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CJ E&M Studio Dragon Is Doing Well

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CJ E&M Studio Dragon Is Doing Well Earnings Preview CJ E&M Studio Dragon is doing (130960 KQ) well HJ Kim Kim Soo-min BUY maintained; 6M TP raised 20% to W120,000 - We have arrived at a new target price based on the sum-of-the-parts method in which [email protected] [email protected] the operating value of CJ E&M was added to the value of the stakes in NetMarble and Studio Dragon. Meanwhile, our residual income model puts the value of the company Rating BUY at W137,000. maintain - The target price hike owes to the increased combined value of the aforesaid stakes. The value of NetMarble has risen from W10tn to an average of W13tn following its IPO, 6M TP (W) 120,000 while we assume Studio Dragon is worth W1.3tn. raise CP (W) Christmas holidays are a high-demand season for movie theaters (17.12.08) 89,100 - Usually, the third quarter of the year is a high-demand season, but the movie-goer tally Media for 3Q17 rather fell 12% due to the delayed openings of the four most anticipated movies and the calendar distortion caused by the Chuseok holidays. As a result, CJ KOSDAQ 744.06 E&M and other movie-theater stocks retreated in unison. Market cap (Wbn) 3,451 Market cap portion (%) 1.26 - A string of new blockbuster movies will hit the screens for Christmas: Steel Rain (Dec Paid-in capital (common; Wbn) 194 14; New), Along With The Gods: The Two Worlds (Dec 20; Lotte), and 1987 (Dec 27; 52w high/low (W) 97,300 / 57,600 CJ E&M). It is rare in Korea that the openings of blockbuster movies are concentrated 120d avg. trading volume (Wbn) 22.5 on the year-end period. The movie audience in the quarter to date as of December 9 is Foreign ownership (%) 28.30 up by 14% yoy. Now is time to focus on the movie industry again. Major CJ+5: 42.86% shareholders Wellington Mgmt. Hong Kong Ltd.+1: - CJ E&M’s share price dropped 20% from the April peak to the August low, driven by 6.11% concerns over possible poor box office result of The Battleship Island. A single movie has only so much impact on overall earnings as: 1) the whole movie unit accounts for (%) 1M 3M 6M 12M only 12% of CJ E&M’s annual revenue; and 2) the company produces about 15 Abs. return -0.3 17.4 10.0 54.7 movies a year. Nevertheless, investors tend to react sensitively to the box office result Rel. return -5.0 3.2 -1.0 21.5 of the biggest movie of the year. Fortunately, The Battleship Island broke even, luring (W(천원1K) ) CJ E&M E&M((LHS)좌) (%) 6.5 million people within Korea alone. Since August, the share price has risen to hit a 104 Relative to KOSDAQ to KOSDAQ(우) 45 record high of W98,500 led by positive catalysts such as Studio Dragon’s IPO and 99 40 NetMarble’s share price rally. 94 35 89 30 - 1987, CJ E&M’s second biggest budget movie of the year, will hit the screens on 84 25 December 27. Its break-even point is estimated at 4.33 million people, given that it cost 79 20 74 15 CJ E&M about 65% of what the company spent on The Battleship Island. We view that 69 10 it will far surpass the break-even point partly because it is based on a real story about 64 5 Korea’s pro-democracy movements of that year. 59 0 54 -5 16.12 17.03 17.06 17.09 (Wbn, %) 4Q17(F) 1Q18 4Q16 3Q17 Previous Daishin Daishin YoY QoQ Consensus YoY QoQ estimate estimate estimate Revenue 489 440 472 472 -3.5 7.2 511 407 3.2 -13.8 OP 2 13 33 28 1,386.5 120.0 25 24 4.4 -12.9 NP 4 13 28 34 801.2 158.3 33 41 23.8 19.1 2017(F) Growth 2015 2016 Previous Daishin Chg Consensus 2016 2017(F) estimate estimate Revenue 1,347 1,538 1,731 1,731 0.0 1,767 14.2 12.5 OP 53 28 93 88 -5.5 86 -46.9 213.6 NP 54 62 484 486 0.4 484 14.4 681.6 Source: CJ E&M, WISEfn, Daishin Securities Research Center This report has been prepared by Daishin Securities Co., Ltd. SEE APPENDIX FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATION. Company Analysis 20171211 www.daishin.com CJ E&M (130960 KQ) (Wbn, W, %) Operating results and major financial data 2015A 2016A 2017F 2018F 2019F Revenue 1,347 1,538 1,731 1,731 1,779 OP 53 28 88 110 127 Pretax profit 59 68 654 221 257 NP 53 61 486 168 195 NP (controlling int.) 54 62 486 168 195 EPS 1,403 1,605 12,542 4,331 5,032 PER 57.4 44.2 7.1 20.6 17.7 BPS 40,058 39,922 52,265 56,098 60,532 PBR 2.0 1.8 1.7 1.6 1.5 ROE 3.6 4.0 27.2 8.0 8.6 Note: EPS, BPS, and ROE are based only on the controlling interest. Source: CJ E&M, Daishin Securities Research Center Yearly earnings forecast revision (Wbn, W, %, %p) Previous Revised Chg 2017F 2018F 2017F 2018F 2017F 2018F Revenue 1,731 1,731 1,731 1,731 0.0 0.0 Selling & adm. expense 361 419 381 419 5.6 0.1 OP 93 110 88 110 -5.5 -0.1 OP margin 5.4 6.3 5.1 6.3 -0.3 0.0 Non-operating profit 559 36 567 112 1.4 210.8 Pretax profit 652 146 654 221 0.4 51.9 NP (controlling int.) 484 110 486 168 0.4 51.9 NP margin 27.9 6.4 28.1 9.7 0.1 3.3 EPS (controlling int.) 12,492 2,852 12,542 4,331 0.4 51.9 Source: CJ E&M, Daishin Securities Research Center Studio Dragon is doing well - Studio Dragon, a CJ E&M subsidiary producing and distributing TV dramas, is now listed on the stock market. We estimate that it is worth W1.3-1.5tn. CJ E&M has strong share price upside potential even if we conservatively assume Studio Dragon is worth W1.3tn. - Studio Dragon’s value is closely related to that of CJ E&M. CJ E&M owns 71% of Studio Dragon, whose major role is to produce and distribute TV dramas for tvN and OCN. - Its TV dramas struggled with low viewership ratings (2-3%) after Goblin posted 20.5% in 1Q17, but started rebounding in 4Q17: Avengers Social Club (6.3%), Because This Is My First Life (4.9%), and Wise Prison Life (6.2%). - The average ad fee is also rising: W9.2mn for Avengers Social Club to W13.80mn for Wise Prison Life (6th episode). 2 DAISHIN SECURITIES Tab 1. CJ E&M SOTP valuation (W”00mn, x) Item Value Discount rate Fair value Per share value A Operating value 21,451 0% 21,451 55,384 OP 603 Dep. 3,330 EBITDA 3,933 EV/EBITDA 5.5 20% off from the 2014-2016 average of 6.8x B Non-operating value 37,934 29,319 75,697 Investment securities 37,934 29,319 75,697 NetMarble 28,717 30% 20,102 51,900 Studio Dragon 9,217 0% 9,217 23,797 C Total value (A+B) 59,385 50,770 131,080 D Net borrowings 4,462 4,462 11,520 E Shareholder value (C-D) 54,923 46,308 119,560 Note 1: Assuming NetMarble is worth W13tn (post-IPO average) and Studio Dragon is worth W1.3tn. Note 2: EV/EBITDA of 5.5x is derived by giving a 20% discount to the 2014-2016 average of 6.8x. Source: Daishin Securities Research Center Fig 1. Movie-goer tally for 4Q17 up 14.1% yoy (as of Dec 9) Movie3Qaudience관객수for 3Q Movie4Q 관객수audience for 4Q 7,23972.39만명 mn 6,39663.96만명 mn 3,87538.75 만명mn 3,39633.96 만명mn -11.6% +14.1% 3Q16 3Q17 4Q16(12/9) 4Q17(12/9) Source: Korea Film Council, Daishin Securities Research Center Fig 2. CJ E&M dramas tend to post high viewership ratings in the fourth quarter of the year (%) (W1K)(천원) tvN 주말드라마 tvN 월화드라마 tvN 수목드라마 CJ E&ME&M share 주가 (pricesRHS) 25 120 Weekends Mon-Tue Wed-Thu (RHS) dramas dramas dramas 100 20 80 15 60 10 40 5 20 0 0 14.1 14.5 14.8 14.12 15.4 15.8 15.11 16.3 16.6 16.10 16.12 17.3 17.7 17.11 Source: AGB Nielson, Daishin Securities Research Center 3 CJ E&M (130960 KQ) Fig 3. 22:00 ad fees rising fast ((Wmn백만원) ) AvgCJ .E&Mfor 22 22h.:00 평균 CJWeekday E&M 22평일:0022averageh 평균 14 12 10 8 6 4 2 0 14.1 14.6 14.11 15.4 15.9 16.2 16.7 16.12 17.5 17.10 Source: CJ E&M, Daishin Securities Research Center Per share intrinsic value Residual Income Model (Wbn, W, %) 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F Ⅰ NP (contr. int.)(Note 2) 486 168 195 218 244 281 323 371 427 491 Ⅱ Shareholders’ equity (contr. int.)(Note 2) 2,024 2,173 2,345 2,535 2,748 2,994 3,232 3,507 3,785 4,105 Estimated ROE 27.2 8.0 8.6 8.6 8.9 9.4 10.0 10.6 11.3 12.0 Ⅲ Required rate of return (Note 3) 5.1 Risk free rate of return (Note 4) 2.3 Market risk premium (Note 5) 4.0 Beta 0.70 Ⅳ Spread (estimated ROE – required rate of return) 22.1 2.9 3.5 3.5 3.8 4.3 4.9 5.5 6.2 6.9 Ⅴ Required income 79 103 111 119 129 140 152 165 178 193 Ⅵ Residual income ( l -Ⅴ) 407 65 84 98 115 141 170 206 248 298 Present value factor 1.00 0.95 0.91 0.86 0.82 0.78 0.74 0.71 0.67 0.64 PV of residual income 407 62 76 85 94 110 126 146 167 191 Ⅶ Sum of residual income 1,463 Ⅷ PV of residual income following forecasting period 2,303 Terminal growth (g)(Note 6) 0.0% Ⅸ Beginning shareholders’ equity 1,546 Ⅹ Fair market cap (Ⅶ+Ⅷ+Ⅸ) 5,312 Total number of shares (thousands) 38,732 Ⅹl Per share value (W) 137,160 Current share price (W) 89,100 Potential (%) 53.9% Note 1: Under the residual income model (RIM), we add the current shareholders’ equity to the residual income based on the earnings forecast for the next ten years before adding the result to the residual income after the forecasting period to derive the value of shareholders’ stakes.
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