Film/Broadcast Content The increasing role of “tentpoles” in the content industry
The need for tentpoles in the content industry Overweight (Maintain) The content industry and a tent have one thing in common: both need a tentpole to support the entire structure. In the content industry, tentpoles are defined as hit titles Industry Report that provide a source of steady cash flow, such as the blockbuster films of movie studios July 27, 2015 and the top-rated programs of TV networks. The content industry is vulnerable to the success or failure of a title as well as changes in seasonality. Establishing a tentpole by investing around 70% of the annual budget on Daewoo Securities Co., Ltd. just one or two projects could prove an effective strategy against such risks. If tentpole [Telecom Service / Media] films or shows become a hit, they can compensate for losses made elsewhere. Creating a long-term tentpole lineup, increasing the number of tentpoles, and being able to predict Jee-hyun Moon future revenue can lead to a structural improvement in the business. In other words, +822-768-3615 tentpoles can make the content industry more predictable. [email protected] Tentpole strategies used in the film distribution and broadcasting industries
The tentpole strategy is primarily used in the film distribution and broadcasting
industries. A major proponent of the strategy is Walt Disney, which plans its five-year release lineup based on its Disney and Marble Comics franchises. The media giant has recently seen its film profits steadily grow after releasing a string of successful tentpole movies every quarter. We believe Korean film distributors are also beginning to follow this strategy. Similar moves have also been seen in the broadcasting industry’s programming trends. A notable example is CJ E&M, which has built its Friday night entertainment shows into its tentpoles. The company has also been moving to increase its tentpoles on a weekday, quarterly, and channel basis.
2015 earnings to confirm growth opportunities In 2015, we expect major domestic film and broadcast content companies to deliver YoY earnings improvements, backed by the release of a number of tentpole films in 2H and continued cost control. The growth of the content rights distribution market should also prove favorable to profit margins. In 2H, we expect to see more foreign co-productions, as well as more localized content offerings overseas via newly established subsidiaries in China and several other countries.
Overweight on film/broadcast content; Top pick is CJ E&M We believe the increasing adoption of the tentpole strategy is making film and broadcast content a more predictable and investable sector. We present CJ E&M as our top pick in the sector. We upgrade our rating on J Contentree to Buy (from Trading Buy) and initiate coverage on movie investors/distributors Showbox and Next Entertainment World (NEW).
A look at the film/broadcasting industry through the tentpole lens
Business Geographical Lineup structure expansion
Profit leverage Balanced growth of Growth opportunities Stable cash flow business portfolio overseas
Source: 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. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
July 27, 2015 Film/Broadcast Content
CONTENTS
I. The role of “tentpoles” in the content industry 3 1. What do tentpoles mean for the content industry? 3 2. Need for tentpoles in the content industry 4
II. Tentpoles in the film distribution industry 5 1. Concerns about the Korean film market 5 2. Hollywood cases 7 3. Growth opportunities for Korean films 9
III. Tentpoles in the broadcasting industry 12 1. Broadcasters taking a tentpole strategy in programming 12 2. Snowball effect of tentpoles 13
IV. Earnings forecast 14 1. Turnaround 14 2. Growth opportunities 15 3. Major lineup for 2H 17
V. Investment strategy and valuation 19 1. Investment strategy and key considerations 19 2. Comparison with global peers 20
Key Recommendations 21 CJ E&M (130960 KQ) 22 J Contentree (036420 KQ) 28 Showbox (086980 KQ) 32 Next Entertainment World (160550 KQ) 37
KDB Daewoo Securities Research 2 July 27, 2015 Film/Broadcast Content
I. The role of “tentpoles” in the content industry
1. What do tentpoles mean for the content industry?
Tentpoles are playing an increasingly important role in the film and broadcasting industry. In the content industry, the term refers to hit titles that provide a source of steady cash flow, such as the blockbuster films of movie studios and the top-rated programs of TV networks (analogous to Samsung’s Galaxy smartphone models in the manufacturing sector).
Let us imagine a film studio or TV network is planning 10 projects for the year; in that case, a tentpole strategy would be to concentrate 70-80% of the annual budget on just one or two projects, as opposed to allocating 10% of the budget to each project. This can be an effective strategy because the success of a single title can have an outsized impact, potentially compensating for losses made elsewhere.
As tentpole content determines producers’ annual earnings, the presence of long-term tentpole lineups can make the content industry more predictable. In addition, increasing the number of tentpole titles would signal that a producer is increasing its investments and business scale. Although risks could also grow, such a strategy should ease earnings uncertainties/volatility, assuming the projects have a reasonable expectation of success.
Building tentpoles into lineups is widespread among Hollywood film studios, with many studios even presenting five-year tentpole lineups; examples include The Avengers series by Disney’s Marvel Studios, Warner Bros. Entertainment’s superhero-themed movies (e.g., Batman, Superman, and Wonder Woman), and 21st Century Fox’s Fantastic Four and X-Men series.
Korean movie studios are also building tentpoles into their lineups. For example, CJ E&M released The Admiral: Roaring Currents and Ode to My Father last year and plans to release Veteran and Himalayas this year. The company also has tentpole shows for its broadcast business, including Superstar K, Three Meals a Day, and the Reply series. Showbox’s tentpoles are Kundo: Age of the Rampant (2014), Assassination (2015), and The Throne (2015). And NEW’s tentpoles are Haemoo (2014), Northern Limit Line (2015), and The Great Tiger (2015).
Figure 1. Key programs/movies hold up the content business, similar to how a pole supports a tent
Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 3 July 27, 2015 Film/Broadcast Content
2. Need for tentpoles in the content industry
The tentpole concept can be applied not only to product lineups but also to business portfolios and target markets. Expanding (in both quantitative and qualitative terms) tentpole products, tentpole business areas, and tentpole markets can improve content producers’ fundamentals.
1) Product lineups
Tentpoles are projects that are highly likely to succeed. Even if other projects fare poorly, the success of a tentpole is likely to offset losses made elsewhere.
For CJ E&M, gains on last year’s movie tentpoles—The Admiral: Roaring Currents and Ode to My Father—offset losses on No Tears for the Dead and Make Your Move. The same is true for the broadcast business; CJ E&M operates 18 channels, and though not all of them are believed to be in the black, the channel tvN is serving as a tentpole. Specifically, top-rated shows such as Superstar K and Three Meals a Day are generating high advertising revenue, offsetting losses on other shows.
2) Business structure
In terms of business portfolio, tentpoles are a major cash cow, and the strong cash flow they generate enable content producers to expand into other business areas.
As for J Contentree, the core magazine unit does not generate good cash flow, and in fact barely breaks even. On the other hand, subsidiary Megabox (whose earnings are reflected in consolidated financial statements) generates an annual OP margin of 17% and contributes the most to net profit attributable to controlling interests. J Contentree plans to increase its stake in Megabox from 46% to 98% in August, using proceeds from a rights offering.
3) Market expansion
For Korean companies, the domestic market is a tentpole market. However, it should be noted that China is fast becoming another key business area. Considering its huge size and strong growth potential, we believe the Chinese market could become a new tentpole market.
Figure 2. A tentpole strategy helps ensure sustainable business through risk management
Business Geographical Lineup structure expansion
Profit leverage Balanced growth of Growth opportunities Stable cash flow business portfolio overseas
Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 4 July 27, 2015 Film/Broadcast Content
II. Tentpoles in the film distribution industry
1. Concerns about the Korean film market
In quantitative terms, the Korean film market has been emerging as one of the strongest local markets, with annual admissions exceeding 200mn. In addition, shares of CJ CGV have recently hit a new high. Yet, concerns about the market have surfaced recently due to the following factors.
1) Weak performance in 1H
First, from a short-term perspective, the Korean film market slowed in 1H.
The number of moviegoers decreased by 2% YoY in 1H, and reached just 44% of the full-year 2014 figure. Although the decline was partly due to the MERS outbreak, the number of moviegoers has in fact been stagnant since reaching the 200mn mark in 2013, and per capita annual theater attendance has already reached four, near the world’s highest level.
In 1H, the market share of Korean films stood at only 42%, due to the strength of foreign films. Over the past five years, the market share of Korean films has ranged from around the mid-40% level to around 60%.
Figure 3. Number of moviegoers decreased YoY in 1H15, partly due to MERS impact
(mn) Total admissions (L) (%) 250 YoY growth (R) 100 78.1 200 75
1H15: 150 -2% YoY; 50 44% of 22.0 2014 total 100 16.9 25 9.5 5.4 5.4 8.1 0.8 -3.0 -4.9 50 0
0 -25 04 05 06 07 08 09 10 11 12 13 14 1H15
Source: KOFIC, KDB Daewoo Securities Research
Figure 4. Market share of Korean films stood at only 42% in 1H15 due to foreign films’ strength
(%) Foreign films' share Korean films' share 100
36 46 42 41 40 75 50 51 48 50 58 53 58
50
64 55 58 59 60 25 50 49 52 50 42 47 42
0 04 05 06 07 08 09 10 11 12 13 14 1H15
Source: KOFIC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 5 July 27, 2015 Film/Broadcast Content
2) Structural issues
In terms of the long-term, structural outlook, it is necessary to consider content and distribution strategies.
1) Compelling content and the value of the viewing experience are key to attracting consumers to theaters. Korean film audiences often say there is no compelling reason to see Korean movies at theaters instead of through VOD; underlying this perception, we believe, is the tendency of Korean films to focus on character-driven story development rather than spectacular scenes.
Among the top 10 titles in the domestic box office from January to mid-July were six Hollywood films: Avengers: Age of Ultron (1st), Kingsman: The Secret Service (3rd), Jurassic World (5th), Mad Max: Fury Road (7th), Furious 7 (8th), and Terminator Genisys (9th). Together, these films accounted for 60% of the total cinema audience and 62% of total revenue over that period. Such films are perceived as being worth watching on the big screen, as they feature spectacular scenes along with famous movie stars and attractive characters. In addition, they are available in 3D and IMAX formats, at higher ticket prices.
The Korean films that ranked within the top 10 were Ode to My Father (2nd), Northern Limit Line (4th), Detective K: Secret of the Lost Island (6th), and Twenty (10th). Among the Korean films, Ode to My Father had the highest production cost, at W18bn, followed by Detective K: Secret of the Lost Island (W10bn), Northern Limit Line (W8bn), and Twenty (W5bn). In our view, Korean film studios would do well to start focusing on producing blockbuster films with attractive characters and spectacular scenes, as well as interesting stories.
In terms of market structure, theater revenue still takes the lion’s share of total revenue, at 82%. Although the digital online market, including IPTV VOD, is growing, its revenue contribution stands at a mere 18%. As such, Korean film companies have no choice but to focus their energy on theaters in order to ensure films’ success.
2) A long-term film distribution strategy is also important. Korean film studios tend to focus on the short term in their distribution plans, usually disclosing lineups for only the next two years (vs. as long as five years for Hollywood studios).
There are some factors making it difficult for Korean film studios to formulate a long-term strategy: 1) Korean films’ return on investment remained negative for an extended period, between 2006 and 2011; and 2) the pool of screenwriters in Korea has not grown enough, either in quality or quantity. Meanwhile, Hollywood studios boast ample characters and storylines that allow them to formulate long-term plans. A case in point is Marvel Comics, acquired by the Walt Disney Company.
On a positive note, Korean films’ return on investment has been positive since 2012, leading to an inflow of capital and talent to the market. In addition, the growth of film audiences and the copyright market, including digital online VOD, is helping to lay a foundation for Korean film studios to present long-term film lineups.
Table 1. Top 10 titles in the domestic box office from January to mid-July (Wbn, ‘000 persons) Rank Title Release date Revenue Number of admissions 1 Avengers: Age of Ultron 4/23/2015 88,583 10,494 2 Ode to My Father 12/17/2014 69,825 8,912 3 Kingsman: The Secret Service 2/11/2015 50,369 6,130 4 Northern Limit Line 6/24/2015 43,191 5,715 5 Jurassic World 6/11/2015 47,588 5,522 6 Detective K: Secret of the Lost Island 2/11/2015 30,457 3,872 7 Mad Max: Fury Road 5/14/2015 32,860 3,838 8 Furious 7 4/1/2015 26,454 3,248 9 Terminator Genisys 7/2/2015 25,843 3,148 10 Twenty 3/25/2015 23,559 3,044 Note: Based on 1/1/2015 to 7/21/2015; Korean films are in bold Source: KOFIC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 6 July 27, 2015 Film/Broadcast Content
2. Hollywood cases
1) The origin of tentpole strategies at Hollywood studios
The tentpole strategy is best exemplified by Hollywood studios. US studios shifted their focus to global markets when the growth of the North American market stalled.
In 2014, the North American market saw the lowest number of moviegoers in 20 years (1.26bn). In particular, North American box office revenue during the summer of 2014 hit the lowest level since 2007, decreasing more than 15% compared to the previous summer. Against this backdrop, US film studios are advancing into strong local markets overseas, including China and Korea, which rank second and seventh in the world, respectively. In 1H, half of the top 10 box office hits in both Korea and China were Hollywood films.
US studios’ great success in the Chinese and Korean markets lies in their strong intellectual property and distribution power, which allow them to present long-term lineups (three to five years) and set their preferred release dates. They often intentionally release highly anticipated films during low-demand season, thus generating demand. Between tentpoles, they place films of different genres and sizes to ensure efficient lineup management.
For tentpole strategies to be successful over the long term, content producers must devote significant effort and resources to promotion and to extending the life of the content. Indeed, film studios often start promoting tentpole movies several years before the actual release, raising expectations. And post-credits scenes in film series are a marketing tool intended to stoke interest in the next movie.
Walt Disney’s film division has been in the black every quarter for the past three years (operating profit, excluding depreciation). And the size of operating profit is growing; the highest quarterly operating profit was US$300bn in 2012, more than US$400bn in 2013, and more than US$500bn in 2014. Moreover, growth is evening out, with the earnings gap between high- and low-demand seasons narrowing. Tentpole movie releases used to be concentrated around year-end, but now are more spread out across the quarters.
Walt Disney’s stock is now trading at an all-time high on the back of steadily solid earnings; investors are particularly attracted to the filmmaker’s predictability, a rare attribute in the high- risk entertainment content space. We believe the firm’s long-term tentpole strategy has played a critical role in improving fundamentals.
Figure 6. Hollywood films account for more than half of top- Figure 5. OP and market cap of Walt Disney’s film division 10 grossing films in China in 1H15
(US$mn) Walt Disney Studios OP (L) (US$bn) Top grossing films in China in 1H (US$mn) 600 Walt Disney Co. market cap (R) 200 Big Hero 6 Furious 7 391
Frozen Avengers 2 Cinderella 236 400 150 Jurassic World 203 The Avengers The Man from Macau 2 157
200 100 The Hobbit 3 124 Dragon Blade 120
Wolf Totem 112 0 50 The Avengers 2 San Andreas 100 Inside Out Wolf Warrior 88 -200 0 Stand by Me Doraemon 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 86
Note: Different financial year from Korea (fiscal year ends in September); Most Note: Based on cumulative box office revenue from Jan 2015 to June 2015 recent 2Q OP is an estimate Source: KDB Daewoo Securities Research Source: Thomson Reuters, Walt Disney, IMDB, KDB Daewoo Securities Research
KDB Daewoo Securities Research 7 July 27, 2015 Film/Broadcast Content
2) Hollywood tentpole lineup
It is common for Hollywood film studios to have tentpole movies lined up for as long as the next five years. Such long-term lineups are common for superhero movies, including Walt Disney’s Avengers series, Warner Bros.’ Batman, Superman, and Wonder Woman series, Sony Picture’s Spider-Man movies, and 21st Century Fox’s Fantastic Four and X-Men series.
Figure 7. Among Hollywood studios, long-term lineups are common for superhero movies
Note: Based on media reports in Feb 2015; Release dates and titles could change; Fox and Sony Columbia have not yet unveiled plans for 2018 and after Source: Comics Alliance, KDB Daewoo Securities Research
KDB Daewoo Securities Research 8 July 27, 2015 Film/Broadcast Content
3. Growth opportunities for Korean films
1) Domestic strategy
Compared to US film studios that operate in the global arena, Korean studios have more limited capital and operate in a smaller and less developed popular culture market. In spite of such limitations, we see growth opportunities for Korean film content producers.
1) Box office revenue is steadily expanding in Korea. Movie attendance is gradually increasing, aided by broader moviegoer demographics (age groups) and geographic distribution. Average ticket price is also climbing, boosted by the introduction of 3D/4D theaters. The Korean box office market is the seventh largest in the world, and Korea has among the world’s highest per capita annual movie attendance figures, at 4.3.
2) The film rights market is also growing, helped by the digital conversion of pay TV and technological improvements (mobile and LTE, etc.). Now that telcos are competing in the media market through IPTV, they are aggressively introducing VOD packages and monetization models. Aggressive monetization efforts by terrestrial TV networks and cable program providers have also helped the growth of the film content market. The expansion of the film rights market in Korea is leading to higher profitability for the Korean movie industry.
3) Recognizing the importance of strategic movie lineups, major Korean film distributors are also deploying tentpole strategies, i.e., securing strong intellectual property and implementing long- term marketing. Distributors begin promoting major new titles at least one year before the release date. In addition, the fact that CJ E&M, Showbox, and NEW are all listed on the stock exchange (and thus under pressure to report steady earnings) encourages them to search actively for intellectual property that can generate predictable earnings.
For its tentpole movies, CJ E&M tends to produce Korean-style blockbusters (which are marked by a focus on storytelling, spectacle scenes, and casts of well-known actors/actresses) utilizing its abundant capital. The Admiral: Roaring Currents—the firm’s biggest hit to date—drew an audience of 17mn viewers. Showbox, which has been in the business for a long time, makes noir & action movies (with Choi Dong-hun often serving as director) and historical drama movies that tend to be released around major holidays. The Thieves is the company’s most successful movie (13mn viewers) to date. And NEW, which is relatively new to the industry, is known for surprising the market with unexpected box office hits, including Miracle in Cell No. 7 (12mn viewers), The Attorney (11mn), and Northern Limit Line.
Figure 8. CJ E&M movie with all-time Figure 9. Showbox movie with all-time Figure 10. NEW movie with all-time highest number of admissions highest number of admissions highest number of admissions
Note: Roaring Currents released in 2014; Cumulative Note: The Thieves released in 2012; Cumulative Note: Miracle in Cell No. 7 released in 2013; audience of 17,611,849 audience of 12,983,330 Cumulative audience of 12,811,206 Source: KOFIC, KDB Daewoo Securities Research Source: KOFIC, KDB Daewoo Securities Research Source: KOFIC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 9 July 27, 2015 Film/Broadcast Content
2) Accelerating global outreach
Domestic film production companies are accelerating their forays into the global market (China and Southeast Asia, in particular) through co-production. China, the world’s second largest film market, is rapidly catching up to the US (number one), and Southeast Asia is anticipated to grow at a CAGR of 5% over the next five years.
In China, CJ E&M, Showbox, and NEW are engaging aggressively in co-production. Under the Sino-Korean Film Co-production Treaty, which Korea and China signed last year, films approved as being co-productions are recognized as domestic films in China, making them exempt from regulations on foreign films.
CJ E&M launched its first joint production project in 2009 by participating in the making of Sophie's Revenge. More recently, the company has found success with A Wedding Invitation (2013) and 20 Once Again (early 2015), both of which were remakes of popular Korean movies. For The Peaceful Island, scheduled for release in 2H15, the company has targeted the Chinese market from the planning and story development stages. CJ E&M plans to establish a Chinese subsidiary this year to further step up its Chinese business.
Showbox and Huayi Brothers (whose relationship began in 2011 with the joint production of Mr. Go) signed an exclusive partnership deal in March. The companies plan to establish Showbox China and produce at least six films over the next three years. They have already commenced the production of two films, one of which might be released as early as this year.
NEW’s Chinese partner, Huace Media, is the leading drama producer in China. The company invested W53.6bn in NEW, becoming the second largest shareholder (with a 13% stake as of end- 1Q). Under the partnership with Huace Media, NEW plans to carry out various content businesses in China.
Figure 11. China’s film market is rapidly catching up to the US, and also seeing increased co- productions with Korean companies
(US$bn) (%) 15 US (L) 70 In the US, actual figures are in line with the forecast YTD in 2015, China (L) while in China actual figures have exceeded the forecast. China vs. US (R) 60 12 50
9 40
30 6
20 3 10
0 0 09 10 11 12 13 14 15F 16F 17F 18F
Source: PwC, KDB Daewoo Securities Research
Table 2. China’s film industry regulations Area Details Imports - Ceiling on number of film imports: 34 based on the system where producer, distributor, and theaters share revenue; 30 based on the system where producer does not participate in revenue sharing Distribution - Not allowed for foreign capital Cinema - Ceiling on foreign stake in theaters (49%) Co-production - Licensed Chinese film producers must receive approval for co-production with foreign partners - If a film co-produced by Chinese and Korean companies is approved, it is recognized as a Chinese
film in China (effective for three years from July 2014) Other - Strict standards for violent and sexual content Note: The Sino-Korea Film Co-production Treaty, signed in July 2014, is effective for three years after signing and will be automatically extended if each party shows no intention of termination within six months before expiration. Source: Ministry of Culture, Sports, and Tourism, KCCA, KOFIC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 10 July 27, 2015 Film/Broadcast Content
CJ E&M sees Southeast Asia as among the most promising global markets, as this region allows foreign players to not only engage in co-productions, but also (unlike China) enter into the distribution market.
In Vietnam, the company’s co-production De Mai Tinh 2 recorded the highest ticket sales in the country’s history. In May 2015, 3 Girls was released, and Starting Over Again is scheduled for release in 2H. And CJ E&M is anticipated to expand its distribution network to include Vietnam.
Vietnam should offer a favorable business environment for the company thanks to CJ CGV’s acquisition of Megastar, the leading movie theater chain in Vietnam. According to PwC, Vietnam’s box office market reached US$30mn last year and is expected to grow at a CAGR of 5.2% over the next five years.
In Thailand, CJ E&M released Cha-Lui: Touching the Sky, in which the company jointly invested with its local partner Transformation Film. Around end-May, the company also unveiled a plan to establish a joint venture with the country’s largest movie theater operator, Major Cineplex Group. CJ E&M has already been selling and distributing Korean films in Thailand since 2000. Going forward, the company plans to increase co-production in the country. Thailand’s film market is estimated at US$130mn, 4.3 times larger than Vietnam’s, and is forecast to expand at a CAGR of 5.6% over the next five years.
CJ E&M is also considering expanding into Indonesia, where the company is currently engaged in a co-production planned for release next year. Along with China, Indonesia has the potential to become a huge market for the company, thanks to its large population and fast-growing middle class. Multiplexes have already taken firm root in the country. Also, the high penetration of social networking services among the young population should help the company advertise films via digital media.
Like China, Indonesia heavily restricts investments by overseas capital to protect its own film industry. CJ E&M is keenly watching whether regulations will be eased going forward. PwC forecasts that the Indonesian box office market stood at US$100mn last year. The entire film market (including box office and additional rights distribution) is anticipated to display a CAGR of 8.9% over the next five years—the fastest growth in Asia outside of China.
Figure 12. China and Southeast Asia—major regions for co-productions with Korea—have bright box office market outlooks
(%) 20 China, Indonesia, Thailand, and Vietnam are major regions for JVs with 15.4 Korean studios; these countries' film markets have higher 15 five-year CAGR estimates compared to other regions.
10
5.6 5.6 5.5 5 4.0 3.6 2.6
0
-5 China Indonesia Thailand Vietnam Philippines Singapore US Korea Taiwan Malaysia Japan France
Note: Five-year CAGR estimates from 2015 to 2019 Source: PwC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 11 July 27, 2015 Film/Broadcast Content
III. Tentpoles in the broadcasting industry
1. Broadcasters taking a tentpole strategy in programming
We can also see a trend toward a greater focus on tentpoles in the broadcasting industry. In particular, new broadcasters are building tentpole programs to ensure efficient channel operations from the start.
During a new channel’s early period, tentpoles tend to be placed on specific dates or in specific time slots. For several years, CJ E&M aired the audition program Superstar K on the Mnet channel on Friday nights. Other tentpoles—e.g., Grandpas Over Flowers, Three Meals a Day, and Reply, all airing on the tvN channel—have also been concentrated on Friday, successfully creating the perception among the public that Friday is the “CJ E&M day.” Similarly, JTBC is well-known for its Monday evening shows, such as Please Take Care of My Refrigerator and Non Summit.
Multiple program providers (MPP) tend to promote several key channels as tentpoles. For example, CJ E&M has nurtured tvN and Mnet as tentpoles among its 18 channels.
Once key programs and channels are positioned as tentpoles, MPPs allocate different genres, or programs with varying budgets, among them. If the strategy proves successful, tentpoles can be expected to increase. Indeed, CJ E&M is attempting to build more tentpole dates (besides Friday) by launching House Cook Master Baek on Tuesday and Wednesday Food Talk on Wednesday. In addition, CJ E&M’s OCN and O’live channels are gaining more popularity. As for JTBC, even before its Monday shows became popular, it attempted to build Ssulzun (Thursday) and Witch Hunt (Friday) into tentpoles.
Given the heavy earnings contribution of media firms’ broadcasting units, earnings are vulnerable to stable programming. As the share of predictable programs increases, profits and leveraging ability should become more stable. And once daily program schedules are set, additional production expenses will be limited. With expenses being more or less fixed, strong ad revenue from tentpoles should lead to profits. In addition, broadcasters can raise overall ad sales by bundling sluggish programs with tentpoles.
Table 3. Daily program schedules; Once schedules are fixed, additional expenses are limited Date CJ E&M JTBC SBS High Society (drama)/ Please Take Care of My Refrigerator, Non Mon Hidden Identity (drama) Healing Camp, Aren't You Summit Happy House Cook Master Baek/ High Society/Some Guys, Tue Off to School Hidden Identity Some Girls Mask (drama)/Night of TV Wed Wednesday Food Talk Children, The Life's Greatest Blessing Entertainment Thu Superstar K 7 With You/Ssulzun Mask/Honey Three Meals a Day/Oh My Ghost Fri Witch Hunt/LAST (drama) Law of the Jungle (drama) Sat Oh My Ghost Where Is My Friend's Home/LAST Same Bed Different Dreams Sun My Beautiful Bride (drama) Talk To You Good Sunday Note: Dramas are as of July 2015; For entertainment programs, only the major titles for 2H are included in the table Source: Respective companies’ data, KDB Daewoo Securities Research
Table 4. Distributing series content across quarters offsets seasonality and increases tentpoles, leading to revenue growth Quarter CJ E&M (tvN) CJ E&M (Mnet) JTBC 1Q SN Korea (2011-) Unpretty Rapstar (2015-) 2Q SNL Korea (2011-), Grandpas Over Flowers (2013-) Dancing 9 (2013-) Crime Scene (2014-) 3Q Three Meals a Day (2014-), The Genius (2013-) Show Me The Money (2012-) 4Q Reply (drama series, 2012-) Superstar K (2009-) Hidden Singer (2012-) Source: Respective companies’ data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 12 July 27, 2015 Film/Broadcast Content
2. Snowball effect of tentpoles
Tentpoles seem particularly valuable to broadcasting in that they create a snowball effect, leading to derivative revenue generation.
For instance, as the popularity of a TV program grows, ad prices are likely to climb, and product placement revenue may expand. Furthermore, re-runs, VOD, program exports, and TV format exports generate content revenue. Tie-in product sales can also grow.
Among these derivative revenue sources, content sales (VOD sales, etc.) should provide the steadiest revenue stream. CJ E&M has enjoyed steady growth in content-related revenue along with the expansion of its program lineup. Also positive are increasing VOD demand and diversifying fee models amid the digital conversion of the pay TV platform.
Figure 13. CJ E&M has enjoyed steady growth in derivative revenue related to popular content along with the expansion of its program lineup
(Wbn) Broadcasting revenue (L) Superstar K6, Sisters/Youth (%) Content/other revenue as % of total (R) 250 Superstar K5, Over Flowers, Three Meals a 30 Trend (R) Superstar K4, Reply 1994, Day, Misaeng, Bad Guys Superstar K3, Reply 1997 Grandpas Over Flowers Drama + variety show hits 220 Comedy Big League, Increased contribution Dramas + variety shows 26 SNL Korea from dramas more firmly established Increased contribution from 190 variety shows 22
160 18
130 14
100 10 1Q11 1Q12 1Q13 1Q14 1Q15
Source: Company data, KDB Daewoo Securities Research
Figure 14. Accelerating domestic VOD market growth
(Wbn) (Wbn) 800 Cable VOD revenue (L) 160 IPTV VOD revenue (L) IPTV monthly plan revenue (R) 600 120 IPTV advertisement volume (R)
400 80
200 40
0 0 2011 2012 2013 2014 2015F
Source: KISDI, Nasmedia, CATV VOD, KDB Daewoo Securities Research
KDB Daewoo Securities Research 13 July 27, 2015 Film/Broadcast Content
IV. Earnings forecast
1. Turnaround This year, major film and broadcast content producers are anticipated to report YoY growth in revenue and operating profit.
Filmmakers CJ E&M, Showbox, and NEW posted dismal revenue growth last year, weighed down by a decline in movie attendance following the ferry-sinking accident and delayed movie releases. Some tentpole movies even reported losses. As a result, investment returns came in at a meager 0.3% (estimate), vs. 13% in the previous two years. Foreign films fared better, with total viewer numbers exceeding 100mn for the first time.
This year, revenue is likely to recover on the back of an increase in the number of moviegoers. In 1H, the number of moviegoers decreased temporarily due to the MERS outbreak, while the release of some Korean films was delayed to avoid competition with foreign blockbusters. Since the start of 2H, however, the market has seen the full-swing release of major tentpole films. Furthermore, cost control will likely continue.
From a structural standpoint, the growing secondary distribution market, including domestic VOD sales and exports, is positive. And the investment return on Korean films is also rising in line with the growth of the secondary distribution market. The domestic market for digital online film distribution grew by 11% YoY last year, and is likely to continue to deliver double-digit growth in 2015, backed by the progress in pay-TV digital conversion and rising VOD consumption. Meanwhile, since last year, film export growth has been driven by the Chinese market.
Figure 15. Earnings trends of major film distributors: CJ E&M, Showbox, and NEW (Wbn) Combined revenue of three major distributors (L) (%) 500 Average OP margin of three major distributors (R) 8
400 6
300 4 200
2 100
0 0 2012 2013 2014 2015F Note: Aggregate data from 2012 (when NEW started to disclose earnings); 2015 is our estimate
Source: Company data, FSS, KDB Daewoo Securities Research
Figure 16. Investment returns on Korean films are closely tied to the growth of the rights distribution market
(%) Investment returns on Korean films (L) (Wbn) 20 Scale of film rights distribution (R) 700
10 600
0 500
-10 400
-20 300
-30 200
-40 100
-50 0 05 06 07 08 09 10 11 12 13 14
Note: Scale of film rights distribution is sum of digital online revenue and overseas revenue Source: KOFIC, KDB Daewoo Securities Research
KDB Daewoo Securities Research 14 July 27, 2015 Film/Broadcast Content
2. Growth opportunities
In our view, film and broadcast content companies will concentrate on finding opportunities and achieving growth in overseas markets, including China, while focusing on improving profitability in the domestic market.
Film and broadcast content companies’ overseas revenue has been rising steadily, and especially surged in 2013, fueled by the Chinese market. According to the Korea Creative Content Agency, broadcast content recorded the highest export growth (+48% YoY) among content exports in 1Q15. In 2015, both film and broadcast content exports will likely increase by 20% YoY.
Korean firms’ overseas content businesses are evolving. While they exported only completed content in the past, now they are exporting content formats, and even generating local service revenue via customized overseas content planning and production. Indeed, the number of joint productions between Korean and foreign firms has been rising significantly this year.
In 2H, major content firms, including CJ E&M, Showbox, NEW, and SBS Contents Hub, plan to establish branches to engage in joint ventures overseas. As such, we expect them to expand localized content businesses full swing based on their lineup plans.
Figure 17. Revenue trend and forecast for film and broadcasting content
(US$mn) 500 Overseas revenue from films Broadcasting exports
400
300
200
100
0 05 06 07 08 09 10 11 12 13 14 15F
Note: 2015F is our estimate; Film exports (excluding local sales) grew 7% YoY and broadcasting exports grew 48% YoY in 1Q15 Source: KOFIC, KCCA, KDB Daewoo Securities Research
KDB Daewoo Securities Research 15 July 27, 2015 Film/Broadcast Content
Table 5. Localized overseas joint productions to increase full swing this year Company Country 2013 2014 2015 2016- A Wedding Grandpas Over Peaceful Island (movie) Plans to increase joint Invitation Flowers Naminbang 2 (movie) production by (movie) (entertainment establishing a local China show) subsidiary and expand the Hong Kong MTV business De Mai Tinh 2 A Story of Three Women Plans to expand (movie) (movie) business through a joint CJ E&M Vietnam Forever Young Starting Over Again (movie) venture with VTV (drama) VK-POP Super Star (entertainment show) Cha-Lui: Touching the Sky Plans to expand a joint Thailand (movie) venture with Major Cineplex Group Joint movie production project Plans to release a jointly Indonesia underway produced movie Mr. Go Started two film productions Plans to expand a joint Showbox China (movie) venture with Huayi Brothers To establish a joint venture with Plans to expand NEW China Huace Media business with Huace Media Running Man Hurry Up, Brother 2 Plans to expand SBS (entertainment (entertainment show) business after SBS Contents China show) Law of the Jungle establishing a Chinese Hub (entertainment show) subsidiary Infinite Challenge MBC China (entertainment show) Off to School (entertainment Please Take Care of My JTBC China show) Refrigerator, Crime J Contentree Scene, etc. Source: Press release, Respective companies’ data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 16 July 27, 2015 Film/Broadcast Content
3. Major lineup for 2H
We will likely see more hit films in 2H than in 1H. Accordingly, major film companies’ earnings are anticipated to improve heading into 2H.
Of note, renowned directors are set to stage a comeback in 2H, with Choi Dong-hoon and Ryu Seung-wan, in particular, competing again after three years. CJ E&M plans to release Veteran (directed by Ryu Seung-wan) in 3Q and Himalaya (Lee Seok-hoon, who also directed The Pirates) in 4Q. Showbox has already released Assassination (Choi Dong-hoon) and is expected to release The Throne (Lee Joon-ik) around end-3Q. As for NEW, Beauty Inside (Baek Jong-yeol) and The Great Tiger (Park Hoon-jeon, the director of New World) are awaiting release in 3Q and 4Q, respectively. Meanwhile, Memories of the Sword (Park Heung-sik) and Western Front (Chun Seong-il) are in Lotte Entertainment’s lineup for 3Q and 4Q, respectively.
Historically, blockbuster hopefuls have been released during the summer. Showbox’s Assassination, released on July 22nd, currently occupies the top spot in the box office. The film is expected to remain firmly in the lead at least until Mission: Impossible Rogue Nation is released in Korea on July 30th. Also lined up for release are CJ E&M’s Veteran (August 5th), Lotte Entertainment’s Memories of the Sword (August 13th), and NEW’s Beauty Inside (August 20th). The short intervals between the releases might be negative to each film’s ticket sales. However, demand for Korean movies appears to be running high due to the weaker lineup in 1H. In addition, as the new movies are of various genres, they could absorb a wider range of moviegoers.
Figure 18. CJ E&M’s anticipated films for 2H15: Veteran and Figure 19. Showbox ’s anticipated films for 2H15:
Himalaya Assassination and The Throne
Note: Veteran and Himalaya slated for Aug. 5th and 4Q release, respectively Note: Assassination released on Jul. 22nd; The Throne to be released in Sep. Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Figure 20. NEW’s anticipated films for 2H15: Beauty Inside Figure 21. Lotte’s anticipated films for 2H15: Memories of the and The Great Tiger Sword and Western Front
Note: Beauty Inside and The Great Tiger slated for Aug. 20th and year-end release, Note: Memories of the Sword and Western Front slated for Aug. 13th and 2H respectively release, respectively Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 17 July 27, 2015 Film/Broadcast Content
Table 6. 2H distribution schedule (Korean films) of major listed companies Distributor Release date Title Director Cast CJ E&M Jul. 9 The Guest Kim Kwang-tae Ryu Seung-ryong, Lee Sung-min, Lee Joon Aug. 5 Veteran Ryu Seung-hwan Hwang Jung-min, Yoo Ah-in, Yoo Hae-jin 3Q Detective Kim Jeong-hoon Kwon Sang-woo, Sung Dong-il 4Q Angry Lawyer Heo Jong-ho Lee Sun-gyun, Kim Go-eun 4Q Dori Artist Lee Jong-pil Ryu Seung-ryong, Bae Soo-ji, Kim Nam-gil 4Q Black Priests Jang Jae-hyun Kim Yun-seok, Kang Dong-won 4Q Home Sweet Home Lee Kyung-mi Son Ye-jin, Kim Joo-hyuk 4Q Himalaya Lee Seok-hoon Hwang Jung-min, Jung Woo Not finalized Time Renegade Kwank Jae-yong Lim Soo-jung, Lee Jin-wook, Jo Jung-seok Not finalized Detective Hong Gil-dong Jo Sung-hee Lee Jae-hoon, Kim Sung-gyun 2H Pyeongan-do (Co-production with China) Jang Yoon-hyun Hwang Ri Sing, Ddairirun 2H Final Recipe (Co-production with China) Kim Jin-ah Henry, Yank Ja-kyung 2H Starting Over Again (Co-production with Vietnam) N/A N/A Showbox Jun. 18 The Classified File Kwak Kyung-taek Kim Yoon-seok, Yu Hae-jin Jul. 22 Assassination Choi Dong-hoon Jeon Ji-hyun, Lee Jung-jae, Ha Jung-woo In Sep. The Throne Lee Jun-ik Song Gang-ho, Yu Ah-in, Moon Geun-young 2H Prosecutor’s Supplementary Story Lee Il-hyung Hwang Jung-min 2H In the Mood for Love Jo Kyu-jang Moon Chae-won, Yu Yeon-seok 2H Summer Snow Jeon Yoon-soo Ji Jin-hee, Seong Yu-ri, Kim Seong-gyun 2H A Man and a Woman Lee Yoon-gi Jeon Do-yeon, Gong Yu 2H The Insiders Woo Min-ho Lee Byung-hun, Jo Seung-woo, Baek Yun-sik NEW Jun. 24 Northern Limit Line Kim Hak-soon Jin Koo, Kim Moo-yeol, Lee Wan Aug. 20 Beauty Inside Baek Jong-yul Han Hyo-joo, Kim Joo-hyuk 2H Waiting For You Mo Heung-jin Sim Eun-kyung, Yoon Je-moon 2H You Sound Like Passion Jung Gi-hoon Jung Jae-young, Park Bo-young 2H The Phone (tentative) Kim Bong-joo Son Hyun-joo, Uhm Ji-won 2H To Busan Yeon Sang-ho Gong Yu, Ma Dong-seok 2H Lucid dream Kim Joon-seong Ko Soo, Seol Gyung-goo, Kang Hye-jung 2H The Great Tiger Park Hoon-jung Choi Min-sik, Jung Man-sik Note: As of Jul 2015; Release dates subject to change Source: KOFIC, Respective companies’ data, KDB Daewoo Securities Research
Table 7. 2H distribution schedule of Lotte and major foreign companies Distributor Release date Title Director Cast Lotte Jul. 2 Terminator - Genisys Alan Taylor Arnold Schwarzenegger, Emilia Clarke Entertainment Jul. 30 Mission Impossible – Rogue Nation Christopher McQuarrie Tom Cruise, J.J. Abrams, David Ellison Aug. 13 Memories of the Sword Park Heung-sik Lee Byung-hun, Jeon Do-yeon, Kim Go-eun 2H Western Front Cheon Sung-il Seol Kyung-goo, Yeo Jin-goo 2H The Joseon Magician Kim Dae-seung Yu Seoung-ho, Go Ah-ra 2H Journalist (Title not finalized) No Deok Cho Jung-seok, Lee Ha-na, Lee Mi-sook 2H Haeeohwa Park Heung-sik Han Hyo-joo 2H Robot, Sori Lee Ho-jae Lee Sung-min, Lee Hee-joon, Lee Ha-nui Universal Jul. 9 Insidious: Chapter 3 Leigh Whannell Lin Shaye, Stefanie Scott, Dermot Mulroney Pictures In Sep. Everest Baltasar Kormákur Jake Gyllenhaal, Josh Brolin, Keira Knightley International In Oct. Crimson Peak Guillermo del Toro Tom Hiddleston, Jessica Chastain Korea In Oct. The Walk Robert Zemeckis Joseph Gordon-Levitt, Charlotte Le Bon In Nov. Spectre Sam Mendes Daniel Craig, Christoph Waltz, Monica Bellucci 20st Century Aug. 20 Fantastic Four Josh Trank Michael B. Jordan, Miles Teller Fox Korea Sep. 17 Maze Runner: Scorch Trials Wes Ball Dylan O'Brien, Kaya Scodelario Oct. 8 The Martian Ridley Scott Matt Damon, Jessica Chastain In Dec. The Peanuts Movie Steve Martino Francesca Capaldi, Bill Melendez 2H Plaintive Whining Na Hong-jin Kwak Do-won, Hwang Jung-min Note: As of July 2015; Release date subject to change Source: KOFIC, Respective companies’ data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 18 July 27, 2015 Film/Broadcast Content
V. Investment strategy and valuation
1. Investment strategy and key considerations
The unpredictability and uncertainty of media companies’ businesses is one risk involved in investing in media content stocks. As such, in making decisions regarding investment timing and choosing stocks, investors should focus on companies’ efforts to make inherently unpredictable businesses more predictable. They should also watch whether companies are successful in reducing risks or offsetting risks with opportunities.
In the short term, highly anticipated movies could affect share prices, given that expectations around new movies and businesses tend to boost content companies’ shares. During expectation- driven rallies, stocks often show stronger momentum when valuations are somewhat stretched. Once the results of movies are confirmed or new businesses begin generating revenue, valuation tends to subside steadily, as expectations and expected earnings have already been priced in. Looking at the share price trends of film companies, expectations tend to be reflected full swing two weeks before new movie releases, while the performance of movies one week after the release and thereafter determines the direction of stocks.
In the long term, improvement in the business outlook due to structural factors could provide positive momentum. Expansion into new markets, the formation of new business strategies, and the expansion of business areas are likely to be key triggers for upward share price movement. Viacom’s share price around the time of its entry into the Chinese market well illustrates the correlation between new momentum and share performance.
Figure 22. Short-term share price trends of film companies: Effect of new film expectations as well as movies’ performance after release date must be taken into consideration
(Release date=100) Showbox (Assassination, 2015) Showbox (Kundo, 2014) 130 Showbox (The Thieves, 2012) CJ E&M (Roaring Currents, 2014) CJ E&M (Ode to My Father, 2014-2015) NEW (Battle of Yeonpyeong, 2015)
120 Confirmation of results starting one week after 110 Expectations reflected full swing release 2 weeks before release
100
90
80 1 month prior 2 weeks prior 1 week prior Release date 1 week after 2 weeks after 1 month after
Source: Thomson Reuters, Respective companies’ data, KDB Daewoo Securities Research
Figure 23. Long-term share price trends: Viacom case illustrates how expectations are reflected when overseas business is begun in earnest
(US$bn) Combined market cap of Viacom + CBS since 2006 (L) 2014 (US$) 80 Combined EPS of Viacom + CBS since 2006 (R) Rise in revenue led by 12 2005 success of films in China Separation from CBS, 10 Focus on cable PP and film 60 1999-2000 businesses China CCTV-MTV 2008 8 music show Economic downturn 2001 due to financial crisis 40 Launch of Nickelodeon 6 channel in China; Entered film business 1995 4 Began entry into China; 20 Chinese MTV channel 2
0 0 91 94 97 00 03 06 09 12 15F
Note: Viacom decided to spin off CBS at the end of 2005 Source: Viacom, CBS, Thomson Reuters, KDB Daewoo Securities Research
KDB Daewoo Securities Research 19 July 27, 2015 Film/Broadcast Content
2. Comparison with global peers
CJ E&M, Showbox, and J Contentree are trading at lower EV/EBITDA multiples than global peers. As EV/EBITDA factors in depreciation costs and tax rates that vary across countries and companies, the multiple is useful for comparing valuation.
By country, Chinese players, namely Huayi Brothers and Zhejiang Huace Film & TV, are trading at high premiums thanks to the strong growth of the domestic market. Among individual stocks, companies that are expected to display sharp YoY growth in OP margin and ROE are receiving higher valuations. Walt Disney, 21st Century Fox, and AMC are cases in point.
Table 8. Global content companies’ valuation (Wbn, %, x) OP margin P/E P/B EV/EBITDA ROE Company name Mkt Cap 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F CJ E&M (KR) 3,141 -1.1 2.9 3.5 6.6 27.3 49.1 1.0 1.9 1.9 4.7 8.2 8.0 16.4 7.4 3.9 Showbox 537 2.8 6.5 6.1 - 134.3 94.7 2.8 4.9 4.7 5.4 8.8 7.9 -1.6 3.8 5.1 J Contentree 344 8.9 9.8 10.9 - 27.8 25.3 2.1 3.1 2.7 7.6 8.6 7.7 -0.1 12.3 12.0 NEW 192 11.1 9.3 8.6 29.2 23.8 22.9 2.0 1.4 1.4 25.7 15.3 14.0 5.6 6.2 6.1 Toho (JP) 5,291 15.3 15.4 16.1 25.6 25.1 23.1 2.0 1.9 1.8 12.7 11.8 11.2 8.0 7.8 8.0 Fuji Media Holdings 3,558 4.0 4.3 4.6 18.5 17.4 16.1 0.6 0.6 0.6 8.8 7.6 7.4 3.3 3.2 3.5 Toei 1,214 9.8 10.4 10.8 16.4 15.4 14.0 0.9 0.8 0.8 9.2 9.7 9.1 5.6 5.8 6.2 Walt Disney (US) 236,154 23.3 25.9 26.9 25.5 23.5 20.7 4.4 4.3 3.9 13.4 13.6 12.4 17.7 18.2 21.5 Time Warner - Warner Bros. 84,336 21.8 25.1 27.3 19.2 18.8 15.1 3.0 2.7 2.6 14.1 11.7 10.2 12.9 16.1 20.1 21st Century Fox 80,283 17.2 21.5 22.8 18.7 17.9 17.3 3.8 3.9 3.5 11.7 12.3 11.2 52.0 24.0 22.3 Viacom - Paramount 26,226 29.6 27.6 30.9 10.1 9.8 8.6 9.8 6.6 6.5 11.7 8.6 7.7 53.2 60.0 72.6 Discovery Communications 23,414 32.9 32.1 32.2 17.6 17.1 14.7 2.6 3.5 3.2 8.7 11.4 10.7 17.3 20.2 22.5 ITV (EU) 19,664 25.1 27.4 28.0 23.0 17.0 15.6 10.7 8.8 6.8 11.6 12.3 11.3 49.8 54.5 48.5 RTL Group 16,747 17.3 19.0 19.4 19.8 18.0 17.1 4.6 4.7 4.8 10.9 10.5 10.0 21.8 25.6 27.3 Huayi Brothers Media (CH) 10,298 35.9 42.7 42.3 70.3 46.6 38.7 9.1 8.4 7.1 - 41.1 31.7 15.2 17.9 17.5 Beijing Enlight Media 8,010 31.2 40.3 42.0 114.1 60.4 45.3 12.1 8.1 7.0 60.6 66.5 49.6 12.2 13.4 15.1 Zhejiang Huace Film & TV 6,461 22.4 25.2 27.7 84.7 53.0 42.0 10.2 6.0 5.4 36.9 42.5 32.4 15.3 14.2 13.2 Beijing Hualubaina Film & TV 5,376 19.3 19.5 20.3 138.5 50.8 35.5 7.8 5.2 4.8 77.7 58.6 43.4 6.4 9.5 10.7 Average excluding China 15.6 16.9 17.7 19.2 28.1 25.3 3.6 3.5 3.2 11.2 10.7 9.9 18.7 18.9 20.0 Average 18.2 20.3 21.1 39.9 33.6 28.7 5.0 4.3 3.9 19.5 20.0 16.4 17.3 17.8 18.7 Note: Korean companies are KDB Daewoo Securities estimates; Bloomberg consensus for others; CJ E&M recognized one-off profit in 2014-2015; Ex-rights have already occurred for NEW’s bonus issue (new shares to be listed on Aug. 18th); Financial year ends in March for Japanese companies Source: Bloomberg, KDB Daewoo Securities Research
Table 9. Global major film multiplex companies’ valuation (Wbn, %, x) OP margin P/E P/B EV/EBITDA ROE Company name Mkt Cap 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F J Contentree - Megabox (KR) 344 8.9 9.8 10.9 - 27.8 25.3 2.1 3.1 2.7 7.6 8.6 7.7 -0.1 12.3 12.0 CJ CGV 2,613 5.0 6.5 7.6 117.5 50.0 35.7 6.8 6.3 5.4 13.2 17.5 14.0 5.9 12.4 15.1 Wanda Cinema (CH) 23,942 18.6 18.2 18.8 141.6 108.8 76.4 37.8 25.0 19.8 - 68.3 51.0 30.8 27.6 29.2 Cinemark (US) 5,284 13.8 16.5 17.0 21.2 18.6 16.5 4.2 3.7 3.2 11.9 8.9 8.3 18.4 20.3 19.4 AMC Entertainment 3,540 6.5 9.2 9.9 40.6 25.2 21.4 2.0 1.9 1.8 12.7 8.9 8.3 5.0 7.6 7.8 Regal Entertainment 3,485 10.2 11.8 12.3 21.0 16.2 15.3 - - - 11.6 8.2 8.0 - -20.5 -23.9 Cineplex (CN) 2,730 9.4 38.9 38.8 35.9 28.0 22.6 4.3 4.1 3.9 17.4 13.6 11.9 11.3 16.8 20.8 Cineworld (UK) 2,404 12.3 14.3 14.9 23.4 18.4 16.5 2.6 2.3 2.2 11.2 10.7 9.7 15.6 13.5 14.2 Average 10.6 15.6 16.3 57.3 36.6 28.7 8.5 6.6 5.6 12.2 18.1 14.9 12.4 11.3 11.8 Note: KDB Daewoo Securities estimates for J Contentree; Bloomberg consensus for others Source: Bloomberg, KDB Daewoo Securities Research
KDB Daewoo Securities Research 20 July 27, 2015 Film/Broadcast Content
Key Recommendations
CJ E&M (130960 KQ/Buy) Success of tentpole strategy to lead to growth
Tentpoles strategies coming to the fore this summer Expectations for earnings and events to grow through 2H Raise TP by 25% from W80,000 to W100,000; Maintain Buy
J Contentree (036420 KQ/Buy) Theater franchise and TV content to drive growth Rights offering for full-ownership in Megabox Multiplex and TV content—two mainstays—offer stability and growth Upgrade from Trading Buy to Buy; Raise TP from W4,700 to W6,000
Showbox (086980 KQ/Trading Buy) A living witness to Korean movie industry development
Showbox announces the start of the summer movie season Dual engines (China + domestic) to power growth Initiate coverage with Trading Buy and TP of W10,000
Next Entertainment World (060550 KQ/Trading Buy) Note business expansion
Young and agile film distributor Earnings improvement and business expansion to be confirmed in 2H Initiate coverage with Trading Buy and TP of W16,000
KDB Daewoo Securities Research 21 July 27, 2015 Film/Broadcast Content
CJ E&M (130960 KQ) Success of tentpole strategy to lead to growth
Media Tentpoles strategies coming to the fore this summer CJ E&M appears to be increasing the use of tentpole strategies across its broadcasting, (Maintain) Buy movie, and game business units. 1) Broadcasting unit: Along with tvN and Mnet, the OCN channel now also boasts a Target Price (12M, W) 100,000 stable quarterly program lineup, supporting earnings stability. Some channels—including StoryOn (soon to be renamed O tvN) and Ongamenet (OGN)—are taking a rebranding Share Price (07/24/15, W) 81,100 strategy to revamp programming and operating efficiency. 2) Movie unit: The company’s movie business has been sluggish since the release of Ode Expected Return 23% to My Father. We attribute this sluggishness to the absence of hit movies, the outbreak of MERS-CoV, and delayed recognition of earnings related to the overseas release of co- OP (15F, Wbn) 38 produced movies. However, the company will likely revive earnings in 2H through Consensus OP (15F, Wbn) 52 various efforts, beginning with the release of the tentpole movie Veteran this summer.
EPS Growth (15F, %) -48.8 3) Game unit: Netmarble Games, in which CJ E&M holds a 31% stake, is taking an Market EPS Growth (15F, %) 33.5 audacious approach; last week it announced its acquisition of SGN, the second largest P/E (15F, x) 27.3 casual mobile game developer in North America, for US$130mn. Under a business th Market P/E (15F, x) 11.0 strategy unveiled during a July 15 press conference with CEO Bang Jun-hyuk, the KOSDAQ 776.26 company plans to release 31 new games by 1H16 and expand into the North American and European markets (in addition to China, where it is operating in partnership with Market Cap (Wbn) 3,141 Tencent). Shares Outstanding (mn) 39 Free Float (%) 56.7 Expectations for earnings and events to grow through 2H Foreign Ownership (%) 13.2 We forecast 2Q results to fall below market expectations due to the sluggish movie Beta (12M) 1.56 business. However, we believe the resulting short-term correction will represent a 52-Week Low 32,300 buying opportunity, considering: 1) strong seasonality in 4Q, and 2) positive events 52-Week High 83,100 anticipated in 2H, such as the establishment of overseas subsidiaries and the release of (%) 1M 6M 12M co-produced movies. Absolute 10.0 106.6 80.8 We expect earnings related to co-produced movies (recognition of which has been Relative 5.8 56.9 30.4 delayed) to be booked in 2H, and three co-produced movies are anticipated to be
210 CJ E&M KOSDAQ released in China and Vietnam. The company also plans to build overseas subsidiaries in China and Vietnam this year. 160 Raise TP by 25% to W100,000; Maintain Buy
110 We retain our Buy call on CJ E&M, and raise our target price to W100,000 (from W80,000). We revised up the P/B multiple for the asset value of the parent company in 60 7.14 11.14 3.15 7.15 light of improving broadcast program lineups, as well as the expanding scope of the movie business (due to increase in co-productions with local studios). We also upped our
estimate for the value of game operations, considering improving earnings and expanding business at Netmarble Games.
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 1,395 1,246 1,233 1,296 1,358 1,414 OP (Wbn) 39 -9 -13 38 47 54 OP margin (%) 2.8 -0.7 -1.1 2.9 3.5 3.8 NP (Wbn) 37 5 225 115 64 77 EPS (W) 975 133 5,796 2,967 1,651 1,982 ROE (%) 3.1 0.4 16.4 7.4 3.9 4.5 P/E (x) 27.2 229.0 6.6 27.3 49.1 40.9 P/B (x) 0.8 1.0 1.0 1.9 1.9 1.8 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 22 July 27, 2015 Film/Broadcast Content
Earnings outlook
Despite the robust performance of the broadcasting unit (driven by strong seasonality), we believe CJ E&M’s 2Q earnings fell below market expectations due to the tepid movie unit. The sluggishness of the movie unit was likely attributable to the absence of hit movies, the outbreak of MERS-CoV, and delayed recognition of earnings related to the overseas release of co-produced movies. Meanwhile, we estimate that the game unit contributed to net profit growth on the back of the success of Raven and Marvel Future Fight.
The company will likely engage in various efforts to revive earnings in 2H, beginning this summer with the release of the tentpole movie Veteran. We expect earnings related to co-produced movies (recognition of which has been delayed) to be booked in 2H, and three co-produced movies are anticipated to be released in China and Vietnam. The company also plans to build overseas subsidiaries in China and Vietnam this year.
We also highlight 1) the strong seasonality in 4Q, and 2) business scope expansion in light of the establishment of overseas subsidiaries and the release of co-produced movies.
Table 10. Quarterly and annual earnings (Wbn, %) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15F 3Q15F 4Q15F 2013 2014 2015F Revenue 265 284 343 341 293 294 353 355 1,246 1,233 1,296 Broadcasting 170 209 205 242 178 222 220 251 771 826 871 Film 50 30 93 38 66 27 81 46 209 211 219 Music/performance 45 44 45 61 49 45 52 59 266 196 205 Operating Profit -3 -9 -11 10 9 7 -2 24 -9 -13 38 Broadcasting -4 -1 -15 22 3 9 -7 26 2 2 30 Film 4 -2 7 -12 7 -3 4 -1 5 -4 7 Music/performance -4 -5 -2 0 0.3 0.3 0.3 0.1 -15 -11 1 OP margin -1.2 -3.0 -3.1 2.8 3.2 2.2 -0.6 6.9 -0.7 -1.1 2.9 Broadcasting -2.3 -0.6 -7.2 9.2 1.4 4.0 -3.0 10.2 0.3 0.3 3.5 Film 8.6 -7.9 7.0 -32.6 9.8 -10.0 5.0 -2.9 2.2 -1.9 3.0 Music/performance -8.2 -11.1 -5.1 -0.2 0.6 0.6 0.6 0.2 -5.6 -5.6 0.5 Net profit 0 -11 284 -39 90 10 6 7 1 233 114 Net margin -0.1 -4.0 82.8 -11.5 30.8 3.4 1.8 2.1 0.1 18.9 8.9 YoY growth Revenue -3.8 -1.6 7.2 1.7 10.6 3.7 2.9 4.2 5.3 -1.0 5.9 Broadcasting -1.0 4.6 10.0 13.7 4.4 6.3 7.3 3.8 0.9 7.1 5.4 Film -12.3 -19.3 33.6 -15.0 32.5 -12.1 -13.2 20.2 -4.6 1.2 10.3 Music/performance -3.8 -12.8 -29.5 -21.5 9.6 1.9 15.8 -4.0 33.4 -26.5 3.1 Operating profit RR TTR -54.3 162.2 TTB TTB RR 152.4 TTR 48.8 TTB Broadcasting RR TTR 6.5 181.0 TTB TTB RR 15.6 -95.5 10.0 TTB Film -10.4 TTR 282.4 327.6 51.2 RR -37.6 RR -48.9 TTR TTB Music/performance RR RR RR RR TTB TTB TTB TTB RR RR TTB Net profit TTB TTB TTB RR TTB TTB -97.8 TTB - - -51.2 Notes: Based on consolidated K-IFRS; For annual data, the game division and investment unit of the performance division are reflected in discontinued operations; Different from previously published FSS data; Net profit attributable to controlling and non-controlling interests; Gains on spin-off of game division and partial sale of game business stake were reflected as income from discontinued operations and non-operating income in 2014; Change in net profit was not included in 2015 due to impact of discontinued operations; RR, TTR, TTB refer to “remain red,” “turn to red,” and “turn to black,” respectively Source: Company data, KDB Daewoo Securities Research
Table 11. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 15F 16F 15F 16F 15F 16F Revenue 1,306 1,370 1,2961,358 -0.8 -0.9 - Revised down film revenue estimates Operating profit 41 49 38 47 -7.3 -4.1 - Revised down film profit estimates Net profit 111 66 115 64 3.6 -3.0 - Revised up game profit estimates EPS 2,869 1,695 2,9671,651 3.4 -2.6 OP margin 3.1 3.6 2.9 3.5 Net margin 8.9 4.8 8.9 4.7 Notes: Based on consolidated K-IFRS; Net profit and EPS are attributable to controlling interests Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 23 July 27, 2015 Film/Broadcast Content
Valuation and considerations
We retain our Buy call on CJ E&M, and raise our target price by 25% to W100,000 (from W80,000). We revised up the P/B multiple for the asset value of the parent company in light of improving broadcast program lineups, as well as the expanding scope of the movie business (due to increase in co-productions with local studios). We also upped our estimate for the value of game operations, considering improving earnings and expanding business at Netmarble Games.
We can see a trend toward greater use of tentpoles at CJ E&M’s broadcasting, movie, and game business units. As the broadcasting unit makes a significant contribution to CJ E&M’s earnings, stable earnings at the unit will be crucial to earnings growth. It is positive that the company is efficiently allocating popular programs (by day, quarter, and channel) on the back of its growing reputation and increased number of tentpole programs. As for the movie unit, the tentpole lineup is concentrated in 2H rather than in 1H. And regarding the game unit, subsidiary Netmarble Games plans to roll out 18 new titles in 2H in Korea, and also plans to continue its partnership with Tencent in China while expanding to other overseas markets (by acquiring a North American game company and securing intellectual property elsewhere in the Western world).
We expect CJ E&M to expand its business scope in 2H, with the overseas release of co- produced movies and establishment of China and Vietnam subsidiaries. Once overseas subsidiaries disclose details regarding business scale and movie lineups, the company’s overseas value should boost corporate value.
Table 12. Calculation of target price (Wbn, x, W) Category Valuation Notes Asset value 54,423 2015F BPS P/B (x) Fundamental value (broadcasting and film) Consolidated basis 41,864 1.3 54,423 Applied highest P/B of SBS during healthy period Operating value 45,731 2015F profit x 31% ownership stake in Netmarble Games Mobile game 63 28 1,764 In line with mobile game company Glu Mobile Number of shares 38,573 Total value 100,154 Combined asset value and operating value Target price 100,000 Rounded Note: Used asset value of parent broadcasting and film operations due to earnings volatility; Applied operating value for Netmarble Games as development costs are not capitalized Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 24 July 27, 2015 Film/Broadcast Content
Table 13. CJ E&M’s major program schedule for 2H Channel Date Title Producer Writer Actors/Actresses Genre tvN Jan- (Wed) Wednesday Food Talk Lee Gilsu Shin Dongyeop, Jeon Hyeonmu Cooking Three Meals a Day May- (Fri) Na Yeongseok Lee Ujeong Lee Seojin, Ok Taekyeon Reality show (in Jeongseon) Baek Jongwon, Yun Sang, Kim May- (Tue) House Cook Master Baek Go Mingu Cooking Gura Let Me In 5 (co-broadcast with Jun- (Fri) Park Hyeonu Hwang Sinhye, Son Hoyeong Beauty StoryOn channel) Park Boyeong, Cho Jeongseok, Jul- (Fri-Sat) Oh My Ghost Yu Jewon Yang Huiseung Romance Kim Seulgi Aug- (Mon-Tue) Rude Miss Young-ae (season 14) Jeong Hwanseok Myoung Suhyeon Kim Hyeonsuk, Ra Miran Drama Aug- (Fri-Sat) Second Time Twenty Years Old Kim Hyeongsik So Hyeongyeong Choi Ji-woo Drama Hyeri, Park Bogeom, Koh Oct. to year-end Reply 1988 Shin Wonho Lee Ujeong Gyeongpyo Drama (not decided)
Kim Muyeol, Lee Siyeong, Ryu OCN Jun-Aug (Sat-Sun) My Beautiful Bride Kim Cheolgyu Yoo Seongyeol Thriller Seungsu Jun-Aug (Mon-Tue) Hidden Identity Kim Jeongmin Kang Hyeonseong Kim Beom, Park Seongung Thriller Aug-Nov (Sun) Cheo Yong 2 Kang Cheolu Hong Seunghyeon Oh Jiho, Jeon Hyoseong Detective Lee Sangyun, Mnet Jun-Sep (Fri) Show Me The Money Tablo, San E, Jay Park, Zico Audition Shin Cheonji Yoon Jong Shin, Baek Ji-young, Aug-Nov (Thu) Superstar K 7 Ma Dusik Audition Kim Bum-soo, Sung Si-kyung Shim Yeongsun, Baek Jongwon, Olive TV May-Dec (Thu) Korean Food war 3 Hyun Don Audition Choi Hyeonseok Park Jeonghui, Son Dam-bi, Yi Yi-kyung, Hyun Jun-Jul (Tue) Yumi’s Room Kim Yeonghwa Sitcom Choi Uju Woo Journey to the West Online Fall- Na Yeongseok Kang Ho-dong, Lee Seung-gi Reality show (tentative) Note: As of July 2015; Dates subject to change Source: Media reports, Company data, KDB Daewoo Securities Research
Table 14. CJ E&M’s major distribution schedule for 2015 (Korean films) Release date Title Director Cast Jan. 14 Love Forecast Park Jin-pyo Lee Seung-gi, Moon Chae-won Feb. 5 C'est Si Bon Kim Hyun-seok Kim Yoon-seok, Jeong Woo, Han Hyo-joo Mar. 5 The Age of Innocence Ahn Sang-hoon Shin Ha-kyun, Jang Hyuk, Kang Ha-neul Apr. 9 Long Lives (tentative) Kang Je-kyu Park Geun-hyung, Yoon Yeo-jung, Han Ji-min May 14 The Chronicles of Evil Baek Woon-hak Son Hyun-joo, Ma Dong-seok, Daniel Choi Jun. 4 Secret Temptation Yoon Jae-goo Lim Soo-jung, Yoo Yeon-seok Jul. 9 The Guest Kim Kwang-tae Ryu Seung-ryong, Lee Sung-min, Lee Joon Aug. 5 Veteran Ryu Seung-hwan Hwang Jung-min, Yoo Ah-in, Yoo Hae-jin 3Q Detective Kim Jeong-hoon Kwon Sang-woo, Sung Dong-il 4Q Angry Lawyer Heo Jong-ho Lee Sun-gyun, Kim Go-eun 4Q Dori Artist Lee Jong-pil Ryu Seung-ryong, Bae Soo-ji, Kim Nam-gil 4Q Black Priests Jang Jae-hyun Kim Yun-seok, Kang Dong-won 4Q Home Sweet Home Lee Kyung-mi Son Ye-jin, Kim Joo-hyuk 4Q Himalaya Lee Seok-hoon Hwang Jung-min, Jung Woo Not finalized Time Renegade Kwank Jae-yong Lim Soo-jung, Lee Jin-wook, Jo Jung-seok Not finalized Detective Hong Gil-dong Jo Sung-hee Lee Jae-hoon, Kim Sung-gyun Jan. 8 Miss Granny (China) Cheon Jung Dao Yangzsan, Guiaroi, Roohan May 15 Three Girls (Vietnam) Bo Ddan bin Hoang Wan, Tui Eunga Jun. 4 Cha-Lui: Touching the Sky (Thailand) N/A Nachat Janthapan 2H Pyeongan-do (China) Jang Yoon-hyun Hwang Ri Sing, Ddairirun 2H Final Recipe (China) Kim Jin-ah Henry, Yank Ja-kyung 2H Starting Over Again (Vietnam) Roland Nguyen N/A Note: As of July 2015; Release dates subject to change Source: Company data, KOFIC, IMDB, KDB Daewoo Securities Research
KDB Daewoo Securities Research 25 July 27, 2015 Film/Broadcast Content
Table 15. Major mobile games scheduled for release at Netmarble Games Developer Release date Title Details Sep 2015 Epic War Saga Casual RPG Netmarble Neo Not decided Project S (tentative) Based on NCsoft’s Lineage 2 Oct 2015 Everyone’s Marble (tentative) Co-produced using Disney IP Netmarble N2 1Q16 Project Stone Age Begins (tentative) Japanese IP, Mobile version of online Stone Age Netmarble Npark 3Q15 Idea RPG, Massive guild war Polygon Games 3Q15 Blade Waltz Action RPG Tencent 3Q15 We Fire Mobile FPS Netmarble Blue 4Q15 KON (Knights Of Night) Dual action RPG EPPSoft 4Q15 ARK Action RPG Alpaca Games 1Q16 Project Destiny 6 (tentative) Action MORPG Infinity 2Q16 Project P (tentative) Action RPG Adventure RPG based on Northern European myth, targeted Level9 Not decided Project Glinda (tentative) at overseas gamers Note: As of July 2015; Dates subject to change; CJ E&M holds a 31% stake in Netmarble Games Source: Netmarble Games, ThisIsGame, KDB Daewoo Securities Research
KDB Daewoo Securities Research 26 July 27, 2015 Film/Broadcast Content
CJ E&M (130960 KQ/Buy/TP: W100,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F12/17F (Wbn) 12/14 12/15F 12/16F12/17F Revenue 1,233 1,296 1,358 1,414 Current Assets 1,039 1,052 1,129 1,113 Cost of Sales 977 1,010 1,059 1,103 Cash and Cash Equivalents 34 72 101 134 Gross Profit 256 286 299 311 AR & Other Receivables 368 405 423 441 SG&A Expenses 268 247 252 257 Inventories 5 6 66 Operating Profit (Adj) -13 38 47 54 Other Current Assets 632 569 599 532 Operating Profit -13 38 47 54 Non-Current Assets 1,318 1,395 1,402 1,412 Non-Operating Profit -37 113 39 49 Investments in Associates 377 453 475 494 Net Financial Income -6 -4 -4 -2 Property, Plant and Equipment 88 91 83 76 Net Gain from Inv in Associates 10 134 41 46 Intangible Assets 695 689 677 670 Pretax Profit -50 151 86 103 Total Assets 2,357 2,447 2,531 2,525 Income Tax 7 37 22 27 Current Liabilities 581 561 581 498 Profit from Continuing Operations -57 114 63 76 AP & Other Payables 215 236 247 257 Profit from Discontinued Operations 290 0 0 0 Short-Term Financial Liabilities 148 155 155 55 Net Profit 233 114 63 76 Other Current Liabilities 218 170 179 186 Controlling Interests 225 115 64 77 Non-Current Liabilities 271 274 275 276 Non-Controlling Interests 9 -1 -1 -1 Long-Term Financial Liabilities 253 253 253 253 Total Comprehensive Profit 228 106 63 76 Other Non-Current Liabilities 18 21 22 23 Controlling Interests 221 107 64 77 Total Liabilities 852 835 856 774 Non-Controlling Interests 8 -1 -1 -1 Controlling Interests 1,510 1,617 1,680 1,757 EBITDA 290 372 371373 Capital Stock 194 194 194194 FCF (Free Cash Flow) 176 249 357 340 Capital Surplus 973 973 973 973 EBITDA Margin (%) 23.5 28.7 27.3 26.4 Retained Earnings 316 431 495 572 Operating Profit Margin (%) -1.1 2.9 3.5 3.8 Non-Controlling Interests -4 -5 -5 -6 Net Profit Margin (%) 18.2 8.9 4.7 5.4 Stockholders' Equity 1,506 1,612 1,675 1,751
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 195 266 362 345 P/E (x) 6.6 27.3 49.1 40.9 Net Profit 233 114 63 76 P/CF (x) 4.4 8.7 8.4 8.3 Non-Cash Income and Expense 104 247 309 301 P/B (x) 1.0 1.9 1.9 1.8 Depreciation 19 14 1312 EV/EBITDA (x) 4.7 8.2 8.07.8 Amortization 284 319 312307 EPS (W) 5,796 2,967 1,6511,982 Others -199 -86 -16-18 CFPS (W) 8,719 9,320 9,6119,744 Chg in Working Capital -99 -66 15 -4 BPS (W) 39,100 41,864 43,516 45,497 Chg in AR & Other Receivables -66 -35 -19 -17 DPS (W) 0 0 0 0 Chg in Inventories 0 -1 0 0 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 6 -40 4 3 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -36 -23 -22 -27 Revenue Growth (%) -1.0 5.1 4.8 4.1 Cash Flows from Inv Activities -640 -281 -353 -238 EBITDA Growth (%) -19.7 28.3 -0.3 0.5 Chg in PP&E -18 -17 -5 -5 Operating Profit Growth (%) - - 23.7 14.9 Chg in Intangible Assets -327 -313 -300 -300 EPS Growth (%) 4,257.9 -48.8 -44.4 20.0 Chg in Financial Assets -413 49 -48 67 Accounts Receivable Turnover (x) 3.3 3.5 3.4 3.4 Others 118 0 00 Inventory Turnover (x) 209.5 235.5 230.2 229.4 Cash Flows from Fin Activities 146 7 0 -100 Accounts Payable Turnover (x) 11.7 14.2 13.9 13.9 Chg in Financial Liabilities -52 7 0 -100 ROA (%) 10.2 4.7 2.5 3.0 Chg in Equity 0 0 0 0 ROE (%) 16.4 7.4 3.9 4.5 Dividends Paid 0 0 0 0 ROIC (%) -1.4 3.2 3.7 4.4 Others 198 0 00 Liability to Equity Ratio (%) 56.6 51.8 51.1 44.2 Increase (Decrease) in Cash -299 39 28 33 Current Ratio (%) 178.9 187.4 194.3 223.3 Beginning Balance 332 34 72 101 Net Debt to Equity Ratio (%) -7.5 -6.0 -10.0 -13.1 Ending Balance 34 72 101 134 Interest Coverage Ratio (x) -0.8 2.6 3.1 4.1 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 27 July 27, 2015 Film/Broadcast Content
J Contentree (036420 KQ) Theater franchise and TV content to drive growth
Media Rights offering for full-ownership in Megabox
J Contentree, a media firm in the JoongAng Media Network (JMnet), has four business (Upgrade) Buy units: theater franchise, broadcast, magazine, and other. Its theater franchise subsidiary, Megabox, accounts for the bulk of the company’s revenue and cash flow, and thus can Target Price (12M, W) 6,000 be said to serve as a tentpole.
J Contentree decided to acquire Korea Multiplex Investment (KMIC), the largest Share Price (07/24/15, W) 4,955 shareholder of Megabox. The acquisition is expected to push up its stake in Megabox from 46.3% to 97.9%. To finance the acquisition, J Contentree will carry out a rights Expected Return 21% offering (43mn shares) on August 11th. With the offering price set at W3,430 per share, the company is expected to raise W147.49bn. OP (15F, Wbn) 39 Consensus OP (15F, Wbn) 39 Multiplex and TV content—two mainstays—offer stability and growth
EPS Growth (15F, %) - J Contentree’s mainstay businesses are the movie theater franchise and TV content. Its Market EPS Growth (15F, %) 33.5 magazine and other (mainly performance) businesses are undergoing restructuring. P/E (15F, x) 27.8 Market P/E (15F, x) 11.0 We believe the acquisition of Megabox will provide growth potential to the company’s KOSDAQ 776.26 businesses. Megabox has delivered an OP margin of around 17% over the past three years, and the acquisition will give the company stronger control over the theater chain. Market Cap (Wbn) 344 On the domestic front, Megabox plans to aggressively expand the number of theaters, Shares Outstanding (mn) 112 but the expansion will likely involve mostly small- to mid-sized theaters to control risks. Free Float (%) 66.2 The company is also considering expanding its business overseas, including China, Foreign Ownership (%) 4.2 Southeast Asia, and South America. Beta (12M) 1.74 52-Week Low 2,833 Another subsidiary, Drama House and J Content Hub (created after the merger of 52-Week High 5,660 Drama House and J Content Hub), handles the company’s TV content business. Drama
(%) 1M 6M 12M House was one of Korea’s major drama production companies, creating dramas for its Absolute 30.9 60.7 48.2 affiliate JTBC as well as providing dramas to terrestrial channels. J Content Hub had Relative 25.9 22.0 6.9 distributed and sold rights for JTBC content. The combined entity is seeing an increase in domestic VOD revenue in line with an increase in the number and popularity of 190 Jcontentree KOSDAQ programs at JTBC. The company recently began co-production with Chinese partners. It 170 is expected to enjoy accelerating growth in line with the growth of JTBC. 150 130 Upgrade to Buy; Raise TP to W6,000 110 90 We upgrade our investment rating on J Contentree to Buy (from Trading Buy) and raise 70 our target price to W6,000 (from W4,700). In light of changes to the firm’s business 7.14 11.14 3.15 7.15 strategies, we upped our valuation multiples for the theater business’s operating value.
Our target price is based on the number of shares after the rights offering, as the shares are currently trading ex-rights and the offering price has already been set.
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 393 380 394 398 411 423 OP (Wbn) 43 38 35 39 45 48 OP margin (%) 10.9 10.0 8.9 9.8 10.9 11.3 NP (Wbn) 12 -10 0 12 13 13 EPS (W) 177 -152 -1 178 196 204 ROE (%) 13.2 -11.1 -0.1 12.3 12.0 11.1 P/E (x) 19.3 - - 27.8 25.3 24.3 P/B (x) 2.3 2.6 2.1 3.1 2.7 2.5 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 28 July 27, 2015 Film/Broadcast Content
Earnings outlook
J Contentree is expected to see stronger improvement in margins than revenue this year. Revenue from the magazine and other businesses is likely to decrease due to restructuring, but the restructuring should positively affect the company’s overall margins going forward.
The theater franchise business is expected to grow this year. With the COEX mall remodeling completed at the end of last year, ticket sales at the flagship COEX theater should increase. Revenue will likely expand further starting next year due to J Contentree’s acquisition of full ownership. On the domestic front, Megabox plans to aggressively expand the number of theaters, but the expansion will likely involve mostly small- to mid-sized theaters to control risks. The company is also considering expanding its business overseas, including China, Southeast Asia, and South America.
The environment for the TV content business is improving. Recently, following the end of its hit drama series Beloved Eun-dong, JTBC began airing a web cartoon-based drama titled Last. Another web cartoon-based drama is in the pipeline, and a drama to be provided to a terrestrial TV channel is scheduled for production in 2H.
In addition, since 2Q, JTBC has been co-producing a popular entertainment program with a Chinese partner, iQiyi. The program was first aired on July 16th on Dragon Television in China and is expected to generate revenue in 2Q and 3Q. J Contentree is also expected to pursue co-production of other popular programs with Chinese partners.
Table 16. Earnings trend and forecast (Wbn, %) 2012 2013 2014 2015F 2016F Revenue 393 401 394 398 411 Film 203 219 232 245 256 Broadcast 80 104 98 105 107 Magazine 65 56 52 48 48 Other 60 40 24 12 12 Proportion Film 51.7 54.6 58.9 61.6 62.3 Broadcast 20.3 26.0 24.8 26.3 26.1 Magazine 16.6 13.9 13.2 12.1 11.7 Other 15.1 9.9 6.2 3.1 2.8 Operating profit 43 37 35 39 45 Film 35 38 38 41 41 Broadcast 5 8 -3 -2 3 Magazine 5.2 -0.1 0.3 0.2 0.2 Other -1.3 -2.3 -1.5 -0.7 -0.2 Proportion Film 82.9 101.0 109.2 104.3 90.9 Broadcast 12.8 20.7 -8.1 -5.3 7.1 Magazine 12.1 -0.1 0.7 0.6 0.5 Other -3.1 -6.3 -4.3 -1.9 -0.5 OP margin 10.8 9.3 8.8 9.9 11.0 Net profit 24 4 15 25 27 Net margin 6.2 0.9 3.7 6.2 6.5 YoY Revenue 2.0 -1.7 0.9 3.2 Film 7.7 6.0 5.5 4.5 Broadcast 30.8 -6.2 7.0 2.3 Magazine -14.6 -7.2 -7.4 0.0 Other -33.5 -38.3 -50.0 -5.0 Operating profit -12.1 -7.0 13.3 14.2 Film 7.0 0.6 8.3 -0.5 Broadcast 42.7 TTR RR TTB Magazine TTR TTB -7.4 0.0 Other 74.6 -35.9 -51.1 -68.3 Net profit -84.8 291.9 71.3 6.8 Note: All figures are based on consolidated K-IFRS; Net profit is attributable to controlling and noncontrolling interests, TTR, TTB and RR refer to “turn to red”, “turn to black” and “remain red” respectively Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 29 July 27, 2015 Film/Broadcast Content
Valuation
We upgrade our investment rating on J Contentree to Buy (from Trading Buy) and raise our target price to W6,000 (from W4,700).
In light of changes to the firm’s business strategies, we upped our valuation multiples for the theater business’s operating value. Our target price is based on the number of shares after the rights offering, as the shares are currently trading ex-rights and the offering price has already been set.
Table 17. Calculation of target price Category Valuation Notes Operating value (Wbn) 771 2015F NP P/E (x) CJ CGV’s average P/E during 2012- Megabox 30 25.3 758 2013 SBS Contents Hub’s average P/E Broadcasting 1 13.0 13 during 2012-2013 Investment value (Wbn) 27 Listed stock Unlisted stock 1 Book value as of end of 1Q15 Investment in associated firms 11 Book value as of end of 1Q15 Real estate 15 Book value as of end of 1Q15 Total asset value (Wbn) 798 Net debt (Wbn) 133 Consolidated at the end of 1Q15 Net asset value (Wbn) 666 Number of shares outstanding 112,330 * After rights issue on Aug. 11 (‘000 shares) Target price (W) 6,000 Rounded Note: Our target price is based on the number of shares after the rights offering, as the shares are currently trading ex-rights and the offering price has already been set (rights offering to be listed on Aug. 11th) Source: KDB Daewoo Securities Research
Table 18. J Contentree’s rights offering Details # of new shares 43,000,000 Face value (W) 500 # of outstanding shares before rights offering 69,330,457 Offering price (W) 3,430 Capital to be raised (W) 147,490,000,000 Subscription date for existing shareholders Jul. 23-24 Payment for new shares Jul. 31 Delivery date of new shares Aug. 10 Listing of new shares Aug. 11 New shares per existing share 0.633908777 # of outstanding shares after rights offering 112,330,457 Note: Based on the company’s disclosure on July 21st Source: Company data, FSS, KDB Daewoo Securities Research
Table 19. J Contentree’s KMIC acquisition Details Acquisition value 152,000,000,000 # of acquired shares 1,585,653 Objective Secure management control Scheduled date for acquisition Jul. 31 Payment method Cash (to be financed via rights offering) Source: Company data, FSS, KDB Daewoo Securities Research
KDB Daewoo Securities Research 30 July 27, 2015 Film/Broadcast Content
Jcontentree (036420 KQ/Buy/TP: W6,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F12/17F (Wbn) 12/14 12/15F 12/16F12/17F Revenue 394 398 411423 Current Assets 160 192 227 263 Cost of Sales 206 209 215 222 Cash and Cash Equivalents 51 82 113 146 Gross Profit 188 189 196 201 AR & Other Receivables 55 55 57 59 SG&A Expenses 153 150 151 153 Inventories 7 7 88 Operating Profit (Adj) 35 39 45 48 Other Current Assets 47 48 49 50 Operating Profit 35 39 45 48 Non-Current Assets 321 315 311 306 Non-Operating Profit -12 -1 -3 -5 Investments in Associates 11 11 12 12 Net Financial Income -4 0 0 0 Property, Plant and Equipment 120 114 108 101 Net Gain from Inv in Associates 2 0 0 0 Intangible Assets 82 81 81 80 Pretax Profit 23 38 42 43 Total Assets 481 507 538 570 Income Tax 8 13 15 15 Current Liabilities 217 219 222 225 Profit from Continuing Operations 15 25 27 28 AP & Other Payables 48 49 50 52 Profit from Discontinued Operations -1 0 0 0 Short-Term Financial Liabilities 112 112 112 112 Net Profit 15 25 27 28 Other Current Liabilities 57 58 60 61 Controlling Interests 0 12 13 13 Non-Current Liabilities 98 99 99 100 Non-Controlling Interests 15 13 14 15 Long-Term Financial Liabilities 78 78 78 78 Total Comprehensive Profit 15 25 27 28 Other Non-Current Liabilities 20 21 21 22 Controlling Interests 0 0 0 0 Total Liabilities 316 317 321 325 Non-Controlling Interests 15 24 27 28 Controlling Interests 90 102 115 128 EBITDA 57 61 6770 Capital Stock 33 33 3333 FCF (Free Cash Flow) 30 42 44 45 Capital Surplus 48 48 48 48 EBITDA Margin (%) 14.5 15.3 16.3 16.5 Retained Earnings 14 25 3852 Operating Profit Margin (%) 8.9 9.8 10.9 11.3 Non-Controlling Interests 75 88 102 117 Net Profit Margin (%) 0.0 3.0 3.2 3.1 Stockholders' Equity 165 190 217 245
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 55 47 49 50 P/E (x) - 27.8 25.3 24.3 Net Profit 15 25 27 28 P/CF (x) 3.0 5.6 5.3 5.1 Non-Cash Income and Expense 52 34 35 36 P/B (x) 2.1 3.1 2.7 2.5 Depreciation 11 11 1111 EV/EBITDA (x) 7.6 8.6 7.77.0 Amortization 11 11 1111 EPS (W) -1 178 196204 Others 30 12 1314 CFPS (W) 1,002 882 938964 Chg in Working Capital 1 0 0 0 BPS (W) 1,438 1,617 1,812 2,016 Chg in AR & Other Receivables 5 -1 -2 -2 DPS (W) 0 0 0 0 Chg in Inventories -2 0 0 0 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -9 0 1 1 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -8 -13 -15 -15 Revenue Growth (%) 3.7 1.0 3.3 2.9 Cash Flows from Inv Activities -27 -16 -18 -18 EBITDA Growth (%) -6.6 7.0 9.8 4.5 Chg in PP&E -25 -5 -5 -5 Operating Profit Growth (%) -7.9 11.4 15.4 6.7 Chg in Intangible Assets -8 -10 -10 -10 EPS Growth (%) - - 10.1 4.1 Chg in Financial Assets 7 -1 -3 -3 Accounts Receivable Turnover (x) 6.9 7.7 7.8 7.8 Others -1 0 00 Inventory Turnover (x) 60.3 53.7 54.2 54.2 Cash Flows from Fin Activities -34 0 0 0 Accounts Payable Turnover (x) 9.3 10.1 10.3 10.2 Chg in Financial Liabilities - - - - ROA (%) 2.9 5.0 5.2 5.1 Chg in Equity 3 0 0 0 ROE (%) -0.1 12.3 12.0 11.1 Dividends Paid -5 0 0 0 ROIC (%) 10.0 11.4 13.4 15.0 Others - - -- Liability to Equity Ratio (%) 191.3 167.2 148.3 132.8 Increase (Decrease) in Cash -6 31 32 33 Current Ratio (%) 73.6 87.8 102.3 117.0 Beginning Balance 56 51 82 113 Net Debt to Equity Ratio (%) 78.7 52.2 31.0 13.9 Ending Balance 51 82 113 146 Interest Coverage Ratio (x) 3.3 0.0 0.0 0.0 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 31 July 27, 2015 Film/Broadcast Content
Showbox (086980 KQ) A living witness to Korean movie industry development
Media Showbox announces the start of the summer movie season
Showbox is the film distribution arm of Orion Group (established in 1999, formerly (Initiate) Trading Buy known as Mediaplex). The history of the company is practically the history of the Korean movie industry itself, with all of the current representatives of major Korean film studios Target Price (12M, W) 10,000 (including CJ E&M and NEW) having worked at Showbox before.
We believe the second half of this year will mark a watershed period for the firm. First of Share Price (07/24/15, W) 8,580 all, its tentpole movie Assassination has gotten off to a good start. Having the same director as the former blockbuster Thieves, the movie topped the box office right after Expected Return 17% its July 22nd release. Moreover, the company’s cooperation with Huayi Brothers of China has begun to pick up speed, which will likely affect the firm’s long-term business results. OP (15F, Wbn) 6 Consensus OP (15F, Wbn) 10 Dual engines (China + domestic) to power growth
EPS Growth (15F, %) - In 2007, the film distributor sold off its theater business, Megabox. As film distribution Market EPS Growth (15F, %) 33.5 tends to be riskier than theater operation, the firm has been focusing on improving P/E (15F, x) 134.3 earnings stability by building around two tentpoles into its total annual lineup of roughly Market P/E (15F, x) 11.0 10 movies. KOSDAQ 776.26 In March of this year, Showbox entered an exclusive partnership agreement with Huayi Market Cap (Wbn) 537 Brothers. We believe the addition of the Chinese operation will help expand the Shares Outstanding (mn) 63 company’s horizon beyond the limitations of the domestic market. Under the Free Float (%) 42.5 agreement, Showbox will establish Showbox China, and produce at least six movies over Foreign Ownership (%) 2.8 the next three years to be released in China. Production on two of those movies has Beta (12M) 1.25 already broken ground, and one of them (based on the storyline of an existing Korean 52-Week Low 3,060 movie and adapted to cater to Chinese viewers) may be released as early as the end of 52-Week High 8,740 this year. The other is a longer-term project, as it has been geared to the Chinese market (%) 1M 6M 12M from the earliest planning stages. Absolute -1.8 49.5 125.2 Relative -5.6 13.5 62.4 Initiate coverage with Trading Buy and TP of W10,000
260 Showbox Corp. KOSDAQ We initiate our coverage of Showbox with a Trading Buy rating and target price of
210 W10,000. The current share price seems to reflect anticipations of 1) positive outcomes from the business partnership with Huayi Brothers and 2) success for the new release 160 Assassination. 110 Showbox’s growth is likely to receive a boost from the firm’s overseas expansion, as well 60 as from the increasing adoption of the tentpole strategy in the domestic film industry. 7.14 11.14 3.15 7.15 We may revisit our valuation based on the box office results of other films slated for
release this year, the quality of next year’s lineup, and progress in the Chinese operation.
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 88 107 72 93 98 101 OP (Wbn) 10 5 2 6 6 6 OP margin (%) 11.4 4.7 2.8 6.5 6.1 5.9 NP (Wbn) -5 2 -2 4 6 6 EPS (W) -79 38 -27 64 91 95 ROE (%) -4.7 2.3 -1.6 3.8 5.1 5.1 P/E (x) - 84.3 - 134.3 94.7 90.2 P/B (x) 1.0 1.9 2.8 4.9 4.7 4.5 Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 32 July 27, 2015 Film/Broadcast Content
Earnings outlook and valuation
For film distributors like Showbox, the quality and outcome of product lineups are key earnings variables. Showbox’s tentpole lineup includes action movies (for the summer movie season) as well as historical period dramas/historical fiction movies (targeting major holiday seasons).
Revenue and operating profit are anticipated to expand YoY. Last year, Showbox movies drew less than 20mn viewers due to the impact of the ferry disaster on consumer sentiment as well as a lack of box office hits. Since early this year, however, growth has been robust, with revenue expanding 92% YoY in 1Q. Gangnam 1970, Detective K: Secret of the Lost Island, and Whiplash were major earnings contributors in 1Q, while in 2Q, The Classified File contributed to earnings growth. For 3Q and 4Q, Assassination and The Throne (to be released during the fall holiday season), respectively, are projected to boost growth.
We initiate our coverage of Showbox with a Trading Buy rating and target price of W10,000. In view of the high earnings volatility of the film distribution business, we used the price-to-sales ratio in calculating our target price.
Table 20. Earnings trend and forecast (Wbn, %) 2012 2013 2014 2015F 2016F Revenue 88 107 72 93 98 Domestic – Film screening 77 91 54 75 74 Domestic – IP 8 9 14 15 16 Exports 2 4 3 3 7 Other 1 3 1 1 1 OP 10 5 2 6 6 OP margin 11.0 5.1 2.5 6.5 6.2 Net profit -5 2 -2 4 6 Net margin -5.6 2.2 -2.4 4.3 5.8 YoY Revenue 21.5 -32.6 28.9 5.6 Domestic – Film screening 17.9 -40.7 38.5 -0.2 Domestic – IP 9.4 54.7 2.7 10.0 Exports 123.2 -29.6 10.0 126.7 Other 283.4 -58.8 -48.1 -0.2 OP -44.1 -66.5 233.8 0.5 Net profit TTB TTR TTB 41.6 Major assumptions Number of admissions 24,739 29,169 16,070 23,140 23,302 (‘000 persons) The Thieves, The Face Kundo: Age of Nameless Reader, Co- the Rampant, Assassination Major titles Gangster: Mr. Go, productions The Divine The Throne Rules of the Secretly, with China Move Time Greatly Note: Based on non-consolidated IFRS Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 33 July 27, 2015 Film/Broadcast Content
Table 21. Calculation of target price Category Valuation Notes Operating value (Wbn) 538 2015F revenue P/S (x) Film investment and distribution 93 5.8 538 Highest P/S during 2012-2015 Investment asset value (Wbn) 33 Listed stock - Unlisted stock 12 Book value as of end of 1Q15 Investment in associated firms 21 Book value as of end of 1Q15 Real estate - Total asset value (Wbn) 571 Net debt (Wbn) -53 Net asset value (Wbn) 624 Number of shares outstanding (‘000 shares) 62,400 Target price (W) 10,000 Rounded Note: In view of the high earnings volatility of the film distribution business, we used the price-to-sales ratio in calculating our target price; Profit growth expected to turn positive this year Source: KDB Daewoo Securities Research estimates
Company overview and earnings variables
Showbox has grown alongside the Korean film industry. Orion Group launched its theater business in 1999 when the Korean movie industry started to blossom, and then expanded to film investment and distribution in 2002. Around 2007, when multiplexes became widespread, the company sold off its theater operation. Now, with annual movie attendance in Korea reaching 200mn and the Chinese movie market starting to expand in earnest, Showbox has formed a partnership with a Chinese film studio.
The quality of movie lineups is particularly important for film distributors like Showbox, which lack their own theaters. Thus, whether such distributors secure strong lineups warrants close monitoring by investors.
As for the Chinese operation, Showbox will establish Showbox China and produce at least six movies over the next three years to be released in China. In the country, the company seems to be taking a two-pronged approach: 1) movies based on existing Korean storylines, adapted to Chinese viewers, and 2) so-called “made in China” movies, with content targeted to the local market from the earliest planning stages. Progress in these projects should determine the firm’s approach to the Chinese market and help set the trend of Sino-Korean partnerships in the film industry more generally.
Table 22. Major film distribution lineup for 2015 Release date Title Director Main cast Jan. 21 Gangnam 1970 Yoo Ha Lee Min-ho, Kim Rae-won Detective K: Secret of the Feb. 11 Kim Seok-yoon Kim Myung-min, Oh Dal-su Virtuous Widow Mar. 12 Whiplash (foreign/distribution) Damien Chazelle Miles Teller, J. K. Simmons May 7 Love Clinic (distribution) Kim Aa-ron Oh Ji-ho, Kang Ye-won Jun. 18 The Classified File Kwak Kyung-taek Kim Yoon-seok, Yu Hae-jin Jeon Ji-hyun, Lee Jung-jae, Ha Jul. 22 The Assassination Choi Dong-hoon Jung-woo Song Gang-ho, Yu Ah-in, Moon In Sep. The Throne Lee Jun-ik Geun-young 2H Prosecutor’s Supplementary Story Lee Il-hyung Hwang Jung-min 2H In The Mood For Love Jo Kyu-jang Moon Chae-won, Yu Yeon-seok Ji Jin-hee, Seong Yu-ri, Kim Seong- 2H Summer snow Jeon Yoon-soo gyun 2H A Man and A Woman Lee Yoon-gi Jeon Do-yeon, Gong Yu Lee Byung-hun, Jo Seung-woo, 2H The Insiders Woo Min-ho Baek Yun-sik The Age of Adaline 2H Lee Toland Krieger Blake Lively, Michiel Huisman (foreign/distribution) Note: As of Jul. 2015; For films not in italics, Showbox served as the main investor and distributor; Release dates subject to change Source: KOFIC, Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 34 July 27, 2015 Film/Broadcast Content
Figure 24. Business plan with China’s Huayi Brothers
Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 35 July 27, 2015 Film/Broadcast Content
Showbox (086980 KQ/Trading Buy/TP: W10,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F12/17F (Wbn) 12/14 12/15F 12/16F12/17F Revenue 72 93 98101 Current Assets 91 145 200 255 Cost of Sales 62 78 83 86 Cash and Cash Equivalents 17 49 99 150 Gross Profit 10 15 15 15 AR & Other Receivables 8 10 10 11 SG&A Expenses 8 9 9 9 Inventories 0 0 00 Operating Profit (Adj) 2 6 6 6 Other Current Assets 66 86 91 94 Operating Profit 2 6 6 6 Non-Current Assets 50 11 -35 -83 Non-Operating Profit -4 -2 0 0 Investments in Associates 21 28 29 30 Net Financial Income 1 0 0 0 Property, Plant and Equipment 0 0 0 0 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 1 -48 -97 -146 Pretax Profit -2 4 6 6 Total Assets 141 156 164 172 Income Tax 0 0 0 0 Current Liabilities 37 48 50 52 Profit from Continuing Operations -2 4 6 6 AP & Other Payables 6 8 8 8 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit -2 4 6 6 Other Current Liabilities 31 40 42 44 Controlling Interests -2 4 6 6 Non-Current Liabilities 0 0 0 0 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit -1 4 6 6 Other Non-Current Liabilities 0 0 0 0 Controlling Interests -1 4 6 6 Total Liabilities 37 48 50 52 Non-Controlling Interests 0 0 0 0 Controlling Interests 104 108 114 120 EBITDA 51 55 5555 Capital Stock 31 31 3131 FCF (Free Cash Flow) -45 43 52 53 Capital Surplus 36 36 36 36 EBITDA Margin (%) 70.8 59.1 56.1 54.5 Retained Earnings 37 41 4753 Operating Profit Margin (%) 2.8 6.5 6.1 5.9 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) -2.8 4.3 6.1 5.9 Stockholders' Equity 104 108 114 120
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities -44 43 52 53 P/E (x) - 134.3 94.7 90.2 Net Profit -2 4 6 6 P/CF (x) 5.6 10.1 9.8 9.7 Non-Cash Income and Expense 54 49 49 49 P/B (x) 2.8 4.9 4.7 4.5 Depreciation 0 0 00 EV/EBITDA (x) 5.4 8.8 7.97.0 Amortization 49 49 4949 EPS (W) -27 64 9195 Others 5 0 00 CFPS (W) 834 849 878882 Chg in Working Capital -98 -10 -2 -1 BPS (W) 1,672 1,736 1,827 1,922 Chg in AR & Other Receivables 6 -1 0 0 DPS (W) 0 0 0 0 Chg in Inventories 0 0 0 0 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -17 1 0 0 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid 0 0 0 0 Revenue Growth (%) -32.7 29.2 5.4 3.1 Cash Flows from Inv Activities 32 -5 -1 -1 EBITDA Growth (%) -17.7 7.8 0.0 0.0 Chg in PP&E 0 0 0 0 Operating Profit Growth (%) -60.0 200.0 0.0 0.0 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) - - 42.2 4.4 Chg in Financial Assets 35 -5 -1 -1 Accounts Receivable Turnover (x) 8.2 17.1 15.5 15.4 Others -3 0 00 Inventory Turnover (x) 0.0 0.0 0.0 0.0 Cash Flows from Fin Activities 0 0 0 0 Accounts Payable Turnover (x) 6.3 21.6 19.8 19.7 Chg in Financial Liabilities - - - - ROA (%) -1.1 2.7 3.5 3.5 Chg in Equity 0 0 0 0 ROE (%) -1.6 3.8 5.1 5.1 Dividends Paid 0 0 0 0 ROIC (%) 7.2 19.3 -38.3 -8.7 Others - - -- Liability to Equity Ratio (%) 35.5 44.2 44.2 43.3 Increase (Decrease) in Cash -13 32 50 52 Current Ratio (%) 246.3 303.5 396.6 490.7 Beginning Balance 30 17 49 99 Net Debt to Equity Ratio (%) -21.2 -51.6 -92.8 -131.5 Ending Balance 17 49 99 150 Interest Coverage Ratio (x) 0.0 0.0 0.0 0.0 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 36 July 27, 2015 Film/Broadcast Content
Next Entertainment World (160550 KQ) Note business expansion
Media Young and agile film distributor
Next Entertainment World (NEW) entered the film distribution business in 2008 and the (Initiate) Trading Buy film investment business in 2009. Despite its short history, the company soon emerged as a major film distributor, with a domestic market share of 18.4% (ranking second) in Target Price (12M, W) 16,000 2013. The company’s major executives, including CEO Kim Woo-taek, came from Mediaplex (now known as Showbox) and Megabox.
Share Price (07/24/15, W) 14,000 In 2014, NEW saw sharp declines in revenue and operating profit due to weak film lineups. In 1H15, the company released only a few films and had no major hits until the Expected Return 14% late June release of Northern Limit Line, which has been delivering robust box office revenue. The number of film releases is anticipated to increase in 2H. OP (15F, Wbn) 7 Consensus OP (15F, Wbn) 8 Earnings improvement and business expansion to be confirmed in 2H
EPS Growth (15F, %) 89.9 From 2Q14 to 1Q15, NEW continued to record operating losses due to the poor Market EPS Growth (15F, %) 33.5 performance of the film business. However, Northern Limit Line has already exceeded P/E (15F, x) 23.8 the break-even point. As such, 2Q15 earnings are likely to swing to a profit. Market P/E (15F, x) 11.0 KOSDAQ 776.26 We also expect NEW’s full-year earnings to improve. Given last year’s disappointing audience numbers for the company’s films, it will see a low base of comparison this year. Market Cap (Wbn) 192 Furthermore, in 2H, the company will likely release double the number of films released Shares Outstanding (mn) 27 in 1H. Highly anticipated films slated for release in 2H include Beauty Inside (starring Free Float (%) 60.5 Han hyo-joo) and The Great Tiger (starring Choi Min-sik). Foreign Ownership (%) 13.4 Beta (12M) 1.96 In addition, NEW has been expanding its businesses, extending film-oriented content to 52-Week Low 8,664 the drama space while advancing into the Chinese market. The company’s subsidiaries 52-Week High 15,376 include MUSCI&NEW (music), Contents Panda (film copyright distribution),
(%) 1M 6M 12M SHOW&NEW (live concerts), and SPORTS&NEW (sports marketing). Absolute -5.1 24.5 0.0 In 2H, NEW is expected to establish a joint venture with Huace Media, which became the Relative -8.7 -5.5 0.0 company’s second-largest shareholder in October 2014. The joint venture will likely be
460 NEW KOSDAQ focusing on distributing or remaking Korean films or dramas.
360 Initiate coverage with Trading Buy and TP of W16,000 260 We initiate our coverage on NEW with a Trading Buy rating and target price of 160 W16,000. Expectations of earnings improvement and business expansion in 2015 appear
60 already to have been priced in to some degree. We will review our rating based on 1) the 7.14 11.14 3.15 7.15 performance of the 2H lineup and 2) progress in the Chinese business going forward.
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) - 122 54 75 81 82 OP (Wbn) - 20 6 7 7 7 OP margin (%) - 16.4 11.1 9.3 8.6 8.5 NP (Wbn) - 12 4 8 8 8 EPS (W) - 1,188 309 588 612 588 ROE (%) - 46.6 5.6 6.2 6.1 5.5 P/E (x) - - 29.2 23.8 22.9 23.8 P/B (x) - - 1.0 1.4 1.4 1.3 Note: All figures are based on non-consolidated K-IFRS; As the shares are currently trading ex-rights, total market cap has been reduced by half (newly issued shares to be listed on Aug. 18) Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 37 July 27, 2015 Film/Broadcast Content
Earnings outlook and valuation
As NEW is an independent film distributor that lacks its own theaters, its earnings hinge mainly on the success of its films. In 2013, the company recorded solid earnings thanks to the box office hits Miracle in Cell No. 7 and New World. Earnings fell sharply in 2014 compared to 2013, but were still higher than in 2012. For 2015, we expect earnings to improve YoY thanks to 1) the low base of comparison, 2) a solid film lineup, and 3) the start of drama revenue generation.
We initiate our coverage on NEW with a Trading Buy rating and target price of W16,000. We derived our target price based on the P/S ratio, as: 1) the company is currently in the early stages of business growth; and 2) its earnings are volatile. New shares arising from the recently announced bonus issue will be listed on August 18th. Since ex-rights have already occurred, we calculated our target prices after reflecting the bonus issue. We believe domestic earnings improvement and the Chinese business expansion will determine share performance going forward.
Table 23. Earnings trend and forecast (Wbn, %) 2012 2013 2014 2015F 2016F Revenue 43 122 54 75 81 Film 43 118 49 65 70 Domestic – Theater 43 104 38 51 53 Domestic – IP 0 14 11 10 11 Exports 0 0 1 3 6 Performance - 4 5 - - Other 0 0 0 11 11 OP 5 20 6 7 7 OP margin 12.2 16.2 10.2 8.7 8.6 Net profit 5 12 4 8 8 Net margin 11.8 9.9 7.8 10.7 10.3 YoY Revenue 182.6 -55.4 38.4 7.1 Film 174.9 -58.4 31.0 8.3 Performance 34.5 -100.0 0.0 Other -12.0 74.9 4049.8 0.0 OP 276.8 -72.0 18.7 5.3 Net profit 135.5 -64.8 90.4 3.3 Major assumptions Number of admissions 23,304 39,005 15,990 17,403 18,040 The Grand Miracle in Cell Northern Limit Pandora (Co- The Attorney, Major titles Heist, No. 7, Line, production Haemoo All About My New World The Great with China) Note: Based on non-consolidated IFRS; Performance business spun off after establishment of SHOW&NEW; Revenue of individual business units is non-consolidated basis Source: Company data, FSS, KDB Daewoo Securities Research estimates
Table 24. Calculation of target price Category Valuation Notes Operating value (Wbn) 331 2015F revenue P/S (x) Film investment and distribution 75 4.4 331 P/S as of end of 2014 Investment asset value (Wbn) 21 Unlisted stock 10 Book value as of end of 1Q15 Investment in associated firms 11 Book value as of end of 1Q15 Total asset value (Wbn) 353 Net debt (Wbn) -84 Net asset value (Wbn) 436 Number of shares outstanding Based on date after Aug. 18 27,406 (‘000 shares) (1:1 bonus issues) Target price (W) 16,000 Rounded Note: In view of the high earnings volatility of the film distribution business, we used the price-to-sales ratio in calculating our target price; Profit growth expected to turn positive this year; Our target price is based on the number of shares after the bonus issues, to be listed on Aug 18th; as the shares are currently trading ex-rights Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 38 July 27, 2015 Film/Broadcast Content
Corporate overview and variables
NEW engages in various entertainment businesses via its subsidiaries. The company entered the film distribution business in 2008 and the film investment business in 2009. In 2013, the company emerged as the largest distributor of Korean films. Its subsidiaries include MUSCI&NEW (music; acquired in 2012), Contents Panda (film copyright distribution; established in 2013), SHOW&NEW (live concerts in 2014), and SPORTS&NEW (sports marketing; established in 2015).
The film business takes the lion’s share of the company’s revenue and cash flow. Its tentpole films have included controversial movies that caused sensations, including Miracle in Cell No. 7, The Attorney, and Northern Limit Line. Beauty Inside, to be released in August, is a romantic comedy about a man who wakes up every day in a different body; 20 actors were cast to play one character. Of note, the company’s 2H film releases should more than double compared to 1H.
The company has been conducting Chinese businesses through its partnership with Huace Media, which became its second-largest shareholder by investing W53.6bn in October 2014. The company is expected to establish a joint venture with Huace Media in 2H, which will likely focus on distributing or remaking Korean films or dramas as well as co-investment and co-production.
Table 25. Major Korean film lineup for 2015 Release date Title Director Main cast Jan. 14 Chronicle of a Blood Merchant Ha Jung-woo Ha Jung-woo , Ha Ji-won Mar. 5 Granny’s Got Talent Shin Han-sol Kim Soo-mi, Jung Man-sik Mar. 25 Twenty Lee Byung-hun Kim Woo-bin, Kang Ha-neul Jun. 24 Northern Limit Line Kim Hak-soon Jin Koo, Kim Moo-yeol Aug. 20 Beauty Inside Baek Jong-yul Han Hyo-joo, Kim Joo-hyuk Sim Eun-kyung, Yoon Je- 2H Waiting For You Mo Heung-jin moon Jung Jae-young, Park Bo- 2H You Sound Like Passion Jung Gi-hoon young 2H The Phone (Title not finalized) Kim Bong-joo Son Hyun-joo, Uhm Ji-won 2H To Busan Yeon Sang-ho Gong Yu, Ma Dong-seok Ko Soo, Seol Gyung-goo, 2H Lucid dream Kim Joon-seong Kang Hye-jung 2H The Great Tiger Park Hoon-jung Choi Min-sik, Jung Man-sik Descendates of the Sun Lee Eung-bok Year-end Song Hye-kyo, Song Jung-ki (KBS drama) (Writer: Kim Eun-suk) Notes: As of Jul. 2015; Release dates subject to change Source: KOFIC, company data, KDB Daewoo Securities Research
Figure 25. Business plan with Huace Media
Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 39 July 27, 2015 Film/Broadcast Content
Next Entertainment World (160550 KQ/Trading Buy/TP: W16,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F12/17F (Wbn) 12/14 12/15F 12/16F12/17F Revenue 54 75 8182 Current Assets 149 162 172 181 Cost of Sales 43 62 67 67 Cash and Cash Equivalents 104 101 106 113 Gross Profit 11 13 14 15 AR & Other Receivables 6 8 8 9 SG&A Expenses 6 7 8 8 Inventories 0 0 00 Operating Profit (Adj) 6 7 7 7 Other Current Assets 39 53 58 59 Operating Profit 6 7 7 7 Non-Current Assets 25 33 36 36 Non-Operating Profit 3 3 3 3 Investments in Associates 9 13 14 14 Net Financial Income 0 0 0 0 Property, Plant and Equipment 1 1 0 0 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 1 1 1 1 Pretax Profit 9 10 10 10 Total Assets 174 195 208 216 Income Tax 4 2 2 2 Current Liabilities 48 62 66 66 Profit from Continuing Operations 4 8 8 8 AP & Other Payables 6 9 9 9 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 12 12 12 12 Net Profit 4 8 8 8 Other Current Liabilities 30 41 45 45 Controlling Interests 4 8 8 8 Non-Current Liabilities 1 1 1 1 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 1 1 1 1 Total Comprehensive Profit 4 8 8 8 Other Non-Current Liabilities 0 0 0 0 Controlling Interests 4 8 8 8 Total Liabilities 49 62 66 67 Non-Controlling Interests 0 0 0 0 Controlling Interests 125 133 141 149 EBITDA 6 7 77 Capital Stock 7 7 77 FCF (Free Cash Flow) -8 1 5 5 Capital Surplus 93 93 93 93 EBITDA Margin (%) 11.1 9.3 8.6 8.5 Retained Earnings 24 32 41 49 Operating Profit Margin (%) 11.1 9.3 8.6 8.5 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 7.4 10.7 9.9 9.8 Stockholders' Equity 125 133 141 149
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities -7 1 5 5 P/E (x) 29.2 23.8 22.9 23.8 Net Profit 4 8 8 8 P/CF (x) 22.7 26.6 25.2 26.6 Non-Cash Income and Expense 1 -1 -1 -1 P/B (x) 1.0 1.4 1.4 1.3 Depreciation 0 0 00 EV/EBITDA (x) 25.7 15.3 14.013.5 Amortization 0 0 00 EPS (W) 309 588 612588 Others 1 -1 -1-1 CFPS (W) 397 526 555526 Chg in Working Capital -6 -5 -2 0 BPS (W) 9,109 9,696 10,308 10,896 Chg in AR & Other Receivables 21 -2 -1 0 DPS (W) 0 0 0 0 Chg in Inventories 0 0 0 0 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -18 0 0 0 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -7 -2 -2 -2 Revenue Growth (%) -55.7 38.9 8.0 1.2 Cash Flows from Inv Activities -2 -3 1 2 EBITDA Growth (%) -70.0 16.7 0.0 0.0 Chg in PP&E -1 0 0 0 Operating Profit Growth (%) -70.0 16.7 0.0 0.0 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) -74.0 90.3 4.1 -3.9 Chg in Financial Assets -4 -5 -2 0 Accounts Receivable Turnover (x) 3.4 11.2 10.0 9.7 Others 3 2 32 Inventory Turnover (x) 0.0 0.0 0.0 0.0 Cash Flows from Fin Activities 81 0 0 0 Accounts Payable Turnover (x) 10.1 45.1 40.5 39.1 Chg in Financial Liabilities - - - - ROA (%) 3.0 4.4 4.2 3.8 Chg in Equity 94 0 0 0 ROE (%) 5.6 6.2 6.1 5.5 Dividends Paid 0 0 0 0 ROIC (%) 41.2 46.0 41.4 38.6 Others - - -- Liability to Equity Ratio (%) 39.1 47.0 47.0 44.9 Increase (Decrease) in Cash 72 -4 5 8 Current Ratio (%) 309.8 262.7 262.0 272.2 Beginning Balance 33 104 101 106 Net Debt to Equity Ratio (%) -73.3 -66.0 -65.7 -67.3 Ending Balance 104 101 106 113 Interest Coverage Ratio (x) 12.5 0.0 0.0 0.0 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 40 July 27, 2015 Film/Broadcast Content
APPENDIX 1
Important Disclosures & Disclaimers 2-Year Rating and Target Price History
Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price CJ E&M(130960) 07/26/2015 Buy 100,000 Jcontentree(036420) 07/26/2015 Buy 6,000 05/11/2015 Buy 80,000 05/28/2015 Trading Buy 4,700 03/29/2015 Buy 70,000 11/26/2014 Buy 4,700 02/06/2015 Buy 51,000 Showbox Corp.(086980) 07/26/2015 Trading Buy 10,000 11/26/2014 Buy 48,000 NEW(160550) 07/26/2015 Trading Buy 16,000 No Coverage
(W) CJ E&M (W) Jcontentree (W) Showbox Corp. (W) NEW 120,000 8,000 12,000 40,000
100,000 10,000 6,000 30,000 80,000 8,000
60,000 4,000 6,000 20,000
40,000 4,000 2,000 10,000 20,000 2,000
0 0 0 0 Jul 13 Jul 14 Jul 15 Jul 13 Jul 14 Jul 15 Jul 13 Jul 14 Jul 15 Jul 13 Jul 14 Jul 15
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 analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.
Equity Ratings Distribution Buy Trading Buy Hold Sell 72.36% 13.57% 14.07% 0.00% * Based on recommendations in the last 12-months (as of June 30, 2015)
Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.
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 Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. 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
KDB Daewoo Securities Research 41 July 27, 2015 Film/Broadcast Content
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.
Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.
KDB Daewoo Securities International Network
Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 320 Park Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 31st Floor
Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong, China United States Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower 42 Six Battery Road #11-01 7th Floor, Yusen Building 25 Old Broad St. Singapore, 049909 2-3-2 Marunouchi, Chiyoda-ku London EC2N 1HQ Tokyo 100-0005 United Kingdom Japan Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 81-3- 3211-5511 Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 2401A, 24th Floor, East Tower, Twin Towers Room 38T31, 38F SWFC Suite 2103, Saigon Trade Center B-12 Jianguomenwai Avenue 100 Century Avenue 37 Ton Duc Thang St,
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