Earnings Review August 10, 2016
Above CJ E&M (130960) In line Below
12M rating BUY (Maintain) Improved contents capabilities, growth outlook firms 12M TP W95,000 from W110,000 Up/downside +49% What’s new: OP below consensus Stock Data CJ E&M posted 2Q16 sales of W357.3bn (+19.4% YoY) and OP of W14.1bn (-20.8%
KOSPI (Aug 9, pt) 2,044 YoY), missing our estimate by 23% and consensus by 24.2%. Sales continued to Stock price (Aug 9, KRW) 63,800 grow across all divisions backed by the media division. However, OP fell as Market cap (USD mn) 2,234 amortization expenses for intangible assets increased at the media division on Shares outstanding (mn) 39 changes in the amortization period of TV show broadcasting rights. Furthermore, 52-Week high/low (KRW) 95,000/61,000 6M avg. daily turnover (USD mn) 18.9 the movie, music and concert divisions posted weaker earnings due to bad debt Free float / Foreign ownership (%) 56.7/18.3 expenses and poor results. However, EBT and NP beat consensus on larger gains Major shareholders (%) on investment in affiliates of W43bn (+226.3% YoY). Of note, Netmarble Games CJ Corp and 5 others 42.9 accounted for W39.2bn (W7.6bn in equity method gains and W31.6bn in appraisal NPS 5.1 gains from recapitalization). Valuation 2015A 2016F 2017F Pros: Robust media performance PE (x) 57.2 26.6 25.2 Media sales reached W268.4bn (+20.1% YoY), consisting of ad sales of W132.2bn PB (x) 2.0 1.5 1.4 (+7.2% YoY), license fees of W47.0bn (flat YoY) and others W89.1bn (+67.8% ROE (%) 3.6 5.8 5.8 DY (%) 0.2 0.3 0.5 YoY). We attribute the rapid growth in the miscellaneous category to increasing EV/EBITDA (x) 8.2 5.9 5.1 digital ads, VOD and overseas content sales. In addition, hit TV shows in 2Q16, EPS (KRW) 1,409 2,399 2,535 including Another Miss Oh and Show Me the Money season 5 contributed to better BPS (KRW) 40,188 42,355 44,558 TV ad sales, despite the weak overall TV ad market. However, media OP improved Performance only 4.4% due to the revised amortization standards, and we forecast earnings 1M 6M 12M growth will ramp up from next year. Absolute (%) (9.0) (24.9) (19.6) Relative to KOSPI (%p) (13.1) (31.5) (21.3) Cons: Movie losses expand 12MF PE trend Operating losses at the movie division expanded to W6.6bn, versus W4.1bn in 2Q15. Backed by the hit release Handmaiden (4.2mn viewers, W34.1bn at the box (X) 12MF PER (LHS) (KRW) 200,000 60.0 price (RHS) 180,000 office), 2Q16 movie sales reached W26.0bn (+81% YoY). However, the rest of the 50.0 160,000 movie lineup disappointed, and losses expanded due to W1.6bn in bad debt 140,000 40.0 120,000 expense from liquidation of RK, a US-based distributor.
30.0 100,000 80,000 Conclusion: Media growth to ramp up in 2H16, maintain BUY 20.0 60,000 40,000 We maintain BUY, but we lower our SotP-derived TP 13.6% to W95,000. We lower 10.0 20,000 our TP as the Netmarble Game’s recapitalization should dilute the value of CJ 0.0 0 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 E&M’s stake. In the media division, the revised amortization standards should Source: WISEfn consensus result in lower amortization costs, which should accelerate earnings growth from next year. As such, divisional OP should surge to W92.5bn in 2017, versus W62.5bn this year. Earnings from overseas should also grow steadily on localization efforts based on content planning and development capabilities.
(W bn, %, %p) 2Q16P Change 2016F KIS est. Actual Diff. Consensus QoQ YoY KIS Consensus Sales 335 357 6.6 346 13.9 19.4 1,536 1,467 OP 18 14 (23.0) 19 58.4 (20.8) 6770 Minha Choi OP margin 5.5 4.0 (1.5) 5.4 1.1 (2.0) 4.3 4.8 822-3276-6260 EBT 18 48 160.6 26 225.4 126.2 10795 [email protected] NP 14 43 198.8 19 228.2 225.2 9376
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS AT THE END OF THIS REPORT. CJ E&M (130960)
Table 1. 2Q16 Earnings review (W bn) 2Q15 1Q16 2Q16 QoQ YoY KIS % differ. Consensus % differ. Sales 299.2 313.5 357.3 13.9% 19.4% 335.0 6.6% 345.6 3.4% OP 17.8 8.9 14.1 58.4% (20.8%) 18.3 (23.0%) 18.6 (24.2%)
OP margin (%) 6.0 2.8 4.0 1.1%p (2.0%p) 5.5 (1.5%p) (1.4%p) 5.4 EBT 21.1 14.6 47.6 225.4% 126.2% 18.3 160.6% 25.6 86.1% Controlling NP 13.3 13.2 43.2 228.2% 225.2% 14.5 198.8% 18.6 132.4%
Source: CJ E&M, FnGuide, Korea Investment & Securities
Figure 1. Quarterly sales and OPM
(W bn) (%) 500 Sales (L) OPM (R) 8
450 6 400 4 350 300 2 250 0
200 (2) 150 (4) 100 50 (6) 0 (8) 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16F
Source: CJ E&M, Korea Investment & Securities
Figure 2. Media sales and OPM Figure 3. Movie sales and OPM
(W bn) (%) (W bn) (%) 140 15 350 Sales (L) OPM (R) 12 Sales (L) OPM (R) 10 10 300 120 8 5 6 250 100 0 4 (5) 200 80 2 (10) 0 60 150 (15) (2) 40 (20) 100 (4) (25) (6) 50 20 (30) (8)
0 (10) 0 (35) 1Q 13 3Q 13 1Q 14 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16 F 1Q 13 3Q 13 1Q 14 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16 F
Source: CJ E&M, Korea Investment & Securities Source: CJ E&M, Korea Investment & Securities
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Figure 4. Music sales and OPM Figure 5. Performance sales and OPM
(W bn) (%) (W bn) (%) 70 Sales (L) OPM (R) 6 12 Sales (L) OPM (R) 50 4 60 10 0 2
50 0 8 (50) (2) 40 (4) 6 (100) 30 (6) 4 (150) 20 (8) (10) 2 (200) 10 (12)
0 (14) 0 (250) 1Q 13 3Q 13 1Q 14 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16 F 1Q 13 3Q 13 1Q 14 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16F
Source: CJ E&M, Korea Investment & Securities Source: CJ E&M, Korea Investment & Securities
Table 2. Quarterly earnings (W bn) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16F 4Q16F 2015 2016F 2017F Sales 293.1 299.2 370.0 385.0 313.5 357.3 429.0 436.2 1,347.3 1,536.0 1,658.2 Media 177.9 223.5 227.6 280.5 225.4 268.4 251.8 317.8 909.5 1,063.4 1,156.5 Movies 65.9 31.5 93.1 47.8 40.3 40.6 124.9 58.6 238.3 264.4 282.0 Music 41.9 43.2 48.5 50.5 44.6 47.2 51.4 53.3 184.1 196.6 207.7 Performance 7.4 1.0 0.8 6.2 3.3 1.1 0.8 6.5 15.4 11.6 12.0 COGS 227.2 218.8 286.5 286.9 236.7 269.8 331.8 315.2 1,019.4 1,153.6 1,222.7 COGS-to-Sales (%) 77.5 73.1 77.4 74.5 75.5 75.5 77.3 72.3 75.7 75.1 73.7 GP 65.9 80.4 83.5 98.1 76.8 87.4 97.2 121.0 327.9 382.4 435.4 GP margin (%) 22.5 26.9 22.6 25.5 24.5 24.5 22.7 27.7 24.3 24.9 26.3 SG&A 56.7 62.6 69.9 86.0 67.9 73.3 82.5 91.9 275.2 315.7 333.9 SG&A-to-Sales (%) 19.4 20.9 18.9 22.3 21.7 20.5 19.2 21.1 20.4 20.6 20.1 OP 9.2 17.8 13.6 12.1 8.9 14.1 14.7 29.0 52.7 66.8 101.6 OPM (%) 3.1 6.0 3.7 3.1 2.8 4.0 3.4 6.7 3.9 4.3 6.1 Media 2.5 19.6 7.0 17.0 5.1 20.5 7.5 29.4 46.2 62.5 92.5 Movies 6.5 (4.1) 7.7 (4.1) 3.8 (6.6) 6.9 (1.2) 6.0 2.8 7.4 Music 0.2 2.1 (0.3) (1.3) (0.1) 1.3 0.7 0.2 0.7 2.1 2.2 Performance 0.1 0.2 (0.9) 0.4 0.1 (1.0) (0.3) 0.6 (0.2) (0.6) (0.5) EBT 105.1 21.1 33.1 (100.0)14.6 47.6 18.2 26.3 59.3 106.8 123.0 Controlling NP 91.2 13.3 27.8 (77.9) 13.2 43.2 14.8 21.4 54.3 92.5 97.8 (% YoY) Sales 10.6 5.5 7.8 12.9 7.0 19.4 15.9 13.3 9.3 14.0 8.0 Media 4.4 6.9 11.2 16.0 26.7 20.1 10.6 13.3 10.1 16.9 8.8 Movies 32.5 4.5 (0.2) 25.6 (38.9) 28.8 34.2 22.6 12.8 10.9 6.7 Music 3.3 1.8 16.5 (9.9) 6.3 9.4 6.0 5.6 1.9 6.8 5.6 Performance 68.2 (42.8) (79.0) 25.0 (55.7) 3.0 6.0 5.0 4.4 (24.3) 3.2 COGS 8.0 (1.9) 0.6 10.8 4.2 23.3 15.8 9.9 4.3 13.2 6.0 COGS-to-Sales (%p) (1.9) (5.5) (5.6) (1.4) (2.0) 2.4 (0.1) (2.2) (3.6) (0.6) (1.4) GP 20.5 32.8 43.4 19.7 16.5 8.7 16.5 23.3 28.4 16.6 13.9 GP margin (%p) 1.9 5.5 5.6 1.4 2.0 (2.4) 0.1 2.2 3.6 0.6 1.4 SG&A (2.2) (9.4) 1.7 19.0 19.7 17.1 18.1 6.9 2.7 14.7 5.8 SG&A-to-Sales (%p) (2.5) (3.4) (1.1) 1.1 2.3 (0.4) 0.3 (1.3) (1.3) 0.1 (0.4) OP NA NA NA 24.6 (2.9) (20.8) 8.1 140.3 NA 26.7 52.1 OPM (%p) 4.4 9.0 6.7 0.3 (0.3) (2.0) (0.2) 3.5 4.9 0.4 1.8 Media NA NA NA (23.2) 105.6 4.4 6.0 72.3 2,048.9 35.2 48.0 Movies 50.5 NA 18.1 NA (41.8) NA (11.2) NA NA (53.0) 165.9 Music NA NA NA NA NA (37.5) NA NA NA 212.5 6.5 Performance NA NA NA NA 109.0 NA NA 44.7 NA NA NA EBT NA NA NA NA (86.1) 126.2 (45.0) NA NA 79.9 15.2 Controlling NP NA NA (90.1) NA (85.6) 225.2 (46.8) NA (75.8) 70.3 5.7 Source: CJ E&M, Korea Investment & Securities
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Figure 6. OP breakdown
(W bn) Media Movies Music Performance 40 29.0 30 9.7 17.8 14.1 12.1 20 13.6 14.7 9.2 8.9 10
0
(10) (3.3) (8.5) (20) (10.5)
(30) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16F 4Q16F
Source: CJ E&M, Korea Investment & Securities
Table 3. 2H16~17 domestic business plan 3Q16 4Q16 2017 tvN:
Table 4. 2H16~17 Overseas business plan 3Q16 4Q16 2017 Global co-production to materialize (efc. China China:
service Accelerating R&D and co-production for global Vietnam:
Source: CJ E&M, Korea Investment & Securities
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Table 5. TP calculation (W bn ) NOPLAT Multiple Value Notes Operating value (a) 2,195 Media 92.5 30 2,069 Applying 2017 NOPLAT Movies 7.4 20 113 Applying 2017 NOPLAT Music/Performance 1.7 10 13 Applying 2017 NOPLAT Game (b) 1,352 27.6% stake in Netmarble Enterprise value 3,547 Net debt (c) (130) Fair value 3,676.7 =(a)+(b)-(c) Shares outstanding (‘000 shares) 38,574 Ex. treasury shares TP (KRW) 95,316
Source: Korea Investment & Securities
Table 6. Earnings revisions (W bn) 2016F 2017F Previous Revised % Previous Revised % Sales 1,510.4 1,536.0 1.7% 1,667.0 1,658.2 (0.5%) GP 383.2 382.4 (0.2%)422.5 435.4 3.1% OP 75.1 66.8 (11.1%) 92.0 101.6 10.4% OP margin 5.0 4.3 (0.6%p) 5.5 6.1 0.6%p EBT 67.1 106.8 59.1% 103.9 123.0 18.3% NP 56.6 92.5 63.5% 85.7 97.8 14.1%
Source: Korea Investment & Securities
Company overview & Glossary CJ E&M was formed in March 2011 through a merger among CJ Group’s five media/entertainment affiliates such as On Media, CJ Media, CJ Internet, M-net Media and CJ Entertainment. In March 2014, CJ E&M signed a deal to attract investment from Tencent to strengthen the game business Net marble that was later split off from the company as CJ Netmarble. And then in October, CJ Netmarble and CJ Games merged to become Netmarble Games. With this, the game business was excluded from CJ E&M’s consolidated accounting. As of now, CJ E&M has 31% of Netmarble Games. CJ E&M is a comprehensive content provider in the broadcast, film, music and performance businesses and CJ Corp. is the largest shareholder with 39.4%.
Product placement (PPL) : A marketing strategy to subtly promote products through an indirect advertising technique; Products are used in films or dramas and their brands or images are exposed to viewers
Contents Power Index (CPI) : A measure of the popularity of content distributed by terrestrial broadcasters and cable companies; Calculated by aggregating their rankings in news search results (sensation), direct searches (engagement) and online buzz in social media (intensity)
Killer content : Primary content that plays a leading role in broadcast, animation, film or music industries
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Balance sheet Income statement
FY-ending Dec. (W bn) 2014A 2015A 2016F 2017F 2018F FY-ending Dec. (W bn) 2014A 2015A 2016F 2017F 2018F Current assets 1,039 940 1,113 1,210 1,296 Sales 1,233 1,347 1,536 1,658 1,782 Cash & cash equivalent 34 47 61 66 78 COGS 977 1,019 1,154 1,2231,319 Accounts & other receivables 372 434 526 569 613 Gross profit 255 328 382 435 462 Inventory 5 4 4 5 5 Non-current assets 1,318 1,425 1,568 1,654 1,755 SG&A expense 268 275 316 334 352
Investment assets 475 603 672 709 744 Operating profit (13) 53 67 102 110 Tangible assets 88 77 78 79 80 Financial income 15 19 16 17 18 Intangible assets 695 653 714 754 810 Total assets 2,357 2,365 2,681 2,864 3,051 Interest income 10 9 8 9 10 Current liabilities 581 642 869 962 1,053 Financial expense 23 21 29 30 32
Accounts & other payables 363 418 485 532 589 Interest expense 15 14 12 13 13 ST debt & bond 45 55 50 50 35 Other non-operating profit (39) (120) (24) (25) (25) Current portion of LT debt 102 121 141 151 201 Gains (Losses) in associates, 10 129 76 60 73 Non-current liabilities 271 162 170 176 173 subsidiaries and JV Debentures 150 100 100 100 90 Earnings before tax (50) 59 107 123 144 LT debt & financial liabilities 103 32 32 32 32 Income taxes 7 6 16 27 32 Total liabilities 852 805 1,039 1,138 1,226 Controlling interest 1,509 1,552 1,635 1,721 1,822 Net profit 233 53 91 96 112 Capital stock 194 194 194 194 194 Net profit of controlling interest 225 54 93 98 114 Capital surplus 973 973 973 973 973 Other comprehensive profit (5) (1) (1) (1) (1) Other Reserves 28 16 16 16 16 Total comprehensive profit 228 52 90 95 111 Retained earnings 316 370 455 541 643 Total comprehensive profit of Minority interest -4 9 7 5 3 221 54 92 97 113 controlling interest Shareholders' equity 1,506 1,560 1,642 1,726 1,825 EBITDA 290 373 404 457491
Cash flow Key financial data
FY-ending Dec. (W bn) 2014A 2015A 2016F 2017F 2018F FY-ending Dec. 2014A 2015A 2016F 2017F 2018F
C/F from operating 195 295 450 418 436 per share data (KRW) EPS 5,821 1,409 2,399 2,5352,947 Net profit 233 53 91 96 112 BPS 39,100 40,188 42,355 44,55847,171 Depreciation 19 14 13 13 13 DPS 0 200 200 300300 Amortization 284 306 324 342 368 Growth (%) Sales growth 3.7 9.3 14.0 8.0 7.4 Net incr. in W/C (102) (42) 94 23 13 OP growth NM NM 26.7 52.1 8.1 Others (239) (36) (73) (56) (69) NP growth 4,336.0 (75.8) 70.3 5.7 16.2 C/F from investing (640) (189) (445) (414) (439) EPS growth 4,244.0 (75.8) 70.3 5.7 16.2 EBITDA growth (13.2) 28.6 8.5 13.1 7.4 CAPEX (19) (8) (15) (15) (15) Profitability (%) Decr. in fixed assets 1 0 0 0 0 OP margin (1.0) 3.9 4.3 6.1 6.2 Incr. in investment (298) 162 6 22 37 NP margin 18.2 4.0 6.0 5.9 6.4 EBITDA margin 23.5 27.7 26.3 27.6 27.6 Net incr. in intangible assets (327) (331) (385) (383) (424) ROA 10.2 2.2 3.6 3.53.8 Others 3 (13) (52) (38) (38) ROE 16.4 3.6 5.8 5.86.4 C/F from financing 146 (94) 9 0 15 Dividend yield - 0.2 0.3 0.5 0.5 Dividend payout ratio 0.0 14.2 8.3 11.8 10.2 Incr. in equity 138 3 0 0 0 Stability Incr. in debts 14 (96) 15 10 25 Net debt (W bn) (113) (52) (98) (130) (151) Dividends 0 0 (8) (8) (12) Debt/equity ratio (%) 26.7 19.8 19.7 19.2 19.6
Others (6) (2) 2 (2) 2 Valuation (X) PE 6.6 57.2 26.6 25.221.6 C/F from others (0) 2 0 0 0 PB 1.0 2.0 1.5 1.41.4 Increase in cash (299) 14 14 5 12 EV/EBITDA 4.7 8.2 5.9 5.14.7
Note: Based on K-IFRS (consolidated)
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Changes to recommendation and price target Company (Code) Date Recommendation Price target CJ E&M (130960) 04-27-15 BUY W76,000 05-12-15 BUY W84,000 05-31-16 BUY W110,000 08-10-16 BUY W95,000
120,000
100,000
80,000
60,000
40,000
20,000
0 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16
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■ Guide to Korea Investment & Securities Co., Ltd. stock ratings based on 12-month forward share price performance relative to the market index BUY: Expected to outperform the market index by 15%p or more Hold: Expected to underperform or outperform the market index by less than 15%p Underweight: Expected to underperform the market index by 15%p or more Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings.
■ Guide to Korea Investment & Securities Co., Ltd. stock rating allocation (as of Jun 30, 2016)
BUY Hold Underweight (Sell) 80.8% 17.9% 1.3% Note: % of companies under coverage with this rating
■ Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sector’s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization.
■ Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.
■ Important compliance notice As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of CJ E&M.
There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance.
Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for CJ E&M in the past 12 months;
Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from CJ E&M in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking services from CJ E&M in the next 3 months.
Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in CJ E&M’s securities at the time that the research report was published.
Korea Investment & Securities Co., Ltd. does not own over 1% of shares of the companies mentioned in this report as of August 10, 2016. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies mentioned in this report as of August 10, 2016.
Prepared by: Minha Choi
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