CJ E&M (130960)
Brisk Growth Across-the-Board Highlighted
Danny Lee Analyst Internet, Game, Media, Leisure April 29, 2018 82-2-6114-2960 [email protected]
1Q18 results surpass consensus CJ E&M’s 1Q18 OR reached KRW476.5bn (down 2.8% QoQ, up 20.9% YoY) and OP KRW34.5bn (up 897% QoQ, up 47.5% YoY). OR and OP exceeded market consensus by 9.8% and 16.6%, respectively. Backed by significant OR growth across the board, CJ E&M attained positive operating results. Backed by robust TV ad sales (up 10.5%) and growth in copyright sales, broadcasting OP came in at KRW24.6bn (OP margin of 7.2%) and led company-wide earnings growth. In the movie segment, 1Q18 OP reached KRW5.2bn (up 169.9% YoY), with sluggish box office revenues being offset by increased secondary copyright sales and other sales. Total distribution sales stemming from proprietary IPs (e.g., dramas, movies, and music) boosted overall profitability.
Business diversification to accelerate CJ E&M pledged to fortify a variety of businesses on the back of its competitive content backed by competitive content (e.g., production, ads, distribution). Earnings are forecast to expand precipitously, bolstered by the expansion of Studio Dragon’s domestic tent-pole line-ups and rising overseas content sales. As for the digital business, CJ E&M aims to establish a comprehensive platform in a tie-up with CJ O Shopping to create synergies and expand digital distribution/content businesses. If a merger with CJ O Shopping is factored out, we project CJ E&M’s 2018 OR at KRW2.0tr (up 15% YoY) and OP at KRW118bn (up 86.9% YoY).
Keep Buy and raise target price by We maintain Buy on CJ E&M and lift the target price by 6.5% to KRW115,000. The upward 6.5% to KRW115,000 revision stemmed from: 1) upward adjustments to earnings forecasts and 2) increased values of the company’s stakes in Studio Dragon and Netmarble. CJ E&M’s market cap represents only 81.9% of the combined value (KRW4.4tr) of its equity stakes in listed companies, which we believe hints at the stock’s downward price rigidity.
Buy maintain Trading Data Performance Free float 56.7% (%) 1M 3M 6M 12M Target Price (raised) KRW115,000 Avg T/O Val (3M, KRWbn) 16.9 Absolute 0.3 1.3 10.1 12.4 Upside/Downside 24.3% Foreign ownership 25.1% Relative -2.8 4.4 -14.3 -20.0 Current price (Apr 27) KRW92,500 Major shareholders CJ Corp and 5 others 42.9%
Consensus Target Price KRW115,038 Wellington Management Hong Kong Limited
Market cap USD3.3bn and 1 others 5.1%
Forecast earnings & valuation Relative performance (LHS) Stock price (RHS) FY-end 2017A 2018E 2019E 2020E % KRW OR (KRWbn) 1,750 2,013 2,253 2,530 5 100,000 OP (KRWbn) 63 118 132 161 0 -5 90,000 NP to parent (KRWbn) 429 142 172 205 -10 EPS (KRW) 11,065 3,661 4,440 5,285 80,000 -15 EPS Growth (%) 589.4 -66.9 21.3 19.0 -20 PER (x) 6.4 25.3 20.8 17.5 70,000 -25 EV/EBITDA (x) 7.7 9.1 12.1 12.7 -30 60,000 PBR (x) 1.3 1.6 1.5 1.4 17.4 17.7 17.10 18.1 18.4 ROE (%) 23.6 6.6 7.5 8.2 Div. Yield (%) NA 0.3 0.4 0.5
Source: CJ E&M, KB Securities estimates
CJ E&M(130960) KB RESEARCH
CJ E&M is forecast to unveil a mid/long-term blueprint and expected synergies at a joint investor’s day meeting with CJ O Shopping on May 9, which heralds expectations over the company’s non-content business growth as well. We present CJ E&M as our industry top pick.
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CJ E&M(130960) KB RESEARCH
Investment opinion and risks
Base-case Scenario: Catalysts
1) Studio Dragon, Netmarble’s stock prices
Bull-case Scenario KRW146,000 (2018E PER of 40x) remain unchanged
2) Merger with CJ O Shopping stabilize
Base-case Scenario (Target Price) KRW115,000 (2018E PER of 31x) Bull-case Scenario: Upside risks 1) Studio Dragon, Netmarble’s stock prices rise
Current Price KRW92,500 2) Maximized effects of merger with CJ O Shopping
Bear-case Scenario KRW80,000 (2018E PER of 22x) Bear-case Scenario: Downside risks
1) Studio Dragon, Netmarble’s stock prices fall
2) Lackluster effects of merger with CJ O Shopping
Adjusted earnings estimates Valuation and target price calculation (KRWbn, %) Before After Change 2018E 2019E 2018E 2019E 2018E 2019E 1) Valuation Method: OR 1,982.1 2,219.9 2,013.1 2,253.1 1.6 1.5 Sum-of-the-Parts Valuation OP 108.4 120.6 118.0 131.6 8.9 9.1 NP to parent 173.1 198.0 141.8 172.0 -18.1 -13.2 2) Target price calculation: Source: KB Securities estimates Operating value of KRW1.4tr Netmarble stake value KRW1.8tr Difference vs. Consensus Studio Dragon stake value KRW1.2tr
(KRWbn, %) KB Securities Consensus Contrast 3) Upside ~ downside of target price: 2018E 2019E 2018E 2019E 2018E 2019E KRW146,000 ~ KRW80,000 OR 2,013.1 2,253.1 1,945.1 2,121.3 3.5 6.2
OP 118.0 131.6 111.9 131.9 5.5 -0.3 4) Valuation upon arriving at target price: NP to parent 141.8 172.0 140.7 163.1 0.7 5.4 PER 31x Source: FnGuide, KB Securities estimates
OR composition (%): 2018E basis Earnings sensitivity analysis (%) EPS Change 2018E 2019E 2.3% 1) 1% rise in FX rate +0.6 +0.6 12.1% Media 2) 1%p rise in GDP +1.1 +1.1
10.8% Movies
Music
74.8% Musical
Source: Company data, KB Securities estimates
PEER group comparison (KRWbn, X, %) Mkt Cap PER PBR EV/EBITDA ROE Dividend Yield 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E CBS 20,329 9.6 8.4 5.6 4.1 8.7 8.1 73.5 55.5 1.6 1.6 Netflix 144,783 95.2 61.6 28.4 20.3 67.9 44.2 26.2 28.4 0.0 0.0 Walt Disney 159,408 14.0 12.9 3.4 3.1 9.8 9.9 24.6 23.4 1.7 1.9 Time Warner 79,066 12.0 11.6 2.1 1.8 10.1 9.6 19.6 17.8 1.8 1.8 Source: Bloomberg consensus, KB Securities
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CJ E&M(130960) KB RESEARCH
Table 1. CJ E&M's 1Q18 consolidated earnings review
(KRWon, %, %p) 1Q18P 4Q17 QoQ 1Q17 YoY KB estimates Diff. Consensus Diff.
OR 476.5 490.4 (2.8) 394.2 20.9 447.0 6.6 434.1 9.8
OP 34.5 3.5 897.0 23.4 47.5 25.0 37.8 29.6 16.6
OP margin 7.2 0.7 6.5 5.9 1.3 5.6 1.6 6.8 0.4
NP to parent 32.4 (22.8) TB 33.2 (2.2) 34.7 (6.5) 31.6 2.6
NP margin 6.8 (4.6) 11.4 8.4 (1.6) 7.8 (0.9) 7.3 (0.5)
Source: FnGuide, KB Securities estimates
Table 2. CJ E&M's consolidated earnings trend and estimates
(KRWbn) 1Q17 2Q17 3Q17 4Q17P 1Q18E 2Q18E 3Q18E 4Q18E 2016 2017P 2018E 2019E
OR 394.2 425.4 440.1 490.4 476.5 496.5 487.5 552.6 1,538.4 1,750.1 2,013.1 2,253.1
Media 285.7 332.1 317.2 359.1 340.4 385.0 367.3 413.2 1,128.4 1,294.2 1,505.9 1,714.8
Pictures 56.5 44.5 47.6 50.0 65.6 47.7 50.7 53.5 189.6 198.7 217.4 231.6
Music 47.4 47.1 66.3 69.8 56.2 54.2 59.7 73.3 199.4 230.7 243.4 255.6
Musical 4.6 1.6 8.9 11.4 14.4 9.6 9.8 12.6 21.0 26.6 46.4 51.1
OP 23.4 23.6 12.7 3.5 34.5 32.0 23.6 28.0 28.0 63.2 118.0 131.6
OP margin (%) 5.9 5.6 2.9 0.7 7.2 6.4 4.8 5.1 1.8 3.6 5.9 5.8
EBT 45.2 537.2 23.9 (14.0) 44.8 44.7 49.3 57.5 67.5 592.3 196.3 238.2
EBT margin (%) 11.5 126.3 5.4 (2.9) 9.4 9.0 10.1 10.4 4.4 33.8 9.8 10.6
NP to parent 33.2 404.9 13.3 (22.8) 32.4 32.3 35.6 41.5 62.2 428.6 141.8 172.0
NP margin (%) 8.4 95.2 3.0 (4.6) 6.8 6.5 7.3 7.5 4.0 24.5 7.0 7.6
Growth Rate (YoY %)
OR 25.7 19.1 16.2 0.3 20.9 16.7 10.8 12.7 14.2 13.8 15.0 11.9
Media 26.8 23.7 18.1 (1.9) 19.1 15.9 15.8 15.1 24.1 14.7 16.4 13.9
Pictures 40.2 9.6 (15.4) (4.5) 16.0 7.1 6.6 6.9 (20.5) 4.8 9.4 6.5
Music 6.4 (0.2) 43.5 13.7 18.4 15.0 (10.0) 5.0 10.5 16.7 12.7 5.8
Musical 39.8 50.7 15.0 28.2 214.5 500.0 10.0 10.0 36.8 26.3 74.8 10.0
OP 162.2 67.2 316.3 83.5 47.5 35.5 85.2 710.8 (46.9) 125.8 86.9 11.5
EBT 208.6 1,027.9 152.7 LC (0.9) (91.7) 106.3 TB 13.8 777.1 (66.9) 21.4
NP to parent 152.0 837.5 570.1 TR (2.2) (92.0) 166.7 TB 14.4 589.6 (66.9) 21.3
Source: Company data, KB Securities estimates
Table 3. Comparison of adjusted earnings estimates
2018E 2019E (KRWbn, %, %p) Changed Previous Diff. Cons. Diff. Changed Previous Diff. Cons. Diff.
OR 2,013.1 1,982.1 1.6 1,945.1 3.5 2,253.1 2,219.9 1.5 2,121.3 6.2
OP 118.0 108.4 8.9 111.9 5.5 131.6 120.6 9.1 131.9 (0.3)
OP margin 5.9 5.5 0.4 5.8 0.1 5.8 5.4 0.4 6.2 (0.4)
NP to parent 141.8 173.1 (18.1) 140.7 0.7 172.0 198.0 (13.2) 163.1 5.4
NP margin 7.0 8.7 (1.7) 7.2 (0.2) 7.6 8.9 (1.3) 7.7 (0.1)
Source: Fnguide, KB Securities estimates
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CJ E&M(130960) KB RESEARCH
Table 4. CJ E&M's sum-of-the-parts valuation Categories Value Note
Operating fair value (KRWbn) 1,391.5
2018E NOPLAT 54.8 Studio Dragon's earnings are excluded
Target PER (X) 25.4 Average PER of global contents companies
Non-operating fair value (KRWbn) 3,063.3
Value of Netmarble stake (KRWbn) 1,862.7 30% discount is applied
market cap (KRWbn) 12,084.4 Based on last closing price
CJ E&M's ownership (%) 22.0
Value of Studio Dragon stake (KRWbn) 1,200.6 30% discount is applied
market cap (KRWbn) 2,405.5 Based on last closing price
CJ E&M's ownership (%) 71.3
Target market cap (KRWbn) 4,454.8
# of issued stocks ('000) 38,732.1 Fully diluted basis
Target price (KRW) 115,000
Current price 92,500
Upside 24.3
Source: KB Securities estimates
Table 5. CJ E&M's major TV program and movie line-up
Type Title Release date note
Children of a lesser god 3/3~4/22 Sat/Sun Drama on OCN
Live 3/10~ Sat/Sun Drama on tvN
My Mister 3/21~ Wed/Thu Drama on tvN
Café Amor 4/1~ Variety show on tvN
The Solitary stay 4/6~ Variety show on tvN
Mix & Mash Saturdays 4/7~ Variety show on tvN Media Mistress 4/28~ Sat/Sun Drama on OCN
The call 5/4~ Variety show on Mnet, tvN
Lawless Lawyer 5/12~ Sat/Sun Drama on tvN
About Time 5/21~ Mon/Tue Drama on tvN
What's Wrong with Secretary kim June Wed/Thu Drama on tvN
Produce 48 June Variety show on Mnet
Seven Years of Night 3/28 - Pictures The Accidental Detective 2: In action June -
CJ E&M lables - Highschool rappers 2, VIXX, eric nam
Music∙ OST - My mister, children of lesser god Musical Concert - Wanna one, Davichi, JBJ, KCON2018
Musical - Man of La Mancha, 42nd Street
Source: Company data, KB Securities estimates
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CJ E&M(130960) KB RESEARCH
Fig 1. 12M fwd. PER band chart Avg. PER of global contents companies stands at PER of 25x KRW Stock price 10.0X 20.0X 30.0X 40.0X 50.0X 120,000
100,000
80,000
60,000
40,000 12mon fwd. PER 20,000 23.6X
0 2011 2012 2013 2014 2015 2016 2017 2018
Source: WiseFn, KB Securities estimates
Fig 2. 12M fwd. PBR band chart
KRW Stock price 0.5X 1.0X 1.5X 2.0X 2.5X 120,000
100,000
80,000
60,000
40,000 12mon fwd. PBR 1.6X
20,000
0 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: WiseFn, KB Securities estimates
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CJ E&M(130960) KB RESEARCH
Profit & Loss Statement of financial position (KRWbn) 2016A 2017A 2018E 2019E 2020E (KRWbn) 2016A 2017A 2018E 2019E 2020E (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C)
Operating revenue 1,538 1,750 2,013 2,253 2,530 Total assets 2,793 3,759 3,913 4,087 4,293 Cost of sales 1,190 1,310 1,484 1,673 1,879 Current assets 996 1,280 1,675 1,959 2,214 Gross profit 349 440 530 580 652 Cash and cash equivalents 81 125 667 930 1,164
SG&A expenses 321 377 411 449 491 Current financial assets 91 248 258 269 279 Operating profit 28 63 118 132 161 Trade receivables 498 519 529 539 549 EBITDA 428 422 386 268 237 Inventories 5 6 6 6 6
Non-operating accounts 40 529 78 107 123 Other current assets 321 215 215 216 216 Interest income 4 3 6 6 6 Non-current assets 1,797 2,479 2,238 2,128 2,079 Interest expenses 12 15 18 18 18 Investment assets 661 1,230 1,233 1,236 1,239
Profit on equity method 81 577 99 142 163 Property, plant and equipment 276 313 312 311 309 Net other non-operating income -24 -27 -14 -15 -15 Intangible assets 724 783 541 429 378 Profit before tax 68 592 196 238 284 Other non-current assets 78 93 93 93 93
Income tax expense 7 170 49 60 71 Total liabilities 1,177 1,510 1,517 1,524 1,531 Net profit 61 422 147 179 213 Current liabilities 937 824 829 834 839 NP to parent 62 429 142 172 205 Trade payables 128 145 150 155 160
Adj. net profit 62 429 142 172 205 Short-term financial liabilities 370 237 237 237 237
Other current liabilities 438 441 441 441 441 Operating Statistics & Ratios Non-current liabilities 240 687 689 691 693
(%) 2016A 2017A 2018E 2019E 2020E Non-current financial liabilities 172 451 453 455 457
OR growth 14.2 13.8 15.0 11.9 12.3 Other non-current liabilities 11 8 8 8 8
OP growth -46.9 125.8 86.9 11.4 22.3 Total equity 1,616 2,249 2,396 2,563 2,762 EBITDA growth 14.7 -1.4 -8.5 -30.5 -11.5 Issued capital 194 194 194 194 194 NP growth of parent 14.4 589.6 -66.9 21.3 19.1 Share premium 973 973 973 973 973
GP margin 22.7 25.2 26.3 25.8 25.8 Other equity interest 60 176 176 176 176 OP margin 1.8 3.6 5.9 5.8 6.4 Accumulated other comprehensive income -100 -92 -92 -92 -92 EBITDA margin 27.8 24.1 19.2 11.9 9.4 Retained earnings 420 835 977 1,138 1,328
EBT margin 4.4 33.8 9.8 10.6 11.2 Equity attributable to owners of parent 1,546 2,086 2,227 2,388 2,579 NP margin 4.0 24.1 7.3 7.9 8.4 Non-controlling Interests 69 163 169 175 183
Cash Flow Main Ratio (KRWbn) 2016A 2017A 2018E 2019E 2020E (X, %, KRW) 2016A 2017A 2018E 2019E 2020E
Cash flow from operating activities 259 239 -4 -163 -214 Multiples
Net profit 61 422 147 179 213 PER 44.2 6.4 25.3 20.8 17.5 Depreciation & amortization 400 359 268 137 77 PBR 1.8 1.3 1.6 1.5 1.4
Other non-cash adjustments -35 -346 -50 -83 -92 PSR 1.8 1.6 1.8 1.6 1.4 Investments in working capital -167 -170 -320 -336 -340 EV/EBITDA 7.4 7.7 9.1 12.1 12.7 Decrease(Increase) in Receivables -76 -43 -10 -10 -10 EV/EBIT 113.9 51.1 29.8 24.7 18.8 Decrease(Increase) in Inventories -1 -5 0 0 0 Dividend yield, ordinary (%) 0.3 NA 0.3 0.4 0.5
Increase(Decrease) in Payables 1 9 5 5 5 EPS 1,605 11,065 3,661 4,440 5,285 Other operating cash flow 0 -26 -49 -60 -71 BPS 39,922 53,849 57,510 61,650 66,573 Cash flow from investing activities -534 -551 130 -37 -38 SPS 39,720 45,185 51,976 58,171 65,329
Capital expenditure -212 -45 -20 -20 -20 DPS (Annual, Ordnry.) 200 0 300 364 433 Investments in intangibles -358 -323 -4 -4 -4 Cash dividends payout ratio (%) 12.4 0.0 8.2 8.2 8.2 Changes in investment assets -88 -6 -3 -3 -3 Operating performance
Other investment cash flow -101 -33 168 0 0 ROE 4.0 23.6 6.6 7.5 8.2 Cash flow from financing activities 306 358 416 463 486 ROA 2.4 12.9 3.8 4.5 5.1 Proceeds from (repayments of) debt 218 156 2 2 2 ROIC 2.8 1.6 7.3 9.4 12.4
Changes in equity 0 0 0 0 0 Financial structure (%) Dividends paid -8 -8 0 -12 -14 Total liab./equity 72.9 67.2 63.3 59.5 55.4 Other financing cash flow 96 210 414 473 498 Net debt/equity 22.9 14.1 Net Cash Net Cash Net Cash
Other cash flow 3 -3 0 0 0 Current Ratio 1.1 1.6 2.0 2.4 2.6 Increase/decrease in cash 34 43 542 263 234 Interest coverage (x) 2.3 4.2 6.6 7.3 9.0 Cash and cash equivalents at FYE 81 125 667 930 1,164 Activity ratios 0 0 0 0 0
Free cash flow 47 194 -24 -183 -234 Asset turnover (x) 0.6 0.5 0.5 0.6 0.6 Net cash flow -422 54 550 271 243 Receivables turnover (x) 3.4 3.4 3.8 4.2 4.7 Net cash (net debt) -370 -316 234 506 749 Inventory turnover (x) 357.1 320.9 324.4 363.0 407.7
Source: CJ E&M, KB Securities estimates
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CJ E&M(130960) KB RESEARCH
Disclosures Rating and Target Price Changes (Share price ━, Target Price ━)
KRW CJ E&M CJ E&M (130960) Date R ating Target Price Differential (%) 140,000 (KRW) Av g. Max / Min 16-11-10 Buy 86,000 -27.51 -17.56 110,000 17-02-09 Buy 115,000 -31.03 -23.22 17-08-09 Buy 98,000 -17.55 -0.71 80,000 17-11-26 Buy 115,000 -19.97 -14.78 18-02-07 Buy 108,000 -16.26 -11.11 50,000 16.5 16.9 17.1 17.5 17.9 18.1 18.5 18-04-29 Buy 115,000
KB Securities is the issuer and liquidity provider of ELW that has [CJ E&M] as an Proportion of investment rating (as of March 31, 2018) underlying asset as of this date of publication. Buy Hold Sell KB Securities has not provided in advance the material contained in this report to any 72.9 27.1 - institutional investor or third party. The analyst(s), who wrote this report, does not have any financial interest in the company(ies) covered herein. The author(s) of this report confirms that the material contained herein correctly represents his/her/their opinion * Note: Based on reports presented with investment ratings over the past one year and that it has been prepared faithfully without any undue influence or intervention.
Classification and Standards for Investment Rating All KB Securities Research is available via the following electronic databases: Bloomberg, Thomson Reuters, FactSet. Contact your KB Securities sales representative for access. Investment Rating for Company (based on estimation of six-month absolute returns) This report has been prepared for informational purposes only, and does not constitute Buy: +15% or beyond Hold: Between 15% and -15% Sell: -15% or beyond an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources KB Securities considers reliable. However, KB Securities does not guarantee that the Note: KB Securities’s classification of investment ratings has shifted from four stages information and data are accurate or complete, and, therefore, this report is subject to (Strong BUY, BUY, Marketperform, Underperform) to three stages (Buy, Hold, Sell) change without prior notice. Individual investments should be made based on each based on Korean reports since February 23, 2017. client’s own judgment and we expressly disclaim all liability for any investment decisions
and any results thereof. This report is a copyrighted material of KB Securities and, thus, it Investment Rating for Industry may not be reproduced, distributed, or modified without the prior consent of KB (based on estimation of six-month absolute returns) Securities. This report is not prepared for academic purposes and any third party wishing Positive: Neutral: Negative: to quote from it for academic publications should receive the prior consent of KB To outperform market To match market performance To underperform market Securities.
Notes: The industry rating system of KB Securities has shifted from (Overweight, Neutral, Underweight) to (Positive, Neutral, Negative) as of Jun 28, 2017
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