daewoo Research reports, FSS, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 44 September 5, 2017 Media/Entertainment

Digitalization of ad media is to be welcomed, not feared In 2016, the digital ad segment overtook the broadcasting ad segment, a mere four years after it surpassed the terrestrial TV ad segment in 2012. The Korean digital ad market looks promising, in our view. Digital ads continue to display explosive growth in 2017, driven by their growing share in user time. In addition, we believe digital ad has room for further growth, given that: 1) digital ad accounts for a disproportionately small share of total ad spending, compared with time spent on digital, especially mobile devices; and 2) target marketing is gaining in importance in the ad market.

Among traditional media companies, CJ E&M is best adapted to media digitalization. CJ E&M has become a major beneficiary of the fast growing digital market by establishing and fostering SMR (PIP), MCN (DIA TV), in-house media rep (MezzoMedia), and OTT (Tving). As the only multi-channel network (MCN) operator among traditional media companies, CJ E&M provides management services to YouTube content creators and shares ad revenues with them. With the launch of DIA TV in July 2013, CJ E&M has forged partnerships with content creators from diverse genres such as game, music, beauty, and food, reaching out to audience across Asia. The service has recorded more than 100m subscribers and 1.5bn cumulative views.

Notably, we find it positive that CJ E&M has diversified its content library by enhancing access to user-generated content (UGC), rather than focusing on readymade content (RMC). We expect CJ E&M to secure long-term stability by expanding its exposure to an increasingly fragmented platform environment and at the same time make an unconventional attempt to develop new markets by crisscrossing RMC and UGC, traditional (broadcasting channels) and new media (e.g., OTT).

Figure 85. MCN’s profit-sharing structure

Direct payment 55%

100% 55%

Distributed 39%~44% after gross is recognized

Source: Mirae Asset Daewoo Research

Figure 86. DIA TV’s ecosystem Figure 87. DIA TV’s growing influence

(bn) (mn persons) 1.6 Clicks per month (L) 120 Cumulative subscribers (R) 100 1.2 80

0.8 60

40 0.4 20

0.0 0 5/15 8/15 11/15 2/16 5/16 8/16 11/16 2/17 5/17

Source: Mirae Asset Daewoo Research Source: Media report, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 45 September 5, 2017 Media/Entertainment

2) CJ E&M’s platform in platform (PIP) model enables Korean players to defend their leadership in the domestic video ad market against global operators. The PIP model enables the collection of user usage data, which is useful for target marketing. SMR (an alliance of three terrestrial networks, four general programming cable channels, and CJ E&M) directly transmits content to platforms such as NAVER, Daum, and Kakao, by having its own platform installed within a portal-based video streaming platform.

Although CJ E&M’s digital ad revenue is undisclosed, we estimate that it is expanding at a rapid pace. SMR’s user traffic has tripled in the 31 months after the December 2014 suspension of content service on YouTube. User traffic has a direct impact on earnings, as most user traffic leads to ad exposure.

CJ E&M’s popular web and broadcasting content, including New Journey to the West (which premiered online) and video clips, is recording high view rates. CJ E&M’s advertising charges on a CPM basis with its ad price increasing from W5,000 in 1H15 to W10,000 in 1H16, W16,000 in 2H16 and W18,000 in 1H17.

For the broadcasting unit, other revenues (excluding content sales, but including PIP, MCN, media rep, Tving) have displayed annual average growth of 101% over the past two years and will likely expand further. CJ E&M’s quick adaptation to media digitalization will continue to translate into earnings, in our view.

Figure 88. Digital ad market has overtaken Figure 89. SMR revenue on sharp increase broadcasting ad market

(Wtr) (Wbn) (%) 4 Terrestrial TV 50 Revenue (L) 228x 2014 revenue 40 Terrestrial TV + pay TV OP margin (R) 2.5x 2015 revenue Digital 20 40 3 0 30 2 -20 20 -40 1 10 -60

0 0 -80 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 14 15 16 Source: Cheil Worldwide, KOBACO, Mirae Asset Daewoo Research Source: FSS, Mirae Asset Daewoo Research

Figure 90. PIP profit-sharing scheme Figure 91. PIP content is directly transmitted by SMR

50% 50%

Billings = 100 Rep fees= 10%

Billings Platform fees 10%

Rep fees 25% Video ad platform

Content Content fees clips 55%

Source: Mirae Asset Daewoo Research Source: NAVER, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 46 September 5, 2017 Media/Entertainment

Further room for TV ad growth based on ad targeting by channel The Korean ad market has grown just 2.9% on average over the past three years, and its growth is expected to remain low, at around GDP growth rates. Amid challenging market conditions, however, CJ E&M holds opportunities for faster growth, backed by its content competency, solid positioning of channels, and agile digital response.

The company is exposed to both the traditional TV ad market, which is struggling from slow growth, and the digital ad market, which is the only ad medium reporting rapid growth at the moment. In TV ads, CJ E&M continues to post faster growth than the market average, thanks to content competency, improvement in viewership ratings, and strategic production/programming efforts. Meanwhile, in digital ads, the company has been swiftly adapting to the shift toward new media, rising as the largest beneficiary of digital ad market growth through the establishment and development of SMR (PIP profit model) and Dia TV (MCN).

Ad revenue booked by the company's media division only includes TV ads, which still accounts for a significant portion of the division's total revenue, at 43%. We expect the division's reliance on TV ads for revenue to decline going forward, driven by the increase in portion of digital revenue and changes in size of the Korean ad market by medium. Nevertheless, with the company's channels offering advantages on ad targeting, we expect CJ E&M to continue to report faster growth in TV ad revenue versus market averages.

Figure 92. Ad targeting reducing gap between TV viewer share and ad share

Audience share - TV ad share (pay TV) (%) 1) Narrowing the gap (quantitative): 2) Qualitative gap: 20 Ad market share converging with Ad market share reflects Audience share - TV ad share (terrestrial) audience share media competiveness 15 (targeting)

-5

-10

-15 2011 2012 2013 2014 2015 2016 Source: AGB Nielson, Cheil Worldwide, KOBACO, KOBACO, Mirae Asset Daewoo Research

Figure 93. Media revenue outlook Figure 94. Growth led by digital ads, but pay-TV ads also up

(Wtr) (%) 12 Three-year average growth 1.8 Digital ads Content sales 9 1.5 Subscription fees 6 Digital ads Overall market growth: 2.9% 1.2 3 0 0.9 -3

0.6 -6 -9 0.3

0.0 2013 2014 2015 2016 2017F 2018F

Source: Mirae Asset Daewoo Research Source: Cheil Worldwide, KOBACO, KOBACO, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 47 September 5, 2017 Media/Entertainment

Content competency-based scheduling (Friday night) and management (premium packages) driving growth

Key drivers of the media division's growth include effective scheduling and management based on content competency. Ad revenue has remained on a steady uptrend, backed by the rise in viewership on improvement in content competency, as well as the increase in ad prices. Following the recruitment of renowned Program Director Na Young-seok (January 2012), the company has enjoyed visible improvement in brand recognition for its cable channels, backed by a competitive program lineup that includes popular entertainment shows (Grandpas Over Flowers , 3 Meals a Day , and Youn ’s Kitchen ), season-based music shows (Superstar K , Show Me the Money , and Produce 101 series), and new-genre dramas (Reply series, Cheese in the Trap , Signal , and Goblin ).

In the process, the company has secured a clear upper hand versus rivals in the competition for viewers during specific timeslots (Friday night). Popular series-based shows, such as tvN's Reply series, 3 Meals a Day , and Grandpas/Youth over Flowers , as well as Mnet's Superstar K , Show Me the Money , and Produce 101 air on Friday night. Non-series hit programs, such as Goblin and Youn ’s Kitchen , are also scheduled on Friday nighttime slots. Anchor programs scheduled for popular timeslots help to drive growth in sales of premium ad packages. By offering ads for popular programs bundled with less popular shows, the company has been able to raise overall TV ad sales. As a result, ad prices for the company's top-tier cable TV channels have jumped to the highest levels in the industry, and are swiftly gaining on the prices for ads on terrestrial TV channels. Most of the top-performing programs are aired on tvN, and others on Mnet and OCN.

Figure 96. Growth driver to shift from premium package Figure 95. Market cap hinging on content competency sales to ad targeting going forward

(Wtr) (%) (%) Premium package sales (L) (%) Contribution to broadcast ads (R) 4 Market cap (L) 1.6 90 60 tvN ratings (R) 75 50 3 1.2 60 40

2 0.8 45 30

30 20 1 0.4 15 10

0 0 0 0 11 12 13 14 15 16 17 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18F

Source: AGB Nielson, Wisefn, Mirae Asset Daewoo Research Source: CJ E&M, Mirae Asset Daewoo Research

Figure 97. CJ E&M's ad prices by channel and day of the week on steady uptrend

(Wmn) 12 Mon. Tue. Youn's Kitchen New Journey to the West 2 Wed. Grandpas Goblin Thur. Youth Over Flowers 9 Over Fri. Three Meals a Day Three Meal a Day New Journey to the West 3 Superstar K 6 Flowers Signal Secret Forest Sat. Three The Good Wife Greece Sun. Meals a Cheese in the Ttrap Criminal Minds Day: Superstar K 7 6 Fishing Reply1988 Grandpas Over Flowers

3 Gapdong Misaeng

0 1/14 7/14 1/15 7/15 1/16 7/16 1/17 7/17

Source: CJ E&M, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 48 September 5, 2017 Media/Entertainment

Watch for re-evaluation of ad targeting by channel Actual ad prices for all of CJ E&M's channels hinge on the popularity of the top-performing show for the timeslot (major channels), as well as advertiser evaluation of viewership ratings (quantitative index) and ad efficiency (qualitative index) of all channels.

We see further room for growth from both sides. On the quantitative side, we expect to see additional improvement in viewership ratings for channels other than tvN. Shifting from its past strategy of concentrating content production budgets and resources on a select number of channels, the company has adopted a flexible stance on allocating production budgets and scheduling shows, backed by the solid standing of popular season-based shows on major channels. Idle resources are re-allocated to other channels to help reinforce the company's overall market standing. The company's food-focused channel, OLIVE, has been expanding into lifestyle content, such as travel and living, as seen on the program Island Trio , airing on both tvN and OLIVE from May 22 nd . XTM, which targets young males, and OnStyle, which targets females between the ages of 20 and 35, have also been expanding their focus to target a wider stratum/age demographic.

On the qualitative side, we find significant opportunities for all channels, backed by the company's detailed targeting of viewers. Ads are primarily attached to specific content on specific channels. Channels focused on building a specific identity and image help to improve ad targeting features. tvN's viewership ratings currently come in at just 30% of the level of terrestrial TV averages, but its ad prices reach near 71% of the levels recorded by terrestrial channels. Data trends show that CJ E&M's ad pricing per viewership rating unit has improved sharply versus that of terrestrial channels. In our view, the wide gap in pricing per rating unit among different types of TV channels is proof that ad targeting is gaining ground in TV ads. Sharper improvement in ad prices relative to the increase in viewership ratings indicate higher ad efficiency and vice versa.

The faster growth of the digital ad market versus TV ads was prompted by changes in viewer share (time spent on each type of medium) and assessment of ad efficiency. Ad targeting, the main characteristic of online ads, became a major advantage, as Google search ads gained market footing in the 2000s. In the 2010s, Facebook's programmatic ads took over alongside the explosive growth of mobile traffic. With market focus placed on the detailed targeting of specific market segments at the optimal time, ad targeting has become an important aspect for traditional ad media as well.

Since 2014, tvN has enjoyed higher ad prices per viewership rating unit versus terrestrial channels, with the gap widening alongside the increase in brand recognition of the channel and successful targeting of viewers aged between 20 to 49 years old. CJ E&M holds several channels with a clearly defined image and target viewer group, such as tvN, Mnet, OCN, CH.CGV, XTM, Olive, OnStyle, and Tooniverse. The company has preemptively secured top- performing producers and writers, and their competitiveness has been proved through the success of programs. With scheduling strategies to help raise the content competency of less-popular channels, we expect to see faster improvement of ad prices versus viewership ratings for a wider range of channels going forward.

Figure 98. CJ E&M exceeding terrestrial broadcasters on ad pricing per rating unit, backed by higher ad efficiency

(Wmn/%) Secret Forest 10 CJ E&M (tvN) Criminal Minds Youth Over Flowers SBS New Journey to the West 3 Cheese in the Trap Youn's Kitchen KBS2 Signal 8 MBC Goblin Superstar K 6 Grandpas Over Flowers: Three Meals a Day 6 Grandpas Over Flowers Greece Superstar K 7 Reply 1988

4 Ad prices and ratings are both increasing 2 Ad price increase Ad price increase Steady ad price Ratings Increase Ratings increase Ad price increase Steady ratings Ad price increase Ad price increase Ratings decrease Ratings decrease Ratings decrease 0 1/14 7/14 1/15 7/15 1/16 7/16 1/17 7/17

Note: Ad prices based on the average of the highest price for each day of the week and the higest price for 22:00 and 23:00 timeslots; CJ E&M ad prices based on the highest level recorded for each timeslot, and viewership ratings based on tnN programs; Source: CJ E&M, AGB Nielson, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 49 September 5, 2017 Media/Entertainment

Figure 99. Ad pricing: Top-tier channels approaching terrestrial channel levels

(%) 110 Mon. Tue. Average of 3 terrestrial broadcasters: 100 Wed. 90 Thur. Fri. 70 Sat. Sun.

10 1/14 7/14 1/15 7/15 1/16 7/16 1/17 7/17

Note: Ad prices based on the average of the highest price for each day of the week and the higest price for 22:00 and 23:00 timeslots Source: CJ E&M, AGB Nielson, Mirae Asset Daewoo Research

Figure 100. CJ E&M's ad pricing per rating unit on sharp uptrend

(Wmn/%) 9 1/14 4/15 11/16 6/17

0 CJ E&M (tvN) SBS KBS2 MBC

Note: Ad prices based on the average of the highest price for each day of the week and the higest price for 22:00 and 23:00 timeslots; CJ E&M viewership ratings based on the highest level recorded for each timeslot Source: CJ E&M, AGB Nielson, Mirae Asset Daewoo Research

Figure 102. Viewer share down for terrestrial/cable, steady Figure 101. Viewership sluggish, aside from top-tier channels for CJ E&M, and up for general programming channels

(%) tvN (%) Average of 3 terrestrial broadcasters 2.0 OCN 18 CJ E&M CH CGV Average of 4 CATV companies Mnet 15 1.6 Other

12 1.2 9 0.8 6

0.4 3

0.0 0 11 12 13 14 15 16 17 11 12 13 14 15 16 17

Source: CJ E&M, AGB Nielson, Mirae Asset Daewoo Research Source: CJ E&M, AGB Nielson, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 50 September 5, 2017 Media/Entertainment

Table 16. Producers and writers who recently joined CJ E&M Time Staff Previous company Major content Apr. 2011 Rhee Myung-han (producer) KBS 2 Days & 1 Night, Reply 1997/1994, SNL Korea, Grandpas Over Flowers, Misaeng Mar. 2011 Kim Seok-hyun (producer) KBS Gag Concert, Comedy Big League 2 Days & 1 Night, Youth Over Flowers/ Grandpas Over Flowers/ Sisters Over Flowers, Dec. 2012 Na Young-seok (producer) KBS Three Meals a Day May 2011 Shin Won-ho (producer) KBS Qualifications of Men, Reply 1997&1994 N/A Koh Min-goo (producer) KBS Immortal Song 2, First Day of Work Jan. 2014 Shin Hyo-jeong (producer) SBS Strong Heart, Youth Over Flowers, New Journey to the West Mar. 2011 Kwon Ik-joon (chief producer) MBC We Got Married The Heirs, Secret Garden, Lovers in Paris, Guardian: The Lonely and Great God, Jan. 2016 Kim Eun-sook (writer) Hwa & Dam Pictures Descendants of the Sun My Love from the Star, The Producers, My Husband Got a Family, The Legend of the Jan. 2016 Park Ji-eun (writer) CultureDepot Blue Sea Sep. 2016 Kim Young-hyun (writer) KPJ Jewel in the Palace, Six Flying Dragons, Deep Rooted Tree Source: Media reports, CJ E&M, Mirae Asset Daewoo Research

Table 17. Characteristics of major channels: CJ E&M has advantage in terms of ad targeting Channel Company Type Genre Main target Characteristics SBS SBS Terrestrial All All age groups KBS1 KBS Terrestrial All Main channel for Koreans aged 18 -49yrs Public channel with older image; focused on honest y and credibility KBS2 KBS Terrestrial All Younger viewers and housewives Younger, feminine image; focused on family and information shows MBC MBC Terrestrial All All age groups Good friend image; focused on fairness and credibility EBS EBS Terrestrial Education Students , children and parents Focused on lifelong education, children, documentaries YTN KEPCO Cable News Professionals in their 30~50 s

CBS CBS Cable Christian All age groups First private channel; offered journalistic views on historical events Arirang TV Arirang Cable Korea info English -speaking/overseas viewers Focused on becoming the main global network representing Asia SBS ESPN SBS Cable Sports Males in their 20 -50s Covers overseas sports events KBS N Sports KBS Cable Sports Males in their 20 -50s Covers less popular overseas sports events as part of public service MBC Sports Covers pro -basketball, MLB, little league, and ssireum (traditional MBC Plus Cable Sports Males in their 20-50s Plus wrestling) events Drama, MBC Dramanet MBC Plus Cable Females in their 30-50s Terrestrial TV program reruns ent ertainment MBC every1 MBC Plus Cable Entertainment Viewers in their 20 -30 s Terrestrial TV program reruns EBSu EBS Cable Children Children ( 3~14 yrs) and parents KBS Drama KBS Cable Drama KBS drama reruns SBS Plus SBS Cable Drama SBS drama reruns Movies, US SUPER ACTION CJ E&M Cable Viewers aged 19-39yrs old series XTM CJ E&M Cable Lifestyle Males Drama, tvN CJ E&M Cable Trendsetters aged 20-49yrs old High ratings for proprietary programs and new/experimental content ent ertainment OCN CJ E&M Cable Movies, drama Younger v iewers aged 25 -49yrs old Slogan: Korea's No. 1 channel Olive CJ E&M Cable Lifestyle Females Mnet CJ E&M Cable Music Younger viewers in their 20s. Focused on music and entertainment content Cartoons , Tooniverse CJ E&M Cable Children Slogan: Kids No.1 channel ani mation Fashion , OnStyle CJ E&M Cable Females in their 20~35s Strong market positioning for female viewers in their 20-30s lifestyle Chinese ZHTV CJ E&M Cable Chinese viewers over 15yrs old Also influences Koreans interested in Chinese content content Channel CGV CJ E&M Cable Movies All age groups Channel focused on movies Catch On 1, 2 CJ E&M Cable Movies All age groups Life, O tvN CJ E&M Cable Middle-aged viewers ent ertainment Personal DIATV CJ E&M Cable Younger viewers in their 10-30s Content producer network; MCN brand DIA TV channel channels US series , AXN IHQ/SONY Cable Younger viewers in their 10-30s movies Ent ertainment , Comedy TV IHQ Cable Younger viewers in their 10-30s drama Dramax IHQ Cable Drama Younger viewers in their 15 -30s Younger ( 20 -30 s) vs other general JTBC JTBC General All channels MBN MBN General All age groups

Mirae Asset Daewoo Research 51 September 5, 2017 Media/Entertainment

TV Chosun Chosun General All age groups Channel A Donga General All age groups Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 52 September 5, 2017 Media/Entertainment

Company outline CJ E&M is a cultural content company with a strong presence in the Pan-Asian market. The company was established in 2010, with CJ O Shopping's media business spun off to create O Media Holdings. In 2011, the company merged with CJ Group's five media/entertainment companies (OnMedia, CJ Internet, Mnet Media, CJ Media, CJ Entertainment). Following the merger, the company has focused on four business areas, including media, pictures, music, and musical/games (current Netmarble Games). CJ E&M's media business operates the largest TV and digital ad platform in the Korean market, in terms of traffic, and has substantial influence on cultural industries as a top content producer. As a pay-TV channel operator, the company manages 16 cable TV channels, including tvN, OCN, and Mnet. Media division revenue consists of earnings from TV ads (43%), MSO subscription fees (17%), and others (39%). Meanwhile, as a film investor and distributor, CJ E&M currently stands as the market leader in Korea’s moviegoer market share. The company has taken the lead on investment/distribution for 10-15 films per annum over the last five years, outpacing rival averages of 7-10 films per year. The company's strengths include in-house film production and relevant networks, as well as global partnerships in film production. The company's music division focuses on producing/distributing albums and music content, providing a digital platform for music content, and managing star artists. After focusing on the expansion of sub-labels in 2016, the company is expected to concentrate on securing music content and artist IP and driving synergy with other non-music businesses in 2017, as seen in the synergy created with the media division through shows such as Idol School and Show Me the Money . CJ E&M's musical business focuses on providing proprietary and licensed musicals, concerts, and events.

Figure 103. Major shareholders and subsidiaries Figure 104. Revenue breakdown

(%) 35 31.7 28.8 28

14 12.8 11.6 8.2 7 1.7 2.3 2.7 0 TV ads Other fees rights Other Albums Ancillary (exports) Theaters Licensing Performance Broadcasting Film Music/ performance

Source: Mirae Asset Daewoo Research Source: CJ E&M, Mirae Asset Daewoo Research

Figure 105. Business structure of media division Figure 106. Business structure of film division

Source: CJ E&M, Mirae Asset Daewoo Research Source: CJ E&M, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 53 September 5, 2017 Media/Entertainment

CJ E&M (130960 KQ/Buy/TP: W97,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/15 12/16 12/17F 12/18F (Wbn) 12/15 12/16 12/17F 12/18F Revenue 1,347 1,538 1,796 2,068 Current Assets 940 996 1,645 1,920 Cost of Sales 1,019 1,190 1,323 1,511 Cash and Cash Equivalents 47 81 642 744 Gross Profit 328 348 473 557 AR & Other Receivables 431 550 603 707 SG&A Expenses 275 321 373 423 Inventories 4 5 5 6 Operating Profit (Adj) 53 28 100 134 Other Current Assets 458 360 395 463 Operating Profit 53 28 100 134 Non-Current Assets 1,425 1,797 1,829 1,790 Non-Operating Profit 6 40 547 27 Investments in Associates 495 463 507 595 Net Financial Income -5 -9 -9 -7 Property, Plant and Equipment 77 275 283 267 Net Gain from Inv in Associates 129 81 590 71 Intangible Assets 653 724 674 528 Pretax Profit 59 68 647 161 Total Assets 2,365 2,793 3,474 3,710 Income Tax 6 7 159 37 Current Liabilities 642 937 955 1,063 Profit from Continuing Operations 53 61 488 124 AP & Other Payables 262 311 341 400 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 177 370 333 334 Net Profit 53 61 488 124 Other Current Liabilities 203 256 281 329 Controlling Interests 54 62 488 125 Non-Current Liabilities 162 240 408 421 Non-Controlling Interests -1 -1 0 -1 Long-Term Financial Liabilities 132 174 336 336 Total Comprehensive Profit 52 -42 507 124 Other Non-Current Liabilities 30 66 72 85 Controlling Interests 54 -41 507 124 Total Liabilities 805 1,177 1,364 1,484 Non-Controlling Interests -2 -1 0 0 Controlling Interests 1,551 1,547 2,037 2,155 EBITDA 373 428 382 297 Capital Stock 194 194 194 194 FCF (Free Cash Flow) 287 46 108 251 Capital Surplus 973 973 973 973 EBITDA Margin (%) 27.7 27.8 21.3 14.4 Retained Earnings 370 420 892 1,010 Operating Profit Margin (%) 3.9 1.8 5.6 6.5 Non-Controlling Interests 9 69 73 72 Net Profit Margin (%) 4.0 4.0 27.2 6.0 Stockholders' Equity 1,560 1,616 2,110 2,227

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/15 12/16 12/17F 12/18F 12/15 12/16 12/17F 12/18F Cash Flows from Op Activities 295 259 125 251 P/E (x) 57.4 44.2 5.9 23.2 Net Profit 53 61 488 124 P/CF (x) 8.1 6.4 7.2 8.8 Non-Cash Income and Expense 332 366 -87 206 P/B (x) 2.0 1.8 1.4 1.3 Depreciation 14 16 18 17 EV/EBITDA (x) 8.3 7.5 7.6 9.4 Amortization 306 384 264 146 EPS (W) 1,403 1,605 12,608 3,234 Others 12 -34 -369 43 CFPS (W) 9,938 11,014 10,364 8,533 Chg in Working Capital -42 -168 -242 -36 BPS (W) 40,188 40,052 52,736 55,770 Chg in AR & Other Receivables -68 -76 -31 -94 DPS (W) 200 200 200 200 Chg in Inventories -1 -1 -1 -1 Payout ratio (%) 14.6 12.7 1.6 6.2 Chg in AP & Other Payables 56 1 -26 24 Dividend Yield (%) 0.2 0.3 0.3 0.3 Income Tax Paid -56 0 -27 -37 Revenue Growth (%) 9.2 14.2 16.8 15.1 Cash Flows from Inv Activities -189 -534 -204 -54 EBITDA Growth (%) 28.6 14.7 -10.7 -22.3 Chg in PP&E -8 -212 -16 0 Operating Profit Growth (%) - -47.2 257.1 34.0 Chg in Intangible Assets -331 -358 -135 0 EPS Growth (%) -75.8 14.4 685.5 -74.3 Chg in Financial Assets 158 134 -28 -54 Accounts Receivable Turnover (x) 3.6 3.4 3.4 3.5 Others -8 -98 -25 0 Inventory Turnover (x) 294.2 357.1 364.4 369.2 Cash Flows from Fin Activities -94 306 115 -7 Accounts Payable Turnover (x) 11.7 10.1 9.8 9.9 Chg in Financial Liabilities -93 236 125 0 ROA (%) 2.2 2.4 15.6 3.5 Chg in Equity 0 0 0 0 ROE (%) 3.6 4.0 27.3 6.0 Dividends Paid 0 -8 -15 -8 ROIC (%) 5.3 2.3 5.7 8.5 Others -1 78 5 1 Liability to Equity Ratio (%) 51.6 72.9 64.6 66.6 Increase (Decrease) in Cash 14 34 561 102 Current Ratio (%) 146.4 106.2 172.2 180.7 Beginning Balance 34 47 81 642 Net Debt to Equity Ratio (%) -3.3 23.0 -3.4 -8.6 Ending Balance 47 81 642 744 Interest Coverage Ratio (x) 3.8 2.3 7.1 9.1 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 54 September 5, 2017 Media/Entertainment

J Contentree (036420 KQ) Focus on growth of content investment business

Media Maintain TP of W5,800; watch for additional opportunities in broadcasting We maintain our Buy rating and target price of W5,800 on J Contentree. We believe a sharp increase in content licensing will fuel strong growth in broadcasting (Maintain) Buy investment/distribution income. We expect content distribution growth to come from two sources: 1) VOD, supported by the success of JTBC’s shows (dramas and variety Target Price(12M, W) 5,800 shows) and the channel’s increased drama programming; and 2) premium OTT services, driven by intensifying competition for content among global OTT platforms. Share Price (09/04/17, W) 3,930 By business segment, we value broadcasting at W612bn and multiplex at W255.7bn. Our valuation of the multiplex business is fairly conservative, reflecting the unfavorable Expected Return 48% conditions of the movie market and worsening profit margins. For broadcasting, we used an EV/EBIT multiple of 24x to account for the growth of the new intellectual

OP (17F, Wbn) 35 property (IP) investment business. Consensus OP (17F, Wbn) 45 Tailwind from JTBC’s consecutive successes and increased drama EPS Growth (17F, %) -15.2 programming Market EPS Growth (17F, %) 43.7 This year, we have seen two positive trends: 1) JTBC’s improving TV viewership, and 2) P/E (17F, x) 27.5 the strong showing of individual programs. In addition to variety shows, the company Market P/E (17F, x) 9.8 has lately extended its success to dramas, producing three hits in a row: Strong Woman KOSDAQ 650.89 Do Bong-soon (9.7% ratings), Man to Man (4.1%), and Women of Dignity (10%). The company benefits from the success of these shows via its subsidiary JTBC Content Hub, Market Cap (Wbn) 448 which is in charge of producing and distributing JTBC’s programs. This bodes well for Shares Outstanding (mn) 114 distribution income, which was a key driver of earnings in 2Q17. Free Float (%) 66.5 We believe the increase in JTBC’s drama slots presents another tailwind, as more drama Foreign Ownership (%) 1.8 slots mean more IP investment opportunities and production/distribution revenues. The Beta (12M) 0.46 majority of J Contentree’s dramas are aired on JTBC. Indeed, the company has produced 52-Week Low 3,520 15 dramas since 2014, all of which were broadcast on the cable channel. JTBC is expected 52-Week High 4,440 to add two new drama slots (Fridays/Saturdays) this year. We assumed that JTBC would air nine dramas for 2017 (versus seven in 2016), of which seven will be produced by the (%) 1M 6M 12M company. Absolute -6.4 4.1 3.4 Relative -7.8 -3.9 7.6 Global content licensing presents lucrative opportunity

130 In just a short period of time, OTT services have emerged as a key platform for the J Contentree KOSDAQ global media industry. In response to changes in the media environment, traditional 120 media companies (such as Walt Disney and Time Warner) and new media companies 110 (such as Netflix and Amazon) are seeking the vertical integration of platform and 100 production, while broadening their geographical footprint to maximize their content 90 leverage. As a result, we believe global competition to secure content will continue for 80 quite some time. 70 8.16 12.16 4.17 8.17 Exports to OTT services have significant market potential and high predictability. We believe that OTT services will be a welcome boon for the Korean media industry, which has been plagued by uncertainties surrounding exports to China. In particular, we think OTT services represent a considerable opportunity for J Contentree and its subsidiary, JTBC Content Hub, given their strong drama production/investment capabilities.

[Media /Entertainment/Leisure] FY (12) 12/13 12/14 12/15 12/16 12/17F 12/18F

Jeong -yeob Park Revenue (Wbn) 380 369 306 335 389 435 +822 -3774 -1652 OP (Wbn) 38 36 33 29 35 43 [email protected] OP margin (%) 10.0 9.8 10.8 8.7 9.0 9.9

NP (Wbn) -10 0 11 19 16 21 EPS (W) -139 -1 128 169 143 186 ROE (%) -11.1 -0.1 15.0 26.3 17.7 19.1

P/E (x) - - 43.9 22.9 27.5 21.2 P/B (x) 2.8 2.3 9.5 5.0 4.3 3.5 메일 @ miraeasset.com Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 55 September 5, 2017 Media/Entertainment

Valuation & earnings outlook We value the multiplex business conservatively at around W332bn, reflecting unfavorable conditions of the movie market and worsening profit margins resulting from new site openings. Given that Megabox was valued at roughly W560bn just four months ago in Korea Multiplex Investment Corporation’s (KMIC) stake sale, we see limited downside to our valuation.

We value broadcasting at W612bn, reflecting strong growth potential of the new intellectual property (IP) investment business. We see a clear path for quantitative growth, driven by: 1) increasing content production/distribution income, due to more drama programming at JTBC and 2) expansion into other broadcasting channels and platforms (OTT, etc.). Our fair multiple for the broadcasting business reflects the growth potential of the new business model. We see upside risks to our target multiple, according to the pace of content revenue growth. In our view, the broadcasting business is currently in the initial stages of a re-rating cycle. We view broadcasting as a quantitative growth story, backed by enhanced content quality.

For 2Q17, J Contentree’s operating profit was revised downward from the preliminary figure (reflecting changes in the valuation of content license during the audit process). Accordingly, we lowered our rather aggressive earnings estimates. However, we remain upbeat on J Contentree’s growth outlook, given favorable market developments, as: 1) investors/production studios are assuming greater control over content licenses from broadcasting networks; and 2) the demand side for content has been diversifying (e.g., Netflix). We believe an upside to the fair value of the broadcast business is justifiable.

Table 18. Fair value calculation SOTP valuation Current price (W) 3,930 Outstanding shares (mn shares) 114.1 Market capital (Wbn) 445.0 Value of Megabox (Wbn) 332 12MF EBITDA 39.1 Based on the average valuation of cinema chain Target EV/EBITDA 8.5 operators in developed markets Reflecting ownership stake (Wbn) (a) 255.7 Value of broadcasting business (Wbn) (b) 612 12MF EBIT 25.5 c) + d) Target EV/EBIT 24.0 Reflect the growth potential of the new business model JTBC Content Hub 12MF EBIT 21.4 EBIT attributable to controlling interests (42.4%, c) 9.1 12MF parent EBIT from IP investments (Wbn) (d) 16.4 Total fair EV 868 a) + b) Net debt 204 Total shareholders’ value 664 Target price (W) 5,800 Upside (%) 47.6 Note: Theater chain peers are Regal (US), CINEMARK, CINEPLEX (Canada), CINEWORLD (UK) Source: Mirae Asset Daewoo Research

Table 19. Earnings forecast revisions (Wbn, W, %, %p) Previous Revised Change Note 17F 18F 17F 18F 17F 18F Revenue 429 482 389 435 -9.4 -9.7 - Reflected sluggish revenue at the film unit - Revised down broadcast earnings estimates Operating profit 59 76 35 43 -39.8 -43.5 - Reflected slowdown in the film market Net profit 35 46 16 21 -53.8 -54.4 OP margin 13.7 15.7 9.1 9.9 -4.6 -5.9 Net margin 8.2 9.6 4.2 4.9 -4.0 -4.8 Notes: All figures are based on consolidated K-IFRS; net profit is attributable to controlling interests Source: Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 56 September 5, 2017 Media/Entertainment

For 2017, we expect J Contentree to post revenue of W388.6bn (+15.9% YoY) and operating profit of W35.3bn (+21.9% YoY). Megabox is facing growing labor expenses and leases, an increase in screen counts and declining theater attendance. Megabox has yielded low margins, due to new theater rollouts over the past two years. Megabox needs a turnaround in the market. If the movie market improves, we expect Megabox to display greater earnings upside than its rivals. We have a bright outlook for the broadcast business, which is managed by: 1) J Contentree’s subsidiary, JTBC Content Hub; and 2) J Contentree’s investment division (established in 2017). JTBC Content Hub is engaged in JTBC’s program production and distribution. JTBC Content Hub’s production unit (formerly DramaHouse) produces programs with JTBC and three terrestrial networks for fees. JTBC Content Hub’s distribution unit (formerly, J Content Hub) distributes content broadcast at JTBC through online or domestic/overseas platforms (e.g., broadcast channels, VOD, app broadcast, N Screen). Distribution revenue varies according to the scale of production, investors, and license ownership. Three parties - broadcasting networks/investor, distributor, and production studios - share revenue as agreed upon. It can be simplified the following three models: 1) investments by the parent company, production and distribution by JTBC Content Hub, and programming by JTBC ( Strong Woman Do Bong-soon , Man to Man , Women of Dignity ); 2) no investments by the parent, production and distribution by JTBC Content Hub, and programming by JTBC (dramas up until 2016); 3) no investments by the parent, in- house/outsourced production by JTBC, distribution by JTBC Content Hub, and programming by JTBC (entertainment shows, such as Hyori's Home Stay , Begin Again , and dramas produced by others). The first model generates the greatest revenue, followed by the second and the third.

Table 20. Quarterly and annual earnings trend and forecast (Wbn , %, mn persons, %p) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17F 4Q17F 2016 2017F 2018F Revenue 92 80 106 58 87 97 102 103 335 389 435 Multiplex 64 51 78 61 68 57 76 66 255 268 284 Box office 33 33 49 38 39 33 49 38 153 160 170 Concessions 10 10 15 11 12 10 15 11 46 48 51 Screen ads 7 7 11 8 9 7 11 8 34 35 37 Other 14 2 4 3 8 7 1 8 23 25 26 Broadcast 19 19 18 26 17 41 32 40 83 130 167 IP investment 4 13 14 15 0 45 65 Magazines 9 10 10 -28 0 0 0 0 1 0 0 Consolidated adj. & other -1 -1 -1 -1 -2 -15 -19 -19 -4 -54 -80 Operating profit 12.0 1.8 15.4 -0.2 5.2 8.9 12.4 8.8 28.9 35.3 42.9 OP margin 13.1 2.2 14.6 -0.4 6.0 9.2 12.1 8.6 8.6 9.1 9.9 Multiplex 11.4 2.3 15.4 -6.9 4.3 0.0 11.1 3.3 22.3 18.7 18.6 Broadcast 2.7 1.5 1.7 2.4 1.0 9.9 3.3 4.5 8.4 18.7 22.2 IP investment -0.1 2.2 2.9 4.6 0.0 9.6 18.7 Magazines -1.8 -2.1 -1.8 4.2 0.0 0.0 0.0 0.0 -1.4 0.0 0.0 Pretax profit 8.3 0.9 15.5 10.4 5.1 8.8 13.5 6.1 35.1 33.6 41.5 Net profit 6.6 -0.9 12.3 4.4 3.8 6.3 10.3 4.6 22.4 25.0 31.6 Net margin (%) 7.2 -1.2 11.6 7.6 4.4 6.5 10.1 4.5 6.7 6.4 7.3 Net profit attributable to controlling interests 5.1 -1.7 11.3 4.5 3.5 3.2 6.9 2.8 19.2 16.3 21.2 YoY Revenue 14.5 2.5 2.6 -34.6 -5.3 21.2 -3.2 77.2 -4.2 15.9 12.0 Multiplex 21.1 6.3 9.3 3.9 6.5 11.5 -3.4 8.4 10.0 4.9 6.0 Broadcast 1.6 -13.1 -21.1 37.7 -13.3 113.1 72.4 54.4 -0.5 56.6 27.8 Magazines -10.6 -12.9 -2.2 TTR - - - - -97.0 - - Operating profit 596.8 -82.2 30.6 TTR -56.8 404.7 -19.7 TTB -7.8 21.9 21.6 Net profit 218.8 TTR 41.2 156.4 -42.8 TTB -16.3 4.6 14.1 11.6 26.2 Assumptions Domestic attendance 49.5 45.1 72.4 50.0 52.3 45.0 66.6 51.0 217.0 214.9 219.2 Megabox attendance 9.0 8.5 13.7 9.6 10.2 8.6 12.6 9.7 40.8 41.2 42.3 Megabox share 18.1 18.8 18.9 19.3 19.6 19.2 19.0 19.1 18.8 19.2 19.3 YoY Domestic attendance -2.0 1.2 -0.9 1.7 5.7 -0.3 -8.0 2.0 -0.1 -1.0 2.0 Megabox attendance -0.4 9.8 6.4 8.9 14.1 1.8 -7.9 0.9 6.1 1.0 2.7 Megabox share 0.3 1.5 1.3 1.3 1.5 0.4 0.0 -0.2 1.1 0.4 0.1 Note: Based on consolidated K-IFRS Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 57 September 5, 2017 Media/Entertainment

Table 21. JTBC Content Hub’s major drama productions (since 2014)

Schedule Title Channel Genre Peak rating (%) 14.01~14.03 Can We Love? JTBC Comedy, family, mini-series, melodrama 3.1 14.01~14.07 Noblewoman JTBC Melodrama 3.2 14.03~14.05 Secret Love Affair JTBC Melodrama 5.4 Wild Chives and Soy Bean Soup: 14.03~14.06 JTBC Romantic comedy, drama 1.7 12 Years Reunion Romance , comedy, romantic comedy, 14.05~14.11 Yoo-na's Street JTBC 2.8 crime Action , romance, period drama, 14.12~15.03 Maids JTBC 4.7 melodrama 15.05~15.07 Beloved Eun-dong JTBC Romance, melodrama 1.8 15.07~15.09 Last JTBC Action, thriller, crime 2.2 16.01~16.03 Madame Antoine JTBC Romance, comedy 1.1 16.03~16.05 Ms. Temper & Nam Jung-gi in JTBC Romance, comedy 3.2 16.05~16.07 Mirror of the Witch JTBC Romance, Fantasy 3.0 Romance , comedy, character growth 16.07~16.08 Age of Youth JTBC 2.5 drama 16.09~16.10 Fantastic JTBC Drama 2.7 My Wife's Having an Affair this 16.10~16.12 JTBC Family, melodrama 3.4 Week 17.02~17.04 Strong Woman Do Bong-soon JTBC Fantasy, romance, comedy, crime drama 9.7 17.04~17.06 Man to Man JTBC Action, melodrama 4.1 17.06~17.08 Women of Dignity JTBC Black comedy drama 12.1 17.08~ Age of Youth 2 JTBC Romance, comedy

Source: AGB Nielson, Mirae Asset Daewoo Research

Figure 107. Rising viewer ratings for dramas: Increased production competitiveness

(%) 15 Highest rating Direct investment in drama IP

0 (3Q16) (2Q16) (4Q14) Last Last (3Q15) (1Q16) (2Q14) (3Q16) (4Q16) (2Q15) Man toMan Man Age ofAge Youth Nam Jung-gi Nam Maids (1Q15) (4/21-6/10/17) Ms.Temper & (2/24-4/15/17) DoBong-soon Strong Woman Yoo-na's Street (6/16-8/19/17) MadameAntoine Woman ofWoman Dignity Secret Love Affair My Wife's My Having Mirror of Witch the an an Affairthis Week MyLoveEun-dong

Source: AGB Nielson, Mirae Asset Daewoo Research

Figure 108. Drama ratings have increased markedly since start of direct IP investments

(%) 7

Direct investment in drama IP 6 leading to strengthened content competitiveness 5

0 2014-16 After 2017

Source: AGB Nielson, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 58 September 5, 2017 Media/Entertainment

Post-restructuring changes J Contentree is a full-range media group operating under the JoongAng Media Network (JMnet) umbrella. J Contentree operated theater franchise, broadcast, magazine, newspaper, and culture businesses from 2011. By end-2016, J Contentree had increased its stake in the core theater franchise business and reorganized the broadcast business toward content production and distribution, transferring the cable channel Qtv to its affiliate JTBC Plus. In addition, the company had exited from loss-making magazine, newspaper, and concert businesses. From 2017, the business structure has been centered on the healthy media group. The closure of the loss-making businesses should help to expand investments in the core businesses and bolster the bottom line.

The exit from the loss-making businesses is freeing more resources for the core business (multiplex). We expect the company’s earnings to expand in absolute terms and finance future IP investments. Prior to 2017, earnings from the multiplex business were used to invest in broadcast content and offset losses in other businesses. From 2017, earnings from the multiplex business have been invested in broadcast content and theater expansion. We believe J Contentree is well-equipped to magnify synergy across the value chain, encompassing ‘investment-production-distribution-platform’.

Figure 109. Restructuring to magnify synergy across value chain

Source: J Contentree, Mirae Asset Daewoo Research

Figure 111. Post-restructuring streamlined governance Figure 110. Governance structure upon establishment structure

Hong Seok-hyun

4.8% 100% 15.6% 23.9% JoongAng 32.9% JTBC JoongAng Ilbo Media Network 21.39% 9.5% J Contentree (036420 KS)

50.0% 95.8% 42.4%

30.5% Korea Multiplex JTBC Content Hub Megabox Investment

Movies Broadcasting content

Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 59 September 5, 2017 Media/Entertainment

J Contentree (036420 KQ/Buy/TP: W5,800)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/15 12/16 12/17F 12/18F (Wbn) 12/15 12/16 12/17F 12/18F Revenue 306 335 389 435 Current Assets 98 136 165 196 Cost of Sales 140 153 178 198 Cash and Cash Equivalents 33 55 22 34 Gross Profit 166 182 211 237 AR & Other Receivables 38 38 68 76 SG&A Expenses 133 154 176 194 Inventories 14 23 41 47 Operating Profit (Adj) 33 29 35 43 Other Current Assets 13 20 34 39 Operating Profit 33 29 35 43 Non-Current Assets 358 414 524 554 Non-Operating Profit -3 6 -1 -1 Investments in Associates 11 1 1 1 Net Financial Income -5 -1 0 0 Property, Plant and Equipment 137 213 178 194 Net Gain from Inv in Associates 2 7 0 0 Intangible Assets 77 76 77 75 Pretax Profit 30 35 34 42 Total Assets 456 550 689 750 Income Tax 10 9 9 10 Current Liabilities 313 330 427 449 Profit from Continuing Operations 20 26 25 32 AP & Other Payables 38 56 100 112 Profit from Discontinued Operations 0 -3 0 0 Short-Term Financial Liabilities 222 235 259 260 Net Profit 20 22 25 32 Other Current Liabilities 53 39 68 77 Controlling Interests 11 19 16 21 Non-Current Liabilities 65 96 112 119 Non-Controlling Interests 8 3 9 10 Long-Term Financial Liabilities 37 66 59 59 Total Comprehensive Profit 31 25 25 32 Other Non-Current Liabilities 28 30 53 60 Controlling Interests 23 22 23 30 Total Liabilities 378 425 539 568 Non-Controlling Interests 8 3 2 2 Controlling Interests 62 84 100 122 EBITDA 50 43 53 64 Capital Stock 57 57 57 57 FCF (Free Cash Flow) 7 -73 55 27 Capital Surplus -51 -51 -51 -51 EBITDA Margin (%) 16.3 12.8 13.6 14.7 Retained Earnings 49 69 85 106 Operating Profit Margin (%) 10.8 8.7 9.0 9.9 Non-Controlling Interests 16 41 50 60 Net Profit Margin (%) 3.6 5.7 4.1 4.8 Stockholders' Equity 78 125 150 182

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/15 12/16 12/17F 12/18F 12/15 12/16 12/17F 12/18F Cash Flows from Op Activities 23 18 86 63 P/E (x) 43.9 22.9 27.5 21.2 Net Profit 20 22 25 32 P/CF (x) 8.6 11.4 8.5 7.2 Non-Cash Income and Expense 38 16 28 31 P/B (x) 9.5 5.0 4.3 3.5 Depreciation 12 13 17 20 EV/EBITDA (x) 17.6 16.9 14.8 12.4 Amortization 5 1 1 1 EPS (W) 128 169 143 186 Others 21 2 10 10 CFPS (W) 650 340 465 546 Chg in Working Capital -22 -5 45 10 BPS (W) 592 780 923 1,109 Chg in AR & Other Receivables 8 -7 -25 -7 DPS (W) 0 0 0 0 Chg in Inventories -5 -10 -18 -5 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -11 26 16 2 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -8 -12 -10 -10 Revenue Growth (%) -17.1 9.5 16.1 11.8 Cash Flows from Inv Activities -15 -44 -138 -51 EBITDA Growth (%) -13.8 -14.0 23.3 20.8 Chg in PP&E -16 -91 -31 -36 Operating Profit Growth (%) -8.3 -12.1 20.7 22.9 Chg in Intangible Assets -4 -1 0 0 EPS Growth (%) - 32.0 -15.4 30.1 Chg in Financial Assets 7 10 -54 -15 Accounts Receivable Turnover (x) 7.1 10.2 8.9 7.3 Others -2 38 -53 0 Inventory Turnover (x) 28.3 17.8 12.0 9.9 Cash Flows from Fin Activities -26 48 19 1 Accounts Payable Turnover (x) 9.1 14.6 12.3 10.1 Chg in Financial Liabilities 70 40 17 1 ROA (%) 4.2 4.5 4.0 4.4 Chg in Equity -75 0 0 0 ROE (%) 15.0 26.3 17.7 19.1 Dividends Paid -5 0 0 0 ROIC (%) 10.1 8.2 8.7 11.5 Others -16 8 2 0 Liability to Equity Ratio (%) 482.9 340.1 359.5 313.1 Increase (Decrease) in Cash -18 23 -34 13 Current Ratio (%) 31.4 41.4 38.7 43.6 Beginning Balance 51 33 55 22 Net Debt to Equity Ratio (%) 283.9 193.6 194.0 153.8 Ending Balance 33 55 22 34 Interest Coverage Ratio (x) 3.4 3.1 0.0 0.0 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 60 September 5, 2017 Media/Entertainment

SM Entertainment (041510 KQ) Clear improvement in main businesses and positive new business direction

Entertainment Initiate coverage with Buy rating and TP of W37,000 We initiate our coverage on SM Entertainment with a Buy rating and target price of W37,000 (based on 2018F net profit and a target P/E of 25x). From 2018, momentum (Initiate) Buy from artist activities should grow in earnest, and the newly acquired ad agency should contribute fully to earnings (annual revenue around W120bn). For our target P/E, we Target Price(12M, W) 37,000 applied a 10% premium to the past-two-year average P/E. We believe shares may trade at higher multiples once the long-term direction of new businesses is confirmed and Share Price (09/04/17, W) 28,950 synergy comes into view. Key investment points include: 1) the expected continuous growth in earnings with the expansion of the artist lineup; 2) rising demand for Expected Return 28% music/video content production and artist resources amid the transition to new

OP (17F, Wbn) 23 platforms; and 3) the expected operational synergy from new businesses. Consensus OP (17F, Wbn) 21 Focus on accumulation, not replacement, of artists EPS Growth (17F, %) 261.1 Artist lineup accumulation should drive earnings growth in stages. Although out of the Market EPS Growth (17F, %) 43.7 public eye for long periods, seasoned performers continue to enjoy significant fan bases P/E (17F, x) 47.4 at home and abroad. TVXQ's filmed concert, held during the duo’s hiatus, recorded total Market P/E (17F, x) 9.8 attendance of 150,000, and plans have been finalized for an arena tour (attendance KOSDAQ 650.89 upwards of 650,000). Super Junior will also resume activities, with eight out of 10 members recently back from military service. Rather than posing a serious risk, artists’ Market Cap (Wbn) 630 military service is merely resulting in delayed earnings. We also remain upbeat on the Shares Outstanding (mn) 22 continued addition of new artists. Regardless of music industry conditions, the company Free Float (%) 78.9 Foreign Ownership (%) 16.7 continues to debut one arena-level group every two to three years, and is shortening the Beta (12M) 0.95 time needed to nurture them into arena-level artists. 52-Week Low 22,150 Rise in value of performers and producers in the shift toward new platforms 52-Week High 30,700 Amid the transition to new platforms and OTT, demand for in-house developed and (%) 1M 6M 12M licensed content has been on the rise. Positioned at the starting point of the media value Absolute 0.3 29.2 2.3 chain, SM Entertainment stands to benefit from the rise in content demand thanks to its Relative -1.1 19.3 6.4 ample producer/performer resources and affiliate platforms (Oksusu, IPTV).

120 SM Entertainment KOSDAQ Synergy expected from newly-added ad agency and content business 110 Through a cross-shareholding investment deal with SK Telecom, subsidiary SM C&C has 100 added the fifth-largest ad agency in the Korean market to its portfolio. We expect the 90 subsidiary's earnings volatility to decline as a result. We also expect synergy effects, both 80 financial (steady ad earnings to complement content production-driven growth) and

70 operational (internalized planning and production of ads). In the long run, changes in SM 8.16 12.16 4.17 8.17 Entertainment's overall business approach are likely. Backed by recent M&A deals and the shift toward new platforms, the entire SM Group, including subsidiaries, should see steep growth in ad revenue’s portion of total revenue (2018 forecast: 23.4%). We also expect the company to maintain its partnership with SK Group. As such, we recommend keeping an eye on SK Group's ICT-related business plans going forward.

[Media /Entertainment/Leisure] FY (12) 12/13 12/14 12/15 12/16 12/17F 12/18F

Jeong -yeob Park Revenue (Wbn) 269 287 322 350 351 535 +822 -3774 -1652 OP (Wbn) 41 34 38 21 23 52 [email protected] OP margin (%) 15.2 11.8 11.8 6.0 6.6 9.7

NP (Wbn) 19 6 22 4 13 32 EPS (W) 913 290 1,048 169 611 1,479 ROE (%) 8.6 2.5 8.3 1.2 4.0 9.0

P/E (x) 48.4 117.1 41.0 153.0 47.4 19.6 P/B (x) 3.9 2.9 3.1 1.7 1.9 1.7 메일 @ miraeasset.com Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 61 September 5, 2017 Media/Entertainment

Earnings outlook Strong earnings momentum from core businesses

We strongly expect to see sharp growth in earnings from core businesses from 4Q17 onwards. Key drivers should include the comebacks of major groups such as TVXQ and Super Junior and the continued strength of newer groups such as SHINee and EXO, who enjoyed greater-than-expected popularity during the absences of the aforementioned major artists. Prior to entering military service, TVXQ and Super Junior accounted for over 60% of all ticket sales from concerts held in Japan. However, SHINee and EXO have since proven capable of drawing crowds of 800,000 (combined) during their Japanese tours.

TVXQ and Super Junior are now gearing up for comebacks, with the military service of key members coming to a close in August 2017. In particular, TVXQ has been sharing its activity schedule, which includes the releases of two new solo tracks and a domestic concert in September, as well as an arena tour in Japan in November. We expect the group to enjoy fan support on par with the levels seen before the start of their military service (tour attendance upwards of 650,000). Super Junior is also likely to release its schedule soon.

In 2018, we expect total attendance for SM Entertainment concerts in Japan to surpass or roughly match the historical high of 1.88mn recorded in 2014. Major changes compared to 2014 include plans for a large-scale concert for SHINee ahead of the start of the military service of Onew (a key member), and growth in concert attendance levels for newer groups such as EXO and SHINee from 200,000 to the current 400,000 levels.

Table 22. Quarterly and annual earnings trend and forecast (Wbn , %, mn persons, %p) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17F 4Q17F 2016 2017F 2018F Revenue 90 77 104 78 68 68 85 130 350 351 535 SM Ent. 48 42 61 50 41 40 53 67 202 201 246 Record 10 19 14 21 13 12 17 19 63 62 83 Management 39 24 48 29 27 28 35 48 139 138 162 SM Japan 21 6 13 12 13 12 10 20 51 54 81 Dream Maker 23 5 18 4 6 16 13 18 51 52 59 SM C&C 20 25 24 21 15 11 17 39 90 82 211 Consolidated adj. & other -22 -2 -11 -8 -6 -12 -7 -13 -44 -38 -62 Operating profit 9.0 -2.4 13.5 0.6 1.2 1.4 8.8 11.9 21 23 52 OP margin (%) 10.0 -3.2 13.0 0.8 1.8 2.0 10.4 9.2 5.9 6.6 9.6 Pretax profit 10.2 -3.2 11.2 4.3 -3.3 1.9 8.8 11.5 23 19 50 Net profit 6.1 -6.5 8.6 -4.0 -8.0 3.8 6.7 8.7 4 11 38 Net margin (%) 6.8 -8.4 8.2 -5.1 -11.8 5.6 7.9 6.7 1.2 3.2 7.0 Net profit attributable to 5.3 -1.2 7.9 -8.3 -6.8 4.2 7.5 8.4 3.6 13.3 32.2 controlling interests YoY Revenue 38.2 1.0 10.3 -9.1 -24.7 -12.0 -18.5 65.8 8.6 0.2 52.5 SM Ent. 17.9 -13.0 3.3 3.6 -16.4 -4.7 -13.7 33.8 2.4 -0.7 22.3 SM Japan 81.8 -64.6 -63.7 -10.3 -36.8 111.1 -24.5 69.2 -33.0 7.4 49.8 Dream Maker 61.4 -61.7 46.3 -64.7 -76.1 194.4 -28.8 327.3 -3.4 2.5 12.5 SM C&C 68.2 77.6 30.3 -32.8 -27.5 -54.9 -30.0 88.7 19.8 -9.3 158.2 Operating profit 139.8 TTR -27.7 -85.1 -86.7 TTB -34.8 1,815.7 -46.1 12.4 121.8 Net profit 249.6 TTR -35.1 RR TTR TTB -22.4 TTB -50.4 12.1 45.4 Key assumption Concert ticket sales in Japan 0.2 0.5 0.2 0.5 0.2 0.2 0.4 0.9 1.3 1.7 2.0 Note: Based on consolidated K-IFRS; Concert ticket sales are based on the actual date of concert, and include our estimates. Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 62 September 5, 2017 Media/Entertainment

SM C&C to add W120bn in annual revenue from ads

SM Entertainment has sealed a cross-shareholding investment deal with SK Telecom (July 17 th ). Key points of the deal include SM C&C's acquisition of SK Planet's ad business (SK M&C) and SK Telecom's acquisition of a 23% stake in SM C&C. SK M&C is the fifth-largest ad agency in the Korean market by revenue, with clients including SK Group companies as well as non-affiliate companies. The company posted revenue of W123.2bn for 2016 (revenue growth averaged 15.4% over the past two years), and generally records OP margins on par with the Korean market average (5-7%). In addition to the usual conglomerate clients, the company continues to add ICT clients (Kakao, Netmarble Games, and Dabang), which have recently been increasing ad spending. As such, we expect the company to post faster earnings growth compared to the market average going forward.

As a result of its partnership with SK Telecom, we expect SM C&C to: 1) display a decline in earnings volatility and an increase in cash flows; 2) improve its ability to make in-house content production investments; and 3) build a value chain spanning artist IP development and content/ad media production.

Meanwhile, we expect to see financial synergies between the ad agency and the content production unit, as the two businesses are likely to complement each other in terms of earnings stability (content ↓, ad ↑) and potential upside (content ↑, ad ↓). In addition, we expect to see operational synergies from the internalization of ad production segments that had previously been outsourced. As such, OP margin should rise from the previous 5-7% level thanks to the acquisition of the ad agency.

Simply put, we expect to see visible changes to the revenue structure of SM C&C as well as the SM Group as a whole. In the near term, earnings from SK M&C will be recognized starting in 4Q17 (from October 27 th ) and should account for 23.4% of consolidated revenue in 2018. Cash flows generated from the ad agency will likely be reinvested into SM C&C's mainstay business, content production. As a result, we expect to see improvement in content production capabilities for variety shows (currently airing five shows per week) and dramas (three to four per year).

In the long term, we expect to see visible growth in the contribution of digital ad content to overall earnings. Positioned at the starting point of the media value chain, SM Entertainment holds ample producer/performer resources and stands to generate strong synergies by leveraging SK Telecom’s new platforms (e.g., Oksusu and IPTV). With the shift toward new platforms likely to add opportunities for further earnings growth from digital revenue and web-based content, SM Entertainment should emerge as a key beneficiary going forward.

Figure 112. Ownership structure changes

Source: Company materials, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 63 September 5, 2017 Media/Entertainment

Accumulation, not replacement, of artists to drive growth in stages It is important to note that changes in the size of the overall music market in Japan have a limited impact on popular artists’ drawing power. Historical data shows that market expansion/contraction has a low correlation with revenue from album/music content sales and concerts.

In addition, upon building a solid fan base in Japan, artists tend to generate solid and steady revenue flows for long periods of time. Indeed, active expansion into the Japanese market since the early 200s has resulted in longer careers for Korean artists. A key example is TVXQ, which has recently scheduled a dome tour after remaining out of the public eye for a long period due to military service obligations.

SM Entertainment has yet to see a group cease activities after become a major (dome-level) act. As such, we believe the company’s earnings potential need to be assessed based on the size of its roster of artists with significant fan bases, rather than its share of the overall music market. Since the 2000s, the company has consistently debuted one dome-level group every two to three years, and is shortening the time needed to develop its acts into major stars. Going forward, we expect to see growth in earnings from existing artists as well as the addition of new artists.

Table 23. SM accumulating (not replacing) artists since start of concerts in Japan Debut Artist Years active 1996 H.O.T. - 1997 S.E.S - 2000 BoA - 2003 TVXQ 15 2005 Super Junior 13 2007 Girls' Generation 11 2008 SHINee 10 2009 f(x) 9 2010 Infinite 8 2012 EXO 6 2014 Red Velvet 4 2016 NCT 2 2017

Source: Mirae Asset Daewoo Research

Table 24. Military service forecasts for major male artists (through 2020) Team Member Year of birth Start of military service End of military service Super Junior Shindong 1985 Mar 2015 Dec. 2016 Sungmin 1985 Mar 2015 Dec. 2016 Eunhyuk 1986 Nov 2015 Jul. 2017 Donghae 1986 Oct 2015 Jul. 2017 Siwon 1987 Nov 2015 Aug. 2017 TVXQ U-Know 1986 Jul 2015 Apr. 2017 Changmin 1988 Nov 2015 Aug. 2017 SHINee Onew 1989 2018F 2020F Jonghyun 1990 2019F 2021F Minho 1991 2020F 2022F Key 1991 2020F 2022F EXO Xiumin 1990 2019F 2021F Suho 1991 2020F 2022F Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 64 September 5, 2017 Media/Entertainment

Figure 113. Concert sales in Japan: Strong in weak market Figure 114. Annual concert attendance for major artists

(US$bn) (mn tickets) (mn persons) 2.5 Japanese concert market size (L) 2.5 2.5 SM Town SM Entertainment ticket sales (R) EXO f(x) 2 2 2.0 Super Junior Shinee 1.5 1.5 1.5 Girls' Generation TVXQ BoA 1 1 1.0 Most recent 5 years 0.5 Concert market CAGR: 4.98% 0.5 SME ticket sales CAGR: 12.39% 0.5

0 0 0.0 2011 2012 2013 2014 2015 2016 2017F 2018F

Note: Concert ticket sales are estimates based on venue size, Note: Concert ticket sales are estimates based on venue size, Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

Figure 115. SM C&C's revenue contribution to climb Figure 116. SM C&C's OP contribution to surge

(Wbn) Consolidated adj./other (Wbn) Consolidated adj./other 700 SM C&C 60 SM C&C Dream Maker Dream Maker 600 SM Entertainment Japan SM Entertainment Japan 500 Non-consolidated SM Entertainment 40 400

300 20 200

100 0 0

-100

-200 -20 2015 2016 2017F 2018F 2015 2016 2017F 2018F

Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

Figure 117. Timeline of major artists’ business activities Japan concert attendance 1996- 2001- 2006- 2011- 2014- Business Artist 1H16 2H16 1H17 2H17 1H18 2H18 2019 (mn persons, 2000 2005 2010 2013 2015 2011-) H.O.T. - S.E.S. - Album sales BoA 0.01 Digital sales TVXQ 3.3

Music and Concerts Super Junior 1.7 management Girls’ Commercials 0.8 Generation Broadcast SHINee 1.6 appearances f(x) 0.01 EXO 1.3 Merchandise sales Travel packages Other businesses F&B Content production Ad agency Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 65 September 5, 2017 Media/Entertainment

Company overview SM Entertainment, the largest talent management agency in the Korean market, generates most of its revenue from album releases, concerts, and TV appearances at home and abroad. The company's comprehensive management system covers all aspects of artist development, including discovery, training, debut planning, and scheduling. SM Entertainment built the foundation of its artist marketing/training/producing business with groups such as H.O.T. and S.E.S. in the late 1990s and started to expand overseas in earnest in the 2000s. The company derives the bulk of its revenue from the activities of a wide variety of hit artists, including BoA, TVXQ, Super Junior, and EXO. Notably, SM Entertainment has expanded into new regions and business fields through the: 1) acquisition of SM C&C (content production; 32.3% stake) in 2012; 2) a 4% investment by Alibaba and the addition of a Chinese arm in 2016; and 3) a cross-shareholding investment deal with SK Telecom in 2017. Parent revenue consists of: 1) revenue from album/music sales (29.6% of total revenue over the past three years) and 2) revenue from management operations (TV appearances, ads, etc.; 70.4%). While earnings from domestic and overseas markets account for roughly similar portions of total revenue, a major driver of growth is the increase in concerts and album releases in Japan. Revenue generated in Japan is booked through wholly-owned subsidiary SM Japan. Meanwhile, off-season hiatuses and artist comebacks lead to seasonality and volatility of earnings. Since 2015, male artists’ military service obligations have emerged as key determinants of earnings volatility. Artist-related risks remain due to limited visibility on potential contract issues, conflicts between members, and health problems. However, it should be noted that SM Entertainment focuses on minimizing risks by engaging in structured management of artists and bolstering negotiating power. Figure 118. Booking of earnings from SM Japan

Source: Mirae Asset Daewoo Research

Figure 119. Parent revenue breakdown (2016) Figure 120. Parent revenue by country (2016)

(%) Domestic Ent. Domestic Domestic (%) Other China Japan Domestic Exports Music Exports Exports 100 4 5 100 6 10 14 13 18 12 80 80 52 58 27 28 18 21 69 73 60 60

40 40

55 58 57 48 54 20 42 20 31 27

0 0 By region By business By region in music By region in entertainment 2013 2014 2015 2016

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 66 September 5, 2017 Media/Entertainment

SM Entertainment (041510 KQ/Buy/TP: W37,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/15 12/16 12/17F 12/18F (Wbn) 12/15 12/16 12/17F 12/18F Revenue 322 350 351 535 Current Assets 227 293 338 399 Cost of Sales 210 248 232 348 Cash and Cash Equivalents 133 170 133 136 Gross Profit 112 102 119 187 AR & Other Receivables 39 44 73 93 SG&A Expenses 74 82 96 135 Inventories 10 11 19 24 Operating Profit (Adj) 38 21 23 52 Other Current Assets 45 68 113 146 Operating Profit 38 21 23 52 Non-Current Assets 233 232 259 279 Non-Operating Profit -7 2 -4 -2 Investments in Associates 16 39 65 83 Net Financial Income 0 -1 2 2 Property, Plant and Equipment 107 104 88 79 Net Gain from Inv in Associates 0 4 3 3 Intangible Assets 51 37 29 23 Pretax Profit 31 23 19 50 Total Assets 460 525 598 679 Income Tax 10 17 8 12 Current Liabilities 98 135 198 239 Profit from Continuing Operations 21 6 11 38 AP & Other Payables 48 43 71 91 Profit from Discontinued Operations -2 -2 0 0 Short-Term Financial Liabilities 11 46 51 51 Net Profit 18 4 11 38 Other Current Liabilities 39 46 76 97 Controlling Interests 22 4 13 32 Non-Current Liabilities 38 15 16 18 Non-Controlling Interests -3 1 -2 5 Long-Term Financial Liabilities 35 11 9 9 Total Comprehensive Profit 22 5 8 38 Other Non-Current Liabilities 3 4 7 9 Controlling Interests 25 4 6 31 Total Liabilities 136 150 214 257 Non-Controlling Interests -2 1 1 6 Controlling Interests 284 330 340 373 EBITDA 60 44 42 67 Capital Stock 10 11 11 11 FCF (Free Cash Flow) 23 7 23 44 Capital Surplus 127 165 170 170 EBITDA Margin (%) 18.6 12.6 12.0 12.5 Retained Earnings 128 131 144 177 Operating Profit Margin (%) 11.8 6.0 6.6 9.7 Non-Controlling Interests 39 46 44 49 Net Profit Margin (%) 6.8 1.1 3.7 6.0 Stockholders' Equity 323 376 384 422

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/15 12/16 12/17F 12/18F 12/15 12/16 12/17F 12/18F Cash Flows from Op Activities 66 21 24 44 P/E (x) 41.0 153.0 47.4 19.6 Net Profit 18 4 11 38 P/CF (x) 13.0 9.5 15.3 9.9 Non-Cash Income and Expense 50 54 30 26 P/B (x) 3.1 1.7 1.9 1.7 Depreciation 7 10 10 9 EV/EBITDA (x) 14.1 11.0 13.9 8.6 Amortization 14 13 8 6 EPS (W) 1,048 169 611 1,479 Others 29 31 12 11 CFPS (W) 3,317 2,720 1,895 2,913 Chg in Working Capital 11 -15 -11 -9 BPS (W) 13,669 15,144 15,647 17,126 Chg in AR & Other Receivables 7 -9 -27 -21 DPS (W) 0 0 0 0 Chg in Inventories -1 -1 -7 -5 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -1 -1 12 13 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -13 -22 -8 -12 Revenue Growth (%) 12.2 8.7 0.3 52.4 Cash Flows from Inv Activities -68 -38 -33 -23 EBITDA Growth (%) 27.7 -26.7 -4.5 59.5 Chg in PP&E -38 -14 -1 0 Operating Profit Growth (%) 11.8 -44.7 9.5 126.1 Chg in Intangible Assets -12 -5 -1 0 EPS Growth (%) 261.4 -83.9 261.5 142.1 Chg in Financial Assets -1 -2 -32 -23 Accounts Receivable Turnover (x) 7.5 8.5 6.0 6.4 Others -17 -17 1 0 Inventory Turnover (x) 34.6 33.0 23.5 25.2 Cash Flows from Fin Activities 42 51 4 0 Accounts Payable Turnover (x) 6.2 8.1 6.4 6.8 Chg in Financial Liabilities 30 11 3 0 ROA (%) 4.4 0.9 2.0 5.9 Chg in Equity 6 38 6 0 ROE (%) 8.3 1.2 4.0 9.0 Dividends Paid 0 0 0 0 ROIC (%) 16.1 3.2 8.4 24.9 Others 6 2 -5 0 Liability to Equity Ratio (%) 42.1 39.8 55.6 60.9 Increase (Decrease) in Cash 41 36 -36 3 Current Ratio (%) 231.0 217.9 171.1 166.8 Beginning Balance 92 133 170 133 Net Debt to Equity Ratio (%) -29.3 -33.2 -24.3 -24.1 Ending Balance 133 170 133 136 Interest Coverage Ratio (x) 44.7 12.1 18.1 39.9 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 67 September 5, 2017 Media/Entertainment

YG Entertainment Inc. (122870 KQ) Revenue sources to be diversified

Entertainment Initiate coverage with Buy rating and TP of W35,000 We initiate our coverage on YG Entertainment with a Buy rating and target price of W35,000 (based on 12-month forward net profit and a target P/E of 23.5). It is worth (Initiate) Buy noting that 2018 will be the last year that Big Bang can contribute to earnings before its members enlist in the military. It will be challenging for the company to defend its core Target Price(12M, W) 35,000 earnings after that, given its heavy reliance on Big Bang (which alone has accounted for 80% of concert revenue in Japan over the past six years). Hence, our target multiple Share Price (09/04/17, W) 26,950 implies a 10% discount to the peer valuation. Nevertheless, we are encouraged that the company has laid the foundation for a new platform content business by recruiting Expected Return 30% production talent and attracting W100bn in investments from NAVER. In addition, some fast-growing artists (i.e., iKON and Black Pink) may help fill the void left by Big Bang. OP (17F, Wbn) 38 We highlight two investment points: 1) YG Entertainment will likely expand its lineup of Consensus OP (17F, Wbn) 38 artists over the long term to achieve steep earnings growth; and 2) changes in the media EPS Growth (17F, %) 37.7 environment, including the transition to new platforms, should prove favorable for YG Market EPS Growth (17F, %) 43.7 Entertainment, given its rich pool of producers and artists and partnership with NAVER. P/E (17F, x) 17.9 Artist lineup to expand over time Market P/E (17F, x) 9.8 KOSDAQ 650.89 Although the void to be left by Big Bang is unsettling, we think the company will be able to build its artist lineup and resume rapid earnings growth. Besides, judging by the Market Cap (Wbn) 490 experience of its rival SM (e.g., TVXQ, Super Junior), fan bases in Korea and abroad tend Shares Outstanding (mn) 20 to remain intact even when groups go on a long hiatus. Free Float (%) 62.7 We highlight iKON ’s rapid rise and Black Pink ’s debut in Japan. iKON, which debuted in Foreign Ownership (%) 15.2 2015, successfully wrapped up its first Japanese arena tour in early 2017. We expect Beta (12M) 1.13 iKON, like Big Bang, to pull off a global tour. In July, Black Pink held a sold-out showcase 52-Week Low 25,200 in Tokyo's 14,000-capacity Budokan arena, and debuted officially on August 30 th with an 52-Week High 36,150 album release.

(%) 1M 6M 12M Well-prepared for new platform business Absolute -5.3 5.9 -18.0 Amid the transition to new platforms and OTT, market players are expanding in-house Relative -6.6 -2.3 -14.7 content production and content licensing. We expect content demand to keep rising,

120 YG Entertainment KOSDAQ given the ever-increasing scale of competition and the industry’s low entry barriers. The 110 ongoing changes in the media environment should be favorable for YG Entertainment,

100 given its rich pool of producers and artists and its partnership with NAVER (securing a new platform for content). Media landscape changes should bring large benefits to 90 entertainment companies with production capabilities. YG Entertainment has scouted 80 popular TV show/drama directors from terrestrial/cable networks since early 2017. We 70 think YG Entertainment is planning or producing audition programs for broadcast 8.16 12.16 4.17 8.17 networks (e.g., Mnet) and new platform-dedicated web content (NAVER). We expect content production to have significant synergy effects, as it can create a new source of ad revenue and offer more exposure opportunities for artists. Notably, the digital ad revenue sharing scheme for web content should be similar to that for broadcast content (portals, 10%; production studios, 55%; SMR, 20%).

[Media /Entertainment/Leisure] FY (12) 12/13 12/14 12/15 12/16 12/17F 12/18F

Jeong -yeob Park Revenue (Wbn) 116 156 193 322 368 350 +822 -3774 -1652 OP (Wbn) 22 22 22 32 38 28 [email protected] OP margin (%) 19.0 14.1 11.4 9.9 10.3 8.0

NP (Wbn) 15 19 28 19 29 27 EPS (W) 1,116 1,290 1,700 1,094 1,506 1,359 ROE (%) 14.8 13.4 14.7 7.7 9.1 7.3

P/E (x) 34.9 34.3 26.2 25.9 17.9 19.8 P/B (x) 4.9 4.1 3.6 1.8 1.5 1.4 메일 @ miraeasset.com Dividend yield (%) 0.8 0.6 0.8 0.7 0.7 0.7 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 68 September 5, 2017 Media/Entertainment

Earnings outlook We expect YG Entertainment to display robust earnings through 1Q18, given that Big Bang’s box office records have reached new heights ahead of the military enlistment of key members, and iKon’s fan base is growing rapidly. Even if the Chinese market is ruled out, we expect earnings growth to continue, driven by concerts and album releases in Korea and Japan. For 2H17, key events include the ‘Taeyang Dome Concert’ (three shows, 120,000 attendees) in July, ‘G-Dragon Dome Concert ‘(five shows, 220,000 attendees), ‘Daesung’s Solo Dome Concert’ (four shows, 90,000 attendees) in August, and world tours by G-Dragon (26 concerts) and Taeyang (16 concerts), all of which are set to be reflected in 2017 earnings. In addition, Big Bang’s ‘Last Dance Dome Tour’ (13 shows, 650,000 attendees), their last concerts before military enlistment, and iKon’s ‘Dome Tour’ (22 shows, 230,000 attendees) are scheduled for November and December 2017, which will be reflected in 1Q18. In 2018, most of the members of Big Bang, YG Entertainment’s key earnings contributor, begin their military service, posing a challenge for YG Entertainment to defend its core earnings. However, we remain upbeat on iKon, which has become popular enough to hold an arena tour in Japan, and Black Pink, which made a successful debut on August 30th . Given the current media landscape, we believe that YG Entertainment’s entry into the content production business is timely. YG Entertainment is well positioned to benefit from the growth of digital media, as its shareholders, such as Naver and Tencent, are powerful distribution platform operators. YG Entertainment is making concrete efforts to diversify its revenue sources with the rapid expansion of its talent pool and entry into the content production market. YG Entertainment has scouted around 10 prominent TV drama/show directors, who are planning content production either in-house or through partnerships with broadcasting networks or internet portals. We think the level of concern over the void to be left by Big Bang depends on how the high-margin digital content business will fare in 2H17. Table 25. Quarterly and annual earnings trend and forecast (Wbn, %, mn records, %p) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17F 4Q17F 2016 2017F 2018F Revenue 73 77 101 70 107 72 95 94 322 368 350 Overseas 44 48 59 35 67 23 57 50 185 196 181 Domestic 29 29 43 36 40 49 38 44 137 172 169 Product 18 22 24 26 27 32 25 21 91 105 95 Record 3 1 2 4 5 7 4 3 10 19 15 Digital 8 11 8 8 13 16 11 9 35 49 45 Goods and other 8 10 14 14 8 9 10 9 45 37 34 Management 54 56 77 44 80 41 70 73 231 263 256 Concert 17 9 29 7 13 7 15 20 62 54 45 Advertisement 5 6 10 9 9 12 12 13 30 46 51 Royalty 24 22 15 14 49 6 27 25 76 108 92 Appearance fee 4 8 16 5 5 4 8 8 33 25 33 Commission 4 11 7 9 4 11 7 8 30 31 34 Gross profit 23 23 29 20 33 25 31 29 95 118 112 Operating profit 9 7 12 4 15 4 11 8 32 38 28 OP margin (%) 13.0 8.8 12.0 5.0 13.9 6.0 11.4 8.0 9.9 10.2 8.1 Pretax profit 10 11 10 2 14 6 11 7 33 38 29 Net profit 6 7 2 -1 6 5 9 6 14 25 22 Net margin (%) 8.8 8.5 2.3 -1.7 5.6 6.5 9.2 6.0 4.4 6.8 6.4 Net profit attributable to 7 7 3 2 7 4 10 7 18.7 28.8 26.6 controlling interests YoY Revenue 64.3 70.7 112.4 26.1 46.5 -6.5 -6.1 33.9 66.7 14.5 -5.0 Overseas. 54.2 137.4 166.7 23.7 51.9 -51.8 -3.0 43.9 87.7 6.2 -7.7 Domestic 82.5 17.3 65.9 28.5 38.5 67.2 -10.4 24.2 44.8 25.7 -1.9 Product 111.9 92.2 108.3 45.5 43.9 46.5 5.0 -19.1 82.5 15.9 -9.9 Management 52.7 63.6 113.7 16.9 47.4 -27.1 -9.6 65.3 61.2 13.9 -3.0 Gross profit 40.9 55.1 58.0 19.6 42.2 7.1 8.1 45.5 43.3 24.1 -4.7 Operating profit 32.6 33.1 121.3 -13.7 56.3 -36.1 -10.8 114.3 46.3 17.6 -24.9 Net profit 11.2 -43.3 -50.9 TTR -6.8 -27.9 285.1 TTB -41.2 78.7 -10.9 Key assumption Concert ticket sales in Japan 0.4 0.3 0.2 0.9 0.1 0.4 0.4 0.9 1.8 1.9 1.0 Note: Based on consolidated K-IFRS; Concert ticket sales are based on the actual date of concert, and include our estimates. Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 69 September 5, 2017 Media/Entertainment

Table 26. Military enlistment schedule of male artists (~2020) Year of enlistment Year of military Team Member Year of birth (expected) discharge Big Bang G-Dragon 1988 2018 2020 Taeyang 1988 2018 2020 Daesung 1989 2018 2020 Seungri 1990 2019 2021 WINNER Kim Jin-woo 1991 2020 2022 Source: Mirae Asset Daewoo Research

Figure 121. YG Entertainment’s governance structure

Yang Hyun-suk Yang Min-suk NPS LVMH NAVER Tencent Weying 16.1% 3.3% 3.8% 9.5% 8.5% 4.4% 7.5%

YG Entertainment (122870 KQ)

100% 99.8% 45% 50% Projectree YG Entertainment Japan 100% +1 Share +1 Share 51% The Black HIGHGRND PSYG YG Studio Plex Label YG Entertainment 100% 100% YG Entertainment Asia 37.6% Beijing YG Plus

100% 100% Hashtag YG Entertainment USA 72.5% 100% 58.3% 100% 100% Codecosme YG YG YGKPlus YG Sports International Foods Investment

100% Green Works

Source: Mirae Asset Daewoo Research

Figure 122. Weak correlation between Japanese concert Figure 123. Annual concert attendance records by YG market and YG Entertainment’s concert ticket sales Entertainment’s major artists

(USD bn) (mn tickts) (mn persons) 2.4 2.5 Japanese concert market size 2.5 YG Family BlackPink YG Entertianment ticket sales (R) iKON Winner 2.0 2 2 Epik High 2NE1 Psy Big Bang 1.6 1.5 1.5

1.2 1 1 0.8 0.5 0.5 0.4 0 0 0.0 2012 2013 2014 2015 2016 2017F 2018F

Note: Based on the seating capacity of concert venues, Source: Mirae Asset Daewoo Note: Based on the seating capacity of concert venues, Source: Mirae Asset Daewoo Research Research

Figure 124. YG Entertainment’s lineup of artists and auxiliary businesses, by period

Concert 1996- 2001- 2006- 2011- 2014- Business Artist attendance (mn 1H16 2H16 1H17 2H17 1H18 2H18 2019 2000 2005 2010 2013 2015 persons, 2011-)

Album sales Big Bang 5.5 2NE1 0.3 Digital sales Winner 0.01 Music and Concerts iKON 0.8 management Commercials BlackPink - Broadcast appearances Merchandise sales Fashion/ beauty Other businesses F&B Content production Ad agency

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 70 September 5, 2017 Media/Entertainment

Company overview YG Entertainment’s key revenue sources are domestic and global album releases, concerts and broadcasting appearance by its artists. YG Entertainment provides its artists with systematic support, from talent identification, development, market debut, and operation. Since the 2006 debut of Big Bang, branded as a hip hop group, YG Entertainment has expanded its operation globally. Currently, YG Entertainment has contracts with Big Bang, 2NE1, PSY, Epik High, WINNER, and iKon.

According to YG Entertainment’s consolidated financials over the past three years, its revenue breaks down to: 1) album/digital music files/merchandised goods (25.7%); and 2) management of concerts, broadcasting appearances and advertisement (74.3%). Since YG Entertainment went public, its overseas revenue has exceeded domestic revenue, thanks to the high revenue contribution of Bing Bang’s global concerts. One of the key earnings variables is concerts/album releases in Japan, which are recognized by its fully owned subsidiary, YG Japan. Meanwhile, earnings vitality hinges on activities by individual artists. With its key artists (e.g. members of Big Bang) beginning mandatory military service from 2015, military enlistment schedules is considered as a key earnings variable.

There are persistent risks associated with its artists. As changes in human resources have a direct impact on its earnings, YG Entertainment faces uncertainties over contracts with individual artists, conflicts between artists in groups, and personal health issues. The company has been minimizing risks by implementing systematic talent management and enhancing negotiating power.

Figure 125. YG Entertainment’s Japanese business structure

Source: Mirae Asset Daewoo Research

Figure 126. Consolidated revenue breakdown (2016)

(%) Domestic Ent. Domestic Domestic Merchandise Exports Music Exports Exports Albums 100 13 Commissions

36 Performance 80 43 14 50 fees 58 72 Royalties 60 33 Ads 40 Concerts 64 13 57 50 20 42 28 27

0 By region By business By region in music By region in entertainment By segment in music By segment in management

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 71 September 5, 2017 Media/Entertainment

YG Entertainment Inc. (122870 KQ/Buy/TP: W35,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/15 12/16 12/17F 12/18F (Wbn) 12/15 12/16 12/17F 12/18F Revenue 193 322 368 350 Current Assets 246 276 312 342 Cost of Sales 127 227 251 238 Cash and Cash Equivalents 34 62 26 70 Gross Profit 66 95 117 112 AR & Other Receivables 23 29 38 36 SG&A Expenses 44 63 80 84 Inventories 15 16 22 21 Operating Profit (Adj) 22 32 38 28 Other Current Assets 174 169 226 215 Operating Profit 22 32 38 28 Non-Current Assets 130 210 284 268 Non-Operating Profit 11 1 0 1 Investments in Associates 14 14 18 17 Net Financial Income 4 4 8 10 Property, Plant and Equipment 47 61 67 64 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 36 33 61 57 Pretax Profit 33 33 38 29 Total Assets 375 487 596 610 Income Tax 9 19 13 6 Current Liabilities 42 68 92 87 Profit from Continuing Operations 24 14 25 22 AP & Other Payables 19 32 43 40 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 24 14 25 22 Other Current Liabilities 23 36 49 47 Controlling Interests 28 19 29 27 Non-Current Liabilities 64 68 71 71 Non-Controlling Interests -4 -5 -4 -4 Long-Term Financial Liabilities 63 67 69 69 Total Comprehensive Profit 25 19 22 22 Other Non-Current Liabilities 1 1 2 2 Controlling Interests 28 22 96 135 Total Liabilities 106 136 163 158 Non-Controlling Interests -4 -4 -74 -112 Controlling Interests 203 281 350 374 EBITDA 26 39 47 36 Capital Stock 8 8 9 9 FCF (Free Cash Flow) -16 14 26 30 Capital Surplus 97 160 209 209 EBITDA Margin (%) 13.5 12.1 12.8 10.3 Retained Earnings 97 110 129 152 Operating Profit Margin (%) 11.4 9.9 10.3 8.0 Non-Controlling Interests 66 69 83 78 Net Profit Margin (%) 14.5 5.9 7.9 7.7 Stockholders' Equity 269 350 433 452

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/15 12/16 12/17F 12/18F 12/15 12/16 12/17F 12/18F Cash Flows from Op Activities 6 32 35 30 P/E (x) 26.2 25.9 17.9 19.8 Net Profit 24 14 25 22 P/CF (x) 23.8 10.6 11.2 19.8 Non-Cash Income and Expense 7 32 21 4 P/B (x) 3.6 1.8 1.5 1.4 Depreciation 2 3 4 3 EV/EBITDA (x) 23.1 10.3 9.3 11.0 Amortization 2 4 6 5 EPS (W) 1,700 1,094 1,506 1,359 Others 3 25 11 -4 CFPS (W) 1,872 2,678 2,411 1,358 Chg in Working Capital -19 6 -4 0 BPS (W) 12,440 16,007 18,196 19,373 Chg in AR & Other Receivables -12 -5 -11 2 DPS (W) 350 200 200 200 Chg in Inventories -7 -4 -7 1 Payout ratio (%) 22.0 23.2 14.3 16.1 Chg in AP & Other Payables 6 12 3 -1 Dividend Yield (%) 0.8 0.7 0.7 0.7 Income Tax Paid -11 -24 -15 -6 Revenue Growth (%) 23.7 66.8 14.3 -4.9 Cash Flows from Inv Activities -115 -68 -132 17 EBITDA Growth (%) 0.0 50.0 20.5 -23.4 Chg in PP&E -22 -18 -9 0 Operating Profit Growth (%) 0.0 45.5 18.8 -26.3 Chg in Intangible Assets -15 -2 -3 0 EPS Growth (%) 31.8 -35.6 37.7 -9.8 Chg in Financial Assets -81 -52 -80 17 Accounts Receivable Turnover (x) 12.3 13.0 11.4 9.7 Others 3 4 -40 0 Inventory Turnover (x) 15.1 20.5 19.2 16.4 Cash Flows from Fin Activities 1 63 59 -4 Accounts Payable Turnover (x) 25.9 30.8 21.0 17.9 Chg in Financial Liabilities 3 4 3 0 ROA (%) 6.7 3.3 4.7 3.7 Chg in Equity 1 64 50 0 ROE (%) 14.7 7.7 9.1 7.3 Dividends Paid -4 -6 -9 -4 ROIC (%) 21.5 13.7 20.7 16.4 Others 1 1 15 0 Liability to Equity Ratio (%) 39.4 38.9 37.6 34.9 Increase (Decrease) in Cash -108 28 -37 45 Current Ratio (%) 582.5 404.8 340.2 393.5 Beginning Balance 142 34 62 26 Net Debt to Equity Ratio (%) -46.8 -38.1 -32.5 -38.9 Ending Balance 34 62 26 70 Interest Coverage Ratio (x) 15.8 21.4 22.5 16.2 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 72 September 5, 2017 Media/Entertainment

APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price CJ E&M(130960) 09/05/2017 Buy 97,000 08/10/2015 Buy 59,000 01/02/2017 No Coverage YG Entertainment(122870) 09/05/2017 Buy 35,000 2016.08.11 AFTER 1YR 110,000 01/02/2017 No Coverage 08/11/2015 Buy 110,000 11/09/2016 Buy 36,000 J Contentree(036420) 07/23/2017 Buy 5,800 08/11/2016 Buy 45,000 04/17/2017 Buy 5,000 05/12/2016 Buy 60,000 01/03/2017 No Coverage 03/22/2016 Buy 50,000 11/14/2016 Buy 5,000 11/15/2015 Buy 56,000 08/17/2016 Buy 4,900 08/16/2015 Buy 72,000 05/17/2016 Buy 6,200 CJ CGV(079160) 08/11/2017 Buy 96,000 03/23/2016 Buy 6,000 05/14/2017 Buy 105,000 08/18/2015 Buy 7,000 04/17/2017 Buy 120,000 SBS(034120) 09/05/2017 Hold 01/02/2017 No Coverage 01/02/2017 No Coverage 11/09/2016 Buy 95,000 10/21/2016 Buy 32,000 08/04/2016 Buy 105,000 08/17/2016 Trading Buy 30,000 2016.07.16 AFTER 1YR 150,000 05/17/2016 Trading Buy 33,000 07/16/2015 Buy 150,000 02/21/2016 Buy 39,000 Showbox(086980) 06/04/2017 Hold 11/17/2015 Buy 49,000 04/17/2017 Buy 6,300 08/16/2015 Buy 44,000 01/02/2017 No Coverage SM Entertainment(041510) 09/05/2017 Buy 37,000 2016.09.30 AFTER 1YR 11,000 01/02/2017 No Coverage 09/30/2015 Buy 11,000 08/15/2016 Buy 40,000 07/26/2015 Trading Buy 10,000 2016.08.10 AFTER 1YR 59,000

(W) CJ E&M (W) J Contentree (W) SBS (W) SM Entertainment 120,000 8,000 60,000 80,000

100,000 50,000 6,000 60,000 80,000 40,000

60,000 4,000 30,000 40,000

40,000 20,000 2,000 20,000 20,000 10,000

0 0 0 0 Sep 15 Sep 16 Sep 17 Sep 15 Sep 16 Sep 17 Sep 15 Sep 16 Sep 17 Sep 15 Sep 16 Sep 17 (W) (W) YG Entertainment CJ CGV (W) Showbox 80,000 200,000 12,000

10,000 60,000 150,000 8,000

40,000 100,000 6,000

4,000 20,000 50,000 2,000

0 0 0 Sep 15 Sep 16 Sep 17 Sep 15 Sep 16 Sep 17 Sep 15 Sep 16 Sep 17

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 Mirae Asset Daewoo Co., Ltd., 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.

Mirae Asset Daewoo Research 73 September 5, 2017 Media/Entertainment

Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 69.67% 17.06% 13.27% 0.00% Investment Banking Services 70.73% 17.07% 12.20% 0.00% * Based on recommendations in the last 12-months (as of June 30, 2017)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for single stock futures backed by shares of CJ CGV, SM Entertainmen t, YG Entertainment Inc. as an underlying asset, and other than this, Mirae Asset Daewoo has no other special interests in the covered companies. As of the publication date, Mirae Asset Daewoo Co., Ltd. has been acting as a financial advisor to SM Entertainment for its treasury stock trust.

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 or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) 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. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined 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 Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report was prepared by Mirae Asset 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 in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset 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. In case of 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. 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 or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset 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. Mirae Asset 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. 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 Mirae Asset Daewoo.

Distribution United Kingdom: This report is being distributed by Mirae Asset Securities (UK) 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: Mirae Asset Daewoo is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This report is distributed in the U.S. by Mirae Asset Securities (USA) Inc., a member of FINRA/SIPC, to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934, as amended. All U.S. persons that receive this document by their acceptance hereof represent and warrant that they are a major U.S. institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Mirae Asset 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 Mirae Asset Securities (USA) Inc. Mirae Asset Securities (USA) Inc. accepts responsibility for the contents of this report in the U.S., subject to the terms hereof, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through Mirae Asset Daewoo. 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 Mirae Asset Securities (HK) 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

74 Mirae Asset Daewoo Research September 5, 2017 Media/Entertainment

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