July 16, 2012 Industry Report
Media (Overweight)
Daewoo Securities Co., Ltd. Transforming into content players Jee-hyun Moon +822-768-3615 Initiate coverage on the media sector with Overweight rating [email protected]
KoreaÊs media sector appears to have reached a turning point, backed by increasing revenues from overseas markets, an easing regulatory environment, and improving media content. Against this backdrop, we initiate coverage of the Korean media sector with an Overweight rating.
Our recommendation is premised on the following four assumptions:
Major media firms are steadily transforming themselves into content providers, helped by in-house content production and rising use of smart devices. Revenue sources, which have been primarily driven by domestic revenues, are diversifying into overseas markets thanks to structural growth of global revenues. Key media beneficiary of easing regulations is the advertising sector, which is expected to steadily grow through improved and eased regulations related to the broadcast segment. Marketing campaigns arising from major events in 2012, such as the London Olympics and the presidential election, should provide a catalyst to the advertising segment.
Cheil Worldwide is our top pick We present Cheil Worldwide (Reinstate/030000 KS/Buy/TP: W26,000) as our top pick. The company is expected to benefit from Samsung ElectronicsÊ marketing campaigns in the short term. Additionally, it is increasingly securing overseas customers and has plans to acquire foreign advertising agencies this year. The company is expected to be re-rated in the long term, if its global expansion efforts prove sustainable. We present Buy on KT Skylife (Reinstate/053210 KS/Buy/TP: W31,000). KT Skylife should benefit from KTÊs efforts to bolster its media business, and the companyÊs earnings are expected to improve on subscription growth and rising high-margin sales. Although CJ E&M (Initiate/130960 KQ/Trading Buy/TP: W30,000) currently displays poor profitability, the companyÊs earnings should gradually pick up in 2H, backed by rising competitiveness related to in-house content production.
Media sector index trend and forecast
(p) Focused on Combined overseas broadcasting content and ad revenues (R) (Wbn) 140 domestic market Media sector index (L) 2,400 Affected by Event: Yeosu Expo, 120 domestic economy, 2,000 limited ad market growth London Olympics, and seasonality Presidential election 100 1,600
80 1,200
60 800 Structural growth: 40 Content revenues, 400 regulatory easing, overseas expansion 20 0 01 02 03 04 05 06 07 08 09 10 11 12F 13F
Source: KDB Daewoo Securities Research, Reuters, Cheil Worldwide, KOCCA, KDB Daewoo Securities Research
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.
I. Investment summary ...... 3 1. Initiate coverage on the media sector with Overweight ...... 3 2. Korean media industry at a turning point ...... 3 3. Present Cheil Worldwide as top pick ...... 5
II. Media industry outlook ...... 6 1. Market size and value chain ...... 6 2. Media industry driven by advertising; Diversified revenue sources...... 11 3. Room for further growth of ad market ...... 19 4. Content competitiveness is becoming critical ...... 31 5. Growth potential of becoming comprehensive media groups ...... 35 6. Key risks to the media industry ...... 39
III. Media industry issues ...... 40 1. Near-term event: Olympic effects ...... 40 2. Near-term event: Impact of presidential election ...... 44 3. Industry trend: Maturing pay-TV market ...... 49 4. Industry trend: Rising mobile demand ...... 50 5. Domestic issues: General programming channels ...... 51 6. Growth stages of media group ...... 54
IV. Investment strategy and valuation ...... 70 1. Investment strategy: Note short-term events and long-term structural growth! ...... 70 2. Valuations of domestic media firms ...... 72 3. Valuations of overseas peers ...... 73
Cheil Worldwide (030000 KS) ...... 78
KT Skylife (053210 KS)...... 95
CJ E&M (130960 KQ) ...... 107
2
July 16, 2012 Media
I. Investment summary
1. Initiate coverage on the media sector with Overweight
Focus on top-tier media We present the Korean media sector, which appears to have reached an inflection point, firms undergoing with an Overweight rating, for the following four assumptions: transformation 1) Major media firms are transforming themselves from platform to content players.
2) Revenues sources, which were driven by domestic revenues, are diversifying into overseas markets thanks to structural growth of global revenues.
3) The domestic market is expected to grow further, aided by the easing and improvement of regulations.
4) Marketing campaigns for major events scheduled in 2012 are expected to provide a catalyst to the media sector.
Top-tier media firms will likely continue to record growth thanks to fundamental changes occurring in the market. SBS has posted content sales growth on the back of 1) rising overseas demand and 2) increasing copyrights from in-house production. Cheil Worldwide is increasingly securing overseas customers, and plans to acquire foreign advertising agencies this year. The company is expected to be re-rated in the long term, if it can sustain solid growth.
2. Korean media industry at a turning point
In 2012, the Korean We believe that the Korean media industry is at a turning point, as: 1) major regulations that media industry is at a had stifled growth have begun to ease; and 2) major media firms are experiencing turning point; Time to fundamental changes amid an improving market environment. find new growth Deregulation, voiced loudly by both the media industry and the stock market, has recently strategies materialized thanks to regulatory changes in the ad market, a major revenue source for the media industry. In particular, the broadcasting ad market, which had displayed limited growth due to strict regulations and slow revisions to the broadcasting act, has introduced competition after 30 years of monopoly, backed by the creation of private media representatives. In addition, total ad-time cap and mid-program advertising, which were introduced to liberalize the advertising market, are proving effective in the pay-TV market. As such, these measures are now being considered for extension to terrestrial broadcasting. Considering such progress, we believe the advertising market holds high growth potential.
Figure 1. Overweight rating for Korean media sector; Top pick is Cheil Worldwide
Growing into Deregulation Bigger Players
Revenue Events Diversification
Media sector Companies are transforming reaches a turning point Cheil Worldwide SBS KT Skylife CJ E&M Overweight
Source: KDB Daewoo Securities Research KDB Daewoo Securities Research 3 July 16, 2012 Media
Media firmsÊ fundamentals are changing, as content and overseas revenues are expanding in addition to domestic advertising revenues. Content platforms have been diversifying thanks to new innovations in telecommunications technology, including LTE, and the advancement of IT devices, such as smartphones. Furthermore, demand for content is expanding from small and simple content, such as digital music and image files, to premium multimedia content. Media firms, such as SBS and CJ E&M, have been preparing to raise their content revenues by increasing in-house content production and endeavoring to secure copyrights. As such, the fundamental nature of media firms is evolving from a simple broadcaster to producer of premium content. Rising overseas demand is also accelerating the evolution of media firms.
In Korea, major media firms are at the early stage of transforming into a large company or group. During this phase of industry growth, deregulation and corporate size are important to the industrialization of the sector and corporate revenue growth. SBS has emerged as a solid media firm under SBS Media Holdings with a variety of platform and content subsidiaries. CJ E&M has become the largest fee-based content provider in Korea by merging platform providers and content developers. SBS and CJ E&M, which are now considered large firms, have been crowned this status for less than a year. In this report, we have examined the growth plans of major Korean media firms and their current status by contrasting to global media groups.
In 2012, there are many scheduled media-sector-related events. Short-term events include Expo 2012 Yeosu Korea and the upcoming London Olympics. In addition, a general election was held in 1H, and a presidential election is scheduled for 2H. The Olympics and elections are periodic events that can boost the advertising market. We also analyzed the impact of these events on media firmsÊ earnings and share performances.
In Korea, with the introduction of general programming channels, four new broadcasters have entered the market. While concerns of excessive competition were initially raised with their entry into the market, the acquisition/development of content has now taken on greater importance. Now that seven months have past since general programming channel operators started broadcasting, we should conduct a review of their status and impact on the market.
Globally, competition between media and telecom firms is intensifying amid the maturing of the pay-TV market. In particular, the rise in mobile demand is prompting a revision of the existing TV-platform-oriented strategy.
At this critical juncture, we analyze the status of the media industry and major shifts occurring in industry, and identify promising stocks amid this rapidly changing environment.
KDB Daewoo Securities Research 4 July 16, 2012 Media
3. Present Cheil Worldwide as top pick
Top Pick: We present Cheil Worldwide (030000 KS/Buy) as our top pick, considering 1) structural Cheil Worldwide changes in the media industry, 2) corporate earnings, and 3) short-term events. The (030000 KS/Buy) company is expected to benefit from Samsung ElectronicsÊ marketing campaigns in the short term. In addition, the company holds strong growth prospects as a global advertising agency in the long term.
Promising stocks: SBS (034120 KS/Buy), which has created a private media representative, is a beneficiary of SBS (034120 KS/Buy), regulatory easing and improvement. KT Skylife (053210 KT Skylife (053210 KS/Buy) is likely to benefit from KTÊs efforts to bolster its media business, KS/Buy) and the companyÊs earnings are expected to improve on subscription growth and rising high- CJ E&M (130960 margin sales. KQ/Trading Buy) Although CJ E&M (130960 KQ/Trading Buy) currently displays poor profitability, the companyÊs earnings should gradually pick up in 2H, backed by higher in-house content competitiveness.
Table 1. Our media coverage and top pick (%, Wbn, x) Stock Stock Code Rating Target price Expected return Market cap 12F P/E 12F ROE Cheil Worldwide 030000 KS Buy W26,000 44.4 2,071 17.8 15.6 SBS 034120 KS Buy W47,000 41.6 606 10.5 10.4 KT SkyLife 053210 KS Buy W31,000 23.5 1,196 18.6 19.9 CJ E&M 130960 KQ Trading Buy W30,000 17.6 967 20.0 4.1 Source: Bloomberg, KDB Daewoo Securities Research
KDB Daewoo Securities Research 5 July 16, 2012 Media
II. Media industry outlook
1. Market size and value chain
1) Advertising market outlook Korean ad market In 2012, we expect the domestic ad market (the four major mediums, new media outlets, projected to grow and billboards combined) to grow 11.4%, as: 11.4% in 2012 1) A number of industry positive events are set to take place this year, including the Yeosu World Expo, 2012 London Olympics and KoreaÊs presidential elections.
2) Industry deregulation allows media companies to use self-regulating ad rates and to expand revenue opportunities.
3) The launch of general programming channels contributes to an increase advertising volume in the short-term.
4) More aggressive advertisements are prompted by the release of new products and intensifying competition, particularly in industries to which large advertisers belong. New model rollouts by technology firms, the fierce battle among mobile carriers to attract LTE subscribers, and the launch of specialty retailers of private brand apparels are all industry trends that are likely to prove favorable to the growth of the advertising market.
On the other hand, Cheil Worldwide, the largest advertising firm in Korea, forecasts advertisements from the four major media outlets (terrestrial television, radio, newspaper and magazine) combined to remain flat YoY. By advertiser, the agency looks for stronger marketing spending from F&B and cosmetics firms and especially IT companies in line with the release of new smartphone models.
The global research firm PwC forecasts the broadcast ad market to display modest growth. The company forecasts print media ads to expand only 0.6% YoY, but broadcasting ads to continue growth at 6.6% YoY. Online ads are anticipated to grow the fastest at 11.7% YoY.
Looking ahead, we expect the domestic ad market to grow 7.8% in 2013, as the full-fledged impact of broadcasting ad deregulation kicks in and the introduction of private media representatives allows a more competitive environment to take hold in the domestic industry. From a long-term perspective, government support for the ad and content industries will likely continue, having a significant impact on media industry growth. The Korea Communications Commission (KCC) has set a target of expanding the domestic ad market to 1% of GDP by 2015.
Figure 2. Domestic advertising market size trend and forecast
(Wtr) (YoY,%) 12 Domestic ad market (L) Korea-Japan World Cup 40 Growth (R) Asian crisis 9 20
6 0
3 -20
0 -40 90 92 94 96 98 00 02 04 06 08 10 12F
Note: Figures for 2012 and beyond are KDB Daewoo Securities Research forecasts Source: Advertising yearbook, Cheil Worldwide, PwC, KDB Daewoo Securities Research KDB Daewoo Securities Research 6 July 16, 2012 Media
2) Broadcast content market outlook Revenues from We believe broadcasters will continue to focus on securing the copyrights to broadcasting domestic broadcast content, especially as content genres become more diverse and related profits increase. We also content to increase expect positive developments in relevant regulations, an industry transition geared towards smart 7.8% in 2012 technologies, greater market diversification and notable changes in consumer patterns. As for exports, we believe the focus of content exports will increasingly shift away from the Japanese market and dramas. On the policy front, the government has continuously bolstered its support in response to robust exports of broadcast content and its perceived benefits. PwC forecasts profits from KoreaÊs broadcasting content to increase 7.8% in 2012.
Table 2. 2012 Content industry trend forecast Domestic Global Powerful media groups to emerge based on content Spread of smart paradigm and fiercer competition among related companies Production Production materials to diversify & specialize with spotlight on sports content Stability and homogeneity of material choices to intensify; sports Content production and investment environment expected to improve content to remain popular Emergence of smart media & diversification of platforms Easy & Speedy: keywords of mobile life Distribution SS (Smart-Social) distribution structure to take hold New Korean Wave to kick in; diversification in the export market A fairer trade and distribution environment Reinforcement of the 3S (Sensibility-Social-Survival) Human-tech driven human-friendly content consumption Consumption Content consumption to transcend space and reality Upgrade in content consumption due to localization and material diversification Generation F (born 1966-1974) to emerge; F-content consumption to spread (China and South America to emerge as promising markets) Source: Korea Creative Contents Agency
Table 3. Impact of cultural goods exports on consumer goods exports in the past decade (%) Average Cultural Products Consumer Goods Significance Change rate Cultural Consumer goods -Consumer goods exports increased 0.03% as cultural goods exports increased by 1% 4.12 Goods Total - Average consumer goods exports increased $412 as cultural goods export increased $100 Total - IT exports increased 0.032% as cultural products exports increased 1% IT products 3.95 - Average IT exports increased $395 as cultural products exports increased $100 - Clothing exports increased 0.051% as cultural products exports increased 1% Clothes 0.35 - Average clothing exports increased $35 as clothing export increased $100 Processed - Processed food exports increased 0.07% as cultural products exports increased 1% .031 Foods - Average processed foods exports increased $31 as processed foods exports increased $100 Processed - Processed foods exports increased 0.032% as cultural products exports increased 1% Broadcasting 0.64 Food - Average processed goods export increased $64 as processed foods export increased $100 Note: Panel data based on the amount of export of cultural items and consumer goods to 92 countries in 2001~2011, Exported cultural items are movies, TV programs, music, and publications; exported consumer goods are IT products, processed food, clothing and cosmetics. Source: Korea Eximbank
Figure 3. Domestic broadcasting content market size trend and forecast
(US$mn) Additional content market: OTT, mobile TV, PPV, VOD (L) (YoY,%) 4,000 Previous broadcast content market: lincense fee, subscription (L) 25 Total broadcast content market growth (R)
20 3,000
15 2,000 10
1,000 5
0 0 06 07 08 09 10 11 12F 13F
Source: PwC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 7 July 16, 2012 Media
3) Media industry’s value chain analysis OTT platform was added The media industryÊs vertical value chain includes production, distribution (programming, to existing value chain service provision, and content distribution), and the consumption of content. Horizontally, the value chain consists of various types of platforms.
Terrestrial and cable TVs have been primary platforms from the beginning of analog broadcasting. And then, digital broadcasting took off with the launch of satellite TVs. Currently, cable channels are converting to digital broadcasting and terrestrial channels are scheduled to follow suit.
Digital platforms have diversified into DMB, IPTV, and OTT (over-the-top) services. DMB provides mobility to a TV platform, and IPTV provides interactive user experience via the internet.
The emergence of OTT services has made the differentiation of platforms moot. Thanks to advances in communications technology, the speed of content distribution has accelerated and the penetration of IT devices, including smartphones and table PCs, has grown sharply. Thus, the quality of services and the competitiveness of content have become more important than the acquisition of platforms. OTT services are now taking root as a major business of media groups.
Media companies focus Media companies expand the scope of their distribution business from simple distribution to on improving quality of end-users to service provisioning and programming in line with their growth. After their content after securing distribution business stabilizes, they usually strengthen content production capabilities. If platforms broadcasters secure more copyrights by increasing in-house production, they should be able to increase revenues from the distribution of content.
SBS and CJ have been establishing vertically integrated value chains. Telecoms are concentrating on content distribution based on their experience in the telecom network business by securing platforms.
Figure 4. Media industryÊs value chain
Production Distribution Way out (Content consumption)
Production Programming Service providing Distribution Terminal
Terrestrial Terrestrial Terrestrial broadcaster broadcasting broadcaster
Cable system operator (SO) Cable broadcasting TV Cable network operator (NO)
Broadcasting Satellite Program provider (PP) Satellite broadcaster device broadcasting Independent manufacturer production DMB device DMB DMB broadcaster Handset
TV IPTV IPTV content company IPTV broadcaster Handset
TV Everywhere Over-The-Top + User OTT company OTT company website, mobile app, smart TV
Source: SBS, KCC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 8 July 16, 2012 Media
SBS covers the widest range of platforms and businesses. The company allots each segment of content-related business to subsidiaries. SBS produces, programs, and distributes content, and Media Create, its in-house media representative, generates ad revenues. In addition, SBS Contents Hub distributes broadcasting content in the domestic and overseas markets. SBS is also making efforts to make pooq, a joint OTT platform of terrestrial broadcasters, take root.
Meanwhile, CJ has completed vertical integration of broadcasting and film content businesses. CJ E&M produces broadcasting content, and CJ HelloVision, a cable TV system operator (SO), distributes content to paid subscribers. CJ HelloVision also provides Tving, an OTT service. For the film business, CJ E&M is responsible for investments and distribution, while CJ CGV screens films.
Figure 5. SBSÊs media value chain
Production Distribution Way out (Content consumption)
Production Programming Service providing Distribution Terminal
Terrestrial SBS SBS Content Hub broadcasting
Cable broadcasting SBS Plus SBS Sport Satellite SBS Golf broadcasting SBS ePlus SBS Viacom SBS SBS Business Network DMB SBS's affiliated program providers SBS IPTV SPC IPTV SBS KT SPC SKB SBS SPC
Over-The-Top pooq (Alliance of terrestrial TV content)
Source: KDB Daewoo Securities Research
Figure 6. CJ Âs media value chain
Production Distribution Way out (Content consumption)
Production Programming Service providing Distribution Terminal
Terrestrial broadcasting
Cable broadcasting CJ E&M CJ HelloVision
Satellite broadcasting
DMB CJ E&M
IPTV
Over-The-Top Tving (CJ HelloVision)
Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 9 July 16, 2012 Media
KT has secured an IPTV platform and satellite TV platform (KT Skylife). The company accounted for 63% of the IPTV market (in terms of the number of subscribers) as of 1Q12. KT is ahead of other telecoms in the media industry with regard to the number of platforms and subscribers. The company is continuing its efforts to secure more subscribers. Going forward, KT is expected to focus more on the content distribution businesses to maximize earnings.
Recently, KT newly created the media and content business units. We expect Korea HD Broadcasting Corp., a program provider (PP) and the subsidiary of KT Skylife, to play an increasingly important role in KTÊs media business.
As for other telecoms, SK broadband has an IPTV platform and SK planet operates hoppin, an N-Screen service. LG Uplus is also carrying out the IPTV business and offers the U+HDTV service for LTE users. In terms of the number of subscribers, SK broadband and LG Uplus took up 20% and 17% of the IPTV market, respectively, as of 1Q12.
Figure 7. KTÂs media value chain
Production Distribution Way out (Content consumption)
Production Programming Service providing Distribution Terminal
Terrestrial broadcasting
Cable broadcasting
Satellite Korea HD Broadcasting Corp. KT Skylife broadcasting
DMB
IPTV KT (Olleh TV)
Over-The-Top olleh TV now
Source: KDB Daewoo Securities Research
Figure 8. SK Broadband and LG Uplus media value chain
Production Distribution Way out (Content consumption)
Production Programming Service providing Distribution Terminal
Terrestrial broadcasting
Cable broadcasting
Satellite broadcasting
DMB
IPTV SK Broadband, LG Uplus (IPTV)
hoppin (SK Planet) Over-the-Top U+HDTV (LG Uplus) Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 10 July 16, 2012 Media
2. Media industry driven by advertising; Diversified revenue sources
1) Changing viewers’ behavior: N-Screen strategy and cross platform marketing Platforms to watch Media usersÊ behavior is changing. According to a survey on broadcasting media use broadcasting programs released in February by the Korea Communications Commission (KCC), Korean users chose have diversified TVs as the most frequently used platform to watch broadcasting programs. The survey also showed that platforms to watch broadcasting programs have diversified to computers, DMB, smartphones and tablet PCs thanks to the proliferation of smart devices. As for devices to watch internet TV, 61% of the respondents picked desktops. Interestingly, respondents chose smartphones (24%) more than laptops (14.5%) to watch internet TV, confirming mobile TV demand.
Content consumption on On a positive note, content consumption on new platforms is on the rise. The time spent on new platforms is on the watching terrestrial TV shows in real time is declining, while VOD use on IPTVs is expanding. rise In addition, mobile TV subscription is increasing on the spread of 4G LTE services, which are 4-5 times faster than 3G services.
Figure 10. Internet TV platforms : Desktops and smartphones are Figure 9. TV watching platforms: TVs are still dominant dominant
80% 100% Terrestrial TV Internet TV platforms Pay-TV
80% 60%
60% 40%
40%
20% 20%
0% 0% TV Computer DMB Smartphone PMP Tablet PC Desktop Smartphone Lap top/ Net book Tablet PC
Note: 2011 Domestic survey of 6,669 persons Note: 2011 Domestic survey of 6,669 persons Source: KCC, KDB Daewoo Securities Research Source: KCC, KDB Daewoo Securities Research
Figure 11. Daily average frequency of VOD watching on KT Olleh TV Figure 12. LG UplusÊ LTE subscriber and mobile TV content is increasing subscriber trends
('000 times) Daily average frequency of VOD watching on KT Olleh TV (L) (min.) ('000 persons) ('000 persons) 2,000 Daily average time spent on terrestrial TV (R) 160 2,400 LTE subscribers (L) 720 U+HDTV subscribers (R)
1,500 120 1,800 540
1,000 80 1,200 360
500 40 600 180
0 0 0 0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 10/11 11/11 12/11 1/12 2/12 3/12 4/12 5/12
Note: The frequency of VOD (Video on Demand, replay) watching is based on Note: Number of U+HDTV subscribers is estimated as of May 2012 the daily average number of set-top boxes Source: LG Uplus, The Herald Business, KDB Daewoo Securities Research Source: KT, TNmS, Inews 24, KDB Daewoo Securities Research
KDB Daewoo Securities Research 11 July 16, 2012 Media
KCCÊs survey also indicated that the time spent on traditional media outlets - TVs and radio - is on the decline. 21% of the respondents said they spent less time in front of a TV due to the increased use of new devices, including smartphones, tablet PCs, and DMB. The percentage of smartphone users that cut time spent on TV and radio was twice as high as non-smartphone users. Notably, those in their 20s spent much less time on not only TVs but also on computers after smartphone use.
Falling traditional TV In particular, the decline in the time spent on traditional TV platform is more noticeable for watching is being the so called „digital natives‰ – young people who have grown up in the digital world using complemented by rising technology as a way to communicate, record, educate, and understand society. However, internet TV watching, falling traditional TV watching is being complemented by rising internet TV watching. The confirming steady percentage of those with internet TV watching experience is climbing in line with the demand for broadcasting decrease in traditional TV watching. content For media used at least five times a week, 60% of the respondents replied TV, followed by internet (33%), newspaper (2%), and radio (1%), indicating TV remains dominant and internet has emerged as a strong media outlet, while newspaper and radio have lost ground.
Figure 13. Time spent on watching TV and radio decreased particularly for smartphone users
40% Decrease in time spent on TV watching Decrease in time spent on radio
30%
20%
10%
0% Smartphone user Non-smartphone user Average
Note: 2011 Domestic survey of 6,669 persons, Source: KCC, KDB Daewoo Securities Research
Figure 14. Time spent on watching TV decreased while Internet TV Figure 15. TV is still dominant over other media in terms of use watching increased, particularly for young generations
50% Decrease in time spent on TV watching 80% 2009 2010 2011 Users with internet TV watching experience
40% 60% 60%
30%
40% 33% 20%
20% 10%
2% 1% 0% 0% 10~19 20~29 30~39 40~49 50~59 60~ Average TV Internet Newspaper Radio
Note: 2011 Domestic survey of 6,669 persons Note: Domestic survey of 6,404 persons in 2009, 6,409 persons in 2010, Source: KCC, KDB Daewoo Securities Research and 6,669 persons in 2011; the survey is whether to watch TV for at least 5 days per week Source: KCC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 12 July 16, 2012 Media
As for the percentage of time spent on each media outlet based on a recent survey of US users, TV also ranked first with 43%, followed by internet with 26%, radio with 15%, mobile media with 10%, and printing media with 7%. A notable decrease in time spent on printing media, which had ranked second, has also been witnessed in the US.
TV remains dominant For US ad expenses by media outlet, TV took the lionÊs share of 42%, followed by print media in the US media (25%) and internet (22%). Notably, printing media took a high proportion of ad expenses despite its low percentage of time spent. We expect the proportion of ad expenses on internet and mobile media to rise, reflecting their high percentages of time spent.
The rising percentage of The phenomenon of N-Screen – where a user has multiple devices- is spreading, as the using multiple devices screen size and purpose of devices have been clearly defined. For multiple device holders in during TV watching the US, the percentage of traditional TV watching is falling, while the percentage of those suggest the growth of who use other devices during TV watching is rising. As such, media companies need to cross platform marketing formulate a content strategy in light of the N-Screen phenomenon. We expect cross and smart TV market platform marketing expansion and high smart TV market growth.
Figure 16. Proportion of time spent and ad market size by media (US)
(%) 50 Time spent Advertising market 43 42 40
30 26 25 22 20 15 11 10 10 7
1 0 Print Radio TV Internet Mobile
Source: KDB Daewoo Securities Research
Figure 17. N-Screen affects TV watching behavior (US)
2 screens (TV, computer) 87% 3 screens (TV, computer, smartphone) 4 screens (TV, computer, smartphone, tablet) 77% 69% 65% 60% 53%
% of those using other devices while watching TV % of those watching traditional TV
Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 13 July 16, 2012 Media
2) Changes in related businesses: Evolution of TV platforms Currently, producers are leading the development of TV platforms. As users, service providers (telecoms, internet, and media), and producers interact, TV platforms are evolving, giving rise to the formation and growth of related markets.
TV platforms have evolved from analog CRT TVs to digital TVs and home theaters with LCD and LED displays. 3D TVs are offering immersive experience to viewers. Furthermore, the development of mobile devices enables people to watch TVs anytime and anywhere.
TVs connected to the internet will significantly expand viewer experience by providing unlimited content to viewers. An idiot box has now become a smart device enabling interactive communication and user customization. TV producers are providing a diverse selection of content in cooperation with media and internet companies.
Table 4. TV platform and evolution of viewing Improvement in definition and sound quality: Analog CRT TV in living room LCD (LED) Digital TV in living room Home theater system
Increase in services and content: Internet TV IPTV real-time broadcasting, VOD Customized broadcasting on IPTV (biased baseball commentaries)
Diversification of watching experience and platforms: 3D TV N-Screen (Tablet PC + TV) Mobile TV
Convergence of hardware, content and interactive user interface: Smart TV (LG + Google, Samsung and Daum)
Source: Company data, Google, KDB Daewoo Securities Research
KDB Daewoo Securities Research 14 July 16, 2012 Media
The development of TV platforms is ongoing, led by telecoms, internet companies and TV producers. While telecoms have taken the lead until the introduction of IPTVs, internet companies and producers are now leading the development of smart TVs. In Korea, KT, SK Broadband, and LG Uplus are competing in the IPTV service market, with the number of IPTV service subscribers exceeding 5mn in 1Q12. In the smart TV segment, Samsung Electronics (SEC) is taking the lead, and LG Electronics (LGE) recently introduced Google TV. Daum Communications, Korea's major portal operator, also introduced Daum TV Plus, a smart TV set-top box.
Amid the development of TV platforms, media companies have been relatively passive, just providing their content to each platform. SBS Contents HubÊs recent decision to provide 3D versions of their dramas for SamsungÊs smart TVs is in line with this trend.
Joint platform of media However, media companies need to come up with more aggressive strategies targeting companies: Hulu (US) multiple platforms, in our view. In the US, major media companies own and operate Hulu, an and pooq (Korea) online premium video streaming service. Korean companies are now beginning to take action. SBS and MBC launched a joint venture pooq, an N-Screen service, which is now growing into a joint content platform for terrestrial broadcasters. In the cable segment, CJ HelloVision launched Tving, an internet-based video-on-demand service.
Figure 18. Domestic IPTV subscribers exceed 5 million Figure 19. Forecast for global smart TV penetration
('000 persons) (mn units) 500 6,000 Domestic IPTV subscribers Global smart TV penetration
5,000 400
4,000 300
3,000 200 2,000
100 1,000
0 0 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 2011 2012F 2013F 2014F 2015F 2016F
Note: Real-time and VOD service subscribers Source: The Diffusion Group (2011), ET News Source: MFI, KT, KDB Daewoo Securities Research
Figure 20. Smart TV 3D content cooperation: SBS Contents Hub-SEC Figure 21. SBS-MBCÊs N-Screen service „pooq‰
Note: ET News Note: pooq
KDB Daewoo Securities Research 15 July 16, 2012 Media
3) Changes of media companies: Recognition of the importance of content We forecast media companies to put more effort into expanding investments and securing copyrights. Amid changes in viewersÊ behavior and an increase in related-businesses, media companies are also expected to concentrate on expanding their business opportunities and enhancing their competitiveness. In light of the limited opportunities in the domestic ad market, content revenues in the distribution and overseas markets should increasingly contribute to their earnings.
Domestic broadcasters are expanding in-house program production. The exports of program formats, which are already common in advanced countries, are growing, primarily to China and Southeast Asian nations.
In the domestic and Looking at the revenues of global TV networks, broadcasting content revenues have global broadcasting outpaced ad revenues since 2007. The gap between them is wider in Korea than in the markets, content global market. While ad revenue growth is limited due to regulations, content revenues have revenues are outpacing grown steeply thanks to the popularity of Korean dramas in Asia and the availability of legal ad revenues online downloads in the domestic market.
Figure 22. Trend of in-house TV program production costs in Korea Figure 23. Domestic program format export trend
(Wbn) (No. of programs) 1,200 In-house production 25 SBS Outsourcing KBS Domestic and overseas purchases 20 MBC 900
15 600
10
300 5
0 0 06 07 08 09 10 06 07 08 09 10 11
Note: Terrestrial broadcasters and program providers combined Note: 2011 data are estimates Source: KCC, KISDI, KDB Daewoo Securities Research Source: KOCCA, KDB Daewoo Securities Research
Figure 24. Global TV platform revenue trend and forecast Figure 25. Domestic TV platform revenue trend and forecast
(US$bn) (US$mn) 320 Broadcast revenues: OTT, mobile TV, PPV, license fee, subscription, VOD 4,800 Broadcast revenues: OTT, mobile TV, PPV, license fee, subscription, VOD Ad revenues: traditional TV, online TV, mobile TV Ad revenues: traditional TV, online TV, mobile TV
240 3,600
160 2,400
80 1,200
0 0 06 07 08 09 10 11 12F 13F 14F 15F 06 07 08 09 10 11 12F 13F 14F 15F
Source: PwC, KDB Daewoo Securities Research Source: PwC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 16 July 16, 2012 Media
In addition, revenues from new businesses (OTT, mobile TV services, PPV (pay per view), VOD, and online/mobile TV ads) are projected to take off, while revenues from existing businesses (license fees, pay-TV subscription fees, and TV ads) continue to slow down.
According to PwC, global broadcasting companiesÊ revenues from existing business will increase at a CAGR of 4.5% from 2012 to 2015, while Korean companies will see a CAGR of 4.8% during the same period. Revenues from cable and satellite ads are projected to display the strongest growth (CAGR of 10.6%) based on 1) viewer rating growth at cable channels and 2) a narrowing gap with terrestrial TV ad rates. Pay-TV subscription fees are also expected to increase at a CAGR of 5.2% on the back of a structural increase in ARPU resulting from conversion to digital broadcasting.
OTT and mobile TV ad Meanwhile, revenues from new businesses are anticipated to expand at a CAGR of 10.9% revenues to grow from 2012 to 2015 in the global market, and 8.7% in Korea. In the global market, revenues sharply in the global from OTT (over-the-top) services, which provide video content online, are forecast to rise market; In Korea, online most sharply at a CAGR of 32.1%, followed by mobile TV ads (CAGR of 21.6%). Mobile TVsÊ TV ad and VOD businesses break down into ad-based free services and subscription-based paid services. Ad revenues to grow revenues are expected to outgrow subscription revenues starting in 2014. In Korea, online fastest TV ad revenues are projected to grow fastest at a CAGR of 16.3%, followed by VOD revenues (CAGR of 9.4%).
Figure 26. Global trend of revenues from existing broadcasting Figure 27. Domestic trend of revenues from existing broadcasting businesses businesses
(US$bn) (US$mn) 280 3,200 Public TV license fee Public TV license fee Pay TV subscription Pay TV subscription Multi channel TV ad Multi channel TV ad Terrestrial TV ad 210 2,400 Terrestrial TV ad
140 1,600
70 800
0 0 06 07 08 09 10 11 12F 13F 14F 15F 06 07 08 09 10 11 12F 13F 14F 15F
Source: PwC, KDB Daewoo Securities Research Source: PwC, KDB Daewoo Securities Research
Figure 28. Forecast for global N-Screen service and ad market growth Figure 29. Forecast for domestic N-Screen service and ad market growth
(US$bn) (US$mn) 10 Over-The-Top 720 Over-The-Top Mobile TV service Mobile TV service Pay-per-view Pay-per-view VOD 8 540 VOD Online TV ad Online TV ad Mobile TV ad Mobile TV ad
5 360
3 180
0 0 06 07 08 09 10 11 12F 13F 14F 15F 06 07 08 09 10 11 12F 13F 14F 15F
Source: PwC, KDB Daewoo Securities Research Source: PwC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 17 July 16, 2012 Media
4) Expansion of the market: Growth in demand from overseas Expansion of the Asian The markets for Korean media companies are expanding. Revenue sources for broadcasters broadcasting market and are diversifying from ads to VOD and PPV services. However, demand in the domestic growth in Korean market is still limited. In line with the expansion of the overseas broadcasting market and broadcasting content growth in demand for Korean broadcasting content, program exports are emerging as a major revenue source for broadcasters.
PwC said Japan is the largest market in terms of broadcasting revenues, followed by China, India, and Korea. From 2012 to 2016, the broadcasting market, encompassing license fees, subscription fees and ad revenues, is projected to grow at a GAGR of 3.1% in Japan and 5.7% in Korea. The Greater China region, including China, Hong Kong, and Taiwan, and Southeast Asia are also expected to see a robust growth with a CAGR of 9.5% and 7.9%, respectively. The Greater China regionÊs broadcasting market is projected to outgrow JapanÊs in 2016.
According to Korea Creative Contents Agency, KoreaÊs exports of broadcasting programs have exceeded imports since 2004. In 2010, exports of dramas accounted for 87.6% of total, while documentary and entertainment programs took up 6.5% and 2.7%, respectively. By destination country, exports to Japan were the largest in value (53.9%), followed by the Greater China region (22.0%), other Asian countries (14.3%), and America (8.3%). At SBS Contents Hub, a distributor of SBSÊs broadcasting content, dramas account for most of its exports. In 2011, exports to Japan took up 68.1% of the companyÊs total overseas sales. As the Greater China region is anticipated to outpace Japan in terms of growth and size of the ad market, Korean broadcasters should see an increase in the portion of revenues from China, Taiwan and Hong Kong.
Figure 30. Asian broadcast market trend and forecast
(US$bn) 40 Japan China region SE Asia Korea
30
20
10
0 06 07 08 09 10 11 12F 13F 14F 15F 16F
Note: Total of TV license fees, subscription fees, and ad revenues, Source: PwC, KDB Daewoo Securities Research
Figure 31. Broadcasting program exports are on the rise Figure 32. Broadcasting program exports by region and genre (2010)
(US$mn) Japan 54% 250 Exports 22% Imports Other Asia 14% 200 8% Europe 1% 150 1%
100 88% Documentary 7% 50 3% Animation 1%
0 0% 03 04 05 06 07 08 09 10 Others 2%
Source: KCC, KOCCA, KDB Daewoo Securities Research Source: KOCCA, KDB Daewoo Securities Research KDB Daewoo Securities Research 18 July 16, 2012 Media
3. Room for further growth of ad market
The biggest source of revenue for media players has been advertisements. Looking ahead, we believe media firms will continue to make a sizeable portion of their revenues from ads. With the ad industry stagnating, we examined whether there is room for further growth in broadcasting ads and the broader market and whether ad revenues could become less vulnerable to cyclical fluctuations.
1) Korea’s advertisement spending only less than 1% of GDP Even as the economy Measuring ad spending as a percentage of domestic GDP can offer some insight into the grew, the ad market sensitivity of the ad market and its size relative to the overall economy. KCC has announced shrunk as a percentage a target to expand the domestic ad industry to 1% of GDP by 2015 by providing various of GDP supports, including deregulation.
From 1990 to 2011, KoreaÊs ad spending to GDP ratio averaged around 0.92% (0.77% in 2011). The average ratio was roughly 1.11% prior to the 1998 Asian crisis, but fell to 0.82% in the aftermath of the crisis and since then has never regained its previous peak. By country, average ad spending to GDP between 1990 and 2010 was 2.17% in the US, 1.20% in Japan and 0.94% in Korea.
Figure 33. Korean advertising spending compared to GDP
(%) Ad expenditure / GDP 1.5 Ad expenditure / GDP = 1% 1990~2011's average: 0.92% Average in the period Before 1998: 1.11% 1.2 Asian crisis Korea-Japan World Cup
0.9 After 1998: 0.82%
0.6
0.3
0.0 90 92 94 96 98 00 02 04 06 08 10 12F
Source: BOK, Ad almanac, KDB Daewoo Securities Research
Figure 34. Advertising spending compared to GDP of Korea, US and Japan
(%) Ad expenditure / GDP = 1% 3.0 Korea US 2.5 Japan
2.0
1.5
1.0
0.5
0.0 90 92 94 96 98 00 02 04 06 08 10
Source: Dentsu, Galbithink, BOK, Ad Yearbook, KDB Daewoo Securities Research
KDB Daewoo Securities Research 19 July 16, 2012 Media
We compared KoreaÊs ad industry with those in the advanced countries including US and Japan, and Taiwan, which is most similar to Korea in terms of GDP per capita and export- oriented growth. We combined ad spending in each of the five major media platforms – TV, radio, newspapers, magazines and the internet – and excluded non-media sectors (e.g. campaigns and billboards) in our comparison.
In 2010, Korea had the lowest aggregate ad spending as a percentage of GDP at 0.45% vs. 1.02% in the US, 0.79% in Japan and 0.56% in Taiwan. TV ads, which account for the largest percentage of total ads, showed a wider gap on a country-to-country basis compared to the aggregate ratio.
The Korean ad market is As a percentage of GDP, KoreaÊs ad industry was found to be smaller than the US and Japan. small compared to its By media platform, the ratio of KoreaÊs ad spending in traditional mass media (e.g. TVs) was overall economic level even lower, while online ads accounted for a relatively large portion. The domestic TV ad market has faced limitations to growth, as the KOBACO-exclusive media representative scheme and other government regulations had prevented more flexible ad pricing and budgeting. We believe this largely explains why KoreaÊs ad market is smaller than other countries. However, a growing trend towards deregulations in broadcasting ads is spurring hopes of further growth. Online ads, on the other hand, have quickly grown to levels comparable to other countries on the back of surging online traffic and domestic web portalsÊ more flexible pricing scheme.
Figure 35. GDP per capita Figure 36. Five media ad markets to GDP Figure 37. TV ad market to GDP
(USD) 47,233 1.02% 43,144 0.48%
0.79% 0.34% 0.56% 0.29% 20,753 18,588 0.45% 0.17%
US Japan Korea Taiwan US Japan Korea Taiwan US Japan Korea Taiwan
Note: 2010 data, 5 Major media ad is aggregate of TV, radio, newspaper, magazine and internet except billboard, production and campaign, TV ad includes terrestrial, cable, satellite broadcasting ad Source: Statistics Korea, PwC, KDB Daewoo Securities Research
Figure 38. Korea ad market: Compared to US Figure 39. Compared to Japan Figure 40. Compared to Taiwan
Korea compared to US Korea compared to Japan 19% Korea compared to Taiwan 7% 514% 15% 6% 13% 12% 12% 12% 4% 236% 3% 3% 225% 7% 201% 156% 148% 1% 1% 51% TV TV TV Total Total Total Radio Radio Radio internet internet internet Magazine Magazine Magazine Newspaper Newspaper Newspaper Advertising market GDP Advertising market GDP Advertising market GDP
Note: As of US$ in 2010, Source: Statistics Korea, PwC, KDB Daewoo Securities Research KDB Daewoo Securities Research 20 July 16, 2012 Media
2) Uncertainties surrounding the business environment The ad market tends to move in tandem with growth in business facility investment, since ads (i.e. marketing) are considered an expense item. Looking at annual domestic trends since 1991, business spending for facility investment suffered the largest YoY decline in 1998 during the Asian financial crisis, leading to a similar collapse in the ad industry in the same year. However, in years when there were marketing-heavy special events like the 2002 World Cup, industry growth tended to outstrip facility investment growth.
With consumer spending forecast to shrink sharply in 1H12, business facility investment will have to pick up the slack to cushion the blow on the economy. However, the outlook for business investment also appears uncertain due to internal and external macro risks. According to a Joongang Daily survey conducted last month, the ten largest Korean conglomerates said they expect the economy to recover only after 2H13.
Rising uncertainties in In 2012, KoreaÊs export growth is projected to slow down to the low single digits, weighed down both consumer and by the ongoing slowdown in China and Europe. Although the OECD composite leading indicator business spending has been turning around since late 2011, the rebound has been mainly driven by the US and Japan, and it will likely take some time before we see any positive impact on KoreaÊs exports.
On a micro level, we believe corporate ads will shift away from the traditional product-based approach and move towards a more comprehensive campaign-driven approach. Furthermore, as the advance of information technologies drives the advent of new platforms, products and services, and as companies seek new growth engines, we expect to see robust marketing activities.
Figure 41. Annual corporate capex and ad market growth
(% YoY) 60 Capex Asian Crisis Korea-Japan World Cup Ad market 40
20
0
-20
-40
-60 91 93 95 97 99 01 03 05 07 09 11
Source: BOK, Ad Yearbook, KDB Daewoo Securities Research
Figure 42. Corporate capex and growth rate of exported goods trends and forecasts
(% YoY) 20 Capex Export
15
10
5
0
-5 1Q11 3Q11 1Q12 3Q12F 1Q13F 3Q13F
Source: BoK, Statistics Korea, KDB Daewoo Securities Research KDB Daewoo Securities Research 21 July 16, 2012 Media
Still, the domestic economy could start to pick up in 2H12 and we expect moderate growth to continue into 2013. We forecast annual real GDP growth to be 3.2% in 2012 and 3.7% in 2013. Inflation should remain muted through 2H12, but could bounce back in 1H13. The US$/W exchange rate is projected to modestly fall (won appreciation) from 2H12.
Although the pickup in confidence led by the US could extend into the domestic economy, EuropeÊs recession and debt problems and ChinaÊs slowdown are likely to stall the recovery in confidence. With domestic demand facing one of the worst environments in the past decade (except for the 2008 global crisis), the market seems to be waiting for policymakers to take action.
Despite a challenging However, we believe the ad market is poised to benefit from a major industry tailwind: macro environment, deregulation. In the broadcasting ad sector, deregulation has taken place in the form of deregulation and approval of private media representatives, sponsorships for in-house productions and the marketing events are promotion of product placements. The London Summer Olympics and the presidential likely to serve as elections in 2H are also expected to provide a boost. Furthermore, some of the largest industry catalysts Korean firms, such as Samsung Electronics and Hyundai Motor, are anticipated to increase their global marketing spending, which should also prove favorable to the domestic ad market.
Figure 43. Domestic economic forecast
(% YoY) (W) 5 Real GDP (L) Private consumption (L) 1,200 US$/W average rate (R) CPI (L) 4 1,150
3 1,100
2 1,050
1 1,000
0 950 1Q11 3Q11 1Q12 3Q12F 1Q13F 3Q13F
Source: BoK, Statistics Korea, KDB Daewoo Securities Research
Figure 44. Economic forecasts of the US, Europe, and China
(% YoY) 12 US GDP Europe GDP China GDP
9
6
3
0
-3 1Q11 3Q11 1Q12 3Q12F 1Q13F 3Q13F
Note: US GDP changed into the annualized rate from QoQ data Source: BoK, Statistics Korea, KDB Daewoo Securities Research
KDB Daewoo Securities Research 22 July 16, 2012 Media
3) Internal growth driver: Deregulation – Introduction of private media reps The passage of the In February 2012, the Act on the Brokering of Broadcast Advertisements or the so-called media rep bill signals the „Media Rep law‰ was passed by the National Assembly, putting an end to the Korea beginning of open Broadcast Advertising CorporationÊs three decade monopoly of the public broadcasting ad competition in the market. The bill also included support for bundled sales of small-and medium broadcastersÊ ads (although already an industry-wide practice), which is expected to contribute to the terrestrial broadcasting protection of broadcasting diversity. ad market Media representatives refer to ad brokers who sell broadcastersÊ ads in exchange for commissions. Under the previous media rep law, 37 channels, including terrestrial television and radio networks, were obligated to sell their ads only through the state-owned Korea Broadcast Advertising Corporation (KOBACO).
However, in November 2008, the Constitutional Court of Korea ruled that KOBACOÊs monopoly was unconstitutional. The growing number of new media platforms, including cable and satellite networks, aggravated broadcasting ad market competition, but KOBACOÊs artificial price control caused market distortions. As a result, terrestrial networks saw their revenues stagnate, weighed down by a rigid pricing policy and the physical limitations to broadcaast programming.
As a follow-up to the previous media rep law, the KCC established a new public advertisement organization (under the same name KOBACO) and currently plans to finalize the setup process (i.e. enacting enforcement and presidential decrees, and the licensing and screening of private media representatives), by the end of August.
The introduction of private media representatives has opened the doors to a market pricing scheme that is based on supply and demand dynamics. Thus, KOBACO is likely to factor in the sales policies of its private media rep competitors going forward. Following the launch of the new private media rep scheme, broadcasters have immediately begun to reflect the market value of their advertisements, selling some of them at a premium price. Previously, KOBACOÊs arbitrary designation of primetime slots prevented broadcasters from raising ad prices for shows with high ratings.
Table 5. Terrestrial TV Ad sales agency commission system Order-taking amount KOBACO SBS Media Create Less than W200mn 12.0% 12.0% W200mn 11.0% 12.0% More than W200mn~W800mn 11.0% 11.0% (Progressive) More than W800mn 9.3% 11.0% (Progressive) Note: As of Jan 2012, Source: SBS, KDB Daewoo Securities Research
Figure 45. Private media rep: SBS Media CreateÊs list of clients Figure 46. Public media rep: KOBACOÊs list of clients
Source: Media Create Source: KOBACO KDB Daewoo Securities Research 23 July 16, 2012 Media
From the advertisersÊ standpoint, the private media rep scheme could boost their advertising return on investment (ROI). Previously, KOBACOÊs inflexible ad pricing policy and the forced bundling of smaller broadcaster adsÊ with larger ones meant advertisers had to accept the risk of running their ads on an unwanted network or program. Now, with the introduction of the private media rep scheme, such misallocation is likely to abate and open market competition is likely to encourage both private and public media reps to provide a wider option to advertisers. Indeed, we have recently been seeing more diverse program packages and upfront ad sales.
Private media reps to In November 2011, SBS Media Holdings launched its own private media rep called Media pave the way for more Create and began selling ads the following month. After a revised media rep bill prohibiting flexible ad sales holding companies from owning more than a 40% stake in private media reps was passed in between advertisers and February, SBS Media Holdings subsequently sold 60% of its Media Create stake to SBS in broadcasters March, making the media rep SBSÊs subsidiary.
In 1Q, SBS posted an operating loss of W17.95bn, mainly due to 1) the initial instability of its media rep Media Create and 2) weak ad sales from low ratings of its key programs. However, as Media CreateÊs operations stabilize and ratings recover, we expect the broadcaster to revert to operating profit in 2Q.
Looking elsewhere, many countries already have in place open market competition for terrestrial broadcast advertisements. In the US, public broadcasters are operated by donations and government subsidies and the terrestrial broadcast ad market is dominated by the media reps of private broadcasters. Like Korea, major European markets have both public and private media reps and are regulated to prevent a small number of powerful broadcast networks from controlling the ad market. The UK applies a 25% sales cap on media reps (as a percentage of total TV ad sales), Germany imposes a limit on the aggregate rating of broadcasters and their subsidiaries and Italy prohibits a single media rep from accounting for more than 30% of a private broadcasterÊs ad sales.
KoreaÊs terrestrial broadcast ad market has now just begun open market competition. Thus, we think it is too early in the cycle to introduce any meaningful regulation (such as sales cap), especially since revenues have long been stagnant due to earlier price controls. Still, we might see further regulatory action aimed at ensuring the diversity of broadcasting. Indeed, regulatory authorities plan to institutionalize the industry-wide practice of bundling the ad sales of small and medium broadcasters and regional terrestrial networks with larger broadcasters (i.e. stipulating ad ratios and minimum sales requirements).
KDB Daewoo Securities Research 24 July 16, 2012 Media
Table 6. Major terrestrial broadcasting media rep trend Broadcasting Sales Media repÊs Media rep specifics and Nation Ownership Source of income Media rep name station methods ownership restrictions
Korea KBS, MBC Public License fee, Ad Media rep KOBACO Public Each media rep should support small- mid broadcasters through bundled ad SBS Private Ad Media rep Media Create Subsidiary sales
US PBS Public Donation, Sponsorship ABC Private Ad Media rep ABC National TV Sales Subsidiary Broadcasting companyÊs own media CBS Private Ad Media rep CBS Television Sations Sales Subsidiary rep dominates most of the market NBC Private Ad Media rep NBC TV Sales Marketing Inc. Subsidiary FOX Private Ad Media rep FOX TV Sales Subsidiary UK BBC1,2 Public License fee ITV Private Ad Media rep ITV Sales Private Each media repÊs maximum sales are Governmental support, not to exceed 25% of total TV ad Ch4 Public Direct sales Ad revenues FIVE Private Ad Media rep France TF1 Private Ad Media rep TF1 Publicite Subsidiary Public Media rep is independent from F2 Public License fee, Ad Media rep FTP Affiliated company its parent company; ownership and management are separated to maintain public interest; broadcasting F3 Public License fee, Ad Media rep FTP Affiliated company companyÊs financial structure and related regulations are not specified to ensure business freedom Netherlands NOD1,2,3 Public License fee, Ad Media rep STER Public Germany ARD Public License fee, Ad Media rep ARD Werbung Subsidiary Broadcasters and their subsidiaries (over 25% stake) combined are not ZDF Public License fee, Ad Media rep ZDF Werbefernsehen Subsidiary allowed to exceed 25% of total viewership Italy RAI1,2,3 Public License fee, Ad Media rep Sipra Public Existence of governmental approval ReTe4 Private Ad Media rep PubIitalia 80 Private system of public broadcastersÊ total ad revenues; A broadcasting business owner cannot own over 30% of the Canale5 Private Ad Media rep Publitalia 80 Private total TV ad market for private broadcasting Source: Hong Jong Bae (2011), Digital times, KDB Daewoo Securities Research
KDB Daewoo Securities Research 25 July 16, 2012 Media
4) Deregulation: Easing ad regulations and allowance of production sponsorships BroadcastersÊ ad With regulations on the broadcasting industry easing, broadcastersÊ advertising business has revenues to expand on expanded to include virtual ads, product placement, and mid-program advertising. allowance of virtual ads, Furthermore, terrestrial broadcasters will be allowed to accept production sponsorships for product placement, mid- their in-house programs starting in 2012. This loosening of regulations should lead to increases in in-house production, which should in turn lead to increases in copyright program ads, and the acquisition and content-related revenues. receipt of sponsorships for in-house production It should be noted that the new advertising options are subject to certain restrictions under broadcasting law. 1) Virtual ads must be limited to less than a quarter of the screen and can account for up to 5% of a programÊs running time. 2) Product placement is only allowed in educational and entertainment programs and can account for up to 5% of a programÊs running time. 3) Mid-program advertising is only allowed in sports programming and can account for up to 10% of running time.
Meanwhile, in February 2012, the Korea Communications Commission (KCC) permitted three terrestrial TV stations to receive sponsorships for in-house production. Previously, such sponsorships were only allowed for outsourced programs.
There are restrictions for production sponsorships as well. Such sponsorships are allowed only for the following in-house programs: 1) dramas that have production costs in excess of W200mn per episode or that will air more than 110 episodes, 2) mini-series with fewer than four episodes, 3) entertainment shows that have production costs exceeding W0.7mn per episode, and 4) educational programs for which production costs are greater than W0.5mn per episode.
Figure 47. Domestic virtual advertising and product placement market size
(Wbn) 25 2010 2011 21.1
20
15
10
4.7 4.7 5 3.1
0 Virtual ad Product Placement ad
Source: KOBACO, KCC, KDB Daewoo Securities Research
Figure 48. Growth forecasts for in-house prod. and programming sponsorship of terrestrial broadcasters
(Wbn) KCC allowed production sponsorship for terrestrial broadcasters' in-house production 800 Broadcasters strengthen content planning ability and secure copyright on content → In-house production to increase In-house production expenses Outsourcing production expenses 600
400
200
0 03 04 05 06 07 08 09 10 11 12F
Note: 2011 and 2012 data are estimates, Source: KCC, KDB Daewoo Securities Research KDB Daewoo Securities Research 26 July 16, 2012 Media
5) Deregulation: Potential implementation of total ad-time cap & mid-program ads Introduction of total ad- In 2012, the KCC aims to improve the global competitiveness of the domestic broadcasting time cap system to industry via ad revenue growth. The watchdog agency made it clear that it would loosen stimulate ad market regulations to stimulate ad market growth and would reconsider the introduction of a total growth ad-time cap for terrestrial broadcasters. Currently, such a cap is being applied only to pay TV channels in Korea.
Domestic broadcasting authorities have discussed the possibility of introducing a total ad- time cap for more than a decade. Under the proposed total ad-time cap system, although advertising time would remain unchanged, broadcasters would have greater leeway in deciding on the type, running time, frequency, and length of each ad. And if this system is implemented, restrictions against mid-program advertising would be abolished.
The introduction of a total ad-time cap system would allow broadcasters to generate greater ad revenues. In other words, they could reduce ads for low-rate slots (e.g., early morning or late night) and increase ads for prime-time slots. This cap system has already been established in major countries (e.g., Japan, US, UK, France). It should be noted that, while the cap system gives broadcasters significant flexibility, these countries have implemented measures to keep ads from being excessively concentrated during specific times. Significantly, Korean viewers already experience mid-program ads via cable channels (e.g., Mnet used mid-program ads for its singing competition show Superstar K to raise tension).
Table 7. Total ad-time cap and mid-program advertising in major countries Country Ad revenue cap system and commercial break system Terrestrial TV: Different regulations for each advertisement type (a total of 10 minutes per hour) – program ad (6 minutes), station break (3 Korea minutes), identification ad (40 seconds), time check ad (20 seconds); Total ad-time cap regulation has not been introduced yet Pay-TV: Hourly ad-time cap (average 10 minutes, maximum 12 minutes); Applied only to cable PPs Japan Total ad-time cap regulation that prevents total ad time from exceeding 18% of total weekly broadcasting time is in place US Ad-time cap restrictions were abolished in 1984 due to the FCCÊs deregulation policy UK Daily total-ad time cap restriction is in place; During prime time, total ad time cannot exceed 7 minutes 30 seconds per hour Total ad-time cannot exceed 12 minutes per hour in order to prevent ads from being concentrated on specific time France Similar to UK; Total ad time per hour cannot exceed 9 minutes on average Germany, Italy Mid-program advertising is allowed Source: KCC, KAA, KDB Daewoo Securities Research
Figure 49. Combination of a reality TV show and mid-program advertising: MnetÊs Super Star K which uses mid-program advertising to heighten the tension of the show
Source: CJ E&M Note: Show to resume after 60 seconds of advertising
KDB Daewoo Securities Research 27 July 16, 2012 Media
6) Changes in method of ad sales: Greater revenue stability The way broadcasters produce programs and sell ad slots have changed. Since advertisers are now able to acquire program information well before airtime thanks to seasonal programming, they are moving toward upfront ad purchases. As for broadcasters, upfront ad sales should enable programs to be broadcast as planned, and increase the visibility of ad revenues. This should allow broadcasters to produce programs more consistently.
Seasonal programming This virtuous circle is accelerating, aided by: 1) an increasing focus on using set seasons in becoming more popular; the production of programs (i.e., the model seen in the US) and 2) the expansion of upfront Growing upfront ad ad sales by media representatives. Currently, 25 programs are produced using set seasons sales (by major terrestrial broadcasters and cable channels).
The emergence of media representatives has facilitated upfront ad sales (six months to one year in advance). These upfront sales are meant to enhance the stability of the ad business (i.e., contracts between broadcasters and advertisers). In the US, upfront sales account for more than 60% of ad revenues and more than 70% of prime-time ad sales
Need to seek a balance As for broadcasters, introducing regular seasons should make it easier to produce and air programs. between convention and However, if they produce only cookie-cutter programs in familiar formats, these programs are likely invention to be shunned by viewers and advertisers. We believe that, while using season-based programming, broadcasters need to air creative new programs during hiatus periods.
Table 8. Terrestrial and cable TVsÊ seasonal programs On-air Scheduled to air KBS2 tvN (CJ E&M) Olive (CJ E&M) SBS 2 days 1 night Season 2 Comedy Big League 3 Tasty road 3 K-pop star Season 2 (November) Immortal classics Season 2 SNL Korea Season 2 Master chef Korea YouthÊs invincibility Season 2 Korea got talent 2 OnStyle (CJ E&M) Go Dream Team Season 2 Opera star 2012 OCN (CJ E&M) Supermodel Korea 3 (July) Happy Together Season 3 Rollercoaster 2 GodÊs quiz 3 (Drama) Top Band Season 2 Rules of studying 2 Mnet (CJ E&M) Baek Ji YeonÊs ultimate debate 2 StoryOn (CJ E&M) Superstar K 4 (August) MBC The Deliciously, Crude Young Ae Season 10 Diet war Season 6 I am a singer Season 2 I need romance 2012 Dancing with the star Season 2 XTM (CJ E&M) Mnet (CJ E&M) Top gear Korea Season 2 SBS Beatles Code Season 2 Real man 2 Rules of the jungle Season 2 Note: Only major programs included, undecided programs not listed, Source: Company data, KDB Daewoo Securities Research
Figure 50. KoreaÊs upfront ad sales (KOBACO in 2012) Figure 51. KoreaÊs upfront ad sales are on the rise
(%) 40 Upfront sales' portion in terrestrial TV ad
30
20
10
0 2007 2008 2009 2010 2011
Source: KOBACO Source: KOBACO, Press, KDB Daewoo Securities Research
KDB Daewoo Securities Research 28 July 16, 2012 Media
7) The advent of new forms of advertisements
We believe the traditional TV ad market will continue stable growth on the back of televisionÊs overarching power in the mass media. We expect stronger market growth for new media platforms, as advertisement-oriented business models increasingly take root. According to PwC, KoreaÊs terrestrial TV and multi-channel TV (cable and satellites) ad markets are expected to expand at a CAGR of 5.2% and 8.5%, respectively, from 2012 to 2016, whereas mobile TV ads and online TV ads are forecast to grow at a double-digit rate of 30% and 19.8%, respectively, during the same period.
Mobile TV and online TV For new media platforms, ensuring a business model that can generate actual sales is critical. In ads to thrive this regard, advertisements have become one of the most accessible and essential sources of revenue. Hulu, one of the leading N-Screen services in the US, offers both an ad-supported, free- of-charge version and a subscription service version. In Korea, CJ HelloVisionÊs Tving service has attracted 3.5mn subscribers, but only less than 5% of them are paid subscribers. Thus, the company relies heavily on ad revenues driven by subscribersÊ traffic as its main source of income.
Broadcasting contents have the potential to grow into multi-media contents that allow interactive communication between users and media platforms via personal IT devices. We believe this has positive implications for the online ad market. Traditional online ads have so far been simply in the form of online search and display ads, with market growth mainly driven by passive strategies (e.g. price hikes). We believe the introduction of broadcast contents onto online and mobile platforms will facilitate a more creative and proactive approach to advertising. This could give birth to a new form of advertisement that blends online with broadcasting and provide growth opportunities in the existing online ad segment as well.
Figure 52. Global TV ad trend and forecast
(US$bn) (US$bn) 280 Terrestrial TV ad (L) 10 Multi-channel TV ad (L) Online TV ad (R) 210 Mobile TV ad (R) 8
140 5
70 3
0 0 06 07 08 09 10 11 12F 13F 14F 15F 16F
Note: Multi-channel excludes all TV broadcasters except terrestrial TV broadcasters, Source: PwC, KDB Daewoo Securities Research
Figure 53. Ad Selector: Users can select which ads they want Figure 54. Ad Survey: Users can do surveys instead of watching ads
Source: Hulu Source: Hulu
KDB Daewoo Securities Research 29 July 16, 2012 Media
8) KBS’s demand for a TV license fee hike to continue Although proposals for partial revision to the broadcasting act were submitted on March 5th and April 19th in the 18th National Assembly session, they were discarded due to the end of the National Assembly session on May 29th. The details of the proposals included 1) higher quorum for the appointment of KBSÊs CEO and 2) the creation of a TV license assessment committee, which were aimed at solidifying the foundation of KBS as a public broadcasting channel and pushing through a license fee hike.
KBS wants to make KBS has never raised its current monthly license fee since it set the fee at W2,500 in 1981. In license fees its major order to strengthen its roles as a public broadcasting channel, KBS wants to make license fees its revenue source through major revenue source through a license fee hike, citing that: 1) excessive exposure to ad a license fee hike revenues could damage broadcasting neutrality and political independence and 2) a license-fee- based revenue structure is necessary to create an environment for fair broadcasting and the production of TV shows that serve public interest. We believe that KBS is seeking a license fee hike in consideration of 1) rising inflation and broadcasting production expenses and 2) costs involved in converting to digital broadcasting due to the end of analog broadcasting.
At present, the decision to raise the TV license fee is unlikely to be made anytime soon, given the controversy over KBSÊs public services and political consideration outweighs discussion on whether the current license fee is appropriate. In addition, a TV license fee hike could invite resistance as it is viewed as a quasi-tax, while the political community finds it difficult to pursue a fee hike due to the risk of losing votes. As such, even if a fee hike is pushed through, the hike would be modest, in our view.
If KBS reduces its KBSÊs ad revenues accounted for 29% (W598.7bn) of the Korean broadcasting ad market in reliance on ad revenues, 2011. If KBS reduces its reliance on ad revenues while increasing license fee contribution, other terrestrial other terrestrial broadcasters are likely to benefit as preference for mass media, particularly broadcasters are likely to terrestrial broadcasting, remain solid among advertisers. benefit Table 9. Major foreign public broadcastersÊ TV license fee trend (W, x, times) Classification Korea UK Germany France Japan 30,000 260,000 323,000 184,200 250,000 Annual license fee (as of Jan. 2012) GBP145.5 EUR215.76 EUR123 JPY16,740 Relative to KoreaÊs - 8.7 10.8 6.1 8.3 Number of times license fee hiked - 24 8 16 3 Note: F/X rates as of end-2011; Number of times of license fee hikes are based on data since 1981, Source: KBS, KDB Daewoo Securities Research
Figure 55. Broadcasting revenue breakdown of KoreaÊs KBS (2011) Figure 56. Broadcasting revenue breakdown of UKÊs BBC (2011)
Others (Sponsorship, campaign, program content sales) Broadcasting ad 16% 30% Subsidy 1% TV license fee 41% Time rate 0.02%
TV license fee 70% Broadcasting ad 42%
Note: Annual broadcasting revenue of W1.4tr as of December 2011 Note: Annual broadcasting revenue of GBP4.99bn as of March 2011; Source: KBS, National Assembly, KDB Daewoo Securities Research ad revenues are from BBC Worldwide, Source: BBC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 30 July 16, 2012 Media
4. Content competitiveness is becoming critical
Media firms are increasingly pressured to produce and secure quality content due to intensifying competition arising from 1) an increase in the number of broadcasters and channels and 2) diversified storytelling content and platforms. In addition, the media market is expanding on an increase in revenue opportunities resulting from rising overseas demand and One Source Multi-Use (a content strategy for increasing profits by recreating the same content across diverse media).
1) Number of broadcasters and channels is rising, raising need for production capability Entry of general Competition in the broadcasting market is intensifying with the increasing number of cable programming channel PPs and channels, and the emergence of general programming channels. We believe that operators encouraged this competitive environment is increasing the need for media firms to secure quality existing players to content and to enhance their production capability. Indeed, CJ E&M raised its 2012 strengthen their broadcasting content budget by as much as 23% YoY, as general programming channel production capability operators entered the market in end-2011.
Notably, peak viewership levels are falling on the increased number of broadcasting channels and platforms. As for TV dramas, „Sandglass‰ drew the highest viewership of 64.5% in the 1990s, „Dae Jang Geum‰ drew 57.8% in the 2000s, and The Moon That Embraces the Sun recorded 42.2% in the 2010s. The combined viewership of the three terrestrial broadcasters fell from an annual average of 41.1% in 2000 to 30.6% in 2011, while that of cable TV channels soared from 1.7% to 14.9% during this period.
Table 10. Domestic TV dramas with highest viewership Item 1991~ 2001~ 2011~ Prime time dramas on The moon that embraces the sun Sand Glass (SBS, 1995) Dae Jang Geum (MBC, 2003) weekdays (MBC, 2012)
Peak rating 64.5% 57.8% 42.2% Source: Company data, KDB Daewoo Securities Research
Figure 57. Annual cable PP registration trend Figure 58. Annual viewership trends of terrestrial and cable TVs
(%) 280 Number of companies 50 3 terrestrial broadcasters' combined viewership Number of channels Cable PPs' combined viewership 40 240
30 200 20
160 10
120 0 05 06 07 08 09 10 11 00 02 04 06 08 10
Note: Data from KCCÊs annual report (except for 2008) Source: Nielsen, SBS, KDB Daewoo Securities Research Source: KCC, KDB Daewoo Securities Research KDB Daewoo Securities Research 31 July 16, 2012 Media
2) Growing importance of content planning Media companies are increasingly reflecting changes in the market environment, including overseas revenue growth and ease of ad regulations, and demand from the start of content planning.
Broadcasters are producing content to target not only the domestic market, but also the overseas markets. Dramas accounted for 87.6% of total TV program exports in 2011. Dramas can be exported in packages as they consist of a series of stories. They can also generate revenues in the secondary markets from the sale of DVDs, OSTs, and VOD services via IPTVs as well as in the primary markets from the sale of broadcasting rights. If actors/actresses in dramas gain popularity overseas, demand for their previous works could increase.
Broadcasters are Thus, broadcasters are producing dramas, considering the possibility of exports, particularly producing dramas, to Japan. Prime-time dramas of terrestrial broadcasters in which idol stars or Korean wave considering the stars play main characters continue to increase from 5 in 2007 to 12 in 2011 and to 9 in possibility of exports, 1H12. particularly to Japan Figure 59. Trend of the number of terrestrial TV dramas starring Korean wave stars and idols
(No. of programs) 15 SBS KBS 12 MBC ?
9
6
3
0 07 08 09 10 11 1H12
Note: 2012 data includes only 1H data Source: Company data, KDB Daewoo Securities Research
Figure 60. Actor Jang Geun-suk gained huge popularity in Japan after Figure 61. Dream High (KBS): Casts and plot are mainly about K-Pop 0ÂYou are handsome (SBS) was aired in Japan
Source: Fuji TV Source: KBS
KDB Daewoo Securities Research 32 July 16, 2012 Media
Thanks to the easing of regulations, broadcasters are able to increase revenues through content. PPL is the primary source of content revenues. With the approval of PPLs on terrestrial TV channels, the PPL market has surged from W4.7bn in 2010 to W21.1bn in 2011.
Broadcasters utilizing In entertainment programs, product exposure and clothing sponsorship are the most content to generate ad common forms of PPLs. In dramas, the scope of PPLs is expanding from a simple exposure revenues of a product to a major part of a storyline, including main characterÊs job or an important tool used in a plot.
We forecast the PPL market to grow further in line with a change in program production trends. In Korea, entertainment programs with audition and survival formats are increasing sharply, and they are now taking root as an independent genre of TV programs. In the US, PPL spending is concentrated on the entertainment genres including reality (58%) and sitcom (13%) programs. Dramas accounted for 29% of PPL spending.
In addition, viewers appear to be getting used to this new type of advertising, and terrestrial broadcasters that lack stable revenue sources, except license fees, are utilizing PPLs to produce premium content at low costs.
Figure 62. Terrestrial TVÊs PPL: SBSÊs reality show and drama
Source: SBS, KDB Daewoo Securities Research
Figure 63. PPL spending breakdown by genre in the US
Sports Sitcom 0% 13% Drama 29%
News 0.2%
Reality 58%
Source: Nielsen, KDB Daewoo Securities Research
KDB Daewoo Securities Research 33 July 16, 2012 Media
3) Multi-platform era: Increasing content utilization In the past, storytelling platforms and content were limited to books/novels, TVs/drama, and theaters/films. Currently, competitors are increasing within each platform, and the convergence between platforms and the emergence of new platforms (online and mobile) are giving rise to new content and demand.
For media companies, the new trend means the intensification of competition. For example, SBS, which had competed with terrestrial broadcasters (MBC and KBS) in the past, now has to compete with cable channels and to deal with decreasing viewersÊ exposure to dramas.
However, this trend could also be translated as a new opportunity for broadcasters to utilize well-planned stories for various platforms as well as for drama content. If broadcasters secure copyrights by creating content either in house or jointly with outsourcing companies, they should generate more revenues beyond ad sales.
Broadcasters are utilizing Accordingly, Korean media companies are increasing investment in content and making content to create new efforts to secure them. In addition, they are utilizing them in various ways to create business opportunities revenues. In particular, terrestrial broadcastersÊ dramas are better positioned to gain popularity compared to the content of other media. Thus, their one-source multi-use strategies are highly likely to succeed.
SBSÊs drama Secret Garden could be a good example. The success of the drama had led to a surge in the sale of other versions of the content, including books and cartoons, and related goods, including calendars. In addition, OST CD sales generated revenues of W5bn, and over 2,000 tickets for OST concerts were sold out.
Broadcasters are also increasing revenues from music content. In addition to dramas, they are generating revenues from other program genres, including reality shows. Their efforts are boosted by an increase in singing survival shows and audition programs, the development of the digital music market, and the strengthened influences of SNSs.
Figure 64. Drama content generates high leverage Ć Terrestrial TV Ć Cable TV Ć Satellite TV Ć IPTV Additional businesses Ć Exhibition Ć VOD Ć DMB Ć Musical/Play TV Additional Ć Filming site tour OST sales Revenues Movie Performance Exhibition Copyright export Drama
Video Publication Broadcast support linked to ratings Album
Break-even Ć Comic books Ć DVD PPL ad sponsorship Point Character Ć Novels Ć OST Game Trademark Ć Cookbooks Ć etc. Terrestrial TV revenues Ć Mobile games Ć Product merchandising Ć Online games Ć Franchise business Ć Video games Source: KOCCA, KDB Daewoo Securities Research
KDB Daewoo Securities Research 34 July 16, 2012 Media
5. Growth potential of becoming comprehensive media groups
1) Consolidation of domestic media firms to lead to the emergence of larger players The domestic media market is experiencing the consolidation of media firms, as evidenced by SBS-, CJ-, and KT-related media groups.
First, SBS-related media firms belong to the Taeyoung Group, with SBS Media Holdings serving as the holing company of the groupÊs media firms. The group holds KoreaÊs only private terrestrial broadcaster SBS and cable PPs. SBS Contents Hub distributes SBSÊ broadcasting content at home and aboard, while Media Create, which was recently established as a private media rep, sells advertising slots for SBS.
The corporate value of SBS-related media firms is being driven by SBSÊs media power and content. We believe that the SBS media group should stabilize the operation of Media Create and enhance its cable channels in order to emerge as a media group in a true sense.
Figure 65. SBS affiliated media group
Yoon, Seok Min & Affiliates
1.5% 27.1% 2.6% 100% SBS IPTV SPC 61.2% 83.4% SBSSBS Media Media HoldingsHoldings TaeyoungTaeyoung E&C E&C Taeyoung (101060(101060 KS)KS) (009410(009410 KS)KS) Leisure 100% SBS KT SPC
100% SBS Content SKB SBS SPC 65% SBS Content Broadcasting content HubHub (046140 KQ) distribution 50.8% (046140 KQ) SBS 34.7% SBS News Tech SBS (034120(034120 KS)KS) 40% 100% 51.0% Private terrestrial Global D&E The Storyworks SBS Art Tech Broadcaster
60% Media Create Cable PP 4.6% 52.2% SBS Golf Private media representative 100% 51% SBS Plus SBS Viacom
100% 100% SBS Business SBS ePlus Network
100% Li&S Sport 70% SBS International
51% SBS Sport
Category Planning Investment Production Distribution/ Value-added market Broadcasting Content planning/development/ Production Distribution of old media content content investment management Distribution of new media content Expand Expand
Ć Expansion of target content market to Asia from domestic markets Ć Enhances efficiency in developing foreign Ć Enhancement of investment and funding abilities markets Ć Increase in production budgets and content competitiveness Ć Combines information on content value Ć Planning for broadcasting and related businesses, maximizing the value of new Ć Strengthens price negotiation power for media business broadcasting content
Media Distribution channel Domestic market Overseas market
TV On-air/ SBS-affiliated cable PP SBS Old media SBS Contents Hub TV Cable PP (excluding SBS affiliates) SBS Media Net
TV IPTV/ Cable SO
New PC Web/DCP/Syndication SBS Contents Hub media
Mobile Mobile/DMB/Wibro Source: SBS Contents Hub, KDB Daewoo Securities Research
KDB Daewoo Securities Research 35 July 16, 2012 Media
The CJ-related media group controls high domestic market shares in the cable TV and film production/distribution businesses, and engages in game, performance, music, and online businesses.
CJ E&M is the groupÊs comprehensive producer of broadcasting (as a cable multiple program provider (MPP)), film, game, music, and online contents. Although the company enjoys a dominant market share in the broadcasting and film markets, it displays relatively weak competitiveness in the game and music markets. The company needs to check whether the crossover use of broadcasting and music contents could contribute to earnings at its divisions. Given the limited domestic market, the company needs a more concrete overseas business strategy, particularly for the Asian and US markets.
CJ HelloVision, a cable MSO, engages in domestic businesses. If subscriber ownership restrictions are eased, the companyÊs growth potential will likely draw attention. The growth potential of the companyÊs N-Screen services (including Tving) and new businesses (such as MVNO) is expected to boost its corporate value, going forward.
Figure 66. CJ-related media group (CJ E&M, CJ HelloVision) Lee, Jae Hyun & Affiliates CATV MPP 43.5% Film, Game, 90.3% Performance, Orion Cinema CJCJ Music business Network (001040(001040 KS)KS) 40.2% 86.7% CJCJ E&ME&M On Game (130960(130960 KQ)KQ) Network
39.8% 66.2% 60.3% CJ O Shopping Daegu Dong-gu 100% CJ HelloVision CJ O Shopping Baduk Television SO (035760(035760 KS)KS) 51.7% Cable MSO Clip Service 68.8% Daegu Suseong 100% Mediaweb SO 51% N2Play 67.0% 100% Youngdong SO CJ NGC Korea
50% 41.4% 100% CJ Games Ara SO Art Service 92.7% 100% 100% 4D Plex Shilla SO CJ Sports 40.1% 100% 100% CJ CGV Primus Cinema CJ CGV CJ IG (079160(079160 KS)KS) 100% Good Concert D-Cinema of 50.0% Film distribution 52.5% Korea Any-Park 100% KM TV
53.0% 100% Seed9 Games International Media Genius
53.0% 42.1% CJ Game Lab Embaro
Source: CJ E&M, KDB Daewoo Securities Research
KDB Daewoo Securities Research 36 July 16, 2012 Media
2) Subscriber ownership restrictions to be eased: Larger players to emerge in the SO market Cable MSOsÊ M&As to The cable SO market is expected to see M&As, leading to the emergence of larger players. increase In relation to regulations on SOs, revision to the enforcement decree of the broadcasting act is being pursued in order to ease subscriber ownership restrictions. Under the current broadcasting act, the number of a cable SOÊs subscribers should not exceed one third of the total SOsÊ subscribers. However, the revised bill will likely ease this restriction to one third of the total pay-TV subscribers (including IPTVs).
As of 2011, the cable SO market, which is composed of 5 MSOs and 18 independent SOs, was dominated by CJ HelloVision with a market share of 23%, Tbroad with 21%, and C&M with 18%. Given 1) growing IPTV subscriptions and 2) the need for securing growth potential, larger players are expected to emerge through the merger between MSOs and acquisition of independent SOs.
In 2011, the number of cable TV subscribers who converted to digital broadcasting accounted for only 28% of the total subscribers. In addition, even major MSOs recorded a conversion ratio of less than 50%. The cable TV industry is expected to make additional W3tr investments in digital conversion through 2015. Since conversion to digital broadcasting requires massive capital investments, the conversion process is likely to pick up speed after M&As between SOs are completed. Digital conversion is necessary in light of 1) the end of terrestrial analog broadcasting slated for end-2012 and 2) cable SOsÊ efforts to boost average revenue per user (ARPU). Subscriber ownership restrictions on IPTVs are also likely to be eased. Ownership restrictions are projected to be applied to the overall pay-TV market.
Figure 67. Market share of major cable SOs in terms of subscribers
Tbroad (22) CJ HelloVision (19) C&M (18) CMB (9) Hyundai HCN (8) Independent SO (18)
24% 23% 23% 20% 29% 28% 26% 9% 9% 9% 8% 8% 8% 8% 9% 8% 8% 8% 9% 8% 8% 18% 14% 17% 17% 18% 14% 17%
15% 21% 20% 23% 16% 20% 21%
26% 22% 23% 23% 22% 21% 21%
2005 2006 2007 2008 2009 2010 2011
Note: Tbroad merged with Qrix Communications Inc.; CJ HelloVision merged with On Media; C&M merged with GS; A total of 92 companies with 14.93mn subscribers as of 2011 Source: KCTA, KDB Daewoo Securities Research
Figure 68. Subscribers and digital conversion ratios of major cable SOs
('000 persons) Analog Digital * % means digital conversion ratio 4,000 35% 24%
13% 3,000 51%
2,000
4% 34%
1,000
0 Tbroad CJ HelloVision C&M CMB Hyundai HCN Independent SO
Note: 2011 data, Source: KCTA, KDB Daewoo Securities Research
KDB Daewoo Securities Research 37 July 16, 2012 Media
Table 11. MSOsÊ competing region in Korea Region Broadcasting area MSO Seoul (21 areas) Jongno-gu, Jung-gu C&M/ Tbroad Seodaemun-gu C&M/ Tbroad Seongdong-gu, Gwangjin-gu C&M/ Tbroad Dongdaemun-gu Tbroad/CMB owon-gu C&M/Tbroad Seocho-gu HCN/C&M Busan (8 areas) Seo-gu, Saha-gu Tbroad/ Independent SO Gangseo-gu, Buk-gu, Sasang-gu Tbroad Daegu (6 areas) Jung-gu, Nam-gu Independent SO/ Tbroad Su-seong-gu CJ HelloVision/ CMB Dong-gu CJ HelloVision/ CMB Dalseo, Dalseong-gun Independent SO/ Independent SO Seo-gu Independent SO/ Tbroad Gwangju (2 areas) Dong-gu, Buk-gu Independent SO/ CMB Nam-gu, Seo-gu, Gwangsan-gu CMB Daejeon (2 areas) Jung-gu, Seo-gu, Yuseong-gu CMB Dong-gu, Daeduck-gu CMB Ulsan Ulsan GS affiliates/ Independent SO Gyeonggi (9 areas) Uijeongbu and 4 boroughs Independent SO/ C&M Guri and 6 boroughs Independent SO/ C&M Chungnam (3 areas) Dangjin and 5 boroughs CJ HelloVision Kyeongbuk (4 areas) Pohang and 3 boroughs HCN Kyeongnam (4 areas) Masan and 3 boroughs Independent SO/ CJ HelloVision Note: Shadow cells mean competition area between independent SOs and MSOs Source: KCTA, Hana Institute of Finance, KDB Daewoo Securities Research
3) Importance of premium content: Large media firms to attract attention Large media firms that With the quantity of content rising, the quality and purpose of content is taking on more can produce premium importance. The key to the success of next-generation platforms, including smart TVs, will content are likely to be the supply of high-quality content. In order to produce premium content, massive attract attention investments by large media firms will be required. The advancement of UGC (user generated content), represented by Youtube will likely be possible only with the growth of premium content.
Figure 69. Virtuous circle in the content ecosystem
Content
Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 38 July 16, 2012 Media
6. Key risks to the media industry
One of the key risks to the media industry is its vulnerability to cyclical changes in the economy, since most media firms rely on corporate advertisers to generate income. Indeed, growth in facilities investment, a good measure of business spending, tends to move in tandem with ad market growth. If the economy enters a downturn, the ad industry tends to shrink, negatively affecting the earnings and share performances of media players.
We also see risks of higher cost pressures from content-related investments. This is more of a structural problem than a temporary one. We believe broadcast networks and other media firms will continue trying to acquire content copyrights given that content revenues are less sensitive to cyclical fluctuations and can be generated across a diverse range of media platforms (leverage effect of content). That being said, the recent regulatory approval of sponsorships for in-house production should partly offset the cost pressures of terrestrial television networks.
Another area of concern is that content exports are concentrated on only a few markets, most notably Japan. We believe media firms need to diversify their export destination beyond Japan to other countries in Asia.
There are concerns of fierce market competition leading to oversized growth of marketing spending. KoreaÊs pay-TV market is already maturing, with the entry of telecom operators (IPTV) and satellite broadcasters and the transition to digital broadcasting intensifying the fight over subscribers. We expect the marketing spending of pay-TV providers will indeed increase.
The still unclear revenue model and growth potential of new content services (e.g. OTT) represent another risk. The advertising and fee-based revenues of such new services have not yet fully developed. What matters is the consumersÊ willingness to open their wallets for content, but these new services have yet to offer unique, differentiated content. In the end, we believe it will require continued investment in order for pricing models to take hold in the industry. Thus, at present, advertisements appear to be a more promising source of revenue.
Going forward, we believe media firms will become a key player in the debate over net neutrality. Although the advance of mobile internet and smart devices has made N-Screen an indispensable service to the media business, it may take some time for the service to expand its reach, since most media firms do not have the necessary network infrastructure.
The media industry is undoubtedly one of the most regulated industries. The problem is that regulatory changes have not kept up with the pace of the industryÊs development. In particular, the rigid pricing policy of public media reps has undermined the organic growth of the terrestrial broadcasting ad market, which has lagged behind other advertising media outlets and other countries. Thus, the recent deregulation trend in terrestrial broadcasting is spurring hopes of renewed growth in the industry.
KDB Daewoo Securities Research 39 July 16, 2012 Media
III. Media industry issues
1. Near-term event: Olympic effects
1) London Olympics The IOCÊs broadcast Global sporting events provide the greatest momentum to the media industry, by revenues and significantly increasing audience exposure to TV programs and boosting companiesÊ sponsorship amount marketing activities. The domestic ad market has displayed higher portion of GDP in the from the Winter years when major sporting events were held, except in 1998 amid the Asian financial crisis. Olympics in Vancouver The International Olympic Committee unveils combined revenues from the summer and and Summer Olympics winter games every four years. We expect revenues from the sales of broadcasting rights in London to reach and sponsorship from 2009 to 2012 (the Winter Olympics in Vancouver and Summer historic high levels Olympics in London) to reach historic-high levels with broadcast revenues growing 52.3% and sponsorship amount expanding 10.5% from the previous four-year levels.
For the 2012 London Olympics, 11 multinational corporations, including Samsung Electronics (SEC), are participating in the Olympic Partners Program (TOP). Major companies are planning to launch marketing activities for new products in time for the opening of the summer Olympic Games. SEC has also unveiled a series of smartphones, including Galaxy S III, this year. Given that Europe is the companyÊs major market (market shares of 33.2% for smartphones and 33.9% for TVs), SEC is expected to carry out intense marketing campaigns at the Olympics this year.
Figure 70. Global sporting events and domestic ad market growth trend
(%) Sporting event index (R) (p) 1.4 Summer Ad expenditure / GDP (L) 30
Winter Summer 1.2 Winter 24 Summer Summer 1.1 18 Summer Winter
0.9 Winter 12 Winter
0.8 6 Winter
0.6 0 91 93 95 97 99 01 03 05 07 09 11
Note: Sports event index is based on athletesÊ performance results at Summer/Winter Olympics and the World Cup, A sharp decrease in the ad market in 1998 is due to the Asian crisis, Source: Ad Yearbook, BOK, Statistics Korea, KDB Daewoo Securities Research
Figure 71. Broadcast revenues and sponsorship income for 2009-2012 Olympics to reach historic high
(US$mn) 5,000 Global partner sponsorship (TOP Program) Broadcast revenues
4,000
3,000
2,000
1,000
0 1993-1996 1997-2000 2001-2004 2005-2008 2009-2012
Source: IOC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 40 July 16, 2012 Media
In the 2008 Beijing Olympics, the final between Korea and Indonesia of mixed double badminton matches recorded the highest viewership of 54.6% (based on the three major networksÊ combined viewership), followed by swimming of Tae-hwan Park (51.9%) and by weightlifting of Mi-ran Jang (50.4%). The opening and closing ceremonies posted 38.9% and 42.7% in viewership, respectively.
Korea ranked 7th with 13 golds, 10 silvers, and 8 bronzes during the Beijing Olympics. In particular, Korea won four gold metals in taekwondo, and two golds in weightlifting and archery, respectively. In addition, Tae-hwan Park won one gold and one silver in swimming, a game in which Korean players rarely won an Olympic medal, delivered outstanding performance, attracting viewers. As such, ads and sponsorships related to supporting Olympic players expanded.
The Korean Olympics In the 2012 London Olympics, the Korean team is targeting to make it within top ten with at team is targeting to least 10 gold medals. The chairman of the Korea Olympic Committee and the head of the make top ten with at Taereung Training Center expect 10~12 and 13 golds, respectively. Korea is expected to least 10 gold medals break its Olympic gold medal record in London, as it did in Beijing. The Korean team is anticipated to win gold medals in 11 games. Tae-hwan Park (swimming) and Mi-ran Jang (weightlifting) who showed spectacular performance in Beijing will participate in the London Olympics. In particular, expectations are high for archery, taekwondo, judo, wrestling, gymnastics, boxing, badminton, fencing, shooting, and wrestling.
Figure 72. Highest viewership during the 2008 Beijing Olympics
54.6% 51.9% 50.4%
42.7% 38.9%
Badminton mixed double Swimming 400m freestyle Weightlifting final final
1st 2nd 3rd Opening ceremony Closing ceremony
Note: Based on the 3 terrestrial TVsÊ combined viewerhip by TNmS Source: TNmS, SBS, KDB Daewoo Securities Research
Figure 73. Korean teamÊs gold medal winning forecasts in 2012 London Olympics
13 More than 13 10~12
More than 10
Results Official goal Korea Olympic Committee's Taereung Training Center's forecast forecast
Beijing Olympics London Olympics
Source: SBS, KDB Daewoo Securities Research KDB Daewoo Securities Research 41 July 16, 2012 Media
2) Global sporting events and domestic ad market The Korean ad market to In the past 20 years from 1991 to 2011 (excluding 1998 when the Asian financial crisis GDP ratio was higher in occurred), the Korean ad market to GDP ratio was higher in the 9 years with global sporting the 9 years with global events than in 11 years without such events. The average ratio during the 9 years and 11 sporting events (0.94%) years stood at 0.94% and 0.91%, respectively, and the 20 year average ratio also reached than in 11 years without 0.91%. As such, ad spending increased during the years when global sporting events were such events (0.91%). held.
We created a sporting event index to differentiate the impact of different events, as broadcasting schedule depends on the Korean teamÊs performance and the characteristics of games, affecting advertising orders. We gave higher weights in the order of World Cup finals, Summer Olympics, and Winter Olympics. In addition, we took GDP growth into consideration, in the sense that the domestic ad market is affected by economic conditions.
The 2002 Korea-Japan World Cup finals showed the highest sporting event index, as the Korean team advanced into semi finals. As such, broadcasting and printing ad amount and growth hit the highest level during the year.
Figure 74. Global sports events and domestic ad expenses
(Wbn) Sporting event index (R) Atlanta KR-JP World Cup South Africa World Cup (p) 3,000 Broadcast ad (L) Olympics Sydney Vancouver Winter Olympics 30 Print ad (L) General Olympics Beijing Olympics election Global financial crisis
2,250 Asian 23 crisis
1,500 15
750 8
0 0 91 93 95 97 99 01 03 05 07 09 11
Note: Broadcast ad is aggregate of terrestrial TV and radio, print ad is aggregate of newspaper and magazine Source: Ad Yearbook, BoK, Statistics Korea, KDB Daewoo Securities Research
Figure 75. Global sports events and growths of domestic ad expenses and GDP
(YoY) Sporting event index (R) Total ad (L) Beijing Olympics (p) 50% Broadcast ad (L) Print ad (L) Global finance crisis 30 GDP growth (L) IMF
25% 15
0% 0
-25% -15 Barcelona Olympics Korea-Japan South Africa World Cup Albertville Winter Olympics World Cup Vancouver Winter Olympics
-50% -30 91 93 95 97 99 01 03 05 07 09 11
Note: Broadcasting ads are the aggregate of terrestrial TV and radio ads; Printing ad is the aggregate of newspaper and magazine ads Source: Ad Yearbook, BoK, Statistics Korea, KDB Daewoo Securities Research
KDB Daewoo Securities Research 42 July 16, 2012 Media
3) Impact on the earnings and share performances of domestic media firms Strong correlation To assess the impact of sports events (Olympics) on the share performances and earnings between global sports of media stocks, we looked at two of KoreaÊs leading media players, Cheil Worldwide and events and the earnings SBS, both of which have one of the longest time series in the sector. We observed a strong and share performances correlation between global sports events and the share performances and YoY top-line of Cheil Worldwide and growth of the two companies. SBS Of the two, Cheil Worldwide appears to have benefited more consistently from sports events. We believe this stems from the fact that the agency handles many different media outlets (other than broadcasting) as well as ads that run in the overseas markets.
SBS has an overwhelming revenue exposure to ads and has widely covered major sports events. However, its heavy dependence on domestic sales suggests the company is more vulnerable to domestic macro conditions compared to Cheil Worldwide. Furthermore, the impact of sports events on profits is not significant due to its hefty broadcasting license fees and production costs. Even for the upcoming London Olympics, SBS expects to see revenue growth but not strong profits from the games in light of the accompanying cost burden (such as overseas production costs).
Figure 76. Global sports events and Cheil WorldwideÊs share price and revenue growth
(W) Sport event index (R) (p, % YoY) 25,000 Cheil Worldwide's share price (L) 30 Korea's GDP growth (R) Cheil Worldwide parent revenues growth (R)
20,000 20
15,000
10 10,000
0 5,000
0 -10 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Note: Sports event index is based on the weighted results at summer/winter Olympics and the World Cup, Source: Company data, Statistics Korea, Thomson Reuters, KDB Daewoo Securities Research
Figure 77. Global sports events and SBSÊs share price and revenue growth
(W) Sport event index (R) (p, % YoY) 75,000 SBS share price (L) 40 Korea's GDP growth (R) SBS parent revenues growth (R) 60,000 30
45,000 20
30,000 10
15,000 0
0 -10 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Note: Sports event index is based on the weighted results at summer/winter Olympics and the World Cup, Source: Company data, Statistics Korea, Thomson Reuters, KDB Daewoo Securities Research
KDB Daewoo Securities Research 43 July 16, 2012 Media
2. Near-term event: Impact of presidential election
1) Government change and its impact on the media industry History shows that the establishment and growth periods of each media segment have differed by administration. We believe it is meaningful to look back on the relationship between the industry and government given the fact that the media business involves legal amendments and requires government licensing.
Major milestones in Looking at the timeline of the major milestones in KoreaÊs media industry, color broadcasting KoreaÊs media industry was first introduced by KBS and MBC during the early 1980s under the Chun Doo-hwan in each administration regime, followed by SBS in 1991 during the Roh Tae-woo administration. In 1995, cable broadcasting was introduced during Kim Young-samÊs presidency, while satellite broadcasting began in 2002 under the Kim Dae-jung administration. It was during the subsequent Roh Moo-hyun administration that the internet industry and digital media broadcasting (DMB) began to thrive. The current Lee Myung-bak administration paved the way for the launch of telecoms operatorsÊ IPTV and approved the licensing of four general programming channels at the end of 2011.
Other key developments during the Roh administration include the re-rating of the leading online portal NHN and the relative outperformance of the cable system operator Tbroad DobongGangbuk Broadcasting (driven by the growth of cable subscribers). During the Lee Myung-bak administration, the licensing of general programming channels helped drive up the share performance of related stocks. All in all, we believe the media policy and stance of the next administration can affect the regulatory environment and scope of support for the media industry. Thus, such uncertainties surrounding the industry could lead to a more volatile share performance over the 2H, especially in the run-up to the presidential elections.
Figure 78. KoreaÊs political regime and major media companiesÊ establishments
IPTV
DMB
Fifth Republic Sixth Republic YS Kim's Gov. DJ Kim's Gov. MH Roh's Gov. MB Lee's Gov.
1980 1985 1990 1995 2000 2005 2010
Source: SBS, KDB Daewoo Securities Research
KDB Daewoo Securities Research 44 July 16, 2012 Media
Figure 79. Stock prices of major media companies during the President Roh administration
(16th presidential election date=100) 3,000 Terrestrial TV: SBS Cable TV: Tbroad Dobong 2,500 Internet: NHN Internet portal's Telecom: KT online ad revenues grew fast Newspaper: Jcontentree 2,000 2002~2005 Cable TV subscribers 1,500 grew in double digit YoY
1,000
500
0 12/02 12/03 12/04 12/05 12/06 12/07
Note: Jcontentree only operated newspapers, such as daily sports Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 80. Stock prices of major media companies during the President Lee administration
(17th presidential election date=100) 205 Terrestrial TV: SBS KCC approved four general Cable TV: Tbroad Dobong programmming channels Internet: NHN 170 Telecom: KT General programming channel: Jcontentree Satellite: KT Skylife 135
100
65
30 12/07 12/08 12/09 12/10 12/11
Note: For KT Skylife, its June 2011 share price (listed date) was indexed to 100. Jcontentree included JTBCÊs content distribution business at the end of 2011. Source: Thomson Reuters, KDB Daewoo Securities Research
KDB Daewoo Securities Research 45 July 16, 2012 Media
2) Election expense ceilings on the rise Ceilings on campaign The ceilings on election expenses set by the National Election Commission (NEC) can serve expenses for both as an indicator for ad spending for elections. The NEC has raised the election expense general and presidential ceilings in light of population growth and inflation rate. elections increased this Recently, demand for political ads appealing to votersÊ emotions is growing. The Korea year Broadcast Advertising Corporation (KOBACO) estimates the percentage of emotional ads had expanded from 27% during the 14th presidential election in 1992 to over 40% after the 15th presidential election in 1997.
Meanwhile, ceilings on election campaign expenses for the 19th general election rose 3% for single-seat constituency and 16% for proportional representation from the amounts in 18th general election in 2008. In addition, the NEC raised the expense ceiling for the 18th presidential election scheduled for end-2012 by 20% from the 17th election. As competition between candidates from ruling and opposition parties is expected to be fierce in this yearÊs presidential race, political ad spending is projected to increase significantly.
Figure 81. General election expense ceiling on the increase
(Wmn) (Wmn) 240 Single-seat constituency 6,000 Proportional representation
180 4,500
120 3,000
60 1,500
0 0 15th 16th 17th 18th 19th
1996 2000 2004 2008 2012
Note: The calculation method for proportional representation election expense was changed after the revision of related laws on Feb 29 2008 Source: CEMC, KDB Daewoo Securities Research
Figure 82. Presidential election expense ceiling and voter turnout trends
(Wbn) (%) Election expense ceiling (L) 60 100 Voter turnout (R)
81.9% 80.7% 45 80 70.8% 63.0%
30 60
15 40
0 20 14th 15th 16th 17th 18th
1992 1997 2002 2007 2012
Source: CEMC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 46 July 16, 2012 Media
3) Boost from elections A typical media firm whose earnings and share performance are affected by elections is the news channel YTN, as elections generate massive current affairs and news content.
The Korean general and presidential elections are held in mid-April every four years and in mid-December in every five years, respectively. In 2012, there is both a general and presidential elections. Given that the high demand season for the broadcasting ad market is 2Q and 4Q, the April and December elections provide an additional catalyst to the market due to ads from political agencies, including the National Election Commission, and political parties.
YTN deserves attention A close look at Thomson ReutersÊ Korean media/publication sector index and YTNÊs share performance indicates that they moved in sync in the 2002 presidential and 2004 general elections, but diverged in the 2007 presidential and 2008 general elections. In 2007 and 2008, the overall stock market and media sector index fell on the global financial crisis, leading to sluggishness in the ad market, while YTN delivered a double-digit YoY growth of broadcasting revenues thanks to solid ad revenues, displaying solid share performance.
Figure 83. Domestic major elections , Korean media sector index, YTNÊs share price
(p) General election (W) 150 Presidential election 6,000 Thomson Reuters Korea Media/Publication Index (L) YTN's share price (R) 5,000 120
4,000 90 3,000 60 2,000
30 1,000
0 0 02 03 04 05 06 07 08 09 10 11 12
Note: Thomson Reuters Korea Media/Publication index is composed with 21 stocks, including media large caps (such as Cheil Worldwide, SBS and YTN) and small caps (publication and entertainment companies; This index was used because the proportion of media companiesÊ market caps is high Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 84. Domestic major elections and growth of YTNÊs broadcasting revenues
(YoY) General election 90% Presidential election Growth of quarterly broadcast revenues
60%
30%
0%
-30% 02 03 04 05 06 07 08 09 10 11 12
Source: FSS, YTN, Thomson Reuters, KDB Daewoo Securities Research
KDB Daewoo Securities Research 47 July 16, 2012 Media
YTNÊs viewership has shot up whenever a major global event has occurred. Such events include general and presidential elections in Korea, the USÊs military action against Iraq in 2003, the subprime mortgage crisis in 2007, and Japanese earthquake in 2011.
YTNÊs viewership tends YTNÊs viewership and share performance climbed during general and presidential elections. to rise on major political In particular, viewership climbed markedly when a transfer of political power was likely to events occur or when there was a neck-and-neck race among candidates or political parties.
In deed, YTNÊs viewership and shares rose, when: 1) presidential elect Roh Moo-hyun won a victory against Lee Hoi-chang with a slight margin of 2.3% of the vote in 2002; 2) the Uri Party barely won the general election against the Grand National Party with 2.5% more votes in 2004, becoming the ruling party; and 3) an opposition party candidate Lee Myung- bak was elected as president in 2007, achieving a transfer of political power. In 2008, however, with the Grand National Party becoming the ruling party as expected, viewership fell MoM, while the shares advanced only slightly.
Figure 85. YTNÊs viewership and share price trend in 2002~2004
(W) General election (%) 4,200 Presidential election 0.9 US's military action against Iraq YTN's share price (L) YTN's viewership (R)
3,400 0.8
2,600 0.6
1,800 0.5
1,000 0.3 1/02 7/02 1/03 7/03 1/04 7/04
Source: AGB Nielsen, YTN, Thomson Reuters, Wikipedia, KDB Daewoo Securities Research
Figure 86. YTNÊs viewership and share price trend in 2007~2008
US's subprime mortgage crisis; (W) General election (%) Grand National Party's presidential nomination 6,000 Presidential election 1.1 YTN's share price (L) YTN's viewership (R) 1.0 5,000 0.9
4,000 0.8
0.7 3,000 0.6
2,000 0.5 1/07 5/07 9/07 1/08 5/08 9/08
Source: AGB Nielsen, YTN, Thomson Reuters, Wikipedia, KDB Daewoo Securities Research
KDB Daewoo Securities Research 48 July 16, 2012 Media
3. Industry trend: Maturing pay-TV market
Convergence of TV and The pay-TV market, which is represented by cable TV, has seen subscription growth reach telecom services to its limit globally. Subscription growth slowed to one digit from 2001 in the US and from 2006 accelerate in Korea. As cable TV SOs have found it difficult to even retain current subscribers due to the proliferation of IPTV and internet/mobile streaming services offered by telecoms, they will likely continue to seek new growth opportunities through the convergence of TV and telecom services.
In the US, five cable TV MSOs have recently formed an alliance to offer cable WiFi services. Cable TV MSOs have already started broadband internet services that restrict online video streaming. They are pursuing revenue growth through expansion into telecom services, while striving for subscriber retention by keeping competitors in check.
In Korea, deregulation is under consideration amid the stagnation of the pay-TV market. In particular, cable TV SOsÊ subscriber cap regulations are expected to be eased by expanding the base for the cap from the cable TV SO to overall pay-TV market, thus increasing room for subscription growth. MSOs, including CJ HelloVision and Hyundai HCN, have already started broadband internet services for their cable TV subscribers, and are expanding into mobile virtual network operator (MVNO) services.
Figure 87. US cable TV subscriptions and revenues remain stagnant Figure 88. Growing trend of US IPTV subscriptions and revenues
(mn persons) Digital cable TV subscribers (L) (US$bn) (mn persons) (US$bn) 120 Basic cable TV subscribers (L) 60 10 IPTV subscribers (L) 5 Total cable TV revenues (R) IPTV revenues (R)
8 4 90 45
6 3
60 30 4 2
30 15 2 1
0 0 0 0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011
Source: NCTA, Digital TV Research, KDB Daewoo Securities Research Source: AT&T, Verizon, iSupply, Digital TV Research, KDB Daewoo Securities Research
Figure 89. Launching of CableWiFi by five cable TV operators Figure 90. Verizon and AT&T competing in the IPTV market
Source: CableWiFi (Brighthouse, Cox, Cablevision, Time Warner Cable, Comcast) Source: AT&T, Verizon, iSupply, KDB Daewoo Securities Research
KDB Daewoo Securities Research 49 July 16, 2012 Media
4. Industry trend: Rising mobile demand
The difficulty of monetizing mobile traffic has become a key concern. Given changes in the way media is viewed, there is growing need to respond to rising mobile traffic. With advances in telecommunication technology, the amount of time to download a movie has gone down from 30 minutes under 2G services to only one minute under current 4G services. Meanwhile, the number of US mobile broadcasting viewers is expected to increase at a CAGR of 12.3% through 2014 (according to eMarketer).
Despite the surge in mobile traffic, companies are still trying to figure out how to monetize on this trend. For example, Facebook, which recently listed on NADSAQ, is raising concerns about revenue growth, as its web-based revenue models, including online ads, have not panned out in the mobile environment.
Rising mobile demand is However, media companies with content can monetize mobile traffic by providing fee-based promoting N-screen content services. In the UK, BBC has already set a good example as a major TV network by services launching its iPlayer service. In the US, major TV networks have made joint investments in creating Hulu, an ad-supported on-demand streaming video service, and Hulu Plus (a monthly subscription service). PwC projects that, in mobile broadcasting, ad revenues will exceed subscription fees in 2014.
Figure 91. BBCÊs iPlayer (UK) Figure 92. HuluÊs ownership structure (US)
10%
32%
27%
31%
Source: BBC Source: Company data, Wikipedia, KDB Daewoo Securities Research
Figure 93. US mobile broadcasting content demand is rising Figure 94. Rising content downloading speed
(mn persons) (US$mn) Downloading time for a film (700Mb) 60 Viewers (L) 1,600 Revenues (R) 1,806 sec. 2G (CDMA) (30m. 6s.) 45 1,200
30 800 389 sec. 3G (WCDMA) (6m. 29s.)
15 400
75 sec. 4G (LTE) (1m. 15s.) 0 0 08 09 10 11 12F 13F 14F
Note: Revenue includes subscription, PPV downloading fees, ad-based sales Source: Chosun Ilbo, KDB Daewoo Securities Research Source: eMarketer, KDB Daewoo Securities Research
KDB Daewoo Securities Research 50 July 16, 2012 Media
5. Domestic issues: General programming channels
1) Four general programming channels The latest talk of the town in the domestic media industry was general programming channels. The opening of four general programming channels (JTBC, Channel A, MBN and TV Chosun) in February 1, 2011, raised concerns that competition would intensify in the TV media industry. As of now, very few financial data are available regarding these channels, and thus, we supplemented our analysis of the four general programming channels with viewer ratings and major TV programs.
Unlike general cable TV channels that are required to specialize in only one genre, general programming channels, as the name suggests, can broadcast various genres including news, drama, education, entertainment, sports, etc.
Similar to terrestrial Terrestrial broadcasters, such as KBS, MBC and SBS, are also able to broadcast various broadcast channels, but genres. But unlike these broadcasters, general programming channels are broadcast via with less regulation cable and satellite networks, and thus, only subscribers to pay TVs have access to such channels. General programming channels face no limit on broadcasting time (terrestrial broadcasters can broadcast for up to 19 hours a day), and need to allocate only 40% of its broadcast time (vs. 80% for terrestrial broadcasters) to domestically produced programs. Moreover, the channels can insert mid-program advertisements.
At the time of establishment, paid-in capital of JTBC (Korea JoongAng Daily) was W422bn, W408bn for Dong-a IlboÊs Channel A, W395bn for Maeil Business NewspaperÊs MBN, and W310bn for Chosun IlboÊs TV Chosun.
With 90% of Koreans being subscribers to pay TVs, general programming channels were initially expected to have a huge impact on the media market. However, viewership has remained low at all four general programming channels since their opening. May average viewer ratings of the four general programming channels were 0.61% for JTBC, 0.57% for MBN, 0.47% for Channel A and 0.39% for TV Chosun.
While JTBC has more drama and entertainment programs than its peers, MBN, Channel A, and TV Chosun are running only one drama program each, concentrating on current issue/culture programs. All the four general programming channels are scaling down production costs due to sluggish ad sales. A reduction in production spending would likely lead to a fall in program quality, and further hurt sales.
Multi-content cable In selecting and approving general programming channels, the Korea Communications channel operators to Commission (KCC) banned major shareholdersÊ disposal of stakes within three years after focus on boosting approval. Accordingly, the channels will likely focus on boosting viewer ratings to enhance viewer ratings in the their value, rather than improving earnings, until December 2014. In the worst case, they short term might use up their paid-in capital during the period to solidify their positions through higher quality programs and higher viewer ratings in the media market.
Table 12. Comparison of each broadcasterÊs characteristics Classification Transmission & Reception methods Subscription fee Formation Air time Terrestrial TV Radio wave, TV antenna, Must carry(KBS1,EBS) Free (Public-Paid) All genre/specific channel 19hr Cable TV Optical fiber cable, Set-top box Paid Specific genre/multiple channel 24hr Satellite TV Satellite receptive antenna, set-top box Paid Specific genre/multiple channel 24hr General programming channels Cable, Satellite, IPTV, DMB, must-carry Paid All genre/specific channel 24hr IPTV Communication internet net Paid Specific genre/multiple channel 24hr Source: KIS, KDB Daewoo Securities Research
KDB Daewoo Securities Research 51 July 16, 2012 Media
Figure 95. Monthly viewership of general programming channels
(%) 0.7 JTBC MBN Channel A 0.6 TV Chosun
0.5
0.4
0.3 12/11 1/12 2/12 3/12 4/12 5/12 6/12
Note: Paid channels only Source: TNms, Media Today, JTBC, KDB Daewoo Securities Research
Table 13. Number of programs in general programming channels Channel Drama Entertainment News, Culture
On air: 3 dramas Main news at 9.55pm 4 shows Ended: 7 dramas 7 cultural programs
On air: 1 drama Main news at 8pm 5 shows Ended: 2 dramas 11 cultural programs
On air: 1 drama Main news at 10pm 5 shows Ended: 7 dramas 12 cultural programs
On air: 1 drama Main news at 8pm Ended: 2 dramas 3 shows 10 cultural programs Early finish: 1 drama
Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 52 July 16, 2012 Media
2) Impact of general programming channels on each media industry segment KCCÊs approval of general programming channels raised both expectations and concerns. The new channels were expected to boost the ad market, but there were also concerns that they might erode ad revenues for terrestrial and cable broadcasters. However, concerns have mostly dissipated as four general programming channels are all suffering from dismal viewer ratings of less than 1% after seven months of launch.
In the short-term, ad Although the new channels appear to have boosted ad agenciesÊ TV ad volume in the short- agenciesÊ TV ad volume term, their long-term impact on the ad market is forecast to be neutral. to increase, cable Terrestrial broadcastersÊ viewer ratings remain high, and they expect the introduction of channelsÊ production private media reps to have a more significant impact on their earnings. costs to increase, and newspapersÊ influence As for cable channels, an increase in competitors should lead to an improvement in their to decline competitiveness in content production in the long-term. However, they are currently suffering profitability deterioration due to a surge in production costs starting 2H11.
Meanwhile, printed media, namely newspapers, appear to be losing influence since the launch of general programming channels. Ironically, newspaper publishersÊ entry into broadcasting should further accelerate the weakening of newspapersÊ influence.
General programming channels are expected to make all-out efforts to enhance public awareness and viewer ratings in 2H, as viewer ratings should serve as a barometer for their competitiveness and value. Going forward, the position of general programming channels will likely be determined by their performance amid intense competition with terrestrial and cable TVs.
With a new president slated to take office next year in Korea, general programming channels should experience changes in the business environment, public opinions, and their status (whether terrestrial broadcaster or cable PP).
Figure 96. Long-term trends of Korean ad market by segment
(Wtr) General programming channels launched 12 Others CATV Asian financial Korea-Japan Online Crisis World Cup Magazine 9 Newspaper Radio Terrestrial TV 6
3
0 90 92 94 96 98 00 02 04 06 08 10 12F
Source: Ad Yearbook, Cheil Worldwide, KDB Daewoo Securities Research
KDB Daewoo Securities Research 53 July 16, 2012 Media
6. Growth stages of media group
Growth stages of media In Korea, an increasing number of media companies are being listed, and merger between group: Large corporate companies or group affiliates is also on the rise. Investors are now interested in whether groupsÊ entry into the they will grow into a comprehensive media group. In our view, the media industry grows in media industry three major stages. Formation of large media 1) Large corporate groupsÊ entry into the media industry: At this stage, the size of a groups Growth company determines its competitiveness. In the past, companies with large capital had reaching an inflection exerted indirect influence on media companies through ad spending. However, they began point to launch media businesses with their own platforms.
2) Formation of large media groups: The media industry had expanded significantly as companies increased their size through M&As. At this stage, global media groups, including The Walt Disney, News Corporation, Time Warner, and Viacom, appeared.
3) Growth reaching an inflection point: The growth potential and profitability of businesses began to diverge. In the US, some companies are spinning off merged companies or separating some businesses to establish independent companies.
In Korea, media companies have grown by strengthening competitiveness under strong regulations. As regulations began to ease and large companies began to enter into the media industry, large media groups are being formed through M&As.
Along with expansion of sizes, media companies are anticipated to grow further on the back of eased regulations and market expansion. In particular, overseas content sales are expected to serve as a new growth engine for the industry.
Figure 97. Media groupsÊ growth curve
Growth and profitability gap widened Consolidation of media between business segments companies to form groups
Spin-off of media businesses
Small- to mid-size Regulation easing independent active M&As companies Establishment
Entrance Growth Maturity Regrowth
Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 54 July 16, 2012 Media
1) Media industry consolidation is the result of capital inflows Global media companies are increasingly becoming conglomerates by expanding into the new media segments and acquiring related companies. This consolidation/expansion trend is being facilitated by: 1) the diversification of the media industry, 2) a global inter-industry convergence trend (due to technological developments and the slowing growth potential of individual industries), and 3) loosening regulations for ownership and newspaper- broadcasting co-ownership. Meanwhile, this industry trend could raise concerns related to the potential emergence of a media monopoly or restrictions on free speech.
Europe: Relatively tough European countries are placing relatively tough restrictions on the media industry. regulations in place, but Restrictions on broadcastersÊ market shares (in terms of viewership) and ownership remain several media in place. And newspaper-broadcasting co-ownership structures are only allowed on a limited conglomerates exist basis. For instance, the French government held forums for three months (starting in October 2008) to discuss the countryÊs newspaper crisis. At the time, the government stressed the need to promote media conglomerates. However, due to French peopleÊs strong criticism and opposition, the government dropped related measures.
Still, there are media conglomerates on the continent. German-based Bertelsmann is a prime example. The company holds 45 TV networks and 32 radio stations in 11 European countries. The former Italian Prime Minister Silvio Berlusconi owned three private TV networks and held influence over the public media. In Spain, Grupo Prisa engages in the newspaper, radio, cable TV, and publishing businesses.
US: Lenient media The USÊs restrictions on the media industry are relatively lenient. Indeed, several former regulations; administrations were conglomerate-friendly. Since the 1990s, massive capital flocked into Consolidation/expansion the media sector, which accelerated the consolidation/expansion of the industry. has picked up speed After the US Federal Communications Commission (FCC) abolished a regulation related to radio station ownership in 1996, Clear Channel Communications acquired 1,200 stations. During the Bush administration, the FCC eased the cap on broadcasting ownership and lifted the ban on newspaper-broadcasting co-ownership. Meanwhile, the Obama administration is opposing such co-ownership.
Consolidation/expansion In the past, non-media companies had only indirect influence on media via advertising. of the media industry is However, now, more and more firms are expanding into the business and owning and the result of massive running media companies. Indeed, the consolidation/expansion trend of the media industry capital inflows is the result of massive capital inflows.
Figure 98. Clear Channel Communications: Share price and size went up after regulatory easing
(US$bn) (US$) 40 EPS (R) 2.0 Market capital (L)
30 1.5 Clear Channel allowed to own 1,200 radio stations in US 20 1.0
US FCC eased regulations on ownership of radio stations in 1996 10 0.5
0 0.0 1Q86 1Q88 1Q90 1Q92 1Q94 1Q96 1Q98 1Q00 1Q02 1Q04 1Q06
Source: Thomson Reuters, KDB Daewoo Securities Research
KDB Daewoo Securities Research 55 July 16, 2012 Media
The governmentÊs willingness to promote industries and companiesÊ enthusiasm for entering the media business are resulting in deregulation. Generally speaking, investments lead to industry growth, which in turn pushes up profitability and growth potential. Assuming that this virtuous cycle (investments business success and market growth re- investment) will be applicable to the media industry, we expect to see the media industry grow. However, this growth will only be sustainable if interactions between the government and people (TV viewers and content consumers) are smooth.
Growth vs. regulations The competitiveness of media companies hinges on content. And extremely profit-oriented or conservative approaches could hinder content diversity, which might eventually dent companiesÊ ability to serve as outlets for public opinions. Indeed, although the consolidation/expansion trend could be essential to the industryÊs growth, it might give rise to social controversies. As such, we believe that regulatory movements will remain an important factor affecting the media industry.
Larger media groups just In Korea, excessively strong regulations have depressed the growth of the media industry. started to form in Korea Public media repsÊ exclusive TV ad sales were ruled unconstitutional. Recently, the government began to ease regulations in light of the limited growth potential of the domestic market and growing content demand in the overseas markets.
Thus, the government is expected to continue support for restoring and promoting media companiesÊ growth potential. In our view, large companies have built up strong competitiveness amid fierce competition resulting from strict regulations and the small size of the domestic market. They also have accumulated experiences in content production and their utilization. Thus, the industry is expected to grow sharply once the market environment turns favorable. In particular, overseas content sales are expected to serve as a new growth engine for the industry.
The growth types of a media group can be divided into a diversified model and a concentrated model. Under the model of diversified growth, large capital flows into the market on the back of regulation easing, and a companyÊs entry into multiple market segments increases. Thus, a media company can grow into a media group integrating newspaper, film, broadcasting, and internet businesses. A concentrated growth model indicates a type of growth in which companies grow by concentrating on one media segment. In the US, Japan, France, Germany, and UK, companies have grown under a diversified growth model, as newspaper-broadcasting co-ownership was allowed.
Meanwhile, Korean media companies have grown under a concentrated growth model, by strengthening the competitiveness in one market segment amid strict regulations. As regulations began to ease and large companies began to enter into the media industry, large media groups are being formed through M&As.
Figure 99. Media companiesÊ growth strategy
Consolidation of segments Diversified model Formation of big media group Slowdown in Concentrated model Overseas expansion growth and Korean media companies Market share expansion profitability in existing markets
Regulation easing Spin-off of businesses Active M&As Securing new Production and distribution growth drivers competitiveness improvement Small- to mid-size independent companies Competition with rivals Establishment Concentration on Market entrance existing media businesses Growth of scale
Entrance Growth Maturity Regrowth
Note: Based on major success cases Source: Alan B. Albarran, KDB Daewoo Securities Research KDB Daewoo Securities Research 56 July 16, 2012 Media
2) US media conglomerates Within the global media group, we looked at US media conglomerates in particular, as their successful development and expansion strategies across different media platforms have set an important benchmark for domestic media firms.
Major US media giants include the Walt Disney Company (2011 revenues of US$40.8bn; market cap of US$84.9bn), News Corporation (revenues of US$33.4bn; market cap of US$49bn), Time Warner (revenues of US$29bn; market cap of US$35.8bn) and Viacom (revenues of US$14.9bn; market cap of US$25.3bn).
News Corp and Walt News Corp has a dominating market presence across the entire media spectrum, from Disney operate both publishing, terrestrial television (Fox), cable networks to satellite TV channels, film terrestrial and cable production and digital media. networks, similar to SBS A key characteristic of the companyÊs business structure is the large sales contribution of its Media Holdings publishing division, which is often perceived as a declining industry. Focused on premium economic and financial contents (Wall Street Journal, etc.), the publishing business accounted for 26% of total revenues in 2011 (27% in 2005) – the highest among any other of News CorpÊs businesses. The media group also has extended its widely recognized Fox brand into its other operations like broadcast television, cable channels and motion pictures.
Figure 100. US media group: News Corporation (established in 1979)
Rupert Murdoch and News Corporation News Corporation Board of Directors Executives Government Relations
Cable Network Filmed Entertainment Television Direct Broadcast Publishing Other Programming (1985) (1986) Satellite TV
HarperCollins (book FOX Business Network Fox Broadcasting Digital Media Group Fox Studios Australia company) (1989) (2007) Company Sky Italia (Stake: 100%) (2003) New York Post (1993) Hulu ăJoint Venture FOX News Channel Fox Television Studios FOX Sports (2011) (Stake: 27%) BSkyB Fox Networks Twentieth Century Fox (equity affiliate) (Stake: News International FOXSports.com on NDS Group Film 39.14%) (1989) Fox International MSN Channels FOXTEL News Limited Education Division FSN Twentieth Century Fox Fox Television Stations (equity affiliate) Home Entertainment (Stake: 25%, Joint The Wall Street Journal Wireless Generation Venture) (1995) (2007) FX Networks MyNetwork TV Twentieth Century Fox Dow Jones (2007) National Geographic Consumer Products Channel (2001) Twentieth Television The Times (1981) STAR (1993) Twentieth Century Fox Television The Daily National Geographic Shine Group Channel Asia
2011 Revenues
Publication CATV PP Film Terrestrial TV Satellite 26% 24% 21% 14% 11%
Note: Business model is based on year 2012, revenue of $33.4bn is based on 2011, numbers in parenthesis are years of business initiation/M&A. Source: News Corp, Wikipedia, KDB Daewoo Securities Research
KDB Daewoo Securities Research 57 July 16, 2012 Media
Disney makes an overwhelming portion (46% in 2011) of its revenues from its media network division which mostly consists of broadcast television (ABC) and cable channels (ESPN). The parks and resorts division and Walt Disney Studios (films) contribute around 29% and 16% of revenues, respectively.
DisneyÊs media network division has different business characteristics from its film division. The companyÊs sports cable channel ESPN features many different sports genres that attract a large viewer base and has become a model strategy in navigating the cable network industry. The groupÊs strategy of combining its film business with its parks/resorts and consumer product divisions is widely viewed as a textbook case of content marketing. The parks and resorts division in particular has taken hold as a sizeable and profitable business, currently accounting for 29% of the groupÊs revenues.
DisneyÊs business model can be largely characterized by: the parks/resorts and consumer product divisions, which serve as a steady cash cow and a valuable source of additional revenue; the media network division, which generates a variety of income including ad revenues, pay TV, and contents distribution profits, and the film division which heavily depends on box office performances.
Within the domestic media group, SBS Media Holdings can be comparable to the above two media conglomerates in that they both operate terrestrial television and cable networks. Hulu, a digital video streaming service established by a joint venture of broadcast television networks (News CorpÊs Fox, DisneyÊs ABC and NBC), is used as a reference by SBS in its N Screen service strategy.
Figure 101. US media group: The Walt Disney (established in 1923)
Robert Iger & Affiliates Board of Directors
Walt Disney Studio Film Music Live Entertainment Walt Disney Disney Toons Pixar Entertainment Animation Studio Studios (1923)
Disney Consumer Products Disney Stores (1955)
Walt Disney Parks and Walt Disney World Theme Parks Disney Cruise Lines Resorts Resorts (1955)
Disney Media Networks Disney ABC Television ESPN (1996) MARVEL (2009) A&E Network (2009) (1996) Group (1996)
Walt Disney Internet Group/ Disney Interactive Media Disney Online Disney Games Group (1997)
2011 Revenues
Terrestrial TV Parks & Consum Film CATV PP resorts 16% er 46% 29% products
Note: Business model is based on year 2012, revenue of $40.8bn is based on 2011, numbers in parenthesis are years of business initiation/M&A. Source: The Walt Disney, Wikipedia, KDB Daewoo Securities Research KDB Daewoo Securities Research 58 July 16, 2012 Media
Time Warner and Time Warner runs a range of media operations, most notably cable channels (CNN and HBO), Viacom are focused on movie studios (Warner Brothers) and magazines (Time and Fortune). Broadcasting and films cable networks and as a percentage of total revenues have remained largely steady for the past three years, films; contributing 47% and 44%, respectively, to the groupÊs 2011 revenues. similar to CJ E&M The global syndication of its broadcast contents (i.e. CNN news and HBO dramas) has driven an increase in its contents revenues and a gradual rise in the sales contribution of the groupÊs broadcasting division. On the other hand, the percentage of magazines sales has been steadily decreasing, from 19% in 2009 to 13% in 2011.
Figure 102. US media group: Time Warner (established in 1989)
Jeffery L. Bewkes & affiliates
Time Inc. Home Box Office (HBO) Turner Broadcasting Warner Bros. 50% The CW Television (1990) (1989) System (1996) Entertainment (1972) Network
Time Magazine HBO on Demand CNN Warner Bros. Studios
Warner Bros. Pictures Sports Illustrated HBO GO HLN
Warner Bros. Fortune HBO Family TBS Interactive Entertainment TNT People HBO Latino Warner Bros. Television Cartoon Network InStyle HBO Comedy Warner Bros. Boomerang Animation
Life truTV Warner Home Video
Golf Turner Classic New Line Cinema Movies
TheWB.com
DC Comics
2011 Revenues
CATV PP Film Magazine 46% 44% 13%
Note: Business model is based on year 2012, revenue of $29bn is based on 2011 (internal sales of $1bn included), numbers in parenthesis are years of business initiation/M&A. Source: Time Warner, Wikipedia, KDB Daewoo Securities Research
KDB Daewoo Securities Research 59 July 16, 2012 Media
Viacom owns cable networks (MTV), movie studios (Paramount) and digital media operations. Since 2005, cable networks and films have accounted for roughly 60% and 40% of annual revenues, respectively, although the films divisionÊs earnings tend to be volatile depending on box office records and macro conditions.
Both media conglomerates have a large exposure to cable networks and films. Among domestic players, CJ E&M has a similar profit structure. Time Warner and Viacom are both successful cases of expanding their business from traditional films into cable networks, with broadcasting currently generating larger profits than films.
The business structure of these two media groups can be characterized by 1) a broadcasting division that ensures a stable earnings stream (via ads and subscription fees) and features a wide range of contents produced at relatively cheap costs and 2) a film division that involves massive productions costs and bets on box office performances. One of the key advantages of this business model is that they can generate an additional source of profit from film contents by distributing them through their cable network subsidiaries.
Figure 103. US media group: Viacom (established in 1971)
Philippe Dauman Board of Directors and Senior Management
Paramount Pictures Corp VIACOM Media Networks (1994)
Atom Entertainment Paramount Pictures BET.com (2006) (2006) Digital Assets BET Networks (2001) Nick.com Paramount Vintage
CMT MTV.com VIACOM International Media Networks MTV Films Comedy Central (2003) Spike.com Nickelodeon Movies Global Reach VH1 VH1.com
GoCityKids Home Entertainment Atom.com VIVA (2005) Spike TV Ratemyprofessor. Tr3s com (2007) MTV Networks (1985) Musicá y Mas MTV International COLORS Nickelodeon (2002)
News America Marketing
2011 Revenues
CATV PP Film 59% 41%
Note: Business model is based on year 2012, revenue of $14.9bn is based on 2011 (internal sales of $100million excluded), numbers in parenthesis are years of business initiation/M&A Source: Viacom, Wikipedia, KDB Daewoo Securities Research
KDB Daewoo Securities Research 60 July 16, 2012 Media
3) Turning point: Split-offs becoming more common The US media industry We believe that the US media industry has reached a turning point. More and more media has reached a turning groups are splitting off units that they acquired or are spinning off certain businesses. For point; More media instance, News Corp. recently decided to split off its news and entertainment units. groups are splitting off In other words, the era of expansion via M&A deals seems to be over. Generally, when an business units industry is growing, a bigger business scale leads to greater competitiveness. However, when an industry becomes mature, extremely large-scale operations and business integration could pose risks.
Time Warner is a prime example of a media convergence failure. Indeed, Time Warner spun off AOL (at a high cost) shortly after acquiring the company. And there are plenty of other examples of post-convergence setbacks. Disney suffered internal conflicts and deterioration in creativity and efficiency, and Vivendi experienced financial deterioration due to excessive expansion and high acquisition prices. Bertelsmann suffered internal conflicts and margin declines at its music and internet units. Beta-Taurus (an affiliate of the Germany-based media group Kirch) incurred debt increases owing to its excessive optimism about the fee-based broadcasting business in Germany. Spain-based Telefonica Media failed to come up with efficient strategies amid the absence of leadership and faced financial difficulties after paying high acquisition prices.
When an industry reaches a turning point after showing robust growth, companies need to endeavor to find new opportunities. Along the way, companies could learn lessons, which should lay a foundation for re-growth.
Figure 104. Increasing professionalism and falling efficiency
Professionalism Efficiency
Pros: Exchange of ads; sharing of production facilities New resources; Bundling sales and purchase
Strenthening competitiveness; Gap between businesses widening; Increasing scale through M&As; Slowing decision making process; Need for Business diversification spin- off
Cons: Weak barganing power due to small scale; Revenue opportunities are limited due to narrow business areas
Entrance Growth Maturity
Source: Alan B. Albarran, KDB Daewoo Securities Research
Figure 105. News CorpÊs share price and EPS trends
(US$) (US$) 23 Share price (L) 2.0 EPS (R) News Corp announced the spin off of its newspaper 22 and entertainment divisions 1.8
21 1.6
20 1.4
19 1.2
18 1.0 1/12 2/12 3/12 4/12 5/12 6/12
Source: Thomson Reuters, KDB Daewoo Securities Research KDB Daewoo Securities Research 61 July 16, 2012 Media
News Corp.Ês decision We believe that News Corp.Ês decision to implement split-offs was largely motivated by to implement split-offs significant differences in revenues and margins between business units. And we also was largely motivated by believe that OfcomÊs (the UK media regulator) recent restrictions against Rupert Murdoch the significant (Chairman and CEO of News Corp.) played a part. differences in revenues The newspaper unit has been a major drag on the overall earnings of News Corp. In 2011, and margins among the newspaper unit grew only 1%, vs. 10% growth at the entertainment business (including business units cable TV operations, terrestrial TV stations, and movies). The OP margin at the newspaper unit was only 9%, vs. 35% at the cable TV, 14% at terrestrial TV stations, and 13% at the movie unit.
We think that News Corp.Ês entertainment division should gain traction after being spun off in light of its robust growth rate. It has been reported that the market cap of the entertainment unit is likely to surge 292% after the split-off.
Figure 106. News CorpÊs cable PP revenue growth trend and 2011 Figure 107. News CorpÊs terrestrial TV revenue growth trend and earnings 2011 earnings
(% YoY) (US$bn) (% YoY) (US$bn) 40 Cable PP 8 40 Terrestrial TV 8
30 30
6 6 20 20
10 10 4 OP margin 4 0 35% 0
-10 -10 2 2 OP margin 14% -20 -20
-30 0 -30 0 08 09 10 11 12F Revenues Operating profit 08 09 10 11 12F Revenues Operating profit
Source: News Corp, WSJ, KDB Daewoo Securities Research Source: News Corp, WSJ, KDB Daewoo Securities Research
Figure 108. News CorpÊs film revenue growth trend and 2011 Figure 109. News CorpÊs newspaper revenue growth trend and 2011 earnings earnings
(% YoY) (US$bn) (% YoY) (US$bn) 40 Newspaper 40 Film 8 8
30 30
6 6 20 20
10 10 4 4 0 0
-10 -10 2 OP margin 2 13% OP margin -20 -20 9%
-30 0 -30 0 08 09 10 11 12F Revenues Operating profit 08 09 10 11 12F Revenues Operating profit
Source: News Corp, WSJ, KDB Daewoo Securities Research Source: News Corp, WSJ, KDB Daewoo Securities Research
KDB Daewoo Securities Research 62 July 16, 2012 Media
Past US media split-offs include the following:
Viacom spun off CBS to 1) Viacom spun off CBS in 2005 (after the merger in 1999). After the spin-off, ViacomÊs cash separate traditional flow and dividend payout ratio have expanded. And Viacom carried out a share buyback media from new media program. Earnings surged. Since the split, Viacom and CBS have specialized in specific areas, which has caught investorsÊ attention. While CBS has focused on the broadcasting business, Viacom has specialized in new media segments (e.g., video games, online content, and wireless internet).
Time Warner separated 2) Time Warner spun off its cable SO business in March 2009, which was then listed as content production from Time Warner Cable. This is a good example of separation between content production and system operation system operation. Indeed, content production and system operation are different in terms of investment methods, management strategies, growth patterns, and margin generation.
This trend is also found in the domestic media market as well. CJ E&M, CJ HelloVision, and CJ CGV are engaging in different media business areas under the umbrella of the CJ Group. CJ GroupÊs movie production (CJ Entertainment), cable PP, game (CJ Internet), and music (Mnet) businesses were integrated into CJ E&M in 2010. Meanwhile, CJ HelloVision is operating a cable TV business, and CJ CGV is running movie theaters.
Figure 110. EPS trends of Viacom and CBS
(US$) (US$) 4 Viacom's EPS (L) 2.4 CBS' EPS (R)
3 1.8 Spin off
2 1.2
1 0.6
0 0.0 90 93 96 99 02 05 08 11
Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 111. EPS trends of Time Warner and Time Warner Cable
(US$) (US$) 3.2 Time Warner's EPS (L) 8 Time Warner Cable's EPS (R) Spin off 2.4 6
1.6 4
0.8 2
0.0 0 98 00 02 04 06 08 10 12
Source: Thomson Reuters, KDB Daewoo Securities Research
KDB Daewoo Securities Research 63 July 16, 2012 Media
4) Major domestic media companies and their governance structures Major Korean media companies are mostly affiliated with conglomerates. The Samsung Group holds the leading domestic advertising agency (Cheil Worldwide) under its umbrella. The CJ Group has a leading domestic cable TV operator. Taeyoung owns KoreaÊs only private terrestrial broadcaster. SK Group is expanding into the IPTV segment on the back of SK Telecom. KT is reinforcing its media business after making a satellite platform acquisition.
Against this backdrop, we believe that ownership structures, intra-group relationships, and internal competition should significantly affect media companiesÊ decision-making. In order to make projections for domestic media companies, we closely examined these influential factors.
Cheil Worldwide: The Samsung Group (flagship affiliate: Samsung Electronics (SEC)), to which Cheil Worldwide Putting a focus on global belongs, aims to take global leadership of all of the business areas in which it operates. As the competitiveness grandchildren of the groupÊs founder are increasingly taking over management control, intra-group competition has intensified. Given this, each business unit is seeking growth momentum.
Cheil Worldwide is owned by Samsung C&T (ownership stake of 12.6%) and Samsung Card (3%), whose majority stakes are held by Samsung Life Insurance and Everland (both controlled by founding family). As such, Cheil Worldwide is under the control of the founding family. Seo-hyun Lee, the vice president of Cheil Worldwide (as well as Cheil Industries), is focusing on improving the global competitiveness of Cheil Worldwide (and Cheil Industries).
We believe that Cheil Worldwide worked together with SEC and Samsung C&T to expand its global networks (e.g. establishment of overseas subsidiaries). Cheil Worldwide is also affiliated with Samsung Card and Samsung Life Insurance, for which consumer marketing is important. Drawing upon these relationships, Cheil Worldwide has received steady advertising orders. Given that SEC is leading the global IT market, we expect Cheil Worldwide to see a steady increase in orders from affiliates.
Like Cheil Worldwide, most domestic advertising agencies have displayed growth mainly on the back of orders from affiliates. As such, the growth of advertising agencies should hinge on whether or not they can be competitive outside of their respective captive markets. This is why Cheil Worldwide is pushing to secure new non-affiliate customers in Korea and abroad.
Figure 112. Samsung groupÊs holding structure (Owner Samsung C&T Cheil Worldwide)
Samsung Samsung Samsung Corning Samsung Samsung Gen. Samsung Samsung SDS Samsung LED S-LCD Biologics Mobile Display Precision Glass Petrochem Chem Medison
40.0% 64.4% 42.6% 21.7% 50.0% 50.0% 13.0% 3.9% 65.8%
CheilCheil SamsungSamsung SamsungSamsung SDISDI HotelHotel ShillaShilla SamsungSamsung TechwinTechwin SamsungSamsung HeavyHeavy SEMCOSEMCO CommunicationsCommunications FineFine ChemChem (006400(006400 KS)KS) (008770(008770 KS)KS) (012450(012450 KS)KS) (010140(010140 KS)KS) (009150(009150 KS)KS) (030000(030000 KS)KS) (004000(004000 KS)KS) 20.4% 2.6% 5.1% 25.5% 8.4% 17.6% 23.7%
1.3% 7.4% SamsungSamsung ElectronicsElectronics SamsungSamsung F&MF&M 3.6% SamsungSamsung Corp.Corp. SamsungSamsung CardCard (005930(005930 KS)KS) (000810(000810 KS)KS) (000830(000830 KS)KS) 35.3% (029780(029780 KS)KS) 15.3% 3.4% 10.4% 5.1% Samsung 2.4% Samsung SamsungSamsung CardCard Lee, Gun Hee SamsungSamsung HeavyHeavy EngineeringEngineering & Affiliates (010140 KS) (029780(029780 KS)KS) 30.1% (010140 KS) (028050(028050 KS)KS) 25.1% 19.3% 25.6% SamsungSamsung 4.0% 11.5% Samsung Samsung SamsungSamsung 1.7% LifeLife InsuranceInsurance Fine Chem Everland (032830 KS) Everland Fine Chem 5.1% (032830 KS) (004000(004000 KS)KS) SamsungSamsung C&TC&T (000830(000830 KS)KS) 8.4% 11.0% Samsung SDS S-OneS-One (012750(012750 KS)KS) 5.6% 4.3% 2.4% 4.1% 12.6% 10.5% Samsung Gen. 4.0% SamsungSamsung CheilCheil Chem Samsung SamsungSamsung TechwinTechwin SamsungSamsung CardCard SamsungSamsung ElectronicsElectronics FineFine ChemChem WorldwideWorldwide Everland (012450(012450 KS)KS) (029780(029780 KS)KS) (005930(005930 KS)KS) (004000(004000 KS)KS) (030000(030000 KS)KS) 50.0% 27.3% 38.7% 1.5% 18.3% Samsung LED 35.6% Samsung Samsung Samsung Gen. Samsung Samsung SDS Mobile Display Petrochem Chem Everland eSamsung 11.3% International 10.7% Samsung Gen. 50.0% Credu Samsung Total Credu OpenTide Korea Chem (067280(067280 KS)KS) 49.7% 72.6% 10.4%
50.0% SB Limotive
Note: As of Dec 2011, Source: Company data, KDB Daewoo Securities Research In 2008, Cheil Communications changed its name to Cheil Worldwide. As the new company
KDB Daewoo Securities Research 64 July 16, 2012 Media
name implies, the company has steadily expanded its global network and is currently operating 25 subsidiaries, 6 branches, and 4 offices globally.
Cheil Worldwide has acquired three foreign advertising agencies since vice president Seo- hyun Lee was appointed. However, these agencies have not made marked contribution to the companyÊs overseas revenues due to 1) their small size and 2) focus on BTL (below the line; advertising through media other than four major media outlets) and digital ads.
In 2012, Cheil Worldwide is considering acquiring advertising agencies in the US and China. The company is likely to target bigger agencies (than the previously acquired three companies) that have solid brand recognition and knowhow to attract overseas customers.
Cheil Worldwide is striving to enhance its ad production capability, as competitive content arising from creativity is crucial to steadily attract clients. As such, Cheil Worldwide has recently appointed as executives those who had moved up the corporate ladder within the company (rather than Samsung Group-related persons or outside experts) and been recognized for their outstanding ad production capability. The company has also endeavored to prove its global ad production competitiveness by participating in global prestigious ad festivals, including Cannes Lions International Festival of Creativity. The company won one silver and one bronze medals in Cannes Lions 2008 and 12 medals (including three global medals) in 2012.
Cheil WorldwideÊs efforts to bolster its ad production capability and overseas operations are also attributable to 1) the companyÊs determination not to fall behind other Samsung Group affiliates (such as Samsung Electronics and Cheil Industries) and 2) the need for group affiliates to enhance competitiveness before a transfer of the group management control.
Figure 113. Samsung groupÊs holding structure (Owner Samsung Life Insurance Samsung Card Cheil Worldwide)
Samsung Gen. 26.5% Chem
Samsung S-OneS-One HotelHotel ShillaShilla SamsungSamsung TechwinTechwin 41.0% Asset Management (012750(012750 KS)KS) (008770(008770 KS)KS) (012450(012450 KS)KS) Samsung Futures
65.3%1.3% 1.0% 3.1% 2.0% 4.0% 51.0%
50.0% SamsungSamsung SecuritiesSecurities SD Flex (016360(016360 KS)KS)
8.0% 65.3% 4.0% Samsung 1.3% 1.2% Everland SamsungSamsung ElectronicsElectronics SamsungSamsung F&MF&M Samsung (005930(005930 KS)KS) (000810(000810 KS)KS) Asset Management 35.3% 13.1% SamsungSamsung 15.3% 3.4% 10.4% 5.5% Samsung 40.0% Lee, Gun Hee EngineeringEngineering Samsung Card Biologics Samsung Card & affiliated (028050(028050 KS)KS) (029780(029780 KS)KS) persons 25.1% 30.1% 4.7% 21.4% CheilCheil Industries Industries Samsung 25.0% 25.6% 19.3% SamsungSamsung (001300 KS) Petrochem eSamsung Samsung (001300 KS) LifeLife InsuranceInsurance International Everland (032830(032830 KS)KS) 1.3% 100% 1.7% HotelHotel ShillaShilla Gemi Plus 21.0% 5.1% (008770(008770 KS)KS) Distribution SamsungSamsung C&TC&T Gaccinet (000830(000830 KS)KS) 3.0% CheilCheil 3.2% SamsungSamsung WorldwideWorldwide FineFine ChemChem (030000 KS) (004000 KS) 3.4% 7.5% 26.4% (030000 KS) (004000 KS) 1.9% SamsungSamsung HeavyHeavy SamsungSamsung ElectronicsElectronics SamsungSamsung CardCard S-OneS-One Samsung Gen. (010140(010140 KS)KS) (005930(005930 KS)KS) (029780(029780 KS)KS) (012750(012750 KS)KS) Chem 3.6% 5.4% 11.4% 7.7% SamsungSamsung 2.2% SamsungSamsung S-OneS-One HotelHotel ShillaShilla Handuk SecuritiesSecurities FineFine ChemChem (012750(012750 KS)KS) (008770(008770 KS)KS) Chemical (016360(016360 KS)KS) (004000(004000 KS)KS) 50% 3.9% Samsung Asset Management
Note: As of Dec 2011 Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 65 July 16, 2012 Media
CJ E&M, CJ HelloVision The CJ Group, to which CJ E&M, CJ HelloVision, and CJ CGV belong, has a diversified and CJ CGV are business portfolio of food, distribution, entertainment, and infrastructure. strengthening domestic CJ Corporation (CJ GroupÊs holding company) has a stable business structure thanks to the dominance and overseas diversified business structure of its major subsidiaries. In addition, the company has solid operations revenue sources, including dividend, royalty, and rental incomes. The company can afford to provide financial assistance to its subsidiaries if necessary, aided by its massive asset holdings.
The CJ Group is expanding the food business into the services and biotech markets, while strengthening the distribution business, as evidenced by its recent acquisition of Korea Express. The acquisition appears aimed at creating synergies with CJ GLS and enhancing its overseas logistics operations.
CJÊs media/entertainment business is dominant in the cable TV and film markets. CJ has achieved a vertical integration of production and distribution in the pay-TV and film content markets. If ownership restrictions are eased in the pay-TV market, the business environment for cable SOs and PPs will turn favorable, in our view.
CJÊs film business is characterized by overseas expansion. CJ E&M, which has invested in foreign films and production, has recently appointed the new head of its film business and combined its domestic and overseas divisions. CJ CGV, which has minimal domestic growth potential due to its already high market share and limited market size, is expanding its multiplex business in overseas markets, including China.
Figure 114. CJ groupÊs holding structure (CJ E&M, CJ HelloVision)
Lee, Jae Hyun 100% C&I Leisure 90.0% CJ Venture & Affiliates Industry Investment 88.0% 43.5% 90.3% Sinuido Salt Orion Cinema CJCJ Network (001040 KS) 100% (001040 KS) 86.7% 40.2% On Game CJ MD One CJCJ E&ME&M 37.0% Network CJCJ CheiljedangCheiljedang (130960(130960 KQ)KQ) 66.2% 100% 46.5% (097950(097950 KS)KS) Woosung CJCJ Seefood Seefood 39.8% 98.8% Baduk Television CJ O Shopping (011150(011150 KS)KS) 20.1% CJ O Shopping Superrace (035760(035760 KS)KS) 68.8% 97.8% Mediaweb Youngwoo CJCJ Korex Korex (000120 KS) 66.9% 60.3% Frozen Food (000120 KS) SA CJ Hellovision 67.0% Management CJ NGC Korea 100% 100% 20.1% Don Don Super Feed 93.2% 100% 100% 50% Farm CJ GLS CJ Olive Young CJ Telenix CJ Games
100% 41.4% 98.3% Art Service CJ Powercast 92.7% E&C Infra 66.3% 51.7% 4D plex CJ SYSTEMS Clip Service
40.1% Azworks 100% 100% CJCJ CGVCGV 60.0% Primus Cinema CJ Sports (079160(079160 KS)KS) 99.9% 50.0% East Busan 100% D-Cinema of 50.0% CJ E&C Theme Park Good Concert Korea 100% 100% 51.8% 82.5% 17.5% KMTV CJCJ FreshwayFreshway C&I Leisure CJ N-city (051500 KS) HB PFV 100% (051500 KS) Industry International Media genius 96.3% 42.1% CJ Foodville Embaro
Note: As of June 2012 Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 66 July 16, 2012 Media
SBS is expanding its The Taeyoung Group, which has SBS, SBS Media Holdings, and SBS Contents Hub, is businesses from expected to strengthen its value-added media businesses, as its construction and civil terrestrial broadcasting engineering businesses have lower profit margin, higher uncertainty (arising from an orders- to cable PP, content based business structure), and massive capital investments. distribution, media rep, Taeyoung E&C, which plays a role as a parent-company, has a solid level of order backlog and cultural businesses thanks to its public-sector-orders-oriented business structure. The company is currently experiencing rising working capital burden and business volatility due to the expansion of its construction business. The companyÊs operating profit improvement will likely be limited amid mounting competition in the civil engineering market.
SBS Media Holdings plays a role as the holding company of the Taeyoung GroupÊs media businesses, serving as a driving force behind the groupÊs efforts to become a comprehensive media group. SBS and related subsidiaries, which have an image of a cultural business operator, creates positive brand image for the Taeyoung Group. SBS has achieved a vertical integration in the domestic media market by expanding its businesses from terrestrial broadcasting to cable PP, content distribution, media rep, and cultural businesses.
SBS Media Holdings plans to sharpen its cable channel competitiveness, which is weaker than the CJ Group, by increasing the number of cable channels (subsidiaries) in the event of deregulation. The company is also endeavoring to strengthen its broadcasting content production capability and channel awareness. Furthermore, the company is making efforts to utilize content on a variety of platforms. One such effort is „pooq,‰ a united terrestrial broadcasting platform that the company recently built for its N-Screen business.
Figure 115. Taeyoung groupÊs holding structure (SBS, SBS Media Holdings, SBS Contents Hub)
99.9% Taeyoung Yoon, Seok Min 60% Media Create Management & Affiliates
1.5% 27.1% 2.6% 100% SBS IPTV SPC 61.2% 83.4% SBSSBS Media Media HoldingsHoldings TaeyoungTaeyoung E&C E&C Taeyoung (101060(101060 KS)KS) (009410(009410 KS)KS) Leisure 100% SBS KT SPC 52.2% 4.6% SBS Golf 100% 7.3% SKB SBS SPC Taeyoung Grain 28% Terminal 50.8% SBS 34.7% SBS News Tech SBS (034120 KS) 30.4% Taeyoung 50% Taeyoung (034120 KS) 65% SBS Contents Hub SBS Contents Hub Industry Horizon Korea 51.0% (046140(046140 KQ)KQ) 52.3% SBS Art Tech 70% 30.0% 65% Gyeongju Biotech TY Steal 40% 100% 40% The Story Unicity 100% Global D&E 60% SBS Eplus 100% Works 40% Taeyoung GLS SBS Plus Echo City 50% 50% Taeyoung Li&S Sports TSK Water Industry USA 70% 51% 50.0% 57.4% SBS Viacom Yangsan Sanmak Industrial Complex 50% TNC Egro 100% Yangsan 100% SBS Business Sanmak AMC Network 100% Daegu South AMC 49.0% Pocheon Bio 51.0% 100% 29.4% 100% Energy SBS International Inje Autopia TYNE 46.7% Yeosu Expo 40% Yangju Highway Environment 51% 100% SBS Sports Inje Autopia 70% Taeyoung E&C 48.6% Management SDN. BHD
Note: As of June 2012 Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 67 July 16, 2012 Media
With its broad KT owns satellite broadcasting and IPTV operations under its group umbrella. It also has a communication network, number of non-telecom subsidiaries in internet, e-commerce, contents, credit cards, car KT can provide rentals, cloud computing and security services. Most recently, it acquired the satellite convergence services broadcaster SkyLife and the credit card company BC Card. without causing any We believe KTÊs takeover of the satellite broadcaster was based on a strategic decision controversy over net targeted at the domestic pay TV and broadband internet markets, in which telecom providers neutrality have been facing increasing competition from cable service providers across the board who have been strengthening their competitive edge against IPTV providers by migrating from analogue to digital broadcasting. Cable service providers have already entered the fixed-line segment (high-speed internet and internet phones) and, more recently, have been making their way into the wireless communication market with the launch of mobile virtual network operator (MVNO) services.
KT SkyLife is key part of KTÊs media business strategy. KT has seen a significant growth in subscribers following the release of its Olleh TV Skylife (OTS) service which combines its legacy IPTV with SkyLife services. From a quantitative point of view, we believe the companyÊs strong growth period is nearing an end. Going forward, we believe qualitative growth, such as improving its ARPU, will become the key challenge facing the company.
KT recently rolled out a mobile TV service called Olleh TV Now for its LTE subscribers. We believe one of its key strengths lies in its ability to tap into its broad communication network (via its subsidiaries) and provide convergence services that integrate telecommunication and broadcasting without raising any controversy over network neutrality.
KTÊs non-telecommunication operations have been attracting attention for its strong growth potential. We believe KT could take note of SK Telecom and the spinoff of SK Planet, its mobile platform operations. The company also seems open to the possibility of converting into a holdings company to ensure the efficient operation and transparent decision making at its subsidiaries and enhance its corporate value.
Figure 116. KT groupÊs holding structure (KT Skylife)
KT 100% KT Pay & Mobile (030200(030200 KS)KS) 1.0% 65.9% 81.6% 38.9% KTH 99.0% 57.0% KT Capital BC Card H&C Network Initech (036030 KQ) 18.4%
19.0% 17.5% KT CS 28.0% Vanguard 44.5% KT Commerce 54.6% 81.0% (030210 KS) Private Equity Fund U-Payment 100% 17.8% 44.9% KT IS 9.0% KT-LIG Ace 50.9% KTP Initech Smartro (058860 KS) Private Equity Fund VP Holdings KT Music 48.7% 93.8% KT Tech (043610 KQ) 61.2% 0.1% KT SM 36.9% 100% KT Skylife KT Networks Smartro (060370 KQ) (053210 KS) 13.3% 50.2% 51.4% 100% 74.2% 48.0% Nasmedia KT M&S 14.2% Korea HD Animax Braodcasting Broadcasting Korea 93.8% 86.8% KT Linkus KT Telecop 26.2% WIC 100% 100% KT Cloudware KT Innotz 53.3% Sofnix 51.0% 65.7% KT M Hows NexR 100% 100% KT Estate KT AMC 65.0% 91.1% Smart Channel KT DS 58.0% KT Rental 51.0% 52.6% Cidus FNH KT Edu i 100% T-Card 82.8% 50.0% KC Smart Service KaN Communications 50.0% Kumho Rent a Car Global
Note: As of Dec 2011, Source: Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 68 July 16, 2012 Media
SKT oversees the overall SK groupÊs telecom and media operations are overseen by SK Telecom (SKT). In recent media business: SK years, the share performance and corporate value of the groupÊs holdings company SK Corp. Broadband handles IPTV have been increasingly driven by its energy businesses, SK Innovation and SK E&S. operations and SK Planet SKT still maintains a dominating presence in the telecom market. However, the mobile digital services carrier has been faced with persistent worries over margin deterioration due to intensifying LTE competition and the erosion of profits caused by the encroachment of third-party mVoIP services. Recently, SKT spun off its non-telecom service operations (SK Planet) and acquired Hynix Semiconductor, a business decision which we believe is part of an effort to make up for the decline in the telecom business.
SK Broadband, an SKT subsidiary, provides IPTV services (bundled with telecom services) as part of its fixed-line telecom business. Given SKTÊs position as the largest mobile carrier in the domestic market, the businesses of its subsidiaries also tend to evolve around mobile communication.
SK Broadband is currently preparing to launch N Screen services for its LTE subscribers, integrating its existing IPTV contents with its mobile services. However, another SKT subsidiary, SK Planet, already offers a similar service named Hoppin. Indeed, SKT subsidiaries have some overlapping or conflicting operations, which often delay the decision- making process and prevent them from making an early move into new markets.
A prime example is Nate On, an instant messaging service provided by SK Communications, a subsidiary of SK Planet. Nate OnÊs dominating position in the wireline instant messaging market had spurred high hopes for the serviceÊs future in the mobile messaging market in line with the growing penetration of smartphones. However, worries over potential erosion of SKTÊs SMS profits stalled the decision making and development process, eventually leading to the delayed launch of the mobile version and its failure to secure a visible market presence.
Although SKT has experienced much trials and errors, we believe the company may need additional revamping to ensure faster decision-making under the ongoing convergence trend.
Figure 117. SK groupÊs holding structure
100% 48.5% Infosec SKSK C&CC&C Chey, Tae Won 100% (034730(034730 KS)KS) 54.5%& Affiliates Independence 5.9% 0.7% SK E&S 31.8% SK Chey, Chang Won SK SK Bio-Farm SK Shipping 5.0% (003600 KS) & Affiliates Mro Korea (003600 KS) 100% 83.1% 33.4% 25.2% 42.5% 39.1% 94.1% 40.0% 13.9% 25.4% SK Innovation SK Telecom SKC SK Networks SK Chemical SK Innovation SK Telecom SKC SK Networks SK E&S SK E&C SK Chemical (096770(096770 KS) KS) (017670(017670 KS)KS) (011790(011790 KS)KS) (001740(001740 KS)KS) (006120(006120 KS)KS) 100% 50.6% SK Broadband 78.4% SK Energy SK Broadband 100% 22.7% SK Securities DaehanDaehan City City GasGas 50.0% (033630 KQ) Sum-ray SK Securities PMP 45.5% SK Gas (033630 KQ) (001510 KS) (026870(026870 KS)KS) SK Gas (001510 KS) 50.0% (018670 KS) 92.4% 100% (018670 KS) 80.0% 40.0% Netruck Service Top 85.0% Busan City Gas 100% SKC Airgas SK Networks Busan City Gas Real Best 100% (015350(015350 KS)KS) 50.0% 50.0% SK Marketing Service Netruckfranz 53.7% 13.0% Greenviro & Company 100% SK Networks Choongnam 45.0% 50.0% SKC Solmics SK D&D 87.5% Internet City Gas 83.5% Encar Networks SK Telink 47.5% 79.6% 100% 50.0% Chonnam 100% SK Telesys LCNC SK Forest SK Sitec 100% 63.7% City Gas Jeju United FC N Treev Soft 65.0% 100% 100% Kangwon 32.0% Daejun Clean 44.0% SK-W WS UBUB CareCare 100% SK Global 100% City Gas Water PS & Marketing (032620(032620 KQ)KQ) 100% Chemical 100% 100% Chungchung 42.0% Gwangju Clean 100% Incyto Speed Motors 50.0% F&U Energy Water 100% SK Lubricants SK Sintec Credit Information 100% 65.0% 100% Chonbuk 41.0% 42.5% SKC Lighting SK Pinx Energy DOPCO MRO Korea 100% 42.5% 100% 100% Youngnam Sleepnetwork 100% 100% SK Mobile Energy SK Planet Broadband media Energy 100% 51.0% 67.6% 100% Pyeongtaek Televisionmedia LoenLoen Entertainment Entertainment Broadband D&M Energy (016170(016170 KQ)KQ) 100% 100% Gimcheon SK Communications 64.6%100% Commerce SK Communications Broadband CS Energy (066270(066270 KQ)KQ) Planet 100% 59.7% 100% Paxnet M&Service Service-In
Note: As of Dec 2011, Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 69 July 16, 2012 Media
IV. Investment strategy and valuation
1. Investment strategy: Note short-term events and long-term structural growth!
Present the Korean We present the Korean media sector with an Overweight rating. We recommend Cheil media sector with Worldwide as our top pick. The Korean media sector deserves attention, as: Overweight 1) Major media firms are transforming themselves from platform to content players.
2) Revenue sources, which were driven by domestic revenues, are diversifying thanks to structural growth of global revenues.
3) The domestic market is expected to grow further, aided by improved and eased regulations.
4) Marketing campaigns arising from major events in 2012 are expected to provide a catalyst to the media sector
Major media firms are experiencing fundamental changes amid an improving market environment. SBS has posted content sales growth on the back of 1) rising overseas demand and 2) increasing copyrights from in-house production. Cheil Worldwide is increasingly securing overseas customers and has plans to acquire a foreign advertising agency this year. The company is expected to be re-rated in the long term, if it maintains solid growth.
In 2012, there are many scheduled media-sector-related events. Short-term events include Expo 2012 Yeosu Korea and a general election in 1H, and the London Olympics in 2H. Although media firms had long been expected to benefit from these events, these benefits have not been fully priced in due to negative factors in end-2011 and 1H12.
Within the media sector, the approval of general programming channels in end-2011 raised concerns about higher competition. Furthermore, shares of SBS corrected as opposed to the high expectation for Mediacre8, as the company posted an operating loss in 1Q due to the unstable operation of the private media representative and 2) disappointing viewership.
Externally, the escalation of the eurozone debt crisis dealt a blow to the Korean economy in 1H, weakening private consumption, while the stock market saw massive foreign capital outflow. As such, the media sector, which is sensitive to economic conditions, was hit hard, negatively affecting media shares.
Easing of uncertainties, However, both short- and long-term momentum will likely pick up from 2H. In addition, earnings improvement, uncertainties over the media sector and the macro economy are projected to decrease. The and positive events impact and size of major events in 2H should be larger than in 1H. Furthermore, the benefits of structural changes, including deregulation, are expected to play out gradually.
Figure 118. Media sector index trend and forecast
(p) Focused on Combined overseas broadcasting content and ad revenues (R) (Wbn) 140 domestic market Media sector index (L) 2,400 Affected by Event: Yeosu Expo, 120 domestic economy, 2,000 limited ad market growth London Olympics, and seasonality Presidential election 100 1,600
80 1,200
60 800 Structural growth: 40 Content revenues, 400 regulatory easing, overseas expansion 20 0 01 02 03 04 05 06 07 08 09 10 11 12F 13F
Note: Media sector index is provided by Thomson Reuters; Overseas sales are the aggregate of Korean broadcasting content exports and Cheil WorldwideÊs overseas revenues Source: Thomson Reuters, Cheil Worldwide, KOCCA, KDB Daewoo Securities Research
KDB Daewoo Securities Research 70 July 16, 2012 Media
We believe that uncertainties have eased to a certain extent. Advertisers, competitors, and investors have identified the impact of the emergence of general programming channels over 1H. SBS is expected to swing to a profit from 2H, boosted by the stabilization of Mediacre8 and a recovery in viewership.
As for the global economy, uncertainties resulting from the eurozone crisis appear to have declined since GreeceÊs general election in June. The domestic economic recovery is likely to receive a boost from the governmentÊs policy measures.
Top pick: Cheil We present Cheil Worldwide (030000 KS/Buy) as our top pick. The company is expected to Worldwide benefit from an increase in marketing resulting from major events in 2H. The companyÊs earnings are forecast to expand on Samsung ElectronicsÊ global marketing campaigns. Deregulations are also positive for the company. Furthermore, the company displays high growth potential as a global advertising agency in the long term.
Promising stocks: We present a Buy rating for both SBS (034120 KS) and KT Skylife (053210 KS). SBS, a SBS (034120 KS/Buy), beneficiary of regulatory easing and improvement, is anticipated to display earnings KT Skylife (053210 improvement. KT Skylife is likely to benefit from KTÊs efforts to bolster its media business, KS/Buy) and the companyÊs earnings are expected to improve on rising high-margin sales CJ E&M (130960 We present a Trading Buy rating for CJ E&M (130960 KQ/Trading Buy). Although the KQ/Trading Buy) company currently displays poor earnings, its earnings should gradually pick up in 2H, backed by higher in-house content competitiveness.
SBS Media Holdings (101060 KS) and YTN (040300 KQ) also deserve attention. SBS Media Holdings best represents the SBS media groupÊs strategies amid structural changes in the media industry. Shares of the holding company tend to outperform the market, whenever the shares are viewed widely as undervalued against subsidiary shares. The ad rate hike that YTN pushed through early this year is positively affecting the companyÊs revenues. The news channel tends to record higher viewership during large-scale events, including a presidential election, boosting earnings and share performance.
Table 14. Media sector coverage and top pick Stock Code Rating Target price Report title Market cap Expected return Cheil Worldwide 030000 KS Buy W26,000 Strong potential to become a global player 2,071 44.4 SBS 034120 KS Buy W47,000 Beneficiary of deregulations 606 41.6 KT SkyLife 053210 KS Buy W31,000 Vital part of KTÊs media strategy 1,196 23.5 CJ E&M 130960 KQ Trading Buy W30,000 Earnings to pick up after some growing pains 967 17.6 Source: KDB Daewoo Securities Research
Figure 119. Key variables for the media sector in 2012 and related stocks
Cheil Worldwide Industry: Regulatory easing SBS 6 KT Skylife 5 CJ E&M 4 Company: Benefit from parent group 3 Industry: Diverse platforms, content production capability 2 1 0
Company: Earnings improvement Short-term event: London Olympics
Short-term event: Presidential election
Source: KDB Daewoo Securities Research KDB Daewoo Securities Research 71 July 16, 2012 Media
2. Valuations of domestic media firms
Domestic media firms mostly receive a valuation premium to the market, aided by stable business models and increased revenues from the distribution of content.
Cheil Worldwide and KT In particular, Cheil Worldwide and KT Skylife are trading at a valuation premium to the Skylife are trading at a market and other media firms thanks to their higher growth potential and profitability. Cheil valuation premium Worldwide is expected to see both domestic and overseas revenues expand in 2012. In thanks to high growth addition, the company is drawing attention thanks to its potential to become a global potential and profitability advertising agency. KT Skylife also deserves attention in light of 1) earnings improvement – EPS growth is forecast to reach as much as 101% this year – and 2) relatively high ROE for a cable SO.
SBS is undervalued, although the company is benefiting from deregulations on terrestrial broadcasting. The company posted an operating loss in 1Q, leading to a decline in share price. However, the company is expected to swing to an operating profit in 2Q. If the company delivers structural growth on the back of 1) an increase in advertising revenues arising from the stabilization of its private media representative business and 2) content sales expansion, it will gradually experience a valuation re-rating.
CJ E&M currently has displayed poor profitability due to higher production expenses and the poor performance of the game division this year. However, given that the company has been investing in bolstering its in-house content competitiveness, its earnings should gradually pick up after a payback period, and its stock will likely no longer be considered overvalued.
Table 14. Earnings and valuation metrics of major domestic media companies (Wbn, %, x) Market OP Margin P/E P/B EV/EBITDA ROE Detailed Business Company Cap 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F Advertising Cheil Worldwide 2,071 6.2 6.0 6.6 23.4 17.8 14.8 3.2 2.8 2.4 13.2 9.7 6.9 13.7 15.6 16.5 Satellite broadcasting SO KT Skylife 1,196 9.0 15.2 18.1 40.9 18.6 14.3 5.3 3.8 3.0 14.5 8.7 6.7 16.4 19.9 21.1 Cable PP, Media group CJ E&M 967 6.1 2.9 6.4 17.4 20.0 14.4 1.8 1.1 0.9 3.7 1.7 1.8 7.7 4.1 5.4 Broadcast TV SBS 606 10.4 9.1 10.7 11.7 10.5 8.5 1.3 1.1 1.0 5.8 6.1 4.5 11.4 10.4 11.8 Media group SBS Media Holdings 588 29.4 0.0 0.0 23.8 7.1 5.9 1.1 0.8 0.8 137.5 7.3 6.2 4.7 10.7 11.6 Cable PP YTN 160 14.8 15.0 17.8 15.1 12.9 9.3 0.9 0.9 0.8 7.3 8.8 7.9 6.3 6.9 8.9 Total Average 12.6 8.0 9.9 22.1 14.5 11.2 2.3 1.8 1.5 30.3 7.0 5.7 10.0 11.3 12.6 Korean market MSCI average 12.7 8.9 7.8 1.1 10.9 Note: SBS Media Holdings and YTNÊs data are Bloomberg consensus, while the othersÊ data are Daewoo Securities Estimates, Cheil Worldwide, CJ E&M, SBS Media Holdings are on consolidated basis, others are on non-consolidated basis, Source: Bloomberg, KDB Daewoo Securities Research
Figure 120. 2012F P/B-ROE of major domestic media companies Figure 121. 2012F P/E-EPSG of major domestic media companies
(PB, x) (PE, x) KT Skylife 4 24
Cheil CJ E&M Worldwide 20 KT Skylife 3 Cheil Worldwide 16
2 Average YTN
12 SBS CJ E&M YTN 1 SBS 8 SBS Media SBS Media Holdings Holdings (ROE, %) (EPSG, %YoY) 0 4 0 5 10 15 20 25 -40 0 40 80 120
Source: Bloomberg, KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research
KDB Daewoo Securities Research 72 July 16, 2012 Media
3. Valuations of overseas peers
Companies that can Media companies that produce and leverage content, namely cable TV PPs and film leverage content are production companies, are trading at higher P/Es than companies in other segments. trading at a premium Meanwhile, terrestrial broadcasters that are subject to regulations are trading at relatively low P/Es. Media groups in Europe and the US are now entering the mature stage. Thus, their valuations are steadily falling.
In addition, companies with large domestic markets are receiving higher valuations. Japanese ad agencies are trading at relatively high P/Es although their ROEs are significantly lower than those of Korean and global peers, since Japan is the second-largest advertising and content market in the world. Chinese companies are also trading at a premium, regardless of their business, thanks to the shear size of the Chinese economy.
Among Korean companies, SBS is undervalued to its overseas peers despite the steady easing of regulations in Korea. Cheil WorldwideÊs P/E is similar to those of Japanese peers, despite its higher ROEs and a higher portion of overseas revenues.
Table 15. Earnings and valuations of global media groups (Wbn, %, x) Market OP Margin P/E P/B EV/EBITDA ROE Company cap 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F CJ E&M (Korea) 967 6.1 2.9 6.4 17.4 20.0 14.4 1.8 1.1 0.9 3.7 1.7 1.8 7.7 4.1 5.4 SBS Media Holdings 588 29.4 23.8 7.1 5.9 1.1 0.8 0.8 137.5 7.3 6.2 4.7 10.7 11.6 The Walt Disney (USA) 97,857 19.0 21.8 23.1 17.2 15.7 13.7 2.3 2.2 2.0 9.3 9.0 8.1 12.8 14.5 15.3 Comcast 96,522 19.2 19.4 20.8 18.6 16.4 14.1 1.8 1.7 1.6 7.0 6.9 6.5 9.1 10.5 10.9 News Corp 60,448 14.5 16.1 17.6 14.8 15.4 12.6 1.9 1.9 1.8 7.9 8.6 7.8 10.0 12.4 14.5 Time Warner 41,802 20.6 20.6 21.1 12.6 11.8 10.3 1.2 1.1 1.0 7.6 7.6 7.2 9.2 10.2 10.8 Viacom 28,336 25.8 27.5 28.4 11.4 11.2 9.7 3.3 3.3 3.3 7.5 7.3 6.9 26.6 31.7 Clear Channel Media Holdings 365 17.2 5.3 2.5 11.5 9.7 9.4 RTL Group (Europe) 15,221 18.9 18.6 18.6 13.5 14.6 14.0 2.3 2.4 2.5 9.0 8.4 8.3 14.5 15.1 16.0 M6-Metropole Television 1,876 17.0 15.3 15.2 9.0 9.6 9.4 1.9 1.9 1.8 3.4 3.5 3.4 21.8 19.9 19.7 Korea average 20.6 13.6 10.2 1.5 1.0 0.8 70.6 4.5 4.0 6.2 7.4 8.5 US average 19.4 21.1 22.2 14.9 12.6 10.5 2.1 2.0 1.9 8.5 8.2 7.7 10.3 14.8 16.7 Europe average 17.9 16.9 16.9 11.3 12.1 11.7 2.1 2.1 2.2 6.2 6.0 5.9 18.1 17.5 17.9 Total average 18.8 17.8 18.9 15.4 12.7 10.7 2.0 1.8 1.7 20.4 7.0 6.6 11.2 13.8 15.1 Note: Bloomberg consensus, Source: Bloomberg, KDB Daewoo Securities Research
Figure 122. 2012F P/E-ROE of major global media groups Figure 123. Share price trends of major global media groups
(P/E, x) (1/12=100) SBS Media Holdings CJ E&M Walt Disney 22 140 Comcast News Corp Viacom CJ E&M RTL Group
18 Comcast 120
Disney News Corp RTL Group 14 100 Time Warner Viacom M6-Metropole Television 10 80 SBS Media Holdings
(ROE, %) 6 60 0 6 12 18 24 30 1/12 2/12 3/12 4/12 5/12 6/12 7/12
Source: Bloomberg, KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research
KDB Daewoo Securities Research 73 July 16, 2012 Media
Table 16. Earnings and valuations of global terrestrial broadcasters (Wbn, %, x) Market OP Margin P/E P/B EV/EBITDA ROE Company Cap 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F SBS (Korea) 606 10.4 9.1 10.7 11.7 10.5 8.5 1.3 1.1 1.0 5.8 6.1 4.5 11.4 10.4 11.8 Fuji Media Holdings (Japan) 4,685 5.6 6.7 7.1 5.2 11.4 10.9 0.6 0.6 0.6 6.0 4.9 4.7 12.4 5.4 5.5 Nippon Television Network 4,609 10.6 11.8 12.6 13.5 11.8 11.0 0.7 1.0 0.9 6.7 5.5 4.8 5.3 5.8 6.4 Tokyo Broadcasting System 2,668 3.5 3.7 4.1 12.6 20.6 18.3 0.5 0.5 0.5 8.7 8.5 8.1 3.6 2.3 2.7 TV Asahi 1,860 4.4 4.7 5.0 17.0 15.4 14.4 0.5 0.5 0.5 3.4 3.8 3.4 3.1 3.4 3.6 Hunan TV (China) 4,221 14.4 31.9 20.0 25.5 33.5 43.5 3.8 5.0 5.4 22.3 25.5 18.1 16.9 12.9 Disney (ABC) (USA) 97,857 19.0 21.8 23.1 17.2 15.7 13.7 2.3 2.2 2.0 9.3 9.0 8.1 12.8 14.5 15.3 Comcast (NBC) 96,522 19.2 19.4 20.8 18.6 16.4 14.1 1.8 1.7 1.6 7.0 6.9 6.5 9.1 10.5 10.9 CBS 60,448 14.5 16.1 17.6 14.8 15.4 12.6 1.9 1.9 1.8 7.9 8.6 7.8 10.0 12.4 14.5 News Corp (Fox) 22,937 18.1 20.0 20.8 16.6 12.2 10.7 2.0 1.9 1.7 8.1 7.1 6.6 13.2 16.2 16.6 RTL Group (Europe) 15,221 18.9 18.6 18.6 13.5 14.6 14.0 2.3 2.4 2.5 9.0 8.4 8.3 14.5 15.1 16.0 ITV 5,025 18.8 20.4 20.4 11.4 8.8 8.3 3.5 1.9 1.6 5.7 5.6 5.4 33.7 30.6 23.0 Mediaset Spa 2,091 12.8 8.0 10.6 8.4 10.8 8.0 0.6 0.6 0.6 2.9 3.9 3.4 8.8 5.2 7.6 M6-Metropole Television 1,876 17.0 15.3 15.2 9.0 9.6 9.4 1.9 1.9 1.8 3.4 3.5 3.4 21.8 19.9 19.7 Antena 3 TV 910 13.9 7.1 8.5 7.5 11.9 2.3 2.1 9.7 9.7 31.2 17.5 Japan average 6.0 6.7 7.2 12.1 14.8 13.6 0.6 0.6 0.6 6.2 5.7 5.3 6.1 4.2 4.5 USA average 17.7 19.3 20.6 16.8 14.9 12.8 2.0 1.9 1.8 8.1 7.9 7.3 11.3 13.4 14.3 Europe average 16.3 13.9 14.7 10.0 11.1 9.9 2.1 1.8 1.6 6.1 6.2 5.1 22.0 17.7 16.6 Total average 13.4 14.3 14.3 13.5 14.6 14.1 1.7 1.7 1.6 6.7 7.6 7.2 13.9 12.4 11.9 Note: SBS is Daewoo Securities estimate, the rest are from Bloomberg consensus. Source: Bloomberg, KDB Daewoo Securities Research
Table 17. Earnings and valuations of global cable PPs (Wbn, %, x) Market OP Margin P/E P/B EV/EBITDA ROE Company Cap 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F CJ E&M (Korea) 967 6.1 2.9 6.4 17.4 20.0 14.4 1.8 1.1 0.9 3.7 1.7 1.8 7.7 4.1 5.4 YTN 160 14.8 15.0 17.8 15.1 12.9 9.3 0.9 0.9 0.8 7.3 8.8 7.9 6.3 6.9 8.9 Disney (ESPN) (US) 97,857 19.0 21.8 23.1 17.2 15.7 13.7 2.3 2.2 2.0 9.3 9.0 8.1 12.8 14.5 15.3 News Corp (Fox Channel) 60,448 14.5 16.1 17.6 14.8 15.4 12.6 1.9 1.9 1.8 7.9 8.6 7.8 10.0 12.4 14.5 Time Warner (CNN, HBO) 41,802 20.6 20.6 21.1 12.6 11.8 10.3 1.2 1.1 1.0 7.6 7.6 7.2 9.2 10.2 10.8 Discovery Communications 21,624 40.1 42.7 44.2 18.6 18.2 14.9 2.0 3.0 2.8 8.6 10.3 9.4 17.8 16.5 18.7 (Non-Fiction) Korea average 10.4 9.0 12.1 16.2 16.4 11.9 1.4 1.0 0.8 5.5 5.3 4.8 7.0 5.5 7.2 USA average 23.6 25.3 26.5 15.8 15.3 12.9 1.8 2.0 1.9 8.4 8.9 8.1 12.5 13.4 14.8 Total average 19.2 19.9 21.7 15.9 15.7 12.5 1.7 1.7 1.6 7.4 7.7 7.0 10.6 10.8 12.3 Note: CJ E&M is Daewoo Securities estimate, the rest are from Bloomberg consensus. Source: Bloomberg, KDB Daewoo Securities Research
Table 18. Earnings and valuations of global cable SOs (Wbn, %, x) Market OP Margin P/E P/B EV/EBITDA ROE Company Cap 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F Tbroad Hanvit (Korea) 390 30.2 12.2 1.7 3.9 13.4 Hyundai HCN 262 19.8 24.0 21.8 12.1 7.6 7.0 0.7 0.7 0.6 23.5 3.0 2.9 3.8 12.3 11.3 Tbroad Dobong 78 24.0 10.5 1.3 5.2 14.3 Jupiter Telecom (Japan) 8,481 19.3 19.5 20.2 15.6 14.7 13.4 1.3 1.3 1.2 4.3 4.5 4.5 8.8 8.9 9.3 Beijing Gehua Catv Network 1,421 -6.3 -1.6 0.3 27.8 24.4 20.7 1.5 1.3 1.2 5.8 5.0 5.3 6.2 7.0 (China) Comcast (USA) 96,522 19.2 19.4 20.8 18.6 16.4 14.1 1.8 1.7 1.6 7.0 6.9 6.5 9.1 10.5 10.9 Time Warner Cable 29,609 21.3 21.3 22.5 14.7 14.6 11.9 3.4 3.5 3.5 6.8 6.4 6.1 19.9 25.4 32.4 Charter Communications 8,452 14.5 14.5 15.8 54.0 22.4 18.2 7.3 7.3 7.0 -39.1 -8.5 4.3 Cablevision 4,007 18.4 16.5 17.0 12.2 15.0 12.0 6.6 6.5 6.3 -2.5 -2.4 Asia average 17.4 14.0 14.1 15.7 15.6 13.7 1.3 1.1 1.0 9.2 4.5 4.1 9.1 9.1 9.2 USA average 18.4 17.9 19.0 15.2 15.3 23.0 9.2 7.8 2.5 6.9 6.8 6.5 -3.4 6.2 11.3 Total average 17.8 16.2 16.9 15.5 15.5 19.0 4.3 4.4 1.6 8.1 5.8 5.5 4.4 7.5 10.4 Note: Bloomberg consensus, Source: Bloomberg, KDB Daewoo Securities Research
KDB Daewoo Securities Research 74 July 16, 2012 Media
Figure 124. 2012F P/E-ROE of major terrestrial broadcasters Figure 125. Share performance of major terrestrial broadcasters
(P/E ,x) (1/12=100) SBS Nippon TV TBS 40 150 CBS ITV Mediaset SPA Hunan TV M6-Metropole TV Antena 3 TV
30 125
TBS News Corp (Fox) 20 Comcast (NBC) Disney (ABC) 100 TV Asahi Fuji Media RTL Group Holdings SBS Antena 3 TV 10 Nippon TV CBS 75 Mediaset Spa M6-Metropole TV
(ROE, %) 0 50 0 6 12 18 24 1/12 2/12 3/12 4/12 5/12 6/12 7/12
Source: Bloomberg, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 126. 2012F P/E-ROE of major cable PPs Figure 127. Share performance of major cable PPs
(P/E, x) (1/12=100) CJ E&M YTN 22 190 Disney (ESPN) News Corp (Fox channel) Time Warner (CNN, HBO) Discovery Comms. CJ E&M
19 Discovery Comm. 160
Disney (ESPN) News Corp (Fox 16 130 Channel)
YTN Time Warner 13 (CNN, HBO) 100
(ROE, %) 10 70 0 2 4 6 8 1012141618 1/12 2/12 3/12 4/12 5/12 6/12 7/12
Source: Bloomberg, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 128. 2012F P/E-ROE of major cable SOs Figure 129. Share performance of major cable SOs
(P/E, x) (1/12=100) 28 Beijing Gehua 145 Hyundai HCN Jupiter Telecom Catv Network Beijing Gehua CATV Comcast Time Warner Cable 21 130 Comcast Cablevision Time Warner Cable Jupiter Telecom 14 115
Hyundai HCN
7 100
(ROE, %) 0 85 -7 0 7 14 21 28 1/12 2/12 3/12 4/12 5/12 6/12 7/12
Source: Bloomberg, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research
KDB Daewoo Securities Research 75 July 16, 2012 Media
Table 19. Earnings and valuations of global satellite broadcasting companies (Wbn, %, x) Market OP Margin P/E P/B EV/EBITDA ROE Company Cap 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F KT Sky Life 1,196 9.0 15.2 18.1 40.9 18.6 14.3 5.3 3.8 3.0 14.5 8.7 6.7 16.4 19.9 21.1 Sky P/Efect Jsat (Japan) 1,750 11.3 10.1 11.1 13.7 12.7 11.0 0.6 0.6 0.6 2.8 2.8 2.7 4.7 5.1 5.2 DirecTV (US) 35,966 17.0 17.1 17.3 12.9 11.1 9.0 ------6.5 5.9 5.5 ------Dish Network 13,591 18.6 16.4 16.5 8.8 9.8 9.5 -- 13.2 5.6 5.0 4.9 ------Shaw Communications (Canada) 10,029 27.3 25.8 25.8 11.9 12.5 12.9 2.4 2.4 2.2 6.7 6.8 6.7 15.8 20.2 17.6 British Sky Broadcasting (UK) 20,512 16.4 17.7 18.0 14.2 13.9 12.4 10.8 12.2 8.8 8.8 8.0 7.5 ------Total average 16.6 17.0 17.8 17.1 13.1 11.5 4.8 6.4 4.0 7.9 6.2 5.7 12.3 15.0 14.6 Note: KT SkyLife is Daewoo Securities Research estimates, the rest are from Bloomberg consensus, Source: Bloomberg, KDB Daewoo Securities Research
Table 20. Earnings and valuations of global IPTV companies (telcos) (Wbn, %, x) Market OP Margin P/E P/B EV/EBITDA ROE Company Cap 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F KT (Korea) 8,473 10.0 7.6 7.9 6.1 7.3 6.7 0.7 0.7 0.6 3.3 3.7 3.6 11.3 9.6 9.6 LG U+ 3,115 2.3 2.9 5.8 57.1 23.9 7.3 0.7 0.8 0.7 4.8 4.2 3.7 2.1 2.8 9.5 SK Broadband 878 3.3 4.2 5.6 45.6 26.5 11.0 0.6 0.8 0.7 4.2 3.8 3.6 1.4 2.9 6.8 NTT Docomo (Japan) 84,269 20.6 20.8 20.9 11.9 9.9 9.7 1.1 1.0 1.0 3.6 3.3 3.3 9.4 10.6 10.1 KDDI 34,059 13.4 14.2 14.6 9.0 7.9 6.9 1.0 0.9 0.8 3.4 3.6 3.5 11.5 12.2 13.0 PCCW (Hong-Kong) 3,161 14.8 17.0 17.3 12.6 10.9 10.0 3.5 5.6 4.6 5.3 5.3 5.2 29.7 28.8 AT&T (US) 236,091 9.6 18.9 19.6 15.8 14.7 13.7 2.0 1.9 1.9 8.0 6.3 6.1 3.6 13.3 13.7 Verizon 146,553 11.6 18.7 19.7 19.9 17.9 16.0 3.5 3.1 2.9 6.8 5.9 5.6 6.5 16.4 17.7 Virgin Media (UK) 7,750 13.7 17.1 18.8 30.1 15.8 10.0 8.9 9.6 6.5 6.3 6.1 5.8 8.0 -- Korea average 5.2 4.9 6.4 36.3 19.2 8.3 0.7 0.8 0.7 4.1 3.9 3.6 4.9 5.1 8.6 Japan average 16.3 17.3 17.6 11.2 9.6 8.9 1.9 2.5 2.2 4.1 4.0 4.0 10.4 17.5 17.3 US average 11.6 18.2 19.4 21.9 16.1 13.2 4.8 4.9 3.8 7.0 6.1 5.8 6.0 14.8 15.7 Total average 11.0 13.5 14.5 23.1 15.0 10.1 2.4 2.7 2.2 5.1 4.7 4.5 6.7 12.2 13.7 Note: Bloomberg consensus, Source: Bloomberg, KDB Daewoo Securities Research
Table 21. Earnings and valuations of major global advertising companies (Wbn, %, x) Market OP Margin P/E P/B EV/EBITDA ROE Company Cap 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F Cheil Worldwide (Korea) 2,071 6.2 6.0 6.6 23.4 17.8 14.8 3.2 2.8 2.4 13.2 9.7 6.9 13.7 15.6 16.5 Dentsu Inc. (Japan) 8,851 2.7 3.1 3.2 18.4 15.9 14.4 1.0 1.0 0.9 8.6 7.3 7.0 5.7 6.0 6.5 Hakuhodo Dy Holdings 2,990 2.0 2.3 2.5 23.3 16.8 15.0 1.0 0.9 0.9 4.7 4.2 3.9 4.3 5.8 6.4 Asatsu-Dk Inc 1,394 1.1 1.3 1.5 41.3 25.8 23.9 1.0 1.0 0.9 12.2 9.1 8.8 2.3 3.8 3.5 WPP PLC (UK) 17,666 11.9 14.2 14.4 11.6 10.5 9.5 1.5 1.4 1.3 7.1 7.2 6.8 12.8 12.8 12.9 Omnicom Group (US) 15,061 12.0 12.8 13.1 14.2 13.2 11.8 3.6 3.3 3.0 8.5 7.8 7.3 26.6 26.4 27.8 Publicis Groupe (France) 9,475 15.7 16.0 16.1 12.4 11.3 10.5 1.7 1.8 1.6 6.4 6.0 5.6 16.5 17.6 17.3 Interpublic Group (US) 5,377 9.8 10.4 11.1 12.2 12.9 10.6 2.4 1.8 1.7 6.8 5.7 5.1 22.9 15.8 18.0 Aegis Group Plc (UK) 4,916 12.8 17.1 17.4 35.1 19.1 17.4 5.7 5.5 4.9 8.2 11.2 10.4 27.8 27.6 28.4 Japan average 2.0 2.2 2.4 27.7 19.5 17.8 1.0 1.0 0.9 8.5 6.9 6.6 4.1 5.2 5.5 Global group average 12.5 14.1 14.4 17.1 13.4 12.0 3.0 2.8 2.5 7.4 7.6 7.0 21.3 20.0 20.9 Total average 8.3 9.2 9.5 21.3 15.9 14.2 2.3 2.2 1.9 8.4 7.6 6.9 14.7 14.6 15.2 Note: Bloomberg consensus, Source: Bloomberg, KDB Daewoo Securities Research
KDB Daewoo Securities Research 76 July 16, 2012 Media
Figure 130. 2012F P/E-OP margin of major satellite broadcasters Figure 131. Share performance of major satellite broadcasters
(P/E, x) (1/12=100) 20 140 KT Skylife KT Skylife Sky Perfect JSAT DirecTV Dish Network Shaw Comms. BSkyB
17 120
British Sky Broadcasting Shaw 14 100 Sky Perfect Jsat Communications
Directv 11 80
Dish Network
(OPM, %) 8 60 5 10152025301/12 2/12 3/12 4/12 5/12 6/12 7/12
Note: Used OP margin data due to a lack of ROE consensus data Source: Thomson Reuters, KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research
Figure 132. 2012F P/E-ROE of major IPTV companies Figure 133. Share performance of major IPTV companies
(P/E, x) (1/12=100) 28 140 SK Broadband KT LG Uplus SK Broadband NTT Docomo LG Uplus AT&T Verizon 21 PCCW Verizon 120
AT&T
14 100 PCCW NTT Docomo
KDDI 7 KT 80
(ROE, %) 0 60 0 7 14 21 28 35 1/12 2/12 3/12 4/12 5/12 6/12 7/12
Source: Bloomberg, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 134. 2012F P/E-ROE of major advertising companies Figure 135. Share performance of major advertising companies
(P/E, x) (1/12=100) 28 Asatsu-Dk Inc 140 Cheil Worldwide Dentsu WPP Omnicom Publicis Interpublic Aegis Cheil Aegis Group Plc 21 125 Worldwide Dentsu
Omnicom Group Interpublic Group 14 Hakuhodo Dy 110 Holdings
WPP PLC Publicis Groupe 7 95
(ROE, %) 0 80 0 6 12 18 24 30 1/12 2/12 3/12 4/12 5/12 6/12 7/12
Source: Bloomberg, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research
KDB Daewoo Securities Research 77 July 16, 2012 Media
Cheil Worldwide (030000 KS)
Buy (Reinstate) Strong potential to become a global player
Target Price (12M, W) 26,000 Reinstate our coverage with a Buy rating and a target price of W26,000 Share Price (07/13/12, W) 18,000 Expected Return (%) 44.4 2012 Drivers: SEC’s marketing expansion; Event-driven ad demand growth EPS Growth (12F, %) 24.5 Overseas revenues likely to show structural growth Market EPS Growth (12F, %) 17.1 P/E (12F, x) 17.8 Market P/E (12F, x) 9.0 We reinstate our coverage on Cheil Worldwide with a Buy rating and a target price KOSPI 1,812.89 of W26,000. We derived our target price by applying a P/E of 26x to our 2012F Market Cap (Wbn) 2,071 EPS. In deriving our target P/E, we took into account WPPÊs (the worldÊs leading Shares Outstanding (mn) 115 ad agency) average P/E during 1999~2000 (when WPP delivered growth via Avg Trading Volume (60D, '000) 538 aggressive M&A deals and overseas expansion). In fact, our target P/E is the mean Avg Trading Value (60D, Wbn) 10 of WPPÊs average P/E during 1999~2000 and the multiple that we derived by Dividend Yield (12F, %) 1.1 Free Float (%) 75.7 applying a premium to the global advertising industryÊs 2012F P/E (we applied a 52-Week Low (W) 12,750 premium to reflect the ROE gap between Cheil Worldwide and the global ad 52-Week High (W) 21,700 industry). Beta (12M, Daily Rate of Return) 0.25 Price Return Volatility (12M Daily, %, SD) 2.6 Our recommendation is premised on the following. Foreign Ownership (%) 38.0 1) Cheil Worldwide provides Samsung Electronics (SEC) with marketing services Major Shareholder(s) (i.e., brand image improvement, global marketing for mobile devices). As such, Samsung C&T (18.36%) Korea Investment Mgmt. (12.33%) SECÊs schedules for new product (e.g., smartphones) launches and event NPS (7.21%) participation are important factors affecting Cheil WorldwideÊs earnings. Indeed, it Price Performance is evident that Cheil WorldwideÊs share price moves in tandem with SECÊs share (%) 1M 6M 12M price. Since SEC rolled out a new smartphone model, Cheil Worldwide has seen Absolute 1.1 5.3 16.9 its revenues grow. Relative 3.6 8.6 31.8 2) We believe that Cheil Worldwide has strong potential to become a global ad player. The company stands to benefit from Samsung GroupÊs global expansion over the near and long term. Furthermore, we believe that the companyÊs global competitiveness is improving steadily. We believe that, this year, the company has been considering acquiring overseas ad agencies (that are larger than previous M&A targets).
3) We expect ad demand to rise in 2012 on the back of a variety of events, including International Exposition Yeosu Korea 2012 (Cheil Worldwide was responsible not only for SECÊs exhibitions but also overall Korea-related marketing). Most importantly, the London Olympics are likely to have the most significant impact on ad demand this year. SEC is an official sponsor for the sporting event, and, as a leading domestic ad agency, Cheil Worldwide should benefit from Olympics-related ad demand growth. Furthermore, the presidential election in 4Q
Share price § Earnings & Valuation Metrics 140 KOSPI FY Revenu OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 120 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 100 12/10 1,450 139 9.6 108 935 119 -6 17.5 14.8 2.5 8.8
80 12/11 1,758 109 6.2 93 811 119 101 13.7 23.4 3.2 13.2 12/12F 2,167 129 6.0 116 1,010 141 123 15.6 17.8 2.8 9.7 60 12/13F 2,516 165 6.6 140 1,219 178 157 16.5 14.8 2.4 6.9 40 12/14F 2,875 200 7.0 168 1,458 212 182 16.9 12.4 2.0 5.0 7/11 11/11 3/12 7/12
Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: KDB Daewoo Securities Research KDB Daewoo Securities ResearchKDB Daewoo Securities C S KDB Daewoo Securities Research 78 July 16, 2012 Media
should boost ad demand as well. In particular, it should be noted that the cap on election campaign funds has been eased by 20%, and that the proportion of image advertising (out of overall ads) is on the upswing.
For 2012, we project Cheil Worldwide to show operating revenue growth of 23.2% and operating profit growth of 21.0%. OP margin is expected to stay flat YoY due to an increase in workforce. In 2013, operating revenues and operating profit are forecast to improve 16.1% and 25.4%, respectively.
KDB Daewoo Securities Research 79 July 16, 2012 Media
Reinstate coverage with Buy rating and TP of W26,000
Reinstate our coverage We reinstate our coverage on Cheil Worldwide with a Buy rating and a target price of with a Buy rating and a W26,000. We derived our target price by applying a P/E of 26x to a 2012F EPS. In deriving target price of W26,000 the P/E multiple, we factored into WPPÊs (the worldÊs leading ad agency) average P/E during 1999~2000 (when WPP delivered growth on aggressive M&A deals and overseas expansion). Our target P/E is based on the average of this WPPÊs average P/E and the multiple that we derived by applying a premium to the global advertising industry 2012F P/E (the premium was to reflect a ROE difference between Cheil Worldwide and the global ad industry).
Cheil Worldwide is in full charge of global marketing for the rapidly-growing IT giant Samsung Electronics (SEC). In addition, the company is likely to seek to increase overseas accounts by acquiring bigger-sized overseas ad agencies (than those it acquired before 2012).
Cheil Worldwide is one of the 20th largest global ad agencies. The companyÊs overseas revenues account for 60% of overall revenues. Once Cheil Worldwide grows into a global player on the back of business scale expansion and overseas account increases, we believe that the company will undergo a valuation re-rating.
Figure 136. P/E-ROE of advertising companies (2012F) Figure 137. P/E trends of WPP and Cheil Worldwide
(P/E, x) (x) WPP P/E Cheil Worldwide's P/E (1Q03~) 28 Asatsu-Dk Inc 50 WPP's growth Cheil Aegis Group Plc 40 21 through M&As Worldwide Dentsu and overseas 30 expansion Omnicom Group Interpublic Group 14 Hakuhodo Dy Holdings 20 WPP PLC Publicis Groupe 7 10
(ROE, %) 0 0 0 6 12 18 24 30 1Q88 1Q92 1Q96 1Q00 1Q04 1Q08 1Q12
Source: Bloomberg, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Table 22. Earnings and valuations of major global advertising companies (Wbn, %, x) Market OP Margin P/E P/B EV/EBITDA ROE Company Cap 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F Cheil Worldwide (Korea) 2,071 6.2 6.0 6.6 23.4 17.8 14.8 3.2 2.8 2.4 13.2 9.7 6.9 13.7 15.6 16.5 Dentsu Inc. (Japan) 8,851 2.7 3.1 3.2 18.4 15.9 14.4 1.0 1.0 0.9 8.6 7.3 7.0 5.7 6.0 6.5 Hakuhodo Dy Holdings 2,990 2.0 2.3 2.5 23.3 16.8 15.0 1.0 0.9 0.9 4.7 4.2 3.9 4.3 5.8 6.4 Asatsu-Dk Inc 1,394 1.1 1.3 1.5 41.3 25.8 23.9 1.0 1.0 0.9 12.2 9.1 8.8 2.3 3.8 3.5 WPP PLC (UK) 17,666 11.9 14.2 14.4 11.6 10.5 9.5 1.5 1.4 1.3 7.1 7.2 6.8 12.8 12.8 12.9 Omnicom Group (US) 15,061 12.0 12.8 13.1 14.2 13.2 11.8 3.6 3.3 3.0 8.5 7.8 7.3 26.6 26.4 27.8 Publicis Groupe (France) 9,475 15.7 16.0 16.1 12.4 11.3 10.5 1.7 1.8 1.6 6.4 6.0 5.6 16.5 17.6 17.3 Interpublic Group (US) 5,377 9.8 10.4 11.1 12.2 12.9 10.6 2.4 1.8 1.7 6.8 5.7 5.1 22.9 15.8 18.0 Aegis Group Plc (UK) 4,916 12.8 17.1 17.4 35.1 19.1 17.4 5.7 5.5 4.9 8.2 11.2 10.4 27.8 27.6 28.4 Japan average 2.0 2.2 2.4 27.7 19.5 17.8 1.0 1.0 0.9 8.5 6.9 6.6 4.1 5.2 5.5 Global group average 12.5 14.1 14.4 17.1 13.4 12.0 3.0 2.8 2.5 7.4 7.6 7.0 21.3 20.0 20.9 Total 8.3 9.2 9.5 21.3 15.9 14.2 2.3 2.2 1.9 8.4 7.6 6.9 14.7 14.6 15.2 Note: All figures from Bloomberg consensus, excluding Cheil Worldwide. Source: Bloomberg, KDB Daewoo Securities Research
KDB Daewoo Securities Research 80 July 16, 2012 Media
Investment point 1: Marketing for SEC
SECÊs new product roll- Cheil Worldwide provides SEC with marketing services (i.e., brand image improvement, outs and marketing global marketing for mobile devices). The companyÊs services for SEC include marketing enhancement should related to new product roll-outs, global sports sponsorships, and participations in global lead to Cheil exhibitions and IT events. Indeed, with SECÊs global operations expanding, SECÊs need for WorldwideÊs earnings global marketing is growing as well. SECÊs new product roll-outs and marketing growth enhancement should lead to Cheil WorldwideÊs earnings growth.
As such, SECÊs schedules for new product (e.g., smartphones) launches and event participations are important factors affecting Cheil WorldwideÊs earnings. Indeed, it is evident that Cheil WorldwideÊs share price moves in tandem with SECÊs share price. Since SEC rolled out a new smartphone model, Cheil Worldwide has seen revenues growing.
Since 2009, Cheil Worldwide has been responsible for marketing campaigns related to SECÊs global smartphone roll-outs via various types of advertisements and events (e.g., Consumer Electronics Show).
In addition, Cheil Worldwide is in charge of SECÊs sports marketing (i.e., sponsorship for Chelsea FC) since 2005. Chelsea won the UEFA Champions League in May 2012, which helped to provide a boost to SECÊs brand image.
Figure 138. Share price trends of Samsung Electronics and Cheil Worldwide
(1/12=100) 145 Cheil Worldwide Samsung Electronics KOSPI 130
115
100
85 1/12 2/12 3/12 4/12 5/12 6/12 7/12
Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 139. Samsung ElectronicsÊ operating profit and Cheil WorldwideÊs revenue trends and forecasts
(Wbn) (Wbn) Galaxy Note 8,000 SEC's operating profit (L) Galaxy S 300 Cheil Worldwide's parent revenues (R) Galaxy S2 6,000 240
4,000 180
2,000 120
0 60
Galaxy Galaxy -2,000 S3 Note 2 0 1Q08 1Q09 1Q10 1Q11 1Q12
Source: Company Data, WifeFn, KDB Daewoo Securities Research
KDB Daewoo Securities Research 81 July 16, 2012 Media
Figure 140. Samsung Galaxy S III launched May 2012
Source: jamoiholland.blogspot.kr
Figure 141. Chelsea FA, sponsored by Samsung Electronics, wins the 2012 UEFA Champions League
Source: bluechampions.com
Figure 142. Samsung and Apple smartphone shipment trends and forecasts
(mn units) 70 SEC Apple Galaxy S3 60
50 Galaxy Note iPhone 5
40
30 Galaxy S2 iPhone 4S
20
10
0 1Q08 1Q09 1Q10 1Q11 1Q12
Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 82 July 16, 2012 Media
Investment point 2: Potential to grow into a global ad agency
Cheil Worldwide is expected to grow into a global ad agency. Currently, overseas revenues account for over 50% of total revenues. In 2011, 59% of consolidated revenues and gross operating profit were generated overseas.
The high percentage of overseas revenues is attributable to SECÊs global marketing campaigns. Given that the ad market is sensitive to economic conditions and the growth potential of domestic demand is limited, Cheil Worldwide is expected to maintain solid growth going forward. SEC is leading the global smartphone market, which is immune from the global economic slowdown. Over the near and long term, Cheil Worldwide stands to benefit from Samsung GroupÊs global expansion
Global competitiveness Furthermore, we believe that Cheil WorldwideÊs global competitiveness is steadily improving. is improving steadily This year, the company has been considering acquiring overseas ad agencies in North America and China (that are larger than previous M&A targets). In addition, the company is expected to grow overseas subsidiaries with separate brands. Currently, the companyÊs domestic and overseas network mainly consists of its own branches. Meanwhile, the company is also considering either establishing or acquiring domestic ad agencies.
Figure 143. Cheil WorldwideÊs business units and company structure
Cheil Worldwide
Integrated Solution Media Digital Creative Promotion Sports Marketing Global Business
CEO
Middle East & Africa The Americas Asia & Oceania CIS Europe China (2 subsidiaries) (4 subsidiaries) (4 subsidiaries) (2 subsidiaries) (7 subsidiaries) (3 subsidiaries)
The Barbarian Group Beattie McGuinness Open Tide Greater (2009) Bungay (2009) China (2009)
Note: The number in brackets means the number of overseas branches; The subsidiaries of each region are acquired in 2009 Source: Company data, KDB Daewoo Securities Research
Figure 144. Revenue trends of Cheil Worldwide (domestic) and consolidated subsidiaries (overseas)
(Wbn) Parent London Olympics 2,000 Consolidated subsidiaries SEC's Galaxy S 3 launch Cheil Worldwide plans additional M&As overseas
Ad market recovered after global financial crisis SEC ranked 1,500 South Africa World Cup, Vancouver Winter Olympics No.1 in global Overseas branches' employees increased 18% YoY smartphone market Acquired overseas ad companies 1,000 BMB (UK), OTGC (CN), TBG (US) Beijing Olympics SEC's smartphone launch 500 Expanding customer base to non-SEC and overseas companies
0 03 04 05 06 07 08 09 10 11 12F 13F
Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 83 July 16, 2012 Media
According to Advertising Age, Cheil Worldwide ranked 16th among global ad agencies in terms of revenues in 2011. Given that 1) the Korean ad market is smaller than those of other advanced economies, 2) most of the high-ranking agencies have several global brands, and 3) consulting firms were included in the ranking, the company has been faring well in the global market.
Cheil Worldwide has to Ad agencies have to deal with two markets – media and advertisers. Recently, different expand its global media companies are consolidating into media groups. Among advertisers, large global network and enhance consumer companies are the biggest contributors to ad agenciesÊ revenues. Thus, Cheil brand recognition to Worldwide has to expand its global network and enhance brand recognition to increase increase overseas orders orders from large overseas advertisers. Cheil Worldwide could find lessons in the cases of Dentsu in Japan and WPP in the UK.
Table 23. Global advertising agency rankings (2011) YoY CountryÊs rank in the Rank Advertising agency Location Business type Main business Local revenueÊs portion Chg. global ad market 1 - WPP Ireland Group Media ad, marketing 12% 5 2 - Omnicom Group US Group Media ad, marketing 51% 1 3 - Publicis Groupe France Group Media ad, marketing 47% 7 4 - Interpublic Group of Cos. US Group Media ad, marketing 55% 1 5 - Dentsu Inc. Japan Group Media ad, marketing 87% 2 6 - Havas France Group Media ad, marketing 21% 7 7 - Hakuhodo DY Holdings Japan Group Media ad, marketing 97% 2 8 - Aegis Group UK Group Media ad, marketing 56% 5 9 +1 MDC Partners US Group Media ad, marketing 80% 1 10 +1 Alliance Data System Corp's Epsilon US Independent Marketing consulting 92% 1 11 -2 Acxiom Corp. US Independent Marketing consulting 80% 1 12 +2 Sapient Corp.'s SapientNitro US Group Media ad, marketing 66% 1 13 - Daniel J.Edelman US Group Marketing consulting 63% 1 14 +1 Asatsu-DK Japan Group Media ad, marketing 91% 2 15 -3 Aimia US Group Marketing consulting n/a 10 16 +1 Cheil Worldwide Inc. Korea Independent Media ad, marketing 41% Outside the top 10 17 -1 Media Consulta Germany Group Marketing consulting n/a 4 Source: Advertising Age, Bloomberg, PwC, Company data, KDB Daewoo Securities Research
Figure 145. Concentration of media and the necessity of securing large advertisers Larger advertising firms have advantage The evolution of media and advertiser network Previous: Current: No broker, non-concentrated market Highly concentrated market Media Advertiser Media Advertiser
Merger between Acquisition ad agencies
Ad agency (media purchase)
Acquisition Merger
Advertiser Media rep (media sales)
Source: Alan B. Albarran, KDB Daewoo Securities Research
KDB Daewoo Securities Research 84 July 16, 2012 Media
WPPÊs growth has been driven by aggressive M&As. The company generated 88% of revenues overseas in 2011.
Through aggressive The company has acquired large domestic ad agencies and overseas companies since the M&As, WPP has 1980s. After acquisition, it has maintained the brands of acquired companies and improved developed into a their competitiveness and awareness. Thanks to the strategy, WPP was able to secure and comprehensive maintain both media and advertisers. In addition, the company has been able to skirt a long- marketing firm time rule in the ad industry (one agency is not permitted to provide services for multiple companies in the same industry). Furthermore, as the company is headquartered in Ireland and listed in the UK, it has faced little language barriers in its global expansion.
Through M&As, WPP established itself as a comprehensive marketing solution provider, by acquiring PR, consumer survey, brand planning, media investments, healthcare, and communication consulting service firms.
Figure 146. WPPÊs business units and company structure
Philip Lader and Board of Directors
HS Ad GroupM Advertising (17) Media Investment Ogilvy & Mather Management (14) KR Media Advertising tenthavenue
Kantar Blanc & Otus Consumer Insight (15) Public Relations & Public TNS Affairs (18) Buchanan Center Partners Communications
G2 Healthcare Feinstein Kean Direct, Digital, Promotion & Communications (5) Healthcare Relationship Marketing A. Elcoff & Co (31) 24/7 Media OgilvyAction WPP Digital (11) Blue State Digital Ace Metrix WPP Digital Partner Companies (14) WPP knowledge community The Store Buddy Media (1)
Coley Porter Bell Branding & Identity (11) Ogilvy Primary Contact Specialist Communications Dovetail (24) Forward
JWT Inside Note: The number in bracket means the number of related subsidaries, Source: WPP, KDB Daewoo Securities Research
Figure 147. WPPÊs domestic and overseas revenue trends
(GBPmn) Acquired stake W.Europe (L) Others (L) North America (L) 12,000 in Chinese Domestic (UK) (L) % of overseas (R) 110% ad companies Expand investment Acquired in African ad companies Acquired AGB Nielsen established TNS 9,000 Cordiant 90% Group
Acquired Grey Group 6,000 70%
3,000 50%
0 30% 02 03 04 05 06 07 08 09 10 11
Note: Consolidated basis Source: WPP, KDB Daewoo Securities Research
KDB Daewoo Securities Research 85 July 16, 2012 Media
Dentsu began its global outreach in 1959 by establishing a New York office. In 1961, the company presented its vision to become a global player, and it topped the global market in terms of billings in 2011. At that time, however, most of the billings were domestically generated on the back of the stellar growth of the Japanese economy. Japan is still the second-largest ad market. Dentsu ranked fourth in terms of revenues in 2011, but overseas operations contributed just 13% to the total.
Lesson from DentsuÊs The companyÊs lackluster overseas performances are attributable to Japanese ad agenciesÊ lackluster overseas business practices that are more like media agencies rather than creative ad producers. They performance: No more were able to maintain dominance in the domestic market with the strategy. business as usual In the overseas markets, however, Japanese ad agencies have struggled, since agencies in each country have already had close relations with the local media. Japanese companies have faced difficulties penetrating these markets. Therefore, Dentsu has to either acquire local agencies or improve its ad production capability to succeed overseas. Against this backdrop, Dentsu has recently decided to acquire a major local agency.
Figure 148. DentsuÊs business unit and company structure
Dentsu Inc.
Communication Strategic Media Content Digital Promotions Creative Sphere Social Solutions Design Solutions
Tatsuyoshi Takashima Dentsu and Board of Directors Executives
Japan The Americas Asia & Oceania India & MENA Europe & Russia (15 China & Taiwan (48 subsidiaries) (15 subsidiaries) (31 subsidiaries) (6 subsidiaries) subsidiaries) (17 subsidiaries)
Source: Dentsu, KDB Daewoo Securities Research
Figure 149. DentsuÊs domestic and overseas revenue trends
(JPYbn) Domestic (Japan) (L) Established Dentsu Network to control global branches 2,400 Overseas (L) 16% Started Facebook ad Overseas' portion (R) Global financial crisis
1,800 12%
1,200 8%
600 4%
0 0% 03 04 05 06 07 08 09 10 11 12
Note: DentsuÊs fiscal year starts in April; 2012 data are based on April 2011~March 2012 results; On a consolidated basis Source: Dentsu, KDB Daewoo Securities Research
KDB Daewoo Securities Research 86 July 16, 2012 Media
Dentsu acquired Dentsu announced on July 12 that it will acquire Aegis, a UK listed ad agency. In 2011, Aegis European big ad ranked 8th in terms of revenues among global advertising firms. The acquisition cost will company; amount to GBP3.2bn (equivalent to around W5.6tr), the fourth largest among ad sector Turning point for global M&As. The acquisition price is based on 2012F EV/EBITDA of 12.2x, which appears to be a business 70% premium to global peersÊ average EV/EBITDA.
With the acquisition of Aegis, Dentsu is likely to see a turning point in its overseas businesses. The company has a displayed an uptrend in overseas revenue contribution since 2009, backed by additional employees in the overseas markets. This acquisition is expected to expand the companyÊs revenues to the level equivalent to the fourth largest global agency.
Dentsu will be able to diversify its sources of revenues. While Aegis generated most of its revenues from Western Europe (47%), Asian countries excluding Japan (25%), and the US (19%) in 2011, Japan accounted for only 0.4% of total revenues. After the merger, revenue sources will become more geographically diverse, with Japan making up 58% of their total revenues, Asian countries excluding Japan 12%, Western Europe 15% and the US 12%.
AegisÊ digital marketing know-how should help beef up DentsuÊs advertising business. In 2011, the digital unit contributed 35% of AegisÊ total ad revenues, higher than 31% at Publicis and 30% at WPP.
According to Dentsu, the acquisition will be completed by year-end, and no changes have yet been determined with regards to the merged corporationÊs management. The deal between an Asian advertising agency with strength in traditional media and a European counterpart is surely raising market attention.
The ad sector M&A market, which flourished in 2005~2008 and slowed dramatically amid the global financial crisis in 2009, is currently recovering. Cheil Worldwide is considering acquiring overseas agencies. If such acquisition creates synergies thanks to an acquired companyÊs solid business network and capability, it will likely have a significant positive impact on Cheil WorldwideÊs business outlook and corporate value.
Figure 150. Regional contribution of Dentsu and AegisÊ combined Figure 151. AegisÊ business division and corporate structure revenues (2011)
Others Aegis Group PLC 3% Western Europe
15% Aztec Aegis Media (10 countries)
Scan data service
Carat Iprospect Isobar Posterscope Vizeum Asia pacific (ex. (82 countries) (35 countries) (32 countries) (20 countries) (36 countries) Japan) Media communications Digital advertising Digital brand marketing Digital, outdoor advertising Digital marketing 12% strategy consulting Japan 58% Aegis Group PLC
Americas 12% Americas EMEU Asia Pacific 20 countries, 80 countries, 18 countries, 2,480 employees 6,600 employees 3,280 employees
Source: Dentsu, KDB Daewoo Securities Research Source: Aegis, KDB Daewoo Securities Research
KDB Daewoo Securities Research 87 July 16, 2012 Media
Investment point 3: Event effects (Expo, Olympics and presidential election)
We expect ad demand to rise in 2012 on the back of a variety of events. 1) Cheil Worldwide was responsible not only for SECÊs exhibitions but also overall Korea-related marketing at International Exposition Yeosu Korea 2012. Revenues from the event are projected to be reflected in 1Q and 2Q earnings.
Expo to boost 1~2Q 2) Most importantly, the London Olympics are likely to have the most significant impact on earnings with Olympics ad demand this year. SEC is an official sponsor for the sporting event and allocated a huge and presidential election amount for marketing. In addition, Olympics also strengthen the marketing activities of improving 3Q and 4Q domestic advertisers. As a leading domestic ad agency, Cheil Worldwide should benefit from Olympics-related ad demand growth. results, respectively The International Olympic Committee (IOC) forecasts global sponsorship income from the London Olympics to exceed the income from the previous Olympics. Cheil Worldwide, as well, expects billings related to this yearÊs Olympics to outweigh those for the Beijing Olympics, since SECÊs global markets and new product lineup have increased from 2008 levels.
3) Furthermore, the presidential election in 4Q should boost ad demand as well. In particular, it should be noted that the cap on election campaign funds has been eased by 20%, and that the proportion of image advertising (out of overall ads) is on the upswing.
Figure 152. Global sporting events and Cheil WorldwideÊs share price and revenue trends
(W) Sport event index (R) (p, % YoY) 25,000 Cheil Worldwide's share price (L) 30 Korea's GDP growth (R) Cheil Worldwide parent revenues growth (R) 20,000 20
15,000
10 10,000
0 5,000
0 -10 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Note: Sports event index is based on athletesÊ performance results at Summer/Winter Olympics and the World Cup, Source: Company data, SBS, Statistics Korea, Thomson Reuters, KDB Daewoo Securities Research
Figure 153. Samsung Pavilion at Yeosu Expo Figure 154. Trend of image ad for presidential elections
(%) 50 Image ad's portion in presidential election campaigns
40
30
20
10
0 67 81 92 02 12F
Source: KDB Daewoo Securities Research Note: 2008 and 2012 data is estimates Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 88 July 16, 2012 Media
Earnings outlook: OP margin to improve in 2013
Earnings momentum to We project Cheil Worldwide to report operating revenue growth of 21.5% YoY and operating strengthen further in 3Q profit growth of 8.5% YoY in 2Q on the back of robust performances in the overseas markets. On the domestic front, Expo-related earnings will be reflected in 2Q results. In addition, earnings related to SECÊs Galaxy S III launch will be reflected in 2Q and 3Q results.
We expect earnings momentum to strengthen in 3Q on the back of 1) SECÊs Galaxy S III marketing campaigns, 2) SECÊs sponsorship for the Olympics, and 3) domestic companyÊs Olympic-related advertising. Although the global launch of Galaxy S III was announced in 2Q, SEC is scheduled to carry out marketing campaigns in 3Q. In 3Q, operating revenues and operating profit are projected to grow 26.2% and 71.8% YoY, respectively. The low base of comparison a year earlier should also contribute to earnings growth.
We project Cheil WorldwideÊs operating revenue growth at 23.2% and operating profit growth at 21.0% for 2012. The company has been expanding its workforce since last year. For an ad agency, workforce expansion should be considered as an investment as ad production capabilities and network determine its competitiveness. Despite an increase in personnel expenses, major events this year are expected to drive up operating revenues, offsetting margin deterioration.
This year, TV ad demand appears to be increasing from a year earlier on the launch of general programming channels. In addition, the presidential election at end-2012 is also expected to boost print ad demand in line with growth in image advertising.
The Korea Advertising Index (KAI) announced by KOBACO is an advertiser sentiment index, measuring advertisersÊ sentiment and the seasonality of advertisersÊ ad spending. The KAI indicates that advertisersÊ ad spending will decrease in July MoM. However, the ad market sentiment will likely improve in August, since 1) major games in the Olympics are scheduled to take place in August and 2) companies usually increase advertising during the summer vacation season.
OP margin to improve in We expect Cheil WorldwideÊs operating revenues and operating profit to climb 16.1% and 2013 on a slowdown in 25.4% YoY, respectively, in 2013 with 62.1% of operating revenues generated overseas. If workforce expansion the company acquires overseas ad agencies, the percentage should increase further. OP margin is also anticipated to improve YoY on a slowdown in workforce expansion.
Figure 155. KAI monthly trend
(p) KAI composite 150 KAI baseline = 100
125
100
75
50
25
0 5/09 11/09 5/10 11/10 5/11 11/11 5/12
Note: Survey of marketersÊ forecasts for next monthÊs advertising costs. An index of 100 indicates that the number of forecasts for a decrease and an increase in advertising spending is equal, and an index greater than 100 indicates that the number of forecasts for an increase in advertising spending exceeds the number of forecasts for a decrease Source: KOBACO, KDB Daewoo Securities Research
KDB Daewoo Securities Research 89 July 16, 2012 Media
Table 24. Cheil WorldwideÊs quarterly and annual earnings trends and forecasts (Wbn, %) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12F 3Q12F 4Q12F 2011 2012F 2013F Revenues 309 426 453 571 421 517 571 658 1,758 2,167 2,515 Parent company 135 177 164 244 173 213 229 269 720 884 953 Overseas subsidiaries 173 249 288 327 247 304 342 389 1,038 1,283 1,562 Gross profit 84 113 113 148 102 134 153 193 458 583 676 Domestic 34 49 45 61 38 56 61 78 190 232 251 Traditional media 13 20 18 18 11 23 23 28 69 84 91 New media 7 9 11 20 9 13 14 24 47 60 65 Production 14 20 16 24 17 23 24 30 74 94 101 Overseas 49 64 68 87 65 78 92 115 268 350 426 Operating profit 13 31 23 42 9 33 39 50 109 131 165 OP Margin 4.3 7.2 5.0 7.4 2.2 6.5 6.8 7.6 6.2 6.1 6.6 Net Profit 13 26 22 35 10 29 35 43 96 116 142 NP Margin 4.0 6.1 4.9 6.2 2.3 5.6 6.1 6.5 5.4 5.4 5.6 Revenue breakdown Parent company 43.7 41.6 36.3 42.7 41.2 41.2 40.1 40.9 41.0 40.8 37.9 Overseas subsidiaries 56.0 58.6 63.7 57.3 58.8 58.8 59.9 59.1 59.0 59.2 62.1 Gross profit breakdown Domestic 41.1 43.4 40.0 41.4 36.7 41.6 39.7 40.5 41.5 39.9 37.1 Traditional media 15.6 17.7 15.6 12.3 11.0 17.3 14.7 14.2 15.0 14.5 13.5 New media 8.5 8.2 9.9 13.3 8.9 9.5 9.1 12.3 10.3 10.2 9.6 Production 17.1 17.4 14.5 15.8 16.8 17.1 15.6 15.3 16.1 16.1 14.9 Overseas 58.9 56.7 60.0 58.6 63.3 58.4 60.3 59.5 58.5 60.1 62.9 YoY Growth Revenue 14.4 15.0 16.6 35.5 36.3 21.5 26.2 15.1 21.3 23.2 16.1 Parent company 4.9 8.5 15.7 34.9 28.4 20.4 39.4 10.1 17.2 22.8 7.8 Overseas subsidiaries 22.7 20.5 17.1 35.7 42.9 22.0 18.7 18.9 24.3 23.6 21.8 Gross profit 16.4 5.8 19.7 14.9 22.2 18.5 35.6 30.4 13.9 27.2 16.1 Domestic 5.8 21.9 24.5 18.3 9.0 13.8 34.5 27.7 18.1 22.3 7.8 Traditional media -11.6 27.4 25.7 16.7 -13.8 15.9 28.0 51.1 14.9 22.7 7.8 New media 31.5 27.4 51.4 36.8 28.2 36.5 25.0 20.8 37.1 26.0 8.9 Production 15.3 14.5 10.1 7.3 20.3 16.0 45.9 25.8 11.3 26.6 7.8 Overseas 25.2 -3.8 16.7 12.5 31.5 21.9 36.4 32.2 11.1 30.7 21.6 Operating profit 9.9 -12.0 -3.8 -38.7 -29.3 8.5 71.8 18.9 -21.9 21.0 25.4 Net Profit 5.0 -7.9 0.9 -25.1 -21.6 11.9 57.5 21.3 -12.1 21.5 21.7 Note: K-IFRS Consolidated basis Source: Company data, KDB Daewoo Securities Research
Figure 156. Quarterly revenue and operating profit trends Figure 157. Annual revenue and operating profit forecasts
(Wbn) Operating revenues (L) (%) (Wbn) Operating revenues (L) (Wbn) 800 OP margin (R) 8 2,800 Operating profit (L) 200
600 6 2,100 150
400 4 1,400 100
200 2 700 50
0 0 0 0 1Q11 3Q11 1Q12 3Q12F 2010 2011 2012F 2013F
Note: K-IFRS consolidated basis, Note: K-IFRS consolidated basis, Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 90 July 16, 2012 Media
Company overview
No. 1 Korean advertising Cheil Worldwide was founded in January 1973 as an advertising agency, and was listed on firm; Looking overseas the Korean stock exchange in March 1998. Mr. Nak-hoi Kim, the current representative for further growth director of the company, was inaugurated in February 2007, and was re-appointed in March 2011.
As part of the Samsung Group, Cheil Worldwide has grown mainly by providing advertising services to Samsung Group affiliates. However, further growth and development require competitiveness independent of the group, for which the firm is forming alliances with foreign advertising firms, acquiring other companies to create synergies, and seeking deals with foreign advertisers.
Cheil Worldwide is the largest advertising agency in Korea in terms of billings, followed by Innocean, an affiliate of the Hyundai-Kia Automotive Group. Major Korean advertising firms are either affiliates of large conglomerates, or partners of foreign advertising groups such as WPP, TBWA, Dentsu and Publicis.
We estimate that Cheil Worldwide holds a domestic market share of roughly 17%, although the exact number cannot be determined as the company has not disclosed its billings since 2010. The combined market share of top ten domestic advertising firms (in terms of billings) rose from 69% in 2003 to 81% in 2011.
Figure 158. Major domestic advertising companies (in terms of billings in 2011)
0 1,000 2,000 3,000 4,000 5,000
Cheil Worldwide (Samsung) (Wbn) Innocean Worldwide (Hyundai Motors)
HS Ad (LG, GIIR, WPP)
Daehong Communications (Lotte)
SK Marketing & Company (SK)
TBWA Korea (TBWA)
LBest (LG)
Hancomm (Hanwha)
Dentsu Media Korea (Dentsu) 2011 Billings Welcomm (Publicis)
Source: KFAA, KDB Daewoo Securities Research
Figure 159. Top 10 domestic advertising companiesÊ billing trend
(Wbn) (%) 12,000 Top 10 ad agencies' combined billing (L) 85 % in the market (R)
9,000 80
6,000 75
3,000 70
0 65 03 04 05 06 07 08 09 10 11
Source: KFAA, KDB Daewoo Securities Research KDB Daewoo Securities Research 91 July 16, 2012 Media
Cheil WorldwideÊs source of billings varies widely from media to non-media, and even within the media, across all business sectors. In 2011, the company generated 52.4% of its gross domestic profit from media advertising, 12.9% from production, and 34.8% from marketing services including promotion, sports marketing, and PR.
Sports marketing and Unlike its peers, Cheil Worldwide has ample experience in global sports marketing (thanks to comprehensive ad Samsung Electronics). The company also has strong points in BTL (below the line; campaign advertising businesses other than the four major mediums).
The boundary of the advertising industry is blurring. Indeed, Cheil WorldwideÊs latest award winner (Canne advertising award) could hardly be defined as a simple ad. It was more like a comprehensive ad campaign that ranged from media to non-media, encouraged consumer participation, and created social sensations.
Cheil Worldwide boasts healthy financials. As of end-1Q, the company held cash and cash equivalents of W560bn (including short-term investments). The companyÊs parent-based debt-to-equity ratio is estimated at 87%. Although the projected acquisitions of foreign advertising agencies will require capital, we believe that this will be covered by the companyÊs large cash holdings. In 2011, the companyÊs cash dividend payout ratio was 18.8%. Its ROE is forecast to improve going forward, thanks to its sufficient cash holdings.
Figure 160. Cheil WorldwideÊs gross profit by division (2011)
(%) 40 34.8%
30 52.3%
20 17.7%
12.6% 12.9% 11.1% 10.9% 10
0 Broadcast Internet CATV Print
Media Production Marketing service
Source: Company data, KDB Daewoo Securities Research
Figure 161. Global sports marketing (e.g. Beijing Olympics) Figure 162. Cheil WorldwideÊs marketing solution
Source: Company data Source: Company data
KDB Daewoo Securities Research 92 July 16, 2012 Media
Risk factors
Uncertainty over Cheil Worldwide generates roughly 60% of its gross profit from overseas, and the proportion overseas ad market and will likely increase going forward. However, uncertainty is high in the overseas market, given limited information the ongoing eurozone crisis and a possible global economic downturn. Moreover, limited availability access to information in the overseas markets (compared to the domestic market) also presents a risk.
As the no. 1 advertising agency and an affiliate of the Samsung Group, Cheil Worldwide is also exposed to regulatory risks regarding fair trade. The Korea Fair Trade Commission is inspecting the business practices of large conglomerates awarding large contracts almost exclusively to their affiliates. This is one of the reasons why Cheil Worldwide needs to secure more foreign advertisers and non-affiliate customers
Advertisements for Samsung Group affiliates are also highly likely to be sold through an open tender. Cheil WorldwideÊs overseas ads are mostly for Samsung Group affiliates and other Korean companies marketing to the global market. Going forward, Cheil Worldwide will need to strengthen its production capabilities to be globally recognized as an advertising agency.
KDB Daewoo Securities Research 93 July 16, 2012 Media
Cheil Worldwide (030000 KS/Buy/TP: W26,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 1,758 2,167 2,516 2,875 Current Assets 1,586 1,904 2,239 2,599 Cost of Sales 1,300 1,573 1,826 2,087 Cash and Cash Equivalents 242 340 489 657 Gross Profit 458 594 689 788 AR & Other Receivables 868 1,070 1,242 1,420 SG&A Expenses 352 462 524 588 Inventories 0 0 0 0 Operating Profit (Adj) 107 131 165 200 Other Current Assets 69 85 98 112 Operating Profit 109 129 165 200 Non-Current Assets 225 258 262 269 Non-Operating Profit 18 25 21 22 Investments in Associates 30 31 32 33 Net Financial Income -17 -21 -19 -20 Property, Plant and Equipment 85 84 73 63 Net Gain from Inv in Associates 0 1 1 1 Intangible Assets 38 41 44 47 Pretax Profit 127 154 185 222 Total Assets 1,811 2,162 2,501 2,867 Income Tax 31 37 45 54 Current Liabilities 1,062 1,326 1,536 1,753 Profit from Continuing Operations 96 117 141 168 AP & Other Payables 788 971 1,128 1,289 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1 19 19 19 Net Profit 96 117 141 168 Other Current Liabilities 272 336 390 446 Controlling Interests 93 116 140 168 Non-Current Liabilities 31 33 34 35 Non-Controlling Interests 2 0 0 0 Long-Term Financial Liabilities 1 1 1 1 Total Comprehensive Profit 83 126 150 177 Other Non-Current Liabilities 16 19 19 20 Controlling Interests 80 126 150 177 Total Liabilities 1,093 1,359 1,570 1,789 Non-Controlling Interests 3 0 0 0 Controlling Interests 704 788 916 1,064 EBITDA 119 141 178 212 Capital Stock 23 23 23 23 FCF (Free Cash Flow) 101 123 157 182 Capital Surplus 116 116 116 116 EBITDA Margin (%) 6.8 6.5 7.1 7.4 Retained Earnings 588 684 803 941 Operating Profit Margin (%) 6.2 6.0 6.6 7.0 Non-Controlling Interests 14 15 15 15 Net Profit Margin (%) 5.3 5.4 5.6 5.8 Stockholders' Equity 718 802 931 1,079
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 130 102 157 182 P/E (x) 23.4 17.8 14.8 12.4 Net Profit 96 114 141 168 P/CF (x) 20.6 16.4 13.5 11.6 Non-Cash Income and Expense 32 31 37 43 P/B (x) 3.2 2.8 2.4 2.0 Depreciation 11 8 11 10 EV/EBITDA (x) 13.2 9.7 6.9 5.0 Amortization 1 2 2 2 EPS (W) 811 1,010 1,219 1,458 Others -8 -5 0 0 CFPS (W) 918 1,096 1,330 1,557 Chg in Working Capital 43 0 24 24 BPS (W) 5,870 6,491 7,580 8,843 Chg in AR & Other Receivables -294 -202 -172 -178 DPS (W) 160 200 270 320 Chg in Inventories 0 0 0 0 Payout ratio (%) 18.8 18.6 20.8 20.7 Chg in AP & Other Payables 294 183 156 161 Dividend Yield (%) 0.8 1.1 1.5 1.8 Income Tax Paid -42 -42 -45 -54 Revenue Growth (%) 21.3 23.3 16.1 14.3 Cash Flows from Inv Activities 11 18 17 18 EBITDA Growth (%) 0.0 18.9 25.7 19.1 Chg in PP&E -21 -7 0 0 Operating Profit Growth (%) -21.8 18.8 27.7 21.4 Chg in Intangible Assets -5 -5 -5 -5 EPS Growth (%) -13.2 24.5 20.7 19.6 Chg in Financial Assets 29 11 0 0 Accounts Receivable Turnover (x) 2.5 2.3 2.2 2.2 Others 7 19 21 22 Inventory Turnover (x) Cash Flows from Fin Activities -38 -22 -24 -31 Accounts Payable Turnover (x) 2.8 2.5 2.4 2.4 Chg in Financial Liabilities -2 0 0 0 ROA (%) 5.9 5.9 6.0 6.3 Chg in Equity 1 -21 0 0 ROE (%) 13.7 15.6 16.5 16.9 Dividends Paid 0 -18 -22 -29 ROIC (%) Others -38 0 -2 -2 Liability to Equity Ratio (%) 152.2 169.4 168.7 165.8 Increase (Decrease) in Cash 104 98 150 168 Current Ratio (%) 149.3 143.6 145.7 148.2 Beginning Balance 138 242 340 489 Net Debt to Equity Ratio (%) -90.1 -90.9 -94.4 -97.1 Ending Balance 242 340 489 657 Interest Coverage Ratio (x) 306.0 543.1 88.3 107.1 Source: KDB Daewoo Securities Research KDB Daewoo Securities ResearchKDB Daewoo Securities ResearchCompany data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 94 July 16, 2012 Media
KT Skylife (053210 KS)
Buy (Reinstate) Vital part of KT’s media strategy
Target Price (12M, W) 47,000 Reinstate coverage with Buy rating and TP of W31,000 Share Price (07/13/12, W) 25,100 Expected Return (%) 23.5 Expected to play central role in KT’s media strategy EPS Growth (12F, %) 132.9 Likely to generate both top-line and bottom-line growth in 2012 Market EPS Growth (12F, %) 17.1 P/E (12F, x) 18.6 Market P/E (12F, x) 9.0 We reinstate our coverage on KT Skylife (Skylife) with a Buy rating and a 12-month KOSPI 1,812.89 target price of W31,000. In deriving our target price, we applied a 2012F Market Cap (Wbn) 1,196 EV/subscriber of W396,000 to our 2012 year-end subscriber forecast (3.73mn). Shares Outstanding (mn) 48 One of the biggest drivers of SkylifeÊs share performance is the number of Avg Trading Volume (60D, '000) 197 subscribers. Looking ahead, KTÊs focus on its media business could add a Avg Trading Value (60D, Wbn) 4 premium to SkylifeÊs enterprise value. Dividend Yield (12F, %) 0.0 Free Float (%) 49.7 Our investment recommendation is premised on the following: 52-Week Low (W) 17,350 52-Week High (W) 33,100 1) We believe KTÊs efforts to reinforce its media and contents business at the Beta (12M, Daily Rate of Return) 0.90 group level will provide an overall boost to Skylife. Earlier this month, KT Price Return Volatility (12M Daily, %, SD) 3.4 announced its plan to overhaul and bolster its media and contents units. In our Foreign Ownership (%) 4.3 view, KT will focus first on achieving quantitative growth by securing media Major Shareholder(s) platform subscribers, before reinforcing its content production capabilities to seek KT and et al. (50.3%) KBS (6.8%) qualitative growth. We believe Skylife will play a central role to the groupÊs media strategy. Price Performance 2) We see upside potential to the number of SkylifeÊs subscribers. The sales of (%) 1M 6M 12M Absolute 17.6 -4.6 -2.0 Olleh TV Skylife (OTS; a bundled package between KT and Skylife) have been Relative 20.1 -1.2 12.9 thriving again, as evidenced by the surge in June net subscriber additions. Skylife also plans to work together with KBS to install master television antennas in multi- family housing units from 2H12 through 2013, which we believe will present an opportunity for the company to add more subscribers. With the full transition from terrestrial to digital broadcasting planned for later this year, group contracts for analog cable in many apartment complexes are set to expire, which should also prove positive to the company.
3) SkylifeÊs OP margin has been structurally improving, driven by top-line growth in more profitable items. In 2012, we expect the companyÊs platform income (home shopping transmission commission, etc.) to more than double YoY and OP margin to climb 6.2%p YoY. The home shopping market is projected to continue growth on the back of an increasing number of purchases and a more diverse product offering. Competition in the home shopping market has been intensifying, with second tier players narrowing their market share gap with top tier players and new
Share price § Earnings & Valuation Metrics 140 KOSPI FY Revenu OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 120 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 100 12/10 427 45 10.6 34 858 83 25 34.8 0.0 0.0 1.7
80 12/11 464 42 9.0 31 670 89 -13 16.4 40.9 5.3 14.5 12/12F 550 84 15.2 64 1,347 128 86 19.9 18.6 3.8 8.7 60 12/13F 609 110 18.1 84 1,755 150 121 21.1 14.3 3.0 6.7 40 12/14F 705 173 24.6 135 2,827 206 163 26.7 8.9 2.2 4.1 7/11 11/11 3/12 7/12
Note: All figures are based on non-consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: KDB Daewoo Securities Research KDB Daewoo Securities ResearchKDB Daewoo S C S KDB Daewoo Securities Research 95 July 16, 2012 Media
entrants joining the market. This suggests home shopping companies could increase their commission spending in order to secure favorable channels.
For 2012, we forecast operating revenues and operating profit to grow 18.3% and 100.5%, respectively. Profitability should improve thanks to the dramatic increase in home shopping transmission commissions. In 2013, we estimate operating revenues and operating profit to expand 10.7% and 31.3%, respectively, on the back of growing number of subscribers and continued rise in platform income.
Daewoo Securities Research 96
July 16, 2012 Media
Reinstate coverage with Buy rating and TP of W31,000
Buy call and TP of We reinstate our coverage on KT Skylife (Skylife) with a Buy rating and a 12 month target W31,000 price of W31,000. In deriving our target price, we applied a 2012F EV/subscriber of W396,000 to our 2012 year-end subscriber forecast (3.73mn)
One of the biggest drivers of SkylifeÊs share performance is its number of subscribers, since the companyÊs business fundamentally rests upon its subscriber base. Encouragingly, Skylife has been enjoying accelerating subscriber growth, largely due to the strong popularity of its bundled package OTS.
To calculate SkylifeÊs fair EV/subscriber, we used the EBITDAs of the six largest domestic pay-TV providers – CJ HelloVision, TBroad Holdings, C&M, Hyundai HCN and TBroad Hanvit Broadcasting and TBroad Dobongkangbuk Broadcasting. Using their EBITDAs, we estimated their 2012F EV based on the average 2012F EV/EBITDA of Asian SOs and divided them by the number of subscribers of each company. Then, we applied the average EV/subscriber of the six companies to reach SkylifeÊs fair EV/subscriber.
We believe Skylife is better positioned to gain subscribers thanks to its close relationship with its parent company KT. This makes the companyÊs outlook less uncertain compared to other industry players. The company will likely continue its efforts to lure subscribers away from its competitors, while also aggressively seeking new subscribers from KTÊs fixed-line customer base by leveraging its group partnership.
With revenues from the traditional fixed-line business dwindling and competition within the wireless segment increasingly heating up, KT seems determined to find its next growth engine in the media business. Earlier this month, KT announced its plan to overhaul and bolster its media and contents (M&C) unit. Looking ahead, KTÊs focus on its media business could add a premium to SkylifeÊs enterprise value.
Table 25. Major global SOsÊ earnings and valuations (Wbn, %, x) Market OP Margin P/E P/B EV/EBITDA ROE Company Cap 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F Satellite broadcasters KT Skylife 1,196 9.0 15.2 18.1 40.9 18.6 14.3 5.3 3.8 3.0 14.5 8.7 6.7 16.4 19.9 21.1 Sky Perfect Jsat (Japan) 1,750 11.3 10.1 11.1 13.7 12.7 11.0 0.6 0.6 0.6 2.8 2.8 2.7 4.7 5.1 5.2 DirecTV (US) 35,966 17.0 17.1 17.3 12.9 11.1 9.0 ------6.5 5.9 5.5 ------Dish Network 13,591 18.6 16.4 16.5 8.8 9.8 9.5 -- 13.2 5.6 5.0 4.9 ------Shaw Communications (Canada) 10,029 27.3 25.8 25.8 11.9 12.5 12.9 2.4 2.4 2.2 6.7 6.8 6.7 15.8 20.2 17.6 British Sky Broadcasting (UK) 20,512 16.4 17.7 18.0 14.2 13.9 12.4 10.8 12.2 8.8 8.8 8.0 7.5 ------Average 16.6 17.0 17.8 17.1 13.1 11.5 4.8 6.4 4.0 7.9 6.2 5.7 12.3 15.0 14.6 Cable TV SOs Tbroad Hanvit (Korea) 390 30.2 12.2 1.7 3.9 13.4 Hyundai HCN 262 19.8 24.0 21.8 12.1 7.6 7.0 0.7 0.7 0.6 23.5 3.0 2.9 3.8 12.3 11.3 Tbroad Dobong 78 24.0 10.5 1.3 5.2 14.3 Jupiter Telecom (Japan) 8,481 19.3 19.5 20.2 15.6 14.7 13.4 1.3 1.3 1.2 4.3 4.5 4.5 8.8 8.9 9.3 Beijing Gehua Catv Network 1,421 -6.3 -1.6 0.3 27.8 24.4 20.7 1.5 1.3 1.2 5.8 5.0 5.3 6.2 7.0 (China) Comcast (USA) 96,522 19.2 19.4 20.8 18.6 16.4 14.1 1.8 1.7 1.6 7.0 6.9 6.5 9.1 10.5 10.9 Time Warner Cable 29,609 21.3 21.3 22.5 14.7 14.6 11.9 3.4 3.5 3.5 6.8 6.4 6.1 19.9 25.4 32.4 Charter Communications 8,452 14.5 14.5 15.8 54.0 22.4 18.2 7.3 7.3 7.0 -39.1 -8.5 4.3 Cablevision 4,007 18.4 16.5 17.0 12.2 15.0 12.0 6.6 6.5 6.3 -2.5 -2.4 Asia average 17.4 14.0 14.1 15.7 15.6 13.7 1.3 1.1 1.0 9.2 4.5 4.1 9.1 9.1 9.2 US average 18.4 17.9 19.0 15.2 15.3 23.0 9.2 7.8 2.5 6.9 6.8 6.5 -3.4 6.2 11.3 Total average 17.8 16.2 16.9 15.5 15.5 19.0 4.3 4.4 1.6 8.1 5.8 5.5 4.4 7.5 10.4 Pay-TV average 16.8 16.4 17.3 17.4 14.8 15.4 4.4 5.2 2.8 8.5 6.2 5.6 7.3 10.5 12.6 Note: KT Skylife is Daewoo Securities Research estimate, the rest is from Bloomberg consensus Source: Bloomberg, KDB Daewoo Securities Research
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Investment point 1) Opportunities within the KT group
Likely to play a central Ever since Skylife was brought into the KT group, the satellite provider has made a steady role in KTÊs media contribution to its parent companyÊs media and contents profits. We believe KTÊs efforts to strategy strengthen its M&C business at the group level will provide an overall boost to Skylife, transforming its positioning from a mere satellite broadcasting provider to a key player of the groupÊs M&C business.
1) Skylife is better positioned to gain subscribers than its competitors. Unlike other pay-TV providers, the company can tap into the enormous telecom subscriber base of its parent company KT and also save marketing expenses through joint sales activities. A successful example of their partnership is OTS.
2) We believe Skylife will play a central role in the groupÊs media strategy. In our view, KTÊs media business is halfway through its quantitative growth phase (during which the priority is to attract subscribers). Once the quantitative growth phase is over, KT will start to focus on its qualitative growth. Indeed, KTÊs recent announcement to overhaul and bolster its M&C division seems to be part of the groupÊs search for qualitative growth in the long run. As KTÊs M&C strategy unfolds, we believe Skylife will assume an increasingly important role.
Figure 163. OTS subscribers, KTÊs media revenue and KT SkylifeÊs operating revenue trends
(Wbn) KT Skylife's revenues (L) KT's parent media revenues improve ('000 persons) 140 KT's parent media revenues (L) as the number of OTS subscribers increase 1,600 OTS subscriber (R)
105 1,200
70 800
35 400
0 0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
Note: OTS is an abbreviation of Olleh TV Skylife; it is a bundling product of KTÊs IPTV (Olleh TV) and KT SkylifeÊs satellite v broadcasting service. Source: Company data, KDB Daewoo Securities Research
Figure 164. KT SkylifeÊs and KTÊs share performance
(1/12=100) 130 KT Skylife KT KOSPI 115
100
85
70
55 1/12 2/12 3/12 4/12 5/12 6/12 7/12
Source: Thomson Reuters, KDB Daewoo Securities Research
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Investment point 2) Number of subscribers to rise
OTS sales to rise further; In June, Skylife saw the number of its subscribers surge which has stagnated for a long time. antenna installation Monthly net subscriber increase came in at 50,614 subscribers, the largest pick-up since project commissioned March 2011. Sales of Olleh TV Skylife (OTS) have been thriving again since late June. by KBS to help increase Skylife is anticipated to step up efforts to attract more subscribers. With the full transition the no. of subscribers from terrestrial to digital broadcasting planned for later this year, group contracts for analog cable in many apartment complexes are set to expire.
KBS commissioned Skylife to install master television antennas in multi-family housing units. Regarding this project, Skylife is responsible for site inspection, installation of television antennas and repair & maintenance for roughly 7,200 apartment complexes (3.5mn households) by end-2013. As master television antennas can be used by both terrestrial and satellite TV broadcasters by law, Skylife plans to install its satellite broadcasting devices along with the master antennas, which should help increase the number of subscribers.
Figure 165. KT SkylifeÊs net added subscribers increased rapidly at end-June
('000 subscribers) June subscribers (W) 60 Monthly subscriber increase (1 month delayed, L) Up 38% MoM 35,000 Up 85% YoY Monthly avg. share price (R)
45 30,000
30 25,000
15 20,000
0 15,000 7/11 9/11 11/11 1/12 3/12 5/12 7/12
Note: Subscribers in the corresponding month were counted at the early next month Source: Company data, Thomson Reuters, KDB Daewoo Securities Research
Figure 166. KT SkylifeÊs total subscriber trend and forecast
('000 persons) Project commissioned by KBS to install master antennae 5,000 OTS (bundled) KT's marketing for OTS Terrestrial TV's digital switchover by yearend Skylife products only
4,000
3,000
2,000
1,000
0 02 03 04 05 06 07 08 09 10 11 12F 13F
Source: Company data, KDB Daewoo Securities Research
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Investment point 3) Structural growth of OP margin
Home shopping SkylifeÊs OP margin has been structurally improving, driven by top-line growth in more transmission profitable items. In 2012, we expect the companyÊs platform income (home shopping commission to more transmission commission, etc.) to more than double YoY (to at least W60bn), and OP margin than double YoY; OP to climb 6.2%p YoY. We see room for further growth in the home shopping sector, as the margin to increase companyÊs home shopping revenues are small relative to its number of subscribers. 6.2%p The home shopping market is projected to continue growth on the back of an increasing number of purchases and a more diverse product offering. Competition in the home shopping market has been intensifying, with second tier players narrowing their market share gap with top tier players and new entrants joining the market. This suggests home shopping companies could increase their commission spending in order to secure favorable channels. Indeed, Home & Shopping newly entered the market this year, and its efforts to land a premium channel benefited SOs.
Figure 167. KT SkylifeÊs home shopping fee revenue trend Figure 168. Comparison of platform revenues of major companies
(Wbn) Homeshopping revenues (L) Unrecognized revenues in 1Q to be (%) Platform revenues 20 OP margin (R) recognized in 2Q after negotiation of fees 25 W43.7bn No. of subscribers KT Skylife 3.2mn 20 15 OP margin to rise thanks to profitable homeshopping 15 W144.4bn revenue increase 10 CJ HelloVision 3.4mn 10
5 5 W63.3bn Hyundai HCN 0 0 1.3mn 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12F
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Figure 169. Home shopping companiesÊ GMV share trend and forecast Figure 170. Home shopping companiesÊ GMV and SO fee forecasts
(%) Hyundai Homeshopping (Wbn) 35 CJ O Shopping 10,000 3 Homeshopping companies' combined GMV (L) 7% GS Homeshopping SO fee compared to GMV (R) 8,000 30 6%
6,000
25 5% 4,000
SO fee should increase Competition is strengthening: 4% 20 due to competition 1) New channel HOME & SHOPPING 2,000 to secure premium channels for small and mid sized companies enters the market 2) Top 3's market share gap to narrow 15 0 3% 07 08 09 10 11 12F 13F 07 08 09 10 11 12F 13F
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
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Earnings forecast: Focus on profitability improvement
We expect SkylifeÊs 2Q operating revenue and operating profit to expand 19.2% and 82.3%, respectively. The strong surge in operating profit seems attributable to a 91.3% YoY jump in platform income (inclusive of home shopping fee income).
The highly profitable platform income will likely account for 13.9% of operating revenues this year, up 9.4% YoY. OP margin is forecast to rise by 6.2%p, to 15.2% over the same period.
Expect growth in both Earnings should grow stronger in 2H than in 1H, as the number of subscribers is forecast to the top and bottom line rise in 2H, driven by the transition to digital broadcasting and OTS sales. Skylife is seeing this year more business opportunities not only from existing customers, but also from new customers (including residents of multi-family housing units).
In 2012, we expect SkylifeÊs operating revenues to expand 18.3%, and its operating profit and net profit to double YoY. The company is indeed reporting unparallel earnings growth, widening the gap with its global SO peers. In 2013, the companyÊs operating revenues and operating profit are forecast to rise 10.7% and 31.3%, respectively, on the back of a greater number of subscribers and steady platform income growth.
Figure 171. KT SkylifeÊs revenue trends and forecasts by division
(Wbn) (%) 160 28 Service revenues (L) Platform revenues (L) Cost-related revenues (L) Other revenues (L) YoY growth of total revenues (R) 120 21
80 14
40 7
0 0 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12F 4Q12F
Source: Company data, KDB Daewoo Securities Research
Figure 172. P/E-EPS growth of major global SOs (2012F)
(P/E, x) 30 Beijing Gehua Catv Network 24
KT Skylife 18 Comcast Jupiter Telecom Cablevision Time Warner Cable
12 Sky Perfect Jsat Directv Shaw Communications Dish Network (EPSG, %, YoY) 6 -20 0 20 40 60 80 100 120
Source: Bloomberg, KDB Daewoo Securities Research
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Table 26. KT SkyLifeÊs quarterly and annual earnings trends and forecasts (Wbn, %) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12F 3Q12F 4Q12F 2011 2012F 2013F Revenues 112 115 118 120 123 137 142 148 464 550 609 Service 78 80 84 85 86 89 92 97 326 365 384 Platform 9 11 12 12 16 21 20 20 44 76 110 Cost-related 14 15 13 12 12 16 15 15 54 59 62 Others 10 7 7 10 6 8 12 15 34 41 53 EBITDA 21 21 24 23 33 31 42 34 89 140 175 EBITDA Margin 18.8 18.1 20.8 19.3 26.4 22.5 29.6 23.2 19.3 25.4 28.7 Operating Profit 11 10 12 9 20 17 28 19 42 84 110 OP Margin 9.7 8.3 10.2 7.7 15.8 12.7 19.6 12.9 9.0 15.2 18.1 Net Profit 9 7 9 6 15 13 23 15 31 64 85 NP Margin 7.8 5.9 7.9 5.3 12.0 9.7 15.9 10.5 6.7 11.6 13.9 OP Breakdown Service 69.2 69.8 70.9 71.2 69.9 65.3 65.3 65.3 70.3 66.3 63.0 Platform 8.1 9.4 10.3 9.8 13.2 15.2 13.9 13.3 9.4 13.9 18.1 Cost-related 12.3 13.0 11.3 9.7 9.8 11.9 10.7 10.3 11.6 10.7 10.1 Others 9.2 5.9 5.9 8.2 5.1 6.0 8.7 9.9 7.3 7.5 8.7 YoY Growth Revenues 14.4 4.9 12.1 4.8 10.0 19.2 20.2 23.5 8.8 18.3 10.7 Service 5.9 10.0 9.9 12.6 11.2 11.5 10.7 13.3 9.6 11.7 5.2 Platform 26.0 -4.1 37.8 38.0 80.0 91.3 62.0 68.4 22.2 74.7 44.6 Cost-related 13.9 15.6 5.1 -15.3 -12.3 8.8 13.2 32.0 4.4 9.4 5.1 EBITDA 4.6 -13.2 10.6 38.4 54.4 48.5 70.8 48.4 7.9 56.0 25.1 Operating Profit 2.0 -34.5 -8.0 33.2 78.8 82.3 130.2 106.2 -7.9 100.5 31.3 Net Profit 4.6 -55.8 -11.0 TTB 69.8 94.6 141.0 142.9 -8.0 104.1 32.6 QoQ Growth Revenues -1.8 2.2 2.7 1.6 3.1 10.8 3.6 4.5 Service 2.5 3.2 4.2 2.1 1.2 3.5 3.5 4.5 Platform 7.0 19.5 11.8 -3.5 39.6 27.0 -5.3 0.3 Cost-related 1.1 7.8 -10.7 -13.0 4.7 33.8 -7.1 1.4 EBITDA 26.6 -1.8 18.1 -5.7 41.2 -5.5 35.8 -18.1 Operating Profit 57.6 -12.5 26.2 -23.4 111.6 -10.8 59.3 -31.4 Net Profit TTB -22.1 37.6 -31.8 132.4 -10.8 70.4 -31.3 Note: K-IFRS non-consolidated basis Source: Company data, KDB Daewoo Securities Research
Figure 173. Quarterly revenue and operating profit trends Figure 174. Annual revenue and operating profit forecasts
(Wbn) (%) (Wbn) (Wbn) 160 Revenues (L) 40 640 Revenues (L) 120 OP margin (R) Operating profit (R)
120 30 480 90
80 20 320 60
40 10 160 30
0 0 0 0 1Q11 3Q11 1Q12 3Q12F 2010 2011 2012F 2013F
Note: K-IFRS non-consolidated basis Note: K-IFRS non-consolidated basis Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
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Company overview
Licensed in 2001 and Established in January 2001 as a satellite broadcasting provider, Skylife officially joined the brought under the KT KT corporate group in 2010. group in 2010 Skylife had been KoreaÊs sole licensed provider of digital satellite broadcasting. Compared to the more affordable and popular analog cable channels, digital satellite broadcasting had higher subscription fees due to digital transmission and satellite installation costs, which made it difficult for the company to engage in aggressive marketing.
The company finally marked a turning point with its takeover by KT, a company which had been seeing persistently slowing growth despite its wide subscriber base and long presence in the telecommunications industry. KT made a huge hit with the launch of Olleh TV Skylife (a bundled service package between KT and Skylife) in the pay-TV market, leveraging its existing fixed line customers to increase the number of its satellite broadcast subscribers.
Now, Skylife is competing more aggressively in the pay-TV market to attract a greater number of subscribers. Last year, the company succeeded in increasing its revenues from teleshopping transmission fees, taking an active approach to negotiations of its commission rates. Capitalizing on its increased subscriber base, Skylife is seeking other new sources of income from its partnership with KT.
As of end-2011, Skylife accounted for 14.1% of total pay TV subscribers and, as of end- 1Q12, had the second highest number of subscribers among pay television broadcasters, following CJ HelloVision.
Skylife has a solid balance sheet, with cash and cash equivalents estimated at W91.8bn as of end-1Q. The company significantly improved its financial position in 2011, converting W140bn worth of convertible bonds and redeemable convertible preferred stock into common stock and raising funds of W42bn via an IPO.
Although the companyÊs financing needs are anticipated to increase for the meanwhile due to its set-top box investments and the construction of its Sangam DMC office, marketing and content-related expenses have continued to ease thanks to its joint operations with KT and, given SkylifeÊs strategic positioning within the group, funding support from the parent company remains a possibility.
Figure 175. Pay-TV market share (2011) Figure 176. Number of subscribers in major pay-TV companies (1Q12)
('000 persons) 3,474 IPTV total 3,339 21.3% 3,148
2,699
1,312 Satellite 14.1% SO total 64.6%
CJ HelloVision KT Skylife Tbroad C&M Hyudai HCN
Note: Subscribers of KT and KT SkylifeÊs OTS are double counted Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
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Figure 177. KT and KT SkylifeÊs bundled product, OTS
Source: KT Skylife
Figure 178. KT groupÊs holding structure
KT 100% KT Pay & Mobile (030200(030200 KS)KS) 1.0% 65.9% 81.6% 38.9% KTH 99.0% 57.0% KT Capital BC Card H&C Network Initech (036030 KQ) 18.4%
19.0% 17.5% KT CS 28.0% Vanguard 44.5% KT Commerce 54.6% 81.0% (030210 KS) Private Equity Fund U-Payment 100% 17.8% 44.9% KT IS 9.0% KT-LIG Ace 50.9% KTP Initech Smartro (058860 KS) Private Equity Fund VP Holdings KT Music 48.7% 93.8% KT Tech (043610 KQ) 61.2% 0.1% KT SM 36.9% 100% KT Skylife KT Networks Smartro (060370 KQ) (053210 KS) 13.3% 50.2% 51.4% 100% 74.2% 48.0% Nasmedia KT M&S 14.2% Korea HD Animax Braodcasting Broadcasting Korea 93.8% 86.8% KT Linkus KT Telecop 26.2% WIC 100% 100% KT Cloudware KT Innotz 53.3% Sofnix 51.0% 65.7% KT M Hows NexR 100% 100% KT Estate KT AMC 65.0% 91.1% Smart Channel KT DS 58.0% KT Rental 51.0% 52.6% Cidus FNH KT Edu i 100% T-Card 82.8% 50.0% KC Smart Service KaN Communications 50.0% Kumho Rent a Car Global
Note: Based on Dec 2011 business report Source: Company Data, KDB Daewoo Securities Research
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Risk factors
Intense market Heightening competition in the pay TV market is sparking worries over increased marketing competition is fueling spending pressures. However, we believe upside risks to SkyLifeÊs marketing spending are worries over marketing limited, given its joint sales activities with KT and highly attractive product offerings (most spend notably OTS)
KT group is continuing to We believe KTÊs media strategy is still in the development phase. The company announced develop its media earlier this month that it plans to launch a media and contents (M&C) division, but its long- strategy term roadmap still remains undetermined. From SkyLifeÊs perspective, KT will need to carve out a clearer role of its subsidiary within its media business framework.
Once KT secures an adequate number of media subscribers, it will have to start focusing on enhancing the qualitative aspects of its service offerings. One of the problems that need to be addressed is the overlapping services between SkyLifeÊs satellite broadcasting and KTÊs IPTV offerings. Furthermore, the company will also have to find ways to increase its ARPU.
As the digital contents and media arm of the KT group, Skylife can serve as a good example for internally solving such issues as net neutrality. However, since this would require decision-making at the group level in line with the broader corporate strategy and structure, progress could be slower than expected
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SBS (034120 KS/Buy/TP: W47,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 464 550 609 705 Current Assets 220 317 444 622 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 41 158 271 427 Gross Profit 464 550 609 705 AR & Other Receivables 106 125 139 160 SG&A Expenses 423 466 499 531 Inventories 2 3 3 3 Operating Profit (Adj) 42 84 110 173 Other Current Assets 0 0 0 0 Operating Profit 42 84 110 173 Non-Current Assets 303 295 269 253 Non-Operating Profit -3 -3 -3 0 Investments in Associates 5 5 5 5 Net Financial Income 2 2 1 -1 Property, Plant and Equipment 200 182 150 124 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 45 41 37 34 Pretax Profit 39 81 107 173 Total Assets 523 612 713 875 Income Tax 8 16 24 38 Current Liabilities 224 247 263 289 Profit from Continuing Operations 31 64 84 135 AP & Other Payables 114 135 150 173 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 100 101 101 101 Net Profit 31 64 84 135 Other Current Liabilities 10 11 13 15 Controlling Interests 31 64 84 135 Non-Current Liabilities 9 11 12 14 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 2 1 1 1 Total Comprehensive Profit 33 64 84 135 Other Non-Current Liabilities 4 6 8 10 Controlling Interests 33 64 84 135 Total Liabilities 233 258 275 303 Non-Controlling Interests 0 0 0 0 Controlling Interests 290 354 438 572 EBITDA 89 128 150 206 Capital Stock 119 119 119 119 FCF (Free Cash Flow) -13 86 121 163 Capital Surplus 158 158 158 158 EBITDA Margin (%) 19.3 23.2 24.6 29.3 Retained Earnings 10 74 158 292 Operating Profit Margin (%) 9.0 15.2 18.1 24.6 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 6.7 11.7 13.8 19.1 Stockholders' Equity 290 354 438 572
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 93 108 125 167 P/E (x) 40.9 18.6 14.3 8.9 Net Profit 31 64 84 135 P/CF (x) 16.2 11.1 9.7 7.1 Non-Cash Income and Expense 66 65 66 71 P/B (x) 5.3 3.8 3.0 2.2 Depreciation 38 36 32 26 EV/EBITDA (x) 14.5 8.7 6.7 4.1 Amortization 10 8 8 7 EPS (W) 670 1,347 1,755 2,827 Others -9 -3 -1 -1 CFPS (W) 1,693 2,268 2,594 3,522 Chg in Working Capital -2 -8 -1 -1 BPS (W) 5,140 6,573 8,403 11,290 Chg in AR & Other Receivables 17 -19 -13 -22 DPS (W) 0 0 0 0 Chg in Inventories 4 0 0 0 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -14 21 15 24 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -2 -13 -24 -38 Revenue Growth (%) 8.8 18.3 10.7 15.8 Cash Flows from Inv Activities -101 15 -7 -5 EBITDA Growth (%) 7.9 42.7 17.4 37.6 Chg in PP&E -97 -18 0 0 Operating Profit Growth (%) -7.9 100.5 31.3 57.5 Chg in Intangible Assets -4 -4 -4 -4 EPS Growth (%) -21.9 101.0 30.3 61.1 Chg in Financial Assets 0 40 0 0 Accounts Receivable Turnover (x) 4.5 4.8 4.6 4.7 Others -1 -3 -3 -1 Inventory Turnover (x) Cash Flows from Fin Activities -28 -5 -5 -5 Accounts Payable Turnover (x) Chg in Financial Liabilities -60 0 0 0 ROA (%) 6.0 11.3 12.6 17.0 Chg in Equity 41 0 0 0 ROE (%) 16.4 19.9 21.1 26.7 Dividends Paid 0 0 0 0 ROIC (%) 14.8 27.7 40.1 74.1 Others -8 -5 -5 -5 Liability to Equity Ratio (%) 80.2 72.8 62.9 52.9 Increase (Decrease) in Cash -36 118 113 157 Current Ratio (%) 98.0 128.3 168.7 215.7 Beginning Balance 77 41 158 271 Net Debt to Equity Ratio (%) Ending Balance 41 158 271 427 Interest Coverage Ratio (x) 4.1 15.6 20.4 32.2 Source: KDB Daewoo Securities Research
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CJ E&M (130960 KQ)
Buy (Initiate) Earnings to pick up after some growing pains
Target Price (12M, W) 30,000 Initiate coverage with Trading Buy rating and TP of W30,000 Share Price (07/13/12, W) 25,500 Expected Return (%) 17.6 Improved program competitiveness has led to ad revenue growth EPS Growth (12F, %) -27.0 Earnings to pick up in 2H after being weak in 1H Market EPS Growth (12F, %) 17.1 P/E (12F, x) 20.0 Market P/E (12F, x) 9.0 We initiate our coverage on CJ E&M with a Trading Buy rating and a target price of KOSDAQ 484.32 W30,000. We derived our target price by applying a P/E of 23.5x (15% discount to Market Cap (Wbn) 967 the domestic media industryÊs average P/E in 2005, when SBS saw ad revenue Shares Outstanding (mn) 38 growth) to our 2012 EPS estimate. We applied a 15% discount to reflect the gap Avg Trading Volume (60D, '000) 380 between the domestic media industryÊs 2005 and 2012F P/Es as well as the fact Avg Trading Value (60D, Wbn) 11 that some of CJ E&M operations are showing highly volatile earnings. Dividend Yield (12F, %) 0.0 Free Float (%) 56.0 Our investment recommendation is premised on the following: 52-Week Low (W) 23,850 52-Week High (W) 54,800 1) CJ E&MÊs program competitiveness is improving. The companyÊs success in Beta (12M, Daily Rate of Return) 1.04 using set seasons in program production has prompted other cable program Price Return Volatility (12M Daily, %, SD) 3.4 providers (PP) to follow suit. CJ E&MÊs channels are becoming more competitive Foreign Ownership (%) 3.4 thanks to their broadcasting stability and unique characteristics. And ad demand Major Shareholder(s) visibility for the companyÊs programs is increasing. CJ and et al. (42.96%) As an increasing number of CJ E&MÊs programs are generating high ratings (over 2%),
the companyÊs ad rates are likely to see a premium. Furthermore, as a pay channel Price Performance (operating under the total ad-time cap system), the company can run mid-program ads. (%) 1M 6M 12M Absolute -4.3 -21.3 -37.5 As such, greater program competitiveness should lead to ad revenue growth. Relative -1.8 -18.0 -22.6 2) We expect CJ E&MÊs earnings to improve in 2H, as most of its operations are likely to see strong seasonal effects. We expect the broadcasting operation to experience increases in ad revenues related to flagship programs (e.g., the singing competition Superstar K 4). The game division is likely to generate new sales from new titles. And the movie distribution division should see positive effects from the openings of new movies (e.g., Running Like a Sick Horse in June, Tower in 2H, Masquerade in 2H).
For 2012, we project CJ E&MÊs operating revenues to expand 11.3%, while operating profits are likely to decline 44.8% due to increased program production expenses. The game divisionÊs revenues are unlikely to recover in 2012. In addition, marketing expenses related to new games are slated to be recognized in 2H.
However, we anticipate the companyÊs OP margin to rise in 2013, aided by YoY decreases in production expenses and new game-related revenues.
Share price § Earnings & Valuation Metrics 140 KOSDAQ FY Revenu OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 120 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 100 12/10 98 19 19.5 6 1,208 51 -35 1.9 28.6 1.7 10.1
80 12/11 1,143 70 6.1 57 1,745 361 -127 7.7 17.4 1.8 3.7 12/12F 1,424 42 2.9 48 1,273 578 178 4.1 20.0 1.1 1.7 60 12/13F 1,540 99 6.4 67 1,771 481 104 5.4 14.4 0.9 1.8 40 12/14F 1,655 119 7.2 81 2,141 468 86 6.1 11.9 0.9 1.7 7/11 11/11 3/12 7/12
Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 107 July 16, 2012 Media
Initiate coverage with Trading Buy rating and TP of W30,000
Initiate coverage with a We initiate our coverage on CJ E&M with a Trading Buy rating and a target price of W30,000. Trading Buy rating and We derived our target price by applying a P/E of 23.5x (15% discount to the domestic media TP of W30,000 industryÊs average P/E in 2005, when SBS saw ad revenue growth) to our 2012 EPS estimate. We applied a 15% discount to reflect the gap between domestic media industryÊs 2005 and 2012F P/Es as well as the fact that some of CJ E&M operations are showing highly volatile earnings (compared to SBS). Currently, we believe that CJ E&MÊs shares are overvalued relative to global cable TV PP shares. However, we expect this valuation burden to ease in 2013, as we believe the company is likely to show significant earnings growth.
Figure 179. P/E-ROE of cable PPs (2012F) Figure 180. P/E-EPSG of cable PPs (2013F)
(P/E, x) (P/E, x) 22 16 Discovery Comm. CJ E&M CJ E&M Disney (ESPN) 19 Discovery Comm. 14
News Corp (Fox Disney (ESPN) News Corp (Fox Channel) 16 12 Channel) Time Warner (CNN, HBO) YTN Time Warner 10 13 (CNN, HBO) YTN
(ROE, %) (EPSG, %) 10 8 0 2 4 6 8 1012141618 0 1020304050
Source: Bloomberg, KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research
Table 27. Earnings and valuations of major global cable PPs (Wbn, %, x) Market OP Margin P/E P/B EV/EBITDA ROE Company Cap 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F CJ E&M (Korea) 967 6.1 2.9 6.4 17.4 20.0 14.4 1.8 1.1 0.9 3.7 1.7 1.8 7.7 4.1 5.4 YTN 160 14.8 15.0 17.8 15.1 12.9 9.3 0.9 0.9 0.8 7.3 8.8 7.9 6.3 6.9 8.9 Disney (ESPN) (US) 97,857 19.0 21.8 23.1 17.2 15.7 13.7 2.3 2.2 2.0 9.3 9.0 8.1 12.8 14.5 15.3 News Corp (Fox Channel) 60,448 14.5 16.1 17.6 14.8 15.4 12.6 1.9 1.9 1.8 7.9 8.6 7.8 10.0 12.4 14.5 Time Warner (CNN, HBO) 41,802 20.6 20.6 21.1 12.6 11.8 10.3 1.2 1.1 1.0 7.6 7.6 7.2 9.2 10.2 10.8 Discovery Communications 21,624 40.1 42.7 44.2 18.6 18.2 14.9 2.0 3.0 2.8 8.6 10.3 9.4 17.8 16.5 18.7 (Non-Fiction) Total average 19.2 19.9 21.7 15.9 15.7 12.5 1.7 1.7 1.6 7.4 7.7 7.0 10.6 10.8 12.3 Note: CJ E&M is Daewoo Securities Research estimates, the rest is Bloomberg consensus, Source: Bloomberg, KDB Daewoo Securities Research
Table 28. Earnings and valuations of major global media groups (Wbn, %, x) Market OP Margin P/E P/B EV/EBITDA ROE Company Cap 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F CJ E&M (Korea) 967 6.1 2.9 6.4 17.4 20.0 14.4 1.8 1.1 0.9 3.7 1.7 1.8 7.7 4.1 5.4 SBS Media Holdings 588 29.4 23.8 7.1 5.9 1.1 0.8 0.8 137.5 7.3 6.2 4.7 10.7 11.6 The Walt Disney (US) 97,857 19.0 21.8 23.1 17.2 15.7 13.7 2.3 2.2 2.0 9.3 9.0 8.1 12.8 14.5 15.3 Comcast 96,522 19.2 19.4 20.8 18.6 16.4 14.1 1.8 1.7 1.6 7.0 6.9 6.5 9.1 10.5 10.9 News Corp 60,448 14.5 16.1 17.6 14.8 15.4 12.6 1.9 1.9 1.8 7.9 8.6 7.8 10.0 12.4 14.5 Time Warner 41,802 20.6 20.6 21.1 12.6 11.8 10.3 1.2 1.1 1.0 7.6 7.6 7.2 9.2 10.2 10.8 Viacom 28,336 25.8 27.5 28.4 11.4 11.2 9.7 3.3 3.3 3.3 7.5 7.3 6.9 26.6 31.7 Clear Channel Media Holdings 365 17.2 5.3 2.5 11.5 9.7 9.4 RTL Group (Europe) 15,221 18.9 18.6 18.6 13.5 14.6 14.0 2.3 2.4 2.5 9.0 8.4 8.3 14.5 15.1 16.0 M6-Metropole Television 1,876 17.0 15.3 15.2 9.0 9.6 9.4 1.9 1.9 1.8 3.4 3.5 3.4 21.8 19.9 19.7 Total average 18.8 17.8 18.9 15.4 12.6 10.6 2.0 1.8 1.7 20.4 7.0 6.6 11.2 13.8 15.1 Note: CJ E&M is Daewoo Securities Research estimates, the rest is Bloomberg consensus, Source: Bloomberg, KDB Daewoo Securities Research
KDB Daewoo Securities Research 108 July 16, 2012 Media
Investment point 1: Greater program competitiveness to lead to ad revenue growth
Strong popularity of in- CJ E&MÊs program competitiveness is improving. Generally speaking, the average rating of a house programs should cable TV program is less than 1%. However, four of CJ E&MÊs programs recorded ratings lead to ad revenue exceeding 2% in 2011. And we estimate that ratings for nine of the companyÊs programs growth reached that level in 1H. The company aims to increase this number to 21 in 2012 and 24 in 2013.
This increase in highly-rated programs (over 2%) should lead to a rise in ad rates. CJ E&M has expanded in-house production of entertainment shows and dramas. And viewership of some of the companyÊs programs exceeded the average viewership of basic cable TV programs and even came close to that of terrestrial broadcastersÊ programs.
CJ E&M operates multiple channels. Given that these channels have differing target audiences and broadcasting times, we think that deriving an average ad rate for CJ E&M is not meaningful. Still, it should be noted that exceptionally strong viewership of a cable program should enable the operator of its channel to apply a premium to its ad rates. As such, an increase in highly-rated programs should lead to ad revenue growth.
Figure 181. Current and target number of anchor programs (viewer ratings higher than 2%)
(programs) 30 Additional goal
Achievement status Comedy Big League 2 25 Superstar K 4, etc. Comedy Big League 3 The Voice of Korea 20 Flower Boy's Ramen Shop Yellow Adonis Queen InHyun's Man 15 SNL Korea 2 Come Convenience Store 10 Mak Irae Show
5
0 2011 2012F 2013F
Note: Includes programs with viewer ratings of 2% (rounding off) Source: Company data, KDB Daewoo Securities Research
Figure 182. Quarterly broadcasting revenue trend and forecast
(Wbn) Broadcast revenues (L) (%) Superstar K4 to be released in August 240 Superstar K's peak viewership rate (R) 28 Broadcast revenues level up thanks to high viewership rate 180 of Superstar K series 21 as terrestrial TV's program 18.1% 13.4% 14.0% 120 14 12.7%
60 7
0 0 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12F
Note: Superstar K2 for Jul 23 ~ Oct 22 2010, Superstar K3 for Aug 12~ Nov 11 2011, Superstar K4 to be aired on Aug 17 2012 Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 109 July 16, 2012 Media
Using set seasons in Cable TV PPs desperately need to secure steady ad sales and stable production program production environments in light of the fact that they face tougher conditions than terrestrial should boost ad revenue broadcasters (e.g., less desirable channel numbers and limited viewership). However, CJ growth E&M seems to be overcoming these obstacles, as it has found success producing programs using set seasons.
In fact, while many domestic cable TV PPs are producing entertainment shows using licensed formats, CJ E&M is producing original programs such as popular sitcoms (e.g., Rude Miss Young-Ae; currently in its 10th season) and reality shows.
The use of set seasons should enable advertisers to predict the ad effects of programs (which should lead to upfront ad purchases). As for broadcasters, an increase in upfront ad sales should lead to stronger broadcasting stability and ad revenue visibility, which should help stabilize CJ E&MÊs production environment.
Pay TV channels can run CJ E&M is the best at utilizing mid-program ads among domestic cable PPs. In Korea, only mid-program ads pay TV channels are allowed to use mid-program ads (under the total ad-time cap system). Mid-program advertising can be equivalent to 10 minutes of a programÊs running time (on average; 12 minutes maximum). CJ E&MÊs Superstar K generated strong ad revenues using mid-program ads. We expect the upcoming Superstar K 4 (scheduled for August) to receive strong attention from advertisers.
Table 29. CJ E&MÊs introduction and successful settlement of seasonal programs On air To be aired tvN OÊlive OnStyle Comedy Big League 3 Master Chef Korea Top Model Korea 3 (Jul) SNL Korea Season2 KoreaÊs Got Talent 2 OCN Mnet Rollercoaster 2 GodÊs Quiz 3 (Drama) Super Star K 4 (Aug) Rules of Studying 2 Baek Ji YoenÊs Ultimate Debate 2 OnStyle tvN The Deliciously, Crude Young Ae Season 10 Get It Beauty 2012 OP/Ea Star 2013 I need Romance 2012 StoryOn OÊlive Mnet Diet War Season 6 Tasty Road 3 Beatles Code Season 2 Show Me the Money XTM Top Gear Korea Season 2 Dynamic Gym Show Season 2 Note: Major programs; programs with uncertainty in the production of the next season were excluded, Source: Company Data, KDB Daewoo Securities Research
Figure 183. Reallity show and commercial breaks: Super Star K maximizes ad effects by inserting commercials at intense moments
Source: CJ E&M Translation: Show to resume after 60 seconds of advertising
KDB Daewoo Securities Research 110 July 16, 2012 Media
Investment point 2: Expectations for earnings improvement
Earnings to pick up on a CJ E&M has experienced significant OP margin deterioration since 2H11 (8.4% in 1H11; slowdown in program 3.9% in 2H11; 0.9% in 1H12F). However, we expect the companyÊs OP margin to pick up to production expenses, 4.9% in 2H12. the comeback of The companyÊs earnings deterioration was mostly due to its broadcasting and game Superstar K, and new operations. Despite showing revenue growth, the broadcasting division posted margin game rollouts contractions due to surges in program production expenses. However, these expenses were the result of the companyÊs efforts to improve its content competitiveness by increasing production of in-house programs. Indeed, the importance of quality content emerged when multi-channel cable channel operators were allowed to enter the media market in end-2011.
Meanwhile, the game division has suffered revenue contraction. The division failed to renew its publishing contract for Sudden Attack (a flagship FPS) in July 2011. Margins of web-board games were solid, but web-board game sales were limited by toughed restrictions. And the company has rolled out only one online game (Rift in April) since its failure to renew Sudden Attack.
As mentioned above, we anticipate CJ E&MÊs earnings to pick up starting in 2H12. Production expense growth at the broadcasting division is likely to slow to 14.5% in 2013 (from 23% in 2012). And the game division plans to launch a number of games in 2H, including four in-house online games and three outsourced games). In particular, we expect the company to launch an in-house developed sports game (the company has proven to be competitive in this genre).
Figure 184. CJ E&MÊs planned investments for broadcasting division
(Wbn) 1,000 Non-content expenses (L) 28% Content expenses (L) Growth of content expenses (R) 23.0% 750 21%
500 14.6% 14%
250 7%
0 0% 2011 2012F 2013F
Source: KDB Daewoo Securities Research
Table 30. CJ E&MÊs 2012 game lineup: concentrated in the second half Online games Release date Outsourced online games Release date Smartphone game Magu: Coach CBT in July Rift Commercialize in April Over 20 games Magu the Real 1Q13 Gunz2 4Q12 scheduled to be Chagu Chagu 1Q13 GP Racing 3Q12 released Ghosts n Goblins 3Q12 Shadow Company 1Q13 Monarch 4Q12 Core Fight 1Q13 Hounds 4Q12 Note: Game tests and release dates may change according to company situation; Most dates above are based on OBT Source: Company data, Media reports, KDB Daewoo Securities Research
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Earnings outlook: Likely to recover investment from 2013
Earnings likely to pick up We expect CJ E&MÊs 2Q earnings to come in below consensus. We forecast operating in 2H revenues to grow 6% YoY and operating profit to plunge 73.9% YoY, with margins crippled by increased production costs in the broadcasting division. Meanwhile, the companyÊs game division continued to incur development costs at a time when sales still remain sluggish and spent heavily on marketing due to the April release of its new game Lift.
However, we see several catalysts to drive up top-line growth in 2H. In the broadcasting division, a number of popular programs are lined up, while the game division is set to realize new revenues. For the companyÊs film and live performance units, seasonal demand usually picks up in the second half of the year.
CJ E&MÊs blockbuster hit Superstar K is scheduled to begin its fourth season in August. We expect ad sales from the singing competition to exceed previous season (2011) levels. According to KOBACO data, the Korea Advertising Index for the domestic cable TV segment came in at 98.1 in July, which is more solid than other media outlets (vs. 90.9 for the composite index, 90.7 for terrestrial television and 93.5 for newspapers).
The game division is projected to generate new sources of revenue in 2H, as several in- house developed sports games and outsourced games are scheduled to be launched at end- 3Q~4Q. The film division is likely to benefit from robust seasonal demand during the summer, Chuseok and year-end holiday seasons with major films like Masquerade (starring Lee Byeong-heon), Tower (starring Seol Kyeong-ku and Son Yae-Jin), and Berlin (starring Ha Jeong-woo and Han Suk-kyu) set to be released in 2H. The live performance division should also see strong seasonal demand in 2H (especially 4Q). A number of famous Broadway musicals (licensed versions) are lined up for 2H including Wicked, Phantom of the Opera and Dream Girls.
In 2012, we project CJ E&MÊs earnings will pick up in 2H following a weak 1H. For the full- year, we expect operating revenues to climb 11.3% YoY, but operating profits to decline 44.8% YoY. The drop in net profit is likely to be smaller (27% YoY), thanks to one-off gains from the sale of its SO to CJ HelloVision.
Looking ahead, we expect operating profit to surge 132.3% YoY in 2013, partly because the companyÊs cost increase (content-related investments, etc.) is likely to slow compared to 2012. Also, the release of new game titles will likely be recognized as revenues in all four quarters, driving up both top and bottom-line growth.
Figure 185. CJ E&MÊs quarterly earnings trend and forecast
(Wbn) (Wbn) 500 Music/Performance/Online revenues (L) Game: new game releases 40 Film revenues (L) Game revenues (L) 400 Broadcast: Superstar K 4 to start 30 Broadcast revenues (L) Total operating profit (R) 300 20
200 10
100 0
0 -10 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12F
Source: Company data, KDB Daewoo Securities Research
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Figure 186. Domestic KAI (Korea Advertising Index) for cable TV ads
(p) CATV ad Standard 125
100
75
50
25 5/09 11/09 5/10 11/10 5/11 11/11 5/12
Note: Survey of marketersÊ forecasts on following monthÊs advertising costs. An index of 100 signifies that responses of decrease and increase in advertising costs are equal, and an index greater than 100 notes more responses were towards decreases in advertising costs, vise versa. Source: KOBACO, KDB Daewoo Securities Research
Table 31. CJ E&MÊs film division: Investments and distribution schedule of major Korean films
Premier Movie Year Poduced Genre Director Major casting
Jul 2012 Yeongasi 2012 Horror, SF Jeong-woo Park Myung-min Kim A Millionaire on the Run 2012 Comedy Ik-ro Kim Jin-young Park Aug 2012 R2B: Return to Base 2011 Action, drama Dong-won Kim Ji-hoon Jeong 2H12 A Werewolf Boy 2012 Drama, fantasy Seong-hee Cho Jung-ki Song Perfect Love (Interim title) 2012 Thriller, drama Eun-jin Bang Seung-bum Ryu The Tower 2011 Drama Ji-hoon Kim Kyeong-ku Seol Berlin 2012 Action Seung-wan Ryu Jeong-woo Ha Super Star 2012 Drama Seong-hoon Kim Rae-won Kim Negotiator 2012 Action Seung-jun Lee Kyeong-ku Seol 2012 Fall Masquerade 2012 Historical Chang-min Chu Byeong-heon Lee 2012 Winter My P.S. Partner 2012 Romance, comedy Seong-hyun Byun Ji-seong Dec 2012 Cold 2012 Horror, thriller Seong-soo Kim Hyeok Jang 1H13 AM 11:00 2012 SF, thriller Hyun-suk Kim Jae-young Jeong Temple Stay 2012 Family, adventure Je-kyun Yun 2013 Summer Snow Piercer 2012 SF, action Joon-ho Bong Kang-ho Song, John Heart Note: May change due to future circumstances Source: KOFIC, KDB Daewoo Securities Research
Table 32. CJ E&MÊs performance division: 2012 schedule Original Performance Date Licensed Performance Date Finding Mr. Kim Continuously Evita Jan While You Were Sleeping Doctor Zhivago Jan~Jun Guys and Dolls Wicked May~Oct The Deliciously, Crude Young Ae Man of La Mancha Jun~Oct Bibap Catch Me if You Can Mar~Jun, 2H The Sorrows of Young Werther Phantom of the Opera 2H Love in Paris Apr, May Greece Caffeine Feb~Apr Jack the Ripper Source: Company data
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Table 33. CJ E&MÊs quarterly and annual earnings trends and forecasts (Wbn, %) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12F 3Q12F 4Q12F 2011 2012F 2013F Revenue 273 323 317 367 321 342 352 409 1,279 1,424 1,540 Broadcast 129 174 169 199 162 203 192 222 672 780 838 Game 76 67 55 60 60 60 64 87 258 270 311 Movie 31 45 54 62 62 43 53 50 191 208 219 Music/ Performance/ Online 38 36 39 46 37 36 43 50 158 165 172 Operating Profit 15 35 13 14 -3 9 11 26 77 42 99 Broadcast 2 24 9 15 1 6 6 19 50 31 50 Game 13 8 4 3 1 2 4 9 27 16 31 Movie -1 3 1 1 -1 3 3 1 5 6 9 Music/ Performance/ Online 1 0 -1 -6 -3 -1 -2 -3 -5 -8 3 OP Margin 5.5 10.9 4.1 3.7 -1.0 2.7 3.2 6.3 6.0 3.0 6.4 Broadcast 1.8 13.8 5.2 7.6 0.3 2.8 3.2 8.5 7.5 4.0 6.0 Game 16.7 11.6 6.4 4.7 1.3 2.7 6.9 10.8 10.4 6.0 10.0 Movie -3.2 7.6 2.4 2.1 -2.1 7.4 6.3 2.0 2.6 3.0 4.0 Music/ Performance/ Online 2.9 0.3 -1.5 -12.5 -8.9 -1.7 -4.1 -5.3 -3.2 -5.0 2.0 Net Profit 3 33 11 11 -1 31 5 9 59 45 64 NP Margin 1.2 10.3 3.5 3.0 -0.3 9.1 1.3 2.3 4.9 3.4 4.4 Revenue Breakdown Broadcast 47.1 55.4 45.6 51.6 47.3 54.0 53.4 54.3 52.5 54.8 54.4 Game 27.9 23.9 23.7 22.0 27.7 20.8 17.3 16.4 20.1 19.0 20.2 Movie 13.9 9.6 17.2 10.1 11.3 13.9 17.0 16.9 15.0 14.6 14.2 Music/ Performance/ Online 11.1 11.1 13.4 16.2 13.7 11.3 12.3 12.4 12.4 11.6 11.1 OP Breakdown Broadcast -34.2 40.7 2.0 75.9 15.3 68.0 67.7 111.9 65.4 68.7 53.7 Game 153.2 28.8 59.6 24.5 84.0 22.1 26.9 20.7 34.8 35.7 33.2 Movie 8.9 28.8 30.3 -12.7 -6.7 9.6 10.0 9.6 6.5 13.7 9.3 Music/ Performance/ Online -27.8 1.7 8.1 12.3 7.3 0.3 -4.6 -42.2 -6.6 -18.2 3.7 YoY Growth Revenue 18.1 24.5 10.1 15.6 17.4 6.0 11.1 11.5 16.8 11.3 8.2 Broadcast 19.8 21.4 28.3 20.8 25.7 16.6 13.5 11.5 22.5 16.1 7.5 Game 18.1 8.6 -20.2 -14.9 -21.2 -10.5 16.5 44.8 -2.8 5.0 15.0 Movie -3.1 79.9 7.8 91.4 RR -4.0 -0.9 -19.1 37.7 8.8 5.1 Music/ Performance/ Online 47.1 26.0 0.5 -12.3 -1.6 -2.1 9.6 9.4 10.9 4.2 4.0 Operating Profit TTR -73.9 -12.3 91.5 26.6 -44.8 132.3 Broadcast -78.3 -76.1 -30.2 24.6 169.9 -37.9 61.3 Game -93.7 -79.4 26.0 236.0 -17.8 -39.2 91.7 Movie 30.0 -5.8 157.2 -23.1 -32.4 24.9 40.1 Music/ Performance/ Online TTR TTR RR RR TTR RR TTB Net Profit TTR -6.5 -57.3 -15.7 283.7 -23.5 42.1 Note: K-IFRS consolidated basis, 2011 net profit YoY growth is not marked due to lack of data of 2010 before the merger Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 114 July 16, 2012 Media
Company overview
CJ E&M to generate CJ Group launched CJ E&M in October 2010 after consolidating all its media affiliates under synergies one roof. By incorporating On Media, CJ Media, CJ Internet, CJ Entertainment, and Mnet Media, CJ E&M is expected to improve public awareness and revenues, and achieve economies of scale.
As of end-1Q12, CJ E&M held cash and cash equivalents of W123.3bn. The companyÊs debt-to- equity ratio came in at 67.8% as of end-2011. We expect the companyÊs operating cash flow to improve going forward on the back of 1) the completion of a new company building, 2) a steady decrease in investments and 3) an increase in revenues in the game business.
The broadcasting division makes the biggest contribution to the companyÊs public awareness and revenues. The film division invests in premium film content and distributes films. The performance division produces musicals and holds concerts. The game division, which started as CJ InternetÊs Netmarble, concentrates on web board games and game publishing.
Figure 187. CJ E&M and related media companiesÊ holding structure
Lee, Jae Hyun & Affiliates CATV MPP 43.5% Film, Game, 90.3% Performance, Orion Cinema CJCJ Network Music business (001040(001040 KS)KS) 40.2% 86.7% CJCJ E&ME&M On Game (130960(130960 KQ)KQ) Network
39.8% 66.2% 60.3% CJ O Shopping Daegu Dong-gu 100% CJ HelloVision CJ O Shopping Baduk Television (035760 KS) SO (035760 KS) 51.7% Cable MSO Clip Service 68.8% Daegu Suseong 100% Mediaweb SO 51% N2Play 67.0% 100% Youngdong SO CJ NGC Korea
50% 41.4% 100% CJ Games Ara SO Art Service 92.7% 100% 100% 4D Plex Shilla SO CJ Sports 40.1% 100% 100% CJ CGV Primus Cinema CJ CGV CJ IG (079160(079160 KS)KS) 100% Good Concert D-Cinema of 50.0% Film distribution 52.5% Korea Any-Park 100% KM TV
53.0% 100% Seed9 Games International Media Genius
53.0% 42.1% CJ Game Lab Embaro
Source: KDB Daewoo Securities Research
Figure 188. CJ E&MÊs revenue breakdown (2011)
Music/Performance/Online 12%
Film 15%
Broadcasting 53%
Game 20%
Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 115 July 16, 2012 Media
CJ E&M is solidifying CJ E&M and its subsidiaries operate 19 cable channels. CJ E&M has 7 channels, including each channelÊs tvN, m.net, and OÊlive, which mainly air in-house content. In addition, Tooniverse is an positioning animation channel with a viewer rating of over 2%.
Among subsidiaries, Orion Cinema Network airs entertainment and drama programs produced in-house on OCN and On Style channels.
Although CJ E&M claims dominant audience share in the cable TV segment, the share is on the decline with the addition of new channels.
To survive the ever-intensifying competition, CJ E&M is solidifying each channelÊs positioning, setting target audience (age, gender, and job) and producing flagship programs.
Table 34. CJ E&M and subsidiariesÊ cable TV channels (units) Company Channels Number of channels CJ E&M m.net, tvN, XTM, Channel CGV, O'live, tvN DMB, tvN go, Tooniverse 7 CJNGC Korea NGC, NGC DMB 1 Badook Television Badook TV 1 Orion Cinema Network Catch On Plus, SuP/E Action, OCN, CatchOn, On Style, OCN series, Catch on Demand 7 Ongame Network Ongamenet 1 International Media Genius China TV 1 KMTV KM 1 Total 19 Note: DMB Channels are excluded in the number of channels, Source: Company data
Figure 189. CJ E&MÊs cable TV viewer ratings share trend Figure 190. Major MPPÊs TV viewer ratings in 1Q12
(%) CJ E&M MBC affiliates 40 CJ E&M SBS affiliates KBS affiliates 24% C&M affiliates Tbroad affiliates Other PPs 31% 30
20 MBC affiliates 10%
10 Tbroad's affiliation 10% SBS affiliation 9% 0 C&M's affiliation KBS's affiliation 07 08 09 10 11 1Q12 7% 9%
Note: Summed up of affiliated channelsÊ ratings, based on household viewer ratings Note: Summed up of affiliated channelsÊ ratings, based on household views Source: AGB Nielsen, CJ E&M, KDB Daewoo Securities Research Source: AGB Nielsen, CJ E&M, KDB Daewoo Securities Research
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Film business boasts a CJ E&MÊs film division boasts a dominant admissions market share in the distribution dominant admissions market based on synergies from the companyÊs (CJ Entertainment before consolidation) market share in the strong capital and CJ CGVÊs multiplex chain. In 2011, in particular, most of the films invested distribution market by CJ E&M recorded relatively robust box-office success. In addition, Hollywood films imported and distributed by the company also recorded solid box-office results, boosting its market share sharply.
In 1Q12, however, the companyÊs film distribution market share returned to its normal level of 30% due to the strong performances of new players. In 2Q12, market share might have fallen further due to the poor performance of Korea.
The performance of the film business is highly affected by seasonality, the timing of film releases, and box-office results. However, CJ E&M maintains a stable market share based on the vertical integration of investment, production, distribution, and screening businesses.
We expect CJ E&M to continue to expand direct investments and stake-holding in films produced overseas. It was reported that the company invested W45bn in Snow Piercer, a Korean director Bong Joon-hoÊs Hollywood debut film set for release next year.
Figure 191. CJ E&MÊs film distribution market share trend in terms of audience admissions
(%) CJ E&M Film 40 Showbox (Mediaplex) Lotte Entertainment (Lotte Shopping) Warner Brothers Korea 30
20
10
0 05 06 07 08 09 10 11
Source: KOFIC, CJ E&M, KDB Daewoo Securities Research
Figure 192. CJ E&MÊs film distribution market share in terms of audience admissions in 1Q12
Others 23% CJ E&M Film 30%
Warner Brothers Korea 7%
Lotte Entertainment (Lotte Shopping) N.E.W 11% 15% Showbox (Mediaplex) 14%
Source: KOFIC, CJ E&M, KDB Daewoo Securities Research
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Table 35. 2012 major movie release lineup Audience 2012 Expected Movies Producer Distributor (1,000) 1Q War with Crime 4,681 Palette Pictures, Showbox Mediaplex Showbox Mediaplex Dancing Queen 4,010 JKFilm CJ E&M Unbowed 3,416 Aura Pictures NEW Mission Impossible: Ghost Protocol 2,510 Paramount Pictures CJ E&M Hwa Cha 2,301 Boim Film Filament Pictures 2Q Avengers (3D) 7,060 Walt Disney Sony Pictures Releasing Buena Vista Film Men In Black 3 (3D) 3,372 Amblin Entertainments Sony Pictures Releasing Buena Vista Film BATTLESHIP 2,237 Film44, Battleship Delta Production, Hasbro Universal Pictures International Korea Korea 1,868 The Tower Pictures CJ E&M Dark Shadows 581 GK Films, Warner Bros., The Zanuck Company Warner Brothers Korea 3Q The Amazing Spider-Man (3D) Sony Pictures Sony Pictures Releasing Buena Vista Film The Dark Knight Rises Warner Bros. Warner Brothers Korea Ice Age 4 (3D) Bule Sky Studios 20th Century Fox Korea The Thieves CaP/E Film Showbox Mediaplex Bourne Legacy Universal Pictures Universal Pictures International Korea 4Q 007 Skyfall Metro-Goldwyn-Mayer, Columbia Pictures, etc. Sony Pictures Releasing Buena Vista Film 47 RONIN (3D) Universal Pictures Universal Pictures International Korea Gravity (3D) Heyday Films Warner Bros. Pictures Rise of the Guardians (3D) Dreamworks, Paramount Dreamworks, Paramount Les Miserable Working Title Films Universal Pictures Note: CJ E&M distributed movies are marked yellow Source: CJ CGV, KOFIC, KDB Daewoo Securities Research
The game division is CJ E&MÊs game division has seen its revenues slump after failing to renew its publishing trying to shift its focus contract for Sudden Attack in July 2011 in the wake of GameHiÊs (the gameÊs developer) from publishing to in- takeover by one of its competitors Nexon. Moreover, heated competition in the online game house development market has led to the poor performances of its newly released games. Last year, CJ E&M established a separate holding company that oversees its game development operations. The company plans to launch new games currently under development in 2H.
CJ E&MÊs online game portal NetMarble enjoyed years of strong growth from 2005 to 2009 on the back of the widespread popularity of FPS games in Korea (NetMarbleÊs Sudden Attack was the most popular game in PC cafes). The height of its growth also coincided with an industry boom in online games, during which more diverse genres emerged, game developers strengthened their capabilities and publishers built knowhow in real time server management.
Ever since then, FPS and other casual games have been losing popularity, with game portal traffic continuing to decline, partly due to the governmentsÊ tighter regulations on gambling games. Following the loss of Sudden Attack, NetMarbleÊs traffic has dropped significantly.
Of all the games currently published by CJ E&M, the most popular one in PC cafes is the baseball game MaguMagu. Sports games, FPS and RPG are some of the more popular genres. We believe the companyÊs new games will be concentrated in those genres.
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Figure 193. Monthly unique visitor trends of game portal websites
(mn person) 12 CJ E&M (netmarble.net) Nexon (nexon.com) NHN (hangame.com) Neowiz Games (pmang.com) 9 NCsoft (plaync.co.kr)
6
3
0 04 05 06 07 08 09 10 11 12
Source: KDB Daewoo Securities Research
Table 36. Current states of CJ E&MÊs games within top 100 games played in internet cafes (2Q12) (hrs, min, unit, number of people) Average Peak Usage time Usage Usage time per Hours Number of Rank Change Game Genre concurrent concurrent share time internet cafe stayed PC cafes user user 24 △7 Ma9 Ma9 Sports 0.56% 35,605 234 48 9,125 1,481 5,138 25 ▼5 Special Force 2 FPS 0.55% 34,998 268 90 7,836 1,455 4,517 30 NEW Rift RPG 0.46% 29,148 419 164 4,170 1,221 5,843 31 ▼4 Netmarble Poker Poker 0.44% 28,000 161 37 10,430 1,170 2,651 47 △3 Netmarble Badook Board 0.19% 12,162 164 94 4,441 508 1,217 49 △12 Mstar Online Arcade 0.18% 11,449 255 98 2,690 478 1,106 51 - Netmarble Daebak Matgo Go-stop 0.17% 10,821 107 46 6,088 452 972 59 △3 Netmarble Sacheonseong Board 0.13% 8,532 99 52 5,150 356 1,050 73 ▼8 SD Gundam Capsule Fighter Arcade 0.10% 6,449 155 68 2,500 269 1,498 84 ▼5 Soldier of Fortune Online FPS 0.08% 4,887 131 66 2,235 204 1,142 89 NEW Netmarble Marble for everyone Board 0.07% 4,519 175 73 1,549 189 1,427 91 - Netmarble playing yut Board 0.07% 4,325 103 52 2,508 181 527 92 ▼14 Gunz Online FPS 0.07% 4,281 92 47 2,783 178 876 96 ▼9 Tierra Americana Online RPG 0.06% 4,004 335 120 717 167 606 Note: Apr~Jun 2012 stats Source: Gametrics, KDB Daewoo Securities Research
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CJ E&M has its own music, live performances and online divisions, as well as a subsidiary named Good Concert.
Potential upside from The music division involves record production and digital music distribution and generates digital music prices revenues jointly with the media division by producing and distributing soundtrack albums. Mnet has the second highest number of unique visitors following Melon among domestic music websites. Internet portals have begun to offer their own music services, causing the number of unique visitors to music websites to fall. There has also been growing demand within the industry for a change in the digital music pricing model from flat rate to usage- based pricing and for a hike in digital music prices.
Expanding overseas The live performance division has extended its business scope from musicals and concerts operations of its live into other entertainments like exhibitions and events. One example is „Rude Miss Young- performance and online Ae‰, a Korean television drama that was converted into a musical. The division also businesses organizes the annual Jisan Valley Rock Festival every July, helping to cultivate a music festival culture in Korea. Furthermore, the company has been expanding its overseas concert business for Korean pop groups on the back of the growing global popularity of K- pop.
The company recently created an online head division to strengthen its online business. The division is currently in charge of overhauling the websites of other business units and is also pursuing overseas operations and music N-Screen services.
Figure 194. Monthly unique visitor trends of music portal websites
(mn person) Mnet (CJ) Melon (SKT) 10 Bugs (Neowiz) Soribada Olleh Music (KT) Naver Music (NHN) Daum Music (Daum) Cyworld Music (SK Comms) 8
6
4
2
0 04 05 06 07 08 09 10 11 12
Source: Nielsen Koreanclick, KDB Daewoo Securities Research
Figure 195. TV show ÂRude Miss Young-AeÊ now produced as a musical Figure 196. Jisan Valley Rock Festival is held in July every year
Source: CJ E&M Source: CJ E&M
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Risks
Uncertainties over the Earnings at CJ E&M could improve more slowly than expected due to 1) rising broadcasting game and film content production expenses, 2) investments in the creation of an online business division, businesses and 3) marketing expenses arising from new game launches in 2H.
The game division has higher uncertainty than other divisions. The division is switching from a game publishing-oriented to in-house game development business structure. CJ E&MÊs game development capability has not been confirmed yet. The domestic online game market is already in a mature stage. Foreign games, including the recently launched „League of Legend,‰ and NCsoftÊs „Blade & Soul‰ are high in the internet café game ranking. In addition, game companies are becoming larger, as evidenced by NexonÊs acquisition of large stake in NCsoft. As such, we have a conservative view on the performance of CJ E&MÊs new games amid intensifying competition.
The film division also has high earnings uncertainty due to its business nature. The performances of highly anticipated Korean films „My Way‰ and „Korea‰ that CJ E&M both invested and distributed in 1H fell below the companyÊs expectations. In addition, the production costs of „Tower‰ and „Snow Piercer‰, which the company will distribute in 2H12 and 2013, respectively, appear massive, indicating the rising breakeven point of the companyÊs film business.
Management risk is also rising. The companyÊs CEO is in custody for possible wrongdoings committed at his previous company. If this case remains unresolved, the formulation of the companyÊs 2013 business plan could be delayed. However, CJ E&M is expected to implement its 2H business plans as scheduled, given that heads of the companyÊs divisions holds authority.
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CJ E&M (053210 KQ/Buy/TP: W30,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 1,143 1,424 1,540 1,655 Current Assets 915 1,283 1,432 1,563 Cost of Sales 808 1,006 1,058 1,137 Cash and Cash Equivalents 152 382 476 552 Gross Profit 335 417 482 518 AR & Other Receivables 378 471 510 548 SG&A Expenses 265 375 384 400 Inventories 6 7 8 8 Operating Profit (Adj) 70 43 99 119 Other Current Assets 283 321 337 353 Operating Profit 70 42 99 119 Non-Current Assets 1,136 947 900 888 Non-Operating Profit -7 17 -7 -7 Investments in Associates 116 115 115 115 Net Financial Income 9 18 12 12 Property, Plant and Equipment 118 124 110 97 Net Gain from Inv in Associates 0 43 0 0 Intangible Assets 765 560 521 513 Pretax Profit 63 59 92 112 Total Assets 2,051 2,230 2,333 2,450 Income Tax 19 18 28 34 Current Liabilities 721 706 744 783 Profit from Continuing Operations 44 41 64 78 AP & Other Payables 174 217 235 252 Profit from Discontinued Operations 15 4 0 0 Short-Term Financial Liabilities 311 202 202 202 Net Profit 59 45 64 78 Other Current Liabilities 236 287 308 329 Controlling Interests 57 48 67 81 Non-Current Liabilities 107 217 215 215 Non-Controlling Interests 2 -3 -3 -3 Long-Term Financial Liabilities 63 167 167 167 Total Comprehensive Profit 60 46 65 79 Other Non-Current Liabilities 31 37 35 35 Controlling Interests 58 51 69 83 Total Liabilities 829 922 959 998 Non-Controlling Interests 2 -4 -4 -4 Controlling Interests 1,163 1,222 1,291 1,374 EBITDA 361 578 481 468 Capital Stock 190 190 190 190 FCF (Free Cash Flow) -127 178 104 86 Capital Surplus 948 948 948 948 EBITDA Margin (%) 31.6 40.6 31.2 28.3 Retained Earnings 60 109 176 257 Operating Profit Margin (%) 6.1 2.9 6.4 7.2 Non-Controlling Interests 60 87 82 78 Net Profit Margin (%) 5.0 3.4 4.4 4.9 Stockholders' Equity 1,222 1,308 1,373 1,452
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 300 535 435 417 P/E (x) 17.4 20.0 14.4 11.9 Net Profit 59 45 64 78 P/CF (x) 2.8 1.7 2.2 2.3 Non-Cash Income and Expense 317 540 417 390 P/B (x) 1.8 1.1 0.9 0.9 Depreciation 15 14 14 12 EV/EBITDA (x) 3.7 1.7 1.8 1.7 Amortization 276 522 368 337 EPS (W) 1,745 1,273 1,771 2,141 Others 4 -5 5 5 CFPS (W) 10,744 15,387 11,843 11,339 Chg in Working Capital -64 -32 -18 -17 BPS (W) 17,122 24,311 27,177 29,587 Chg in AR & Other Receivables -71 -86 -39 -38 DPS (W) 0 0 0 0 Chg in Inventories -5 -1 -1 -1 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -8 33 18 18 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -12 -18 -28 -34 Revenue Growth (%) 1,065.0 24.5 8.2 7.5 Cash Flows from Inv Activities -230 -298 -317 -317 EBITDA Growth (%) 611.1 59.9 -16.8 -2.7 Chg in PP&E -21 -10 0 0 Operating Profit Growth (%) 266.1 -40.4 135.8 20.4 Chg in Intangible Assets -329 -329 -329 -329 EPS Growth (%) 44.4 -27.0 39.1 20.9 Chg in Financial Assets 26 -1 0 0 Accounts Receivable Turnover (x) 5.3 3.6 3.4 3.4 Others 95 42 12 12 Inventory Turnover (x) Cash Flows from Fin Activities 40 -6 -24 -24 Accounts Payable Turnover (x) 31.0 19.9 18.6 18.6 Chg in Financial Liabilities -2 -11 0 0 ROA (%) 4.1 2.1 2.8 3.3 Chg in Equity -1 0 0 ROE (%) 7.7 4.1 5.4 6.1 Dividends Paid 0 0 0 0 ROIC (%) 6.3 3.0 7.7 9.4 Others 42 5 -24 -24 Liability to Equity Ratio (%) 67.8 70.5 69.9 68.7 Increase (Decrease) in Cash 109 230 94 76 Current Ratio (%) 126.9 181.8 192.4 199.6 Beginning Balance 43 152 382 476 Net Debt to Equity Ratio (%) Ending Balance 152 382 476 552 Interest Coverage Ratio (x) 5.2 1.9 4.1 4.9 Source: KDB Daewoo Securities Research
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Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of CJ E&M as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with CJ E&M as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies.
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 Daewoo Securities, 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 analystÊs 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.
(W) CheilWorldwide (W) SBS (W) KT Skyl i fe (W) CJ E&M 30,000 50,000 40,000 70,000
25,000 40,000 60,000 30,000 20,000 50,000 30,000 40,000 15,000 20,000 20,000 30,000 10,000 10,000 20,000 10,000 5,000 10,000 0 0 0 0 7/10 1/11 7/11 1/12 7/12 7/10 1/11 7/11 1/12 7/12 7/10 1/11 7/11 1/12 7/12 7/10 1/11 7/11 1/12 7/12
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 and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the AnalystÊs 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. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted 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 Daewoo Securities Co., Ltd. except as otherwise stated herein.
Disclaimers This report is published by Daewoo Securities Co., Ltd. („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 from sources believed to be reliable and in good faith, but such information has not been independently verified and 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. If this report is 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. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. 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 and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and 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 Daewoo. 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. 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. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.
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