August 10, 2012 Company Report

CJ E&M (130960 KQ) Media

Broadcasting operations: The lone bright spot Daewoo Securities Co., Ltd.

Jee-hyun Moon +822-768-3615 Trim TP to W28,000; Maintain Trading Buy call [email protected] We maintain our Trading Buy call on CJ E&M but trim our target price to W28,000 (from

W30,000). Our target price cut is mainly due to the fact that we lowered our 2012 EPS estimate by 4.9% to reflect the companyÊs 2Q results.

CJ E&M has made massive investments since 2H11 to enhance the competitiveness of its programs. And, in 2Q, the companyÊs broadcasting operations delivered revenue growth on the back of this improved competitiveness. However, all of the companyÊs non- broadcasting operations incurred operating losses in the quarter. And the outlooks for these operations are likely to stay murky until the success of their content (e.g., games, Trading Buy (Maintain) movies) and expenses are confirmed. Target Price (12M, W) 28,000 Growth story of broadcasting operations unfolding Share Price (08/09/12, W) 24,150 Expected Return (%) 15.9 CJ E&MÊs consolidated revenues increased 2.6% YoY in 2Q. However, the companyÊs EPS Growth (12F, %) -30.6 consolidated operating profit plunged 72.9% YoY, affected by increased production Market EPS Growth (12F, %) 12.9 expenses and sluggish earnings at non-broadcasting operations. P/E (12F, x) 20.0 1) The broadcasting operationÊs 2Q revenues soared 20% YoY, making a 54% contribution Market P/E (12F, x) 10.3 to revenues. The unitÊs operating profit also leaped QoQ despite an increase in production KOSDAQ 474.05 costs. Because the division saw an increase in highly-rated programs (which command Market Cap (Wbn) 916 premium ad rates), advertising revenues rose. A GentlemanÊs Dignity, a drama produced Shares Outstanding (mn) 38 by CJ E&M, is being aired by a terrestrial broadcaster, and overseas program sales Avg Trading Volume (60D, '000) 302 expanded in 2Q. Avg Trading Value (60D, Wbn) 8 Dividend Yield (12F, %) 0.0 2) However, the companyÊs game and movie divisions saw plunges in revenues (down Free Float (%) 56.0 20% YoY and 40% YoY, respectively). Both units swung to negative in 2Q. The game unit 52-Week Low (W) 22,000 suffered a decline in revenues and an increase in expenses. And the movie unit saw a fall 52-Week High (W) 54,800 in ticket sales due to weak movie line-up and delays to the opening of a movie. Beta (12M, Daily Rate of Return) 1.03 Price Return Volatility (12M Daily, %, SD) 3.3 Earnings momentum to pick up in 4Q Foreign Ownership (%) 3.6 We expect CJ E&MÊs broadcasting operations to see earnings improvements in 2H. The Major Shareholder(s) company is scheduled to air the singing competition 4 starting on August CJ. et al (42.96%)

17th. We expect related ad revenues to expand by at least 10% (vs. the previous Price Performance seasonÊs). And an increasing number of the companyÊs programs produced using set (%) 1M 6M 12M seasons are seeing ad revenue growth. Absolute -6.9 -23.0 -35.3 The game unitÊs new releases are seeing delays. But we expect the unit to generate new Relative -12.6 -19.3 -43.1 revenues in 4Q. And all of the companyÊs units should see strong seasonality in 4Q. Thus, Key Business we expect CJ E&MÊs earnings momentum to rise until year-end. Dominant domestic cable TV program provider; Domestic paid content market leader

§ Share price Earnings & Valuation Metrics 130 KOSDAQ

FY Revenues OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 110

(Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 90

12/10 98 19 19.5 6 1,208 51 -35 1.9 28.6 1.7 10.1 70 12/11 1,143 70 6.1 57 1,745 361 -127 7.7 17.4 1.8 3.7 50 12/12F 1,439 36 2.5 46 1,211 572 170 3.9 20.0 1.0 1.6 30 12/13F 1,548 100 6.5 60 1,584 482 106 4.8 15.3 0.9 1.7 8/11 12/11 4/12 8/12 12/14F 1,664 124 7.4 77 2,019 473 89 5.8 12.0 0.8 1.6 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

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. August 10, 2012 CJ E&M

Table 1. Quarterly and annual earnings trends and forecasts (Wbn, %) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12P 3Q12F 4Q12F 2011 2012F 2013F Revenues 273 323 317 367 321 331 356 431 1,279 1,439 1,548 Broadcast 129 174 169 199 162 209 204 252 672 827 890 Game 76 67 55 60 60 54 56 68 258 237 265 Movie 31 45 54 62 62 26 51 60 191 198 208 Music/Performance/Online 38 36 39 46 37 43 46 52 158 177 185 Operating profit 15 35 13 14 -3 10 14 19 77 36 100 Broadcast 2 24 9 15 1 18 17 22 50 58 80 Game 13 8 4 3 1 -2 -1 -3 27 -5 16 Movie -1 3 1 1 -1 -5 2 3 5 -1 8 Music/Performance/Online 1 0 -1 -6 -3 -2 -2 -2 -5 -9 -6 OP margin 5.5 10.9 4.1 3.7 -1.0 2.9 3.9 4.4 6.0 2.5 6.5 Broadcast 1.8 13.8 5.2 7.6 0.3 8.5 8.4 8.9 7.5 7.0 9.0 Game 16.7 11.6 6.4 4.7 1.3 -3.0 -2.3 -3.9 10.4 -2.0 6.0 Movie -3.2 7.6 2.4 2.1 -2.1 -18.8 4.2 5.0 2.6 -0.5 4.0 Music/Performance/Online 2.9 0.3 -1.5 -12.5 -8.9 -4.2 -4.1 -3.7 -3.2 -5.0 -3.0 Net profit 3 33 11 11 -1 33 6 5 59 43 57 NP margin 1.2 10.3 3.5 3.0 -0.3 9.9 1.7 1.2 4.9 3.2 3.9 Revenue breakdown Broadcast 47.1 55.4 45.6 51.6 47.3 54.0 53.4 54.3 52.5 57.5 57.5 Game 27.9 23.9 23.7 22.0 27.7 20.8 17.3 16.4 20.1 16.5 17.1 Movie 13.9 9.6 17.2 10.1 11.3 13.9 17.0 16.9 15.0 13.7 13.4 Music/Performance/Online 11.1 11.1 13.4 16.2 13.7 11.3 12.3 12.4 12.4 12.3 11.9 OP breakdown Broadcast -34.2 40.7 2.0 75.9 15.3 68.0 67.7 111.9 65.4 133.7 81.1 Game 153.2 28.8 59.6 24.5 84.0 22.1 26.9 20.7 34.8 -10.9 16.1 Movie 8.9 28.8 30.3 -12.7 -6.7 9.6 10.0 9.6 6.5 -2.3 8.4 Music/Performance/Online -27.8 1.7 8.1 12.3 7.3 0.3 -4.6 -42.2 -6.6 -20.5 -5.6 YoY growth Revenue 18.1 24.5 10.1 15.6 17.4 2.6 12.4 17.5 16.8 12.5 7.6 Broadcast 19.8 21.4 28.3 20.8 25.7 20.0 20.3 26.4 22.5 23.1 7.6 Game 18.1 8.6 -20.2 -14.9 -21.2 -20.1 2.0 13.0 -2.8 -8.0 12.0 Movie -3.1 79.9 7.8 91.4 RR -43.1 -6.0 -3.5 37.7 3.2 5.1 Music/Performance/Online 47.1 26.0 0.5 -12.3 -1.6 17.9 17.8 13.6 10.9 12.0 4.2 Operating profit 89.8 198.1 -34.2 -36.3 TTR -72.9 7.8 40.1 26.6 -52.6 174.6 Broadcast TTB 400.0 2100.0 -6.2 -78.3 -25.8 94.2 49.0 169.9 15.3 38.4 Game 4.1 129.4 -70.3 -46.2 -93.7 TTR TTR TTR -17.8 TTR TTB Movie TTR 0.0 -78.3 -148.1 RR TTR 62.8 130.5 -32.4 TTR TTB Music/Performance/Online TTB -50.0 TTR TTR TTR RR RR RR TTR RR RR Net profit TTR -1.8 -45.7 -53.0 283.7 -27.6 33.4 Note: K-IFRS consolidated basis, 2011 net profit YoY growth is not marked due to lack of data of 2010 before merger Source: CJ E&M, KDB Daewoo Securities Research

Table 2. Earnings forecast revisions (Wbn, %) Previous Revised Diff. 12F 13F 12F 13F 12F 13F Revenues 1,424 1,540 1,439 1,548 1.1 0.5 Operating profit 42 99 36 100 -14.4 1.3 Net profit 45 64 43 57 -5.3 -11.1 EPS 1,273 1,771 1,211 1,584 -4.9 -10.6 OP margin 2.9 6.4 2.5 6.5 NP margin 3.4 4.4 3.2 3.9 Note: K-IFRS consolidated basis

Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 2 August 10, 2012 CJ E&M

Figure 1. TV ad market trend and forecast

(Wbn) 2,500 Terrestrial TV ad market Cable TV ad market

2,000

1,500

1,000

500

0 04 05 06 07 08 09 10 11 12F 13F

Source: Advertising Yearbook, KDB Daewoo Securities Research

Figure 2. CJ E&MÊs cable TV quarterly revenue trend

Broadcast revenues (L) (Wbn) to be released in August (%) 280 Superstar K's peak viewership rate (R) 28

Revenues have continuously improved, as viewership of the cable TV program, 210 Superstar K, reached the same level as 21 as terrestrial TV programs 18.1% 13.4% 14.0% 140 14 12.7%

70 7

0 0 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12F

Note: Superstar K2 for Jul 23~Oct 22 2010, Superstar K3 for Aug 12~Nov 11 2011, Superstar K4 to be aired on Aug 17 2012 Source: CJ E&M, AGB Nielsen, KDB Daewoo Securities Research

Table 3. CJ E&MÊs main line-up schedule in 2H Category Date 3Q line-up Date 4Q line-up Broadcast 7/21~10/6 Top Model Korea 3 9/29 Comedy Big League 7/24~9/11 Answer 1997 Sept Vampire Prosecutor Season 2 8/17~11/16 Super Star K4 10/7~12/9 Top Gear Korea 3 9/5~11/8 The 3rd Hospital Dec Music Drama 9/8 SNL Korea Movie 7/5 Yeongasi Oct A Werewolf Boy 8/15 R2B Nov Super Star Sept Masquerade Dec Tower, My P.S. Partner Game Within 4Q Ghosts n Goblins Online Within 4Q Hounds Within 4Q Magu: Coach Music/ July Jisan Valley Rock Festival Oct Global Gathering Performance Sept Maroon 5 Live Oct First Snow Town Jun ~ Oct Man of La Mancha Dec~ Mar 2013 Phantom of the Opera May ~ Oct Wicked Oct~ Dec The Sorrows of Young Werther Source: CJ E&M

KDB Daewoo Securities Research 3 August 10, 2012 CJ E&M

CJ E&M (130960 KQ/Trading Buy/TP: W28,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 1,143 1,439 1,548 1,664 Current Assets 915 1,286 1,429 1,559 Cost of Sales 808 1,017 1,063 1,143 Cash and Cash Equivalents 152 377 469 544 Gross Profit 335 422 485 521 AR & Other Receivables 378 476 512 551 SG&A Expenses 265 385 385 397 Inventories 6 7 8 8 Operating Profit (Adj) 70 37 100 124 Other Current Assets 283 323 338 354 Operating Profit 70 36 100 124 Non-Current Assets 1,136 950 902 886 Non-Operating Profit -7 -23 -19 -19 Investments in Associates 116 115 115 115 Net Financial Income 9 20 20 20 Property, Plant and Equipment 118 124 110 97 Net Gain from Inv in Associates 0 1 0 0 Intangible Assets 765 560 521 513 Pretax Profit 63 12 81 105 Total Assets 2,051 2,236 2,331 2,445 Income Tax 19 5 25 32 Current Liabilities 721 711 747 786 Profit from Continuing Operations 44 7 57 73 AP & Other Payables 174 219 236 254 Profit from Discontinued Operations 15 35 0 0 Short-Term Financial Liabilities 311 202 202 202 Net Profit 59 43 57 73 Other Current Liabilities 236 289 309 330 Controlling Interests 57 46 60 77 Non-Current Liabilities 107 215 216 216 Non-Controlling Interests 2 -3 -3 -3 Long-Term Financial Liabilities 63 167 167 167 Total Comprehensive Profit 60 44 58 75 Other Non-Current Liabilities 31 35 36 36 Controlling Interests 58 48 62 79 Total Liabilities 829 926 963 1,002 Non-Controlling Interests 2 -4 -4 -4 Controlling Interests 1,163 1,224 1,286 1,365 EBITDA 361 572 482 473 Capital Stock 190 190 190 190 FCF (Free Cash Flow) -127 170 106 89 Capital Surplus 948 948 948 948 EBITDA Margin (%) 31.6 39.7 31.1 28.4 Retained Earnings 60 111 171 248 Operating Profit Margin (%) 6.1 2.5 6.5 7.4 Non-Controlling Interests 60 87 82 78 Net Profit Margin (%) 5.0 3.2 3.9 4.6 Stockholders' Equity 1,222 1,310 1,368 1,443

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 300 569 440 423 P/E (x) 17.4 20.0 15.3 12.0 Net Profit 59 47 57 73 P/CF (x) 2.8 1.6 2.1 2.2 Non-Cash Income and Expense 317 563 425 399 P/B (x) 1.8 1.0 0.9 0.8 Depreciation 15 14 14 12 EV/EBITDA (x) 3.7 1.6 1.7 1.6 Amortization 276 522 368 337 EPS (W) 1,745 1,211 1,584 2,019 Others 4 -2 1 1 CFPS (W) 10,744 15,324 11,656 11,217 Chg in Working Capital -64 -36 -17 -18 BPS (W) 17,122 24,373 27,051 29,339 Chg in AR & Other Receivables -71 -91 -36 -39 DPS (W) 0 0 0 0 Chg in Inventories -5 -2 -1 -1 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -8 35 17 18 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -12 -5 -25 -32 Revenue Growth (%) 1,065.0 25.9 7.6 7.5 Cash Flows from Inv Activities -230 -337 -320 -320 EBITDA Growth (%) 611.1 58.2 -15.7 -2.0 Chg in PP&E -21 -10 0 0 Operating Profit Growth (%) 266.1 -49.0 179.4 23.7 Chg in Intangible Assets -329 -329 -329 -329 EPS Growth (%) 44.4 -30.6 30.9 27.5 Chg in Financial Assets 26 -1 0 0 Accounts Receivable Turnover (x) 5.3 3.7 3.4 3.4 Others 95 3 9 9 Inventory Turnover (x) Cash Flows from Fin Activities 40 -6 -28 -28 Accounts Payable Turnover (x) 31.0 20.0 18.6 18.6 Chg in Financial Liabilities -2 -11 0 0 ROA (%) 4.1 2.0 2.5 3.1 Chg in Equity -1 0 0 ROE (%) 7.7 3.9 4.8 5.8 Dividends Paid 0 0 0 0 ROIC (%) 6.3 2.6 7.8 9.8 Others 42 6 -28 -28 Liability to Equity Ratio (%) 67.8 70.6 70.4 69.4 Increase (Decrease) in Cash 109 225 92 74 Current Ratio (%) 126.9 180.9 191.3 198.3 Beginning Balance 43 152 377 469 Net Debt to Equity Ratio (%) 10.3 -8.4 -14.8 -19.1 Ending Balance 152 377 469 544 Interest Coverage Ratio (x) 5.2 1.3 3.5 4.4 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 4 August 10, 2012 CJ E&M

Important Disclosures & Disclaimers

Disclosures As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with CJ E&M as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies.

Buy Relative performance of 20% or greater (W) CJ E&M Stock Trading Buy Relative performance of 10% or greater, but with volatility 80,000

Ratings Hold Relative performance of -10% and 10% 60,000

Sell Relative performance of -10% 40,000 Overweight Fundamentals are favorable or improving Industry 20,000 Neutral Fundamentals are steady without any material changes Ratings 0 Underweight Fundamentals are unfavorable or worsening 8/10 2/11 8/11 2/12 8/12

* Ratings and Target Price History (Share price (----), Target price (----), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analystÊs estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Analyst Certification The research analysts who prepared this report (the „Analysts‰) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the AnalystÊs area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.

Disclaimers This report is published by Daewoo Securities Co., Ltd. („Daewoo‰), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the . If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.

KDB Daewoo Securities Research 5 August 10, 2012 CJ E&M

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. () Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 600 Lexington Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 Suite 301 Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong United States Tel: 82-2-768-3026 Tel: 85-2-2514-1304 Tel: 1-212-407-1022

Daewoo Securities (Europe) Ltd. Tokyo Representative Office Beijing Representative Office Tower 42, Level 41 7th Floor, Yusen Building Suite 2602, Twin Towers (East) 25 Old Broad Street 2-3-2 Marunouchi, Chiyoda-ku B-12 Jianguomenwai Avenue London EC2N 1HQ Tokyo 100-0005 Chaoyang District, Beijing 100022 United Kingdom Japan China Tel: 44-20-7982-8016 Tel: 81-3- 3211-5511 Tel: 86-10-6567-9699

Shanghai Representative Office Ho Chi Minh Representative Office Unit 13, 28th Floor, Hang Seng Bank Tower Centec Tower 1000 Lujiazui Ring Road 72-74 Nguyen Thi Minh Khai Street Pudong New Area, Shanghai 200120 Ward 6, District 3, Ho Chi Minh City China Vietnam Tel: 86-21-5013-6392 Tel: 84-8-3910-6000

KDB Daewoo Securities Research 6