2017 Outlook Sustainable Korea: New investments

CJ E&M (130960) BUY / TP: W95,000

Stock price (Nov 7, KRW) 66,200 Yr to Sales OP NP EPS % chg EBITDA PE EV/EBITDA PB ROE DY Market cap (USD mn) 2,243 Dec (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%) (%) Shares outstanding (mn) 39 52W High/Low (KRW) 93,500/61,000 2014A 1,233 (13) 225 5,821 4,244.0 290 6.6 4.7 1.0 16.4 - 6M avg. daily turnover (USD mn) 14.5 2015A 1,347 53 54 1,409 (75.8) 373 57.2 8.2 2.0 3.6 0.2 Free float (%) 56.7 Foreign ownership (%) 21.9 2016F 1,470 45 74 1,917 36.0 347 34.5 7.2 1.6 4.7 0.3 Major shareholders (%) 2017F 1,643 98 89 2,304 20.2 413 28.7 5.9 1.5 5.4 0.5 CJ Corp and 5 others 42.9 NPS 5.1 2018F 1,771 128 118 3,059 32.8 446 21.6 5.5 1.4 6.8 0.5 Note: NP and EPS based on controlling interest

Confident growth outlook

Performance Earnings to improve in 2017: CJ E&M is a leading comprehensive content 1M 6M 12M provider with robust content-creation capabilities. And, the company is fueling the Absolute (%) (13.1) (6.6) (21.2) growth of demand in both domestic and overseas markets. We forecast earnings Rel. to Kospi (%p) (10.4) (7.7) (19.1) growth will ramp up in 2017 with sales of W1.64tn (+10.6% YoY) and OP of W100.2bn (+62.5% YoY). Backed by higher quality and the success of its content 12MF PE trend and rising unit ad prices, we expect broadcasting earnings to continue improving. (X) 12MF PER (L) (KRW) 60 price (R) 200,000 Furthermore, a rising weighting of high-margin digital media and the fading 50 150,000 depreciation burden due to a change in the depreciation years for TV shows should 40 both contribute to broadcasting earnings growth in 2017. Meanwhile, the value of 30 100,000 investment holdings should re-rate following the IPO of subsidiaries. We derived an 20 50,000 10 SotP-based TP of W95,000 reflecting the operating value of broadcasting, TV and

0 0 others at W2.2tn and the stake value in Games at W1.3tn. Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Broadcasting earnings to confirm growth: Backed by the company’s robust content-creation capabilities, broadcasting earnings should continue to grow. We forecast top-line growth fueled by increased content sales and value-added sales and higher ad unit prices. With the improving competitiveness of high-margin digital content, digital broadcasts and ads should continue to expand across multiple platforms. Of note, there was a substantial burden from the change in depreciation standards for TV shows in 2016 (from four years to 1.5), but we believe this will fuel operating leverage in 2017 backed by the higher sales. Specifically, we forecast 2017 broadcasting sales will reach W1.2tn (+11.1% YoY) and OP W97.1bn (+49.4% YoY) as OPM firms 2%p YoY.

Overseas business to generate positive results: CJ E&M should ramp up efforts to grow sales overseas utilizing popular domestic content. In fact, the company has developed a new one source, multi-use (OMSU) business model that localizes content based on a country’s unique cultural aspects. We believe CJ E&M will succeed overseas over the long term given its content-creation capabilities and competitive advantage in intellectual property. Of note, the joint Korea-China produced film lineup will grow sharply from 2017. And, the acquisition of Blue Group, a Vietnamese content producer, and JV with TrueVisions, a Thai media company, should facilitate CJ E&M’s expansion into Southeast Asia. Minha Choi 822-3276-6260 [email protected] EV re-rating on subsidiary IPOs: CJ E&M plans to list two subsidiaries, (91% stake) and Netmarble Games (27.6% stake). Studio Dragon employs several well-known writers and actors through its subsidiaries, which should help lift content sales and generate profits overseas. We believe CJ E&M’s EV will re-rate as its subsidiaries and those subject to equity method accounting, list.

56 2017 Outlook Sustainable Korea: New investments

Balance sheet Income statement FY-ending Dec. (W bn) 2014A 2015A 2016F 2017F 2018F FY-ending Dec. (W bn) 2014A 2015A 2016F 2017F 2018F Current assets 1,039 940 1,036 1,165 1,252 Sales 1,233 1,347 1470 1643 1771 Cash & cash equivalents 34 47 50 55 66 COGS 977 1,019 1108 1203 1281 Accounts & other receivables 372 434 483 541 585 Gross profit 255 328 362 441 490 Inventory 5 4 4 5 5 Non-current assets 1,318 1,425 1,457 1,550 1,602 SG&A expenses 268 275 317 343 362

Investment assets 475 603 644 695 731 Operating profit (13) 53 45 98 128 Tangible assets 88 77 78 79 80 Financial income 15 19 13 14 15 Intangible assets 695 653 636 665 671 Interest income 10 9 8 9 10 Total assets 2,357 2,365 2,493 2,715 2,854

Current liabilities 581 642 699 832 862 Financial expenses 23 21 28 31 34

Accounts & other payables 363 418 464 527 586 Interest expenses 15 14 12 13 13 ST debt & bonds 45 55 50 50 35 Other non-operating profit (39) (120) (17) (22) (23) Current portion of LT debt 102 121 141 151 201 Gains (Losses) in associates, 10 129 78 62 75 Non-current liabilities 271 162 168 176 172 subsidiaries and JV Debentures 150 100 100 100 90 Earnings before tax (50) 59 92 120 161 LT debt & financial liabilities 103 32 32 32 32 Income taxes 7 6 18 26 36 Total liabilities 852 805 868 1,008 1,035 Net profit 233 53 74 94 125 Controlling interest 1,509 1,552 1,617 1,693 1,799 Capital stock 194 194 194 194 194 Net profit of controlling interest 225 54 74 89 118 Capital surplus 973 973 973 973 973 Other comprehensive profit (5) (1) (1) (1) (1) Other reserves 28 16 16 16 16 Total comprehensive profit 228 52 73 93 124 Retained earnings 316 370 436 514 620 Total comprehensive profit of 221 54 73 88 117 Minority interest (4) 9 8 13 21 controlling interest Shareholders' equity 1,506 1,560 1,625 1,707 1,819 EBITDA 290 373 347 413 446

Cash flow Key financial data FY-ending Dec. (W bn) 2014A 2015A 2016F 2017F 2018F FY-ending Dec. 2014A 2015A 2016F 2017F 2018F Per-share data (KRW) C/F from operations 195 295 279 398 332 EPS 5,821 1,409 1,917 2,304 3,059 Net profit 233 53 74 94 125 BPS 39,100 40,188 41,875 43,849 46,575 Depreciation 19 14 13 13 13 DPS 0 200 200 300 300 Amortization 284 306 289 302 305 Growth (%) Sales growth 3.7 9.3 9.1 11.8 7.8 Net incr. in W/C (102) (42) (23) 41 (49) OP growth NM NM (14.3) 116.5 30.7 Others (239) (36) (74) (52) (62) NP growth 4,336.0 (75.8) 36.0 20.2 32.8 C/F from investing (640) (189) (284) (387) (326) EPS growth 4,244.0 (75.8) 36.0 20.2 32.8 CAPEX (19) (8) (15) (15) (15) EBITDA growth (13.2) 28.6 (6.8) 18.9 7.9 Profitability (%) Decr. in fixed assets 1 0 0 0 0 OP margin (1.0) 3.9 3.1 6.0 7.2 Incr. in investment (298) 162 37 10 38 NP margin 18.2 4.0 5.0 5.4 6.7 Net incr. in intangible assets (327) (331) (272) (331) (311) EBITDA margin 23.5 27.7 23.6 25.1 25.2 ROA 10.2 2.2 3.0 3.6 4.5 Others 3 (12) (35) (52) (39) ROE 16.4 3.6 4.7 5.4 6.8

C/F from financing 146 (94) 7 (7) 6 Dividend yield 0.0 0.2 0.3 0.5 0.5

Incr. in equity 138 3 0 0 0 Dividend payout ratio 0.0 14.2 10.4 13.0 9.8

Stability Incr. in debt 14 (96) 15 10 25 Net debt (W bn) (113) (52) (71) (115) (137) Dividends 0 0 (8) (8) (12) Debt/equity ratio (%) 26.7 19.8 19.9 19.4 19.6 Others (6) (1) 0 (9) (7) Valuation (x) C/F from others (0) 2 0 0 0 PE 6.6 57.2 34.5 28.7 21.6 PB 1.0 2.0 1.6 1.5 1.4 Increase in cash (299) 14 2 5 11 EV/EBITDA 4.7 8.2 7.2 5.9 5.5

Note: K-IFRS (consolidated)

57

■ Guide to Korea Investment & Securities Co., Ltd. stock ratings based on 12-month forward share price performance relative to the market index  BUY: Expected to outperform the market index by 15%p or more  Hold: Expected to underperform or outperform the market index by less than 15%p  Underweight: Expected to underperform the market index by 15%p or more  Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings.

■ Guide to Korea Investment & Securities Co., Ltd. stock rating allocation (as of Sep 30, 2015)

BUY Hold Underweight (Sell) 81.1% 17.6% 1.3% Note: % of companies under coverage with this rating

■ Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months  Overweight: Recommend increasing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization.  Neutral: Recommend maintaining the sector’s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization.  Underweight: Recommend reducing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization.

■ Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.

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Korea Investment & Securities Co., Ltd. does not own over 1% of shares of the companies mentioned in this report as of November 14, 2016. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies mentioned in this report as of November 14, 2016. Korea Investment & Securities Co., Ltd. has worked as a lead manager for Hugel IPO. Korea Investment & Securities Co., Ltd. has other interests in Lotte Shopping, Lotte Chilsung, Dongbu Insurance and Hana Financial Group as of November 14, 2016. Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of SK innovation, POSCO, Hyundai E&C, Hyundai Heavy Ind., Doosan Heavy Ind. & Construction, , AmoreG, , Dongbu Insurance, Naver, SK Hynix, SK Telecom, S-Oil, , Daelim Industrial, Korea Aerospace, Hyundai Motor, Hana Financial Group, Samsung F&M, NCsoft, , LG Display, KT and KEPCO, and is the liquidity provider.

Prepared by: KIS Research Center

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