Cj E&M (130960)

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CJ E&M (130960)

Company Report / Media & Ad. April 28, 2015

12M rating BUY (Reinstate) Evolve into a money-making media 12M TP W76,000 Up/downside +32% enterprise

Stock Data Reinstate coverage with BUY and TP W76,000 KOSPI (Apr 27, pt) 2,158 We reinstate coverage of CJ E&M with BUY and a TP of W76,000. Our TP Stock price (Apr 27, KRW) 57,600 is a sum-of-the-parts of the media operation and the value of shares held Market cap (USD mn) 2,079 in subsidiary Netmarble Games. The media business value is derived by Shares outstanding (mn) 39 applying the global peer average of 25x PE (20% discount to the global 52-Week high/low (KRW) 60,800/32,300 peer avg.) to 2015-2016F average OP (after 10% tax). The games 6M avg. daily turnover (USD mn) 18.1 subsidiary stake value was calculated based on the Netmarble Games Free float / Foreign ownership (%) 56.7/11.4 share acquisition price NCsoft paid in a recent deal. CJ E&M has built a Major shareholders (%) profit-generating structure led by the broadcast business via platform CJ Corp. and 5 others 42.9 diversification and overseas expansion. After making an operating loss of NPS 7.3 W12.6bn in 2014, the firm should turn around with a positive OP of W47.6bn in 2015F and gain 94% in 2016F. The media business valuation EPS revision (KIS estimates, KRW) multiple would drop to 24x 2015F PE and 12x 2016F PE (vs. peer avg. Previous Revised (%) 37x and 27x, respectively) if the subsidiary stake value is not taken into 2015F 1,080 - account. 2016F 2,246 - 2017F 2,823 - Better profits driven by greater content sales such as VoD CJ E&M is the biggest beneficiary of the shift in Korea’s media industry. As Performance selective content consumption is becoming possible thanks to platform 1M 6M 12M diversity, there is mounting demand for CJ E&M’s competitive content. Of Absolute (%) 8.1 66.2 14.3 note, we draw attention to growing content sales such as video on demand Relative to KOSPI (%p) 1.2 54.6 4.9 (VoD). With ad and subscription revenue facing limited growth, we believe 12MF PE greater content sales will drive profit improvement at the broadcast business. We estimate broadcast OP will grow 1,699% YoY in 2015F and (x) (KRW) 93% YoY in 2016F. 12MF PER (LHS) 70,000 60.0 price (RHS) 60,000 50.0 Group-wide cost controls; Big chance of success in China 50,000 At CJ E&M, more efficient execution of production costs would push up 40.0 40,000 profitability. Cost controls being promoted by the overall media business of 30.0 30,000 CJ Group will likely remain in place. The chance of success also seems 20.0 high for its China business. CJ E&M is able to produce content across 20,000 wide-ranging genres and this would enable favorable profit sharing for the 10.0 10,000 company. The China business will become profitable. 0.0 0 May-10 May-11 May-12 May-13 May-14 2013A 2014A 2015F 2016F 2017F Source: WISEfn consensus Sales (W bn) 1,188 1,233 1,344 1,452 1,559 OP (W bn) (8) (13) 48 92 114 EBT (W bn) (34) (50) 48 100 126 NP (W bn) 5 225 42 87 109 EBITDA (W bn) 334 290 349 400 425 Net debt (W bn) 58 (113) (110) (135) (155) OP margin (%) (0.7) (1.0) 3.5 6.3 7.3 ROE (%) 0.4 16.4 2.7 5.5 6.5 Dividend yield (%) - - - - - EPS (KRW) 134 5,821 1,080 2,246 2,823 chg. (% YoY) (86.4) 4,244.0 (81.4) 108.0 25.7 BPS (KRW) 31,992 39,100 40,047 42,155 44,837

DPS (KRW) 0 0 0 0 0 Heuiseok Jeong PE (x) 227.6 6.6 53.3 25.6 20.4 822-3276-6277 PB (x) 1.0 1.0 1.4 1.4 1.3 [email protected] EV/EBITDA (x) 3.8 4.7 6.1 5.2 4.9

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 AT THE END OF THIS REPORT.

Company report focus

ßßß What is the report about? ßßßCompany highlights • Identify a structural change in CJ E&M’s media business 1) Historical share performance • Analyze growth potential in a changing media industry from a • Down (August 2011-July 2012): Slower broadcast earnings mid to long-term perspective growth; Mounting losses from music and games • Measure potential profit growth by analyzing the VoD market • Gradual upward (August 2012-April 2014): Overall OP growth • Provide an interpretation of cost control efforts driven by games • Analyze capacity at the Chinese business, for which • Down (May 2014-October 2014): Broadcast earnings erosion expectations are high caused by greater production costs and so forth, after removing the games business from consolidated accounting ßßßKey assumptions and valuation • Up (November 2014-present): Better broadcast earnings confirmed by 4Q14 results; A surge in content sales driven by • Key assumptions: 1) A structural turnaround at the broadcast core productions business on greater content sales such as VoD; 2) Better

profitability at the media business on cost controls CJ E&M share performance

Media business OP and OPM by unit (W bn) (KRW) 80,000 Broadcast earnings erosion confirmed Slower broadcast earnings after separation of the games 2013 2014 2015F 2016F Loss-making music and games business Broadcast OP 1.7 2.2 38.7 74.8 60,000 OPM(%) 0.2 0.3 4.4 7.9 Improved games earnings Films OP 4.7 (4.0) 6.2 10.7 OPM(%) 2.2 (1.9) 2.6 4.2 40,000 Music/Performance OP (14.3) (10.8) 2.7 6.7 OPM(%) (6.9) (5.5) 1.3 2.7 20,000 Expectations for a structural turnaround at broadcast business Source: Company data, Korea Investment & Securities 0 • Valuation (SotP): For media, 25x PE is applied to 2015-2016F Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 average OP (assuming 10% tax); For games, NCsoft’s Source: Company data, Korea Investment & Securities Netmarble Games share acquisition value is used (Table 1 on pg. 2) 2) Evolving into a money-making media enterprise • Broadcast-driven profit growth: The broadcast division’s profit ßßßSensitivity & scenario analysis improves thanks to greater content sales abroad and VoD sales on the back of diverse platforms • CJ E&M’s earnings hinge on how strongly the broadcast OP • CJ E&M has tightened production cost controls since 2H14, advances also observed at CJ Group’s other media businesses such as • Magnitude of the broadcast business turnaround would be a CJ CGV and CJ HelloVision key share price determinant • Across-the-board profitability improvement is likely on cost controls TP impact of broadcast OP changes (KRW) • Chinese business will very likely succeed given the firm’s 2016F broadcast OP (W bn) ability to produce wide-ranging content genres; Enjoy 59.8 67.3 74.8 82.2 bargaining power over partners and more favorable profit 2015F broadcast 30.9 69,160 71,367 73,573 75,780 OP (W bn) 34.8 70,302 72,508 74,715 76,921 distribution is achievable 38.7 71,443 73,649 75,856 78,063 • The firm is stepping up its drive for the animation business that 42.5 72,584 74,791 76,997 79,204 is anticipated to become another growth engine; Likely to Source: Company data, Korea Investment & Securities bolster content sales and add to the licensing revenue

ßßßRisks/opportunities ßßßPeer comparison • Risks: Sharp slowdown for ad business conditions and the • 24x 2015F PE and 12x 2016F PE (excl. the value of shares domestic film industry held in the games subsidiary) • Opportunities: Accelerating changes in the online (mobile) • Peers trade at 37x 2015F PE and 27x 2016F PE media industry • See Table 2 on pg. 2 for valuation details

Contents

I. Valuation ...... 2 1. Reinstate coverage with BUY and TP W76,000 2. Investment points: Full-fledged profit improvement led by media

II. Evolving into a money-making media enterprise ...... 4 1. Profit-generating structure built led by broadcast business 2. Cost controls a widespread change across CJ media business 3. China business has big chance of success 4. Full-spectrum animation business also deserves attention

III. Earnings forecast: Enter profit growth phase ...... 15

Company overview & Glossary ...... 16

CJ E&M (130960)

I. Valuation

1. Reinstate coverage with BUY and TP W76,000

SotP-based TP of We reinstate coverage of CJ E&M with BUY and a TP of W76,000. Our TP is the W76,000 sum-of-the-parts of the media operation and the value of shares held in the games subsidiary (Table 1). To drive the media business value, we applied 25x PE, which is 20% discounted to the global peer average. While some high valuation online media firms, such as Netflix, lifted the peer average, we view 25x PE as justified given the strong profit growth of CJ E&M’s media business and bright growth prospects for the online environment. The games subsidiary stake value was calculated using the Netmarble Games share acquisition price NCsoft paid in a recent deal.

Media business 24x We believe CJ E&M is still undervalued despite a 51% YTD share price gain. CJ 2015F and 12x 2016F PE; E&M’s market cap was W2.2tn as of April 27. If the games subsidiary stake value Undervalued to peers of W1.2tn is removed, the media business valuation multiple would be only 24x 2015F PE and 12x 2016F PE compared to the respective peer averages of 37x and 27x.

Table1. TP calculation (W bn)

Value Note (A) Media operation 1,597 2015-2016F avg. OP 70 Applied conservative tax rate to 2015-2016F avg. Assuming 10% tax rate (after loss-making operations, the 63 OP actual corporate tax burden would not be heavy) Target PE (x) 25.4 20% discount to the 2015-2016 global peer avg. (B) Games subsidiary stake (Netmarble Games) 1,218 Per-share paid by NCsoft in a recent stake acquisition (C) 2015-2016F avg. net debt (123) (D)=(A)+(B)-(C) Value of common stocks 2,938 (E) Common stocks 38,732,089 (D)/(E) Fair value (KRW) 75,856 TP W76,000

Source: Company data, Korea Investment & Securities

2. Investment points: Full-fledged profit improvement led by media

Investment points: We have four investment points. First, CJ E&M is enjoying full-bore profit growth 1) Broadcast profit led by the broadcast division amid a structural change in the media industry. growth; Second, the group-wide cost controls have worked to enhance profit stability 2) Better profitability on across all business units. Third, the company is entering China by partnering with cost controls; local firms. The Chinese business will very likely enjoy success and become a mid 3) High visibility of to long-term growth driver. Fourth, the firm is powering up its drive for the Chinese business; animation business that has big growth potential stemming from royalties earned 4) Promising growth for on character licensing. animation Best-positioned to The traditional ad market is losing steam in the domestic media industry. Future respond to changes in growth will come from advertising on a wide range of platforms, content sales and the media industry; Full- overseas entry such as China. We believe CJ E&M is the best-positioned to bore profit turnaround respond to these changes among Korea’s media firms. The profit turnaround in 2015 should gain traction beginning in 2015. OP of the media business, a profit growth driver, should jump from W2.2bn in 2014 to W38.7bn (+1,699% YoY) in 2015F and W74.8bn (+93% YoY) in 2016F. At the company level, OP should reach W47.6bn in 2015F compared to operating loss of W12.6bn in 2014. OP would then rise a whopping 94% YoY in 2016F.

2 CJ E&M (130960)

Table 2. Peer valuation (x, %)

Time News 21st TV Fuji CJ E&M Viacom Disney CBS Netflix Discovery TBS SBS Avg. Warner Corp. Century Asahi Media PE 2013 227.6 17.4 19.4 22.7 19.4 53.6 173.8 31.8 24.4 23.4 20.3 12.1 13.6 36.0 2014 6.6 14.0 20.5 18.7 17.3 29.7 79.1 19.6 22.2 19.5 16.1 25.4 35.5 26.5 2015F 54.3 12.1 22.3 17.5 18.4 31.4 205.1 17.4 20.7 22.5 22.2 17.2 NA 37.0 2016F 26.1 10.8 19.6 14.4 14.8 28.4 110.5 14.8 17.1 24.8 19.4 17.9 NA 26.6 PB 2013 1.0 7.2 2.6 3.8 2.1 0.7 16.5 3.4 4.4 0.7 0.7 0.7 2.2 3.7 2014 1.0 8.6 3.4 4.0 2.9 0.8 11.1 2.7 4.5 0.5 0.7 0.8 2.0 3.5 2015F 1.5 8.7 4.0 5.3 2.4 0.7 16.7 3.7 3.8 0.7 0.8 0.7 NA 4.3 2016F 1.4 9.2 3.6 5.9 2.2 0.7 14.7 3.5 3.9 0.7 0.8 0.7 NA 4.2 EV/EBITDA 2013 3.8 9.4 17.3 11.2 12.6 (6.3) 119.8 11.9 13.3 10.9 8.0 6.6 8.7 18.6 2014 4.7 9.4 14.5 11.9 13.5 8.7 72.6 11.5 12.9 10.2 6.6 8.1 15.1 16.2 2015F 6.2 9.2 12.7 11.9 11.6 7.9 68.6 11.5 12.7 10.4 7.0 9.0 NA 15.7 2016F 5.3 8.7 11.5 10.9 10.2 6.7 51.8 10.7 11.4 9.0 6.0 8.2 NA 13.2 ROE 2013 0.4 37.9 14.4 18.6 12.4 4.7 10.8 17.2 34.1 2.9 3.6 5.7 17.6 15.0 2014 16.4 53.7 16.6 34.9 14.1 1.8 16.7 19.3 26.2 2.8 4.5 3.0 5.7 16.6 2015F 2.7 64.1 17.9 28.5 15.7 2.1 5.7 19.9 19.8 3.2 3.7 3.9 NA 16.8 2016F 5.5 77.5 21.6 44.6 19.5 2.3 12.9 21.7 23.2 2.8 4.0 3.8 NA 21.3 OP growth 2013 NA (1.7) 1.8 1.4 5.9 (35.2) 356.8 6.5 13.2 33.1 28.2 13.3 1.4 35.4 2014 NA 6.4 24.0 (4.3) (4.7) (106.1) 76.3 4.4 2.8 (3.0) 32.3 (16.2) (53.2) (3.4) 2015F NA (0.9) 18.9 6.6 20.2 235.9 (27.6) (0.1) 6.2 (6.8) (10.5) (15.4) NA 20.6 2016F 93.6 11.2 10.0 10.4 15.8 22.3 61.9 9.0 16.5 12.2 15.0 16.8 NA 18.3 EPS growth 2013 (86.4) 32.2 7.9 26.1 30.8 (124.3) 522.6 19.5 544.7 (19.3) 20.5 (48.3) 6.8 84.9 2014 4,244.0 12.2 26.0 74.1 11.1 (52.9) 130.1 11.3 (34.3) 1.6 29.3 (44.8) (64.4) 8.3 2015F (81.4) 6.1 14.0 (33.3) 4.6 20.7 (38.7) 12.5 (15.7) 17.3 (13.8) 33.7 NA 0.7 2016F 108.0 11.9 13.6 21.6 24.5 10.5 85.6 17.9 21.0 (9.4) 14.6 (3.6) NA 18.9

Note: CJ E&M is not included in the average Source: Company data, Korea Investment & Securities

Figure 1. 12MF PE Figure 2. 12MF PB

(W) (W) 100,000 100,000

80,000 80,000 1.75x

45.0x 60,000 60,000 1.50x 39.0x 1.25x 33.0x 40,000 40,000 1.00x 27.0x 21.0x 0.75x

20,000 15.0x 20,000 0.50x

0 0 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Source: Company data, Korea Investment & Securities Source: Company data, Korea Investment & Securities

CJ E&M (130960)

II. Evolving into a money-making media enterprise

1. Profit-generating structure built led by broadcast business

Biggest beneficiary of CJ E&M is the biggest beneficiary of the changing media environment. Despite changing media slower growth for ad and subscription revenue, the firm’s overall profit should environment improve on greater VoD and content sales. In the past, ad and subscription revenue together accounted for a majority of the media business sales (83% in 2012, 81% in 2013 and 75% in 2014). The ad and subscription revenue is forecast to inch up 2% YoY in 2015F after falling 2% in 2013 and 1% in 2014, and such limited growth was a problem. With the media industry diverging into a wider range of platforms, new content selling channels such as VoD and mobile ad have been introduced. We note that CJ E&M has secured a fresh growth driver in the media business, which propels the firm into a profit-generating cycle.

1) Content consumption becomes more selective Selective consumption The media industry is facing a major change where viewers proactively consume inevitable →→→ rising content via the Internet, IPTV and mobile devices instead of passively watching on consumer willingness TV. The changing patterns owe to the variety in types of media and content to pay for content consumption methods induced by IT advances. Selective consumption is now inevitable amid the exponential expansion of content. That means consumers are becoming more willing to pay for content.

Diversification of With media consumption patterns changing, the distribution channels are distribution channels becoming more wide-ranging and the vigor is provided in the market for new helps boost the market content. In particular, the VoD market has shown outstanding growth. The VoD for new content such as market is estimated to have grown at an average of 29% over the past two years VoD to reach W860.2bn in 2014. We forecast the market will further expand to W1.08trn in 2016F with 12% p.a. growth over the next two years.

Figure 3. Korea’s VoD market size

(W bn) 1,200

1,000

800

600

400

200

0 2012 2013 2014 2015F 2016F

Source: Industry data, Korea Investment & Securities

4 CJ E&M (130960)

Leader of VoD market We pay special attention to CJ E&M because of its leadership in growing the VoD growth market. In the VoD market, selective consumption by consumers works to highlight actual competitiveness. Furthermore, while still at the initial stage of changing media consumption, a media firm will prove its growth potential amid a mid to long- term paradigm shift. CJ E&M’s VoD sales (broadcast + films) have grown 24% p.a. over the past two years with the market share reaching 20% in 2014. VoD sales have steadily grown led by major TV programs (dramas such as Reply 1997 , Reply 1994 , Incomplete Life a.k.a. Misaeng , Bad Guys , etc.; TV shows such as the Grandpas Over Flowers series, Three Meals a Day , etc.) and films distributed by the firm.

CJ E&M would beat Korea’s three terrestrial broadcasters and some comprehensive channels also terrestrial broadcasters match CJ E&M in terms of VoD growth. But CJ E&M would practically beat the in terms of VoD sales- terrestrial media outlets in terms of VoD sales-to-viewing rate. CJ E&M’s combined to-viewing rate viewing rate of tvN, OCN and Mnet, the major sources of VoD sales, was 1.0% (or 2.4% for total channels) in 2014, compared to the average viewing rate of 4.1% for the three terrestrial stations. Despite the four-fold viewing rate gap, CJ E&M commands an estimated market share of 30% and that proves the firm’s strong presence in a changing media environment.

2) Broadcast to start generating profits on greater content sales such as VoD Content sales Greater content sales such as VoD stemming from the diversification of content contribute much to retail channels should lead to better profits for CJ E&M. Of note, the broadcast profits given limited business should be able to generate steady profits and this would help ease the additional investment earnings volatility. Despite its firming content competitiveness, the broadcast business had a shaky profit structure in the past due to the limited growth of ad and subscription revenue. But with greater content sales like VoD that requires only limited additional spending aside from production costs invested already, OP should improve considerably.

Figure 4. Ad and subscription revenue to see limited Figure 5. Broadcast sales breakdown and operating growth costs

(W bn) (W bn) Ad Subscription 140 1,000 Content & others Operating costs Ad Subscription

120 800 100

80 600

60 400

200 20

0 0 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15F 3Q15F 1Q16F 3Q16F 2012 2013 2014 2015F 2016F Source: Company data, Korea Investment & Securities Source: Company data, Korea Investment & Securities

CJ E&M (130960)

Figure 6. Media business OP forecast

(W bn) 80 74.8

50 44.6 38.7 40

10 1.7 2.2 0 2012 2013 2014 2015F 2016F

Source: Industry data, Korea Investment & Securities

More season-long CJ E&M’s content sales should rise as its content competiveness gains strength. programs to help Specifically, the company could sharpen its content edge by 1) adding more content gain more season-long programs and 2) securing exclusive content. popularity In the past, content sales like VoD faced greater volatility based on whether there was a core program on air. However, the addition of season-long programs could help content increase the chance of gaining more popularity. Given that season- long programming adopted mainly by variety shows will probably extend to TV dramas, overall content should show further improvement in terms of profit stability. Of note, the pros of adding more season-long programs are also evident in US drama production and major Hollywood studios pushing to introduce more film franchises.

Table 3. CJ E&M major season-long programs

Genre Program Drama The Reply series, Let’s Eat , I Need Romance , Rude Miss Young-ae The Grandpas Over Flowers series, Three Meals a Day , Comedy Big League , The Genius , SNL Korea , Superstar K , Show Variety show Me the Money , Dancing 9, MasterChef Korea , Let Me In , Talkshow Taxi

Reply 1988 (scheduled), Three Meals a Day: Farm Village 2 (scheduled), Show Me the Money 4 (scheduled), Misaeng2 Scheduled (expected) (expected), Liar Game 2 (expected), Bad Guys 2 (expected)

Source: Company data, Korea Investment & Securities

Working to increase the Securing exclusive content could also help improve the competitiveness of the chance of success by broadcast business. Of note, we draw attention to the fact that several dramas securing exclusive recently aired by CJ E&M such as Misaeng , Fool’s Love and Super Daddy Yeol content were based on webtoons (comics published on a website). In February, CJ E&M formed a strategic tie-up with webtoon publisher Lezhin Comics for content services and it should continue to step up such efforts to secure exclusive content. By using external content with a proven track record, CJ E&M should be able to further increase the chance of success for its broadcast content.

Table 4. CJ E&M continues to procure more external content with proven track record

Source Content Misaeng (aired October 2014), Super Daddy Yeol (March 2015), Fool’s Love (February 2015), Gap-dong (April 2014), Dr. Frost Webtoon (November 2014) Overseas A Family ’s Secret (October 2014), Witch’s Romance (April 2014), SNL Korea (December 2011), Reset (August 2014)

Source: Company data, Korea Investment & Securities

6 CJ E&M (130960)

Broadcast VoD sales to Backed by sharper content, CJ E&M’s broadcast VoD sales should rise 25% YoY rise 25% YoY in 2015F to W115bn in 2015F and 20% YoY to W137.9bn in 2016F (revenue from content and 20% YoY in 2016F sales incl. VoD estimated at W131.3bn and W164.1bn, respectively). In addition, CJ E&M’s broadcast VoD market share should climb from 37% in 2015F to 40% in 2016F (vs. 34% in 2014), exceeding the overall market’s growth. And thanks to the rise in lucrative VoD sales, broadcast OP should go up from W2.2bn in 2014 to W38.7bn in 2015F (+1,699% YoY) and then to W74.8bn in 2016F (+93% YoY).

Figure 7. Broadcast business content sales outlook Figure 8. Broadcast business overall sales and OP outlook

(W bn) (W bn) (W bn) 60 290 40 OP (R)

270 Sales (L) 50 30

250 40 20 230 30 10 210

20 0 190

-10 10 170

0 150 -20 1Q12 4Q12 3Q13 2Q14 1Q15F 4Q15F 3Q16F 1Q13 3Q13 1Q14 3Q14 1Q15F 3Q15F 1Q16F 3Q16F Source: Company data, Korea Investment & Securities Source: Company data, Korea Investment & Securities

3) Best-prepared for the shift in media landscape; Set to take a major step forward Currently producing When the media landscape moves beyond the VoD market and enters the next content for mobile evolutionary phase in the mid to long-term, the extent of benefits for CJ E&M platforms and pursing would become clearer as the company is preemptively preparing for the shift content segmentation triggered by platform diversification and content segmentation. Such efforts include 1) producing content separately for the Internet and mobile platforms at the onset of the production stage, 2) pursuing content segmentation for all areas based on knowledge and skills gained from airing channels tailored to various genres and 3) building diverse retail channels by teaming up with domestic and overseas Internet and mobile platform providers, device makers and telcos.

Figure 9. CJ E&M digital business structure

Content Platform Partner Business model

Content AD TV Multiple system targeting TV operators Subscription VoD

Mobile Internet Content messengers Online targeting online Ad (mobile) Portals & telcos (mobile) platform Over-the-top (OTT) IoT device VoD

Source: Company data, Korea Investment & Securities

CJ E&M (130960)

Internet and mobile CJ E&M should be able to secure the most traffic during the growth of Internet and content traffic to grow mobile-based content going forward. This can be confirmed by examining the as well recent trend in content traffic coming from Naver’s TVcast, a streaming website. At present, CJ E&M has 153 programs registered on TVcast. This is many more than terrestrial broadcasters (KBS 92, MBC 59, SBS 59) as CJ E&M owns channels in various genres, making it possible to provide segmented content. In terms of content view counts, popular video clips for core programs ( Superstar K , Unpretty Rapstar , Talkshow Taxi , I Can See Your Voice , etc.) have more than 1mn views, nearly matching terrestrial broadcasters. In the case of the content business for Internet and mobile platforms, it generates ad revenue via traffic. Accordingly, the business should emerge as a new mid to long-term growth driver for CJ E&M.

Figure 10. Programs registered on Naver’s TVcast by Figure 11. All-time high view counts for popular broadcaster TVcast clips by core program

(units) (views) 180 Radio Star 160 I Am a Singer Infinite Challenge 140 Healing Camp 120 K-pop Star Happy Together Season 3 100 The Return of Superman 80 Sexy Brain Generation

60 Three Meals a Day (Fishing Village) M COUNTDOWN 40 Talkshow Taxi 20 I Can See Your Voice Superstar K 0 MBC KBS SBS CJ E&M 0 2,000,000 4,000,000 6,000,000

Note: As of April 2015 Note: As of April 2015 Source: Company data, Korea Investment & Securities Source: Industry data, Korea Investment & Securities

Even considering long- Even considering long-term landscape changes since the creation of the Internet term IoT environment, of Things (IoT) ecosystem, we believe CJ E&M’s preemptive action is a suitable supplying segmented business strategy. In the IoT environment, all neighboring devices are connected content to be more via the Internet. And such individual devices will probably be used as an ad important platform and to view content. As such, the value of broadcasters will be determined by whether they can provide segmented content on a wide range of platforms.

Table 5. CJ E&M already showed interest in basic IoT content business in 2012

Overview Detail Service UVO Friends Launch September 2012 Partner Kia Motors Platform Vehicle GPS navigation (built-in) Purpose Provide real-time music by linking smartphone and car information system

Example

Source: Company data, Korea Investment & Securities

8 CJ E&M (130960)

2. Cost controls a widespread change across CJ media business

Performance unit to Risks associated with the unexpected rise in costs should ease. The cost reduction show the greatest effect effect is expected to be most pronounced at the performance business. CJ E&M of cost reductions has suspended direct investment in musicals and the number of musicals produced by the company should shrink to 14 in 2015 (56 in 2013 and 32 in 2014). Moreover, it should earn greater licensing revenue via equity investment in securing intellectual property rights for promising global content. This licensing revenue can be generated without spending on direct production costs. At the broadcast business, direct production costs should inch up only 3% YoY from W372.8bn in 2014 to W384bn in 2015F as the number of productions (incl. soap operas and variety shows) and program composition by day of the week will likely be similar. Nevertheless, the company will be able to maintain its content competitive edge on cost savings backed by more season-long programs and joint production across channels.

Figure 12. Musicals produced by CJ E&M by year Figure 13. Quarterly direct production costs at CJ E&M’s broadcast division

(units) (W bn) 120 60 56

50 100

40 80 34 32

30 60

20 40 14

10 20

0 0 2012 2013 2014 2015F 1Q12 4Q12 3Q13 2Q14 1Q15F 4Q15F 3Q16F Source: Company data, Korea Investment & Securities Source: Company data, Korea Investment & Securities

Cost controls effort Cost controls have been implemented since 2H14 amid the structural change of seen across the overall the media business within CJ Group. CJ CGV was the first to confirm the cost media business of CJ savings effect. In 3Q14, the company’s domestic OP reached W38.2bn, 16% Group above the consensus, because labor and selling promotion costs grew less than before. CJ HelloVision also saw its 4Q14 labor costs contract 14%YoY and 19% QoQ. Subscriber acquisition costs appear to have seen a relative decrease as well given the drop-off in broadcast subscribers starting from December 2014. Taking into consideration the management reshuffle in 2H14 for the entire group, cost controls across the group’s media business will likely remain in place. For all divisions that CJ E&M is focusing on, such as broadcast, media and performance, cost controls have become more likely to be implemented.

CJ E&M (130960)

Figure 14. CJ CGV quarterly OPM Figure 15. CJ HelloVision labor costs

(%) (W bn) 16 30 2013 2014

14 25 12 20 10

8 15

6 10 4

5 2

0 0 1Q 2Q 3Q 4Q 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Source: Company data, Korea Investment & Securities Source: Company data, Korea Investment & Securities

3. China business has big chance of success

CJ E&M has a big chance of success in China. It has the structural ability to supply content via production or sourcing and will be able to maintain negotiating power in JVs.

1) Ability to supply content Abundant quality Whether a media company can succeed in China or not is determined by how well content available for it can source competitive content on a structural basis. CJ E&M operates 18 supply broadcast channels in Korea and its content covers a wide range of genres including soap operas, variety shows, documentary and animation. It is also Korea’s largest film distributor that has established a stable lineup for movie content. The company has also secured a comprehensive content library that would be helpful for the steady supply of content to the Chinese market and a greater chance of success.

Table 6. CJ E&M channels by genre

Genre Channel Soap opera/variety show/music tvN, m.net, XTM, KM, Story On Movie ch.CGV, SUPER ACTION, OCN, CatchOn, OCN series, CatchON plus Lifestyle O'live, On Style Hobby/leisure Baduk TV, ongamenet, NCG Animation Tooniverse, Overseas Chinese TV Production (planning) and distribution of soap operas, variety shows, Production & distribution movies, music and animation

Source: Company data, Korea Investment & Securities

10 CJ E&M (130960)

2) Ability to maintain negotiating power in JV business JV is an essential form The key to CJ E&M’s content supply ability lies in its production of content across of business to enter wide-ranging genres. Korean media firms’ engagement in China’s media sector China’s media industry has recently been changing from the simple form of content exports to JV-based production. As imported content is subject to regulations in China, it is impossible for foreign media companies to maintain stable prices with only content exports. They could also encounter problems such as failed localization of content or unfavorable profit sharing caused by uncertainty about meeting censorship restrictions. However, the large part of potential risks can be addressed if the JV approach is taken, such as joint production. In fact, there are ongoing trends where Korean terrestrial broadcast companies are joining forces to produce variety shows and film distributors are making more JV investments.

Table 7. China-bound format exports and joint production by Korea’s major media companies Program Terrestrial broadcast companies MBC Dad! Where Are We Going?, We Got Married, A Celebrity Living in My House, Infinite Challenge , etc. KBS 1 Night 2 Days, Superman Returns, Golden Bell Challenge, Vitamine , etc. SBS Running Man, Law of the Jungle, Couples, etc. Film distributors NEW Plan to establish a local JV with Huace Media Group and produce soap operas and movies together Mediaplex Signed a contract with Huayi Brothers Media Group to produce six movies together Note: Format refers to the programming style and technique used in a particular program Source: Korea Investment & Securities

Ability to produce For Korean media firms, an ability to produce content, requested by Chinese diverse content is key partners, is essential to operate the JV business such as joint production. What CJ to maintaining E&M draws attention is the company is capable of producing content in a wide negotiating power array of genres covering areas such as soap operas, movies, variety shows and animation. Such versatility enables it to maintain negotiating power, disperse risks from some content failing to gain popularity and sustain the JV business. Local partners in China are unlikely to dissatisfy CJ E&M in profit sharing given the possibility of maintaining a long-term business partnership. This leads us to anticipate that CJ E&M’s value will likely rise as an integrated media brand in the Chinese market.

Table 8.CJ E&M major content exports to China Content Genre Time Type Local partner Result Sophie’s Revenge Movie 3Q09 Joint production - - What Women Want Movie 2011 Investment - - Super Diva China Variety show 3Q12/2Q13 Format export Shanghai Media Group Viewer rating 6% (no. 1 in cable) Seasons 1 & 2 Beijing Century Media, A Wedding Invitation Movie 2Q13 Joint production Box office revenue CNY200mn (W35.4bn) C2M, etc. Super Diva China Variety show 2Q13 Format export Dragon Television Highest viewer rating of 30% Season 2 Format export & The Romantic Variety show 3Q13 joint production Format export & joint Hubei Network Radio and No. 1 viewer rating for the final episode Super Star K Variety show 3Q13 production Television average (1.5%) China Film Group, Kwonbub Movie 3Q13 Joint production Pegasus & Taihe Release timeline undecided Entertainment Grandpas Over Format export & Viewer rating of 2% for the Chinese version of Flowers, Variety show 2Q14 Dragon Television joint production Sisters Over Flowers Sisters Over Flowers Format export & No. 1 viewer rating among same-time Queen Inhyun’s Man Soap opera 3Q14 Hunan Television joint production programs Chinese remake of the Korean film Miss 20, Once Again! Movie 1Q15 Joint production Beijing Century Media Granny ; Box office revenue CNY360mn (W63.3bn) Secret Society of Men - Soap opera 1Q15 Joint production Juhe Media In preparation for airing Friends Beijing Century Media, The Peaceful Island Movie 1H15 Joint production C2M, Huace Media Group, To be aired in China during 1H15 Media Asia Love & Lingerie Movie - - - In the planning stage Source: Company data, Korea Investment & Securities

CJ E&M (130960)

Unlike its Vietnamese business, CJ E&M has not yet specified the type of its China business. For Vietnam, it plans to form a JV with state-run TV. For China, we expect one of two types of market entry.

JV with a local partner; First, the company can establish a JV, similarly to its approach in Vietnam. In this Limited profit-sharing case, profits from the sale of content belonging to a single entity (JV) and the risk risks of disadvantageous profit sharing can be alleviated. But this method can present some difficulties in securing a controlling stake over the entity and reflecting its earnings on a consolidated basis given the Chinese regulatory setting.

Local subsidiary s etup Second, it can set up a local media subsidiary in line with Chinese regulations. is more likely for CJ Profit generation can be pursued via equity investment per content (project) after E&M’s China business establishing a subsidiary in unregulated areas dealing with production and distribution. In this case, it is possible to reflect generated profits from the local subsidiary on a consolidated basis for CJ E&M but there would be greater uncertainty about profit sharing. There were some cases where Korean firms could not earn profits from the sale of selling rights apart from box office revenue in the past joint film production projects conducted with Chinese partners. But such risks should be limited for CJ E&M that is able to maintain negotiating power backed by its prowess in diverse content production.

We expect CJ E&M will take the latter approach of establishing a local media subsidiary outside the regulated areas for its entry to the Chinese market.

Figure 16. CJ E&M China business scenario 1: JV Figure 17. CJ E&M China business scenario 2: Subsidiary

Chinese partner Project 1: Film Chinese partner

Equity investment Project 2: TV drama Content investment Content investment

Local business Project 3: TV show Local JV

Equity investment Equity investment Pros: Easier controlling rights and consolidated Pros: No restriction to business area accounting with parent (for less than 50% stake); No risk in Cons: Profit distribution per content that is terms of profit distribution CJ E&M unfavorable (less likely for CJ E&M) CJ E&M Cons: Difficult to secure controlling rights; Not subject to consolidated accounting

Source: Company data, Korea Investment & Securities Source: Company data, Korea Investment & Securities

12 CJ E&M (130960)

4. Full-spectrum animation business also deserves attention

1) Animation business expansion to create bigger impact than expected Animation business The animation business within the broadcast division should play a role in better evolved from content earnings. CJ E&M opened the animation business in January 2015 and has distribution to licensing earmarked W15bn in 2015 for program design and production. The main target appears to be China. The animation business drew our attention with its big growth potential for licensing profit (royalties) from merchandise (toys, stationery, accessories, fancy goods, etc.). Supporting evidence can be found in the performances of domestic merchandise (e.g., Pororo the Little Penguin, Tobot, Robocar Poli, Tayo the Little Bus , etc.) and how Japan’s Bandai Namco raked in profits from items associated with the video game Yokai Watch .

Figure 18. Bandai Namco: Toys & hobby division sales

(JPY bn) 80

60 Yokai Watch release

0 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 3Q14

Source: Company data, Korea Investment & Securities

2) Confirm potential in the first work Robot Train RT Robot Train RT: The potential success of the animation business will likely be confirmed by the Secondary exploit, such company’s first work Robot Train RT . The 16-episode cartoon has aired on SBS as toys, in progress and Tooniverse since February 2015. The show enjoys popularity with the highest viewership rating among animations aired in the same time slot. The division is expanding its business for the program such as toy merchandising with Yujin Robot (listed) and joint marketing with the Korea Railroad Corp.

Figure 19. CJ E&M’s Robot Train RT Figure 20. Robot Train RT toys

Source: Company data, Korea Investment & Securities Source: Company data, Korea Investment & Securities

CJ E&M (130960)

3) Overseas content sales and character license proceeds to contribute to better broadcast profits Overseas sales The animation business will likely develop as a global operation. The company will inevitable for stable likely sell distribution rights for Robot Train RT to overseas markets such as China animation profits and Europe in 2H15. Animation production costs ~W100mn per 20 finished minutes. And animation distribution rights are priced at ~W15mn per episode for domestic TV stations. Since it is difficult to cover production costs with domestic distribution sales alone, an overseas advance is inevitable. Considering the company’s competitive content and global media network, overseas sales expansion appears a feasible earnings generating tactic.

Substantial licensing In addition to overseas sales, profits can be earned from merchandise such as profit likely from Robot toys. We understand the animation designer/producer takes an average 5-10% of Train RT merchandise royalties. In 2014, toymaker Young Toy generated sales of W68.1bn from Tobot products. We estimate the licensing proceeds for the designer/producer of the cartoon at ~W5bn. While it is difficult to compare the Robot Train RT business in the initial phase to the established Tobot, we anticipate significant licensing income for the former given the recently confirmed popularity and similar genre.

Figure 21. Young Toys: Tobot product sales

(W bn) 80

0 2009 2010 2011 2012 2013 2014

Source: Company data, Korea Investment & Securities

CJ E&M likely to adopt The 2015 budget of W15bn can cover production for at least six cartoons (20 aggressive animation finished minutes per episode, 20 episodes per series) in a single year. The strategy ‰‰‰ to contribute investment scale hints how actively CJ E&M would run the business. If all content better broadcast profits progresses to overseas distribution and merchandising, the animation business than expected could create bigger positive effects than hoped for the overall broadcast division.

14 CJ E&M (130960)

III. Earnings forecast: Enter profit growth phase

OP to turn around in In 2015F, total OP should turn around from a loss of W12.6bn to a W47.6bn profit. 2015F and balloon 94% In 2016F, the figure should balloon 94% YoY to W92.1bn. 1) The broadcast wing YoY in 2016F would contribute the most to the earnings improvement. The division should see content (VoD, etc.) sales soar 25% in 2015F and 20% in 2016F, and feature control costs for direct production and indirect costs at the same time. As such, OP should grow 1,699% in 2015F and 93% in 2016F. 2) The films division should maintain distribution market share at 24.2% in 2015 and 25.4% in 2016 (24.7% in 2014), and sales there add 13% and 6%, respectively. With more VoD sales and film content exports, the film unit should post an operating profit in 2015F, after loss a year ago, and the OP should jump 73% YoY in 2016F, thereby outpacing sales growth. 3) Focusing on business efficiency, the music and performance division will trim the artist lineup and expand in-house production. As such, the division’s 2015F OP should turnaround to reach W2.7bn. In 2016F, the performance business should make a big swing (143% YoY) to black ink (W6.7bn).

Figure 22. CJ E&M consolidated sales and OP

(W bn) (W bn) 450 50 Sales (L) OP (R) 400 40

350 30 300 20 250 10 200 0 150 100 (10) 50 (20) 0 (30) 1Q13 3Q13 1Q14 3Q14 1Q15F 3Q15F 1Q16F 3Q16F

Note: Based on broadcast, films, music and performance earnings (excluded the games business performance from past earnings) Source: Company data, Korea Investment & Securities

Table 9. CJ E&M quarterly earnings (W bn)

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15F 2Q15F 3Q15F 4Q15F 2013 2014 2015F 2016F Sales 264.9 283.3 313.7 326.3 265.1 283.5 343.1 340.9 303.7 316.2 346.3 377.8 1,188.1 1,232.7 1,343.9 1,451.7 Broadcast 172.3 199.9 186.0 212.6 170.4 209.1 204.6 241.8 187.7 226.0 222.5 252.2 770.8 825.9 888.4 951.1 Films 56.8 37.4 70.0 44.7 49.8 30.2 93.3 38.1 66.6 38.7 69.5 64.0 208.9 211.3 238.9 252.6 Music 32.8 41.2 49.7 58.5 40.6 42.4 41.7 56.1 44.3 50.0 50.8 56.5 182.3 180.7 201.6 231.5 Performance 3.0 4.8 8.0 10.4 4.4 1.8 3.6 5.0 5.0 1.5 3.5 5.0 26.1 14.7 15.0 16.5 GP 56.8 67.6 40.7 73.2 54.7 60.6 58.2 82.0 77.4 75.3 76.7 108.8 238.3 255.4 338.2 408.1 GPM (%) 21.4 23.9 13.0 22.4 20.6 21.4 17.0 24.0 25.5 23.8 22.2 28.8 20.1 20.7 25.2 28.1 SG&A 58.5 55.5 61.9 70.3 58.0 69.1 68.7 72.3 70.4 67.7 72.7 79.7 246.2 268.1 290.6 316.0 SG&A-to-sales (%) 22.1 19.6 19.7 21.5 21.9 24.4 20.0 21.2 23.2 21.4 21.0 21.1 20.7 21.7 21.6 21.8 OP (1.8) 12.1 (21.2) 2.9 (3.3) (8.5) (10.5) 9.7 7.0 7.6 4.0 29.0 (7.9) (12.6) 47.6 92.1 OPM (0.7) 4.3 (6.7) 0.9 (1.2) (3.0) (3.1) 2.8 2.3 2.4 1.2 7.7 (0.7) (1.0) 3.5 6.3 Broadcast (2.5) 10.2 (13.8) 7.8 (4.0) (1.3) (14.8) 22.2 1.7 9.6 (0.7) 28.1 1.7 2.2 38.7 74.8 Films 4.9 0.9 1.7 (2.9) 4.3 (2.4) 6.5 (12.4) 5.3 (2.8) 4.3 (0.6) 4.7 (4.0) 6.2 10.7 Music (2.8) 2.0 (6.0) (0.6) (2.1) (0.6) (0.3) 2.0 0.9 1.3 0.9 2.6 (7.4) (0.9) 5.7 6.2 Performance (1.4) (0.9) (3.2) (1.4) (1.6) (4.3) (2.0) (2.1) (1.0) (0.5) (0.5) (1.0) (6.9) (9.9) (3.0) 0.5 EBT (7.7) 12.2 (28.2) (10.1) (12.0) (14.5) (9.3) (14.3) 6.6 6.2 4.6 30.7 (33.9) (50.2) 48.1 100.1 EBT margin (%) (2.9) 4.3 (9.0) (3.1) (4.5) (5.1) (2.7) (4.2) 2.2 2.0 1.3 8.1 (2.8) (4.1) 3.6 6.9 NP (8.5) 15.9 (3.3) (3.1) (0.2) (11.2) 284.0 (39.0) 5.9 5.6 4.2 27.6 0.9 233.6 43.3 90.1 NPM (%) (3.2) 5.6 (1.1) (1.0) (0.1) (4.0) 82.8 (11.4) 2.0 1.8 1.2 7.3 0.1 19.0 3.2 6.2 Note: Based on broadcast, films, music and performance earnings (excluded the games business performance from past earnings) Source: Company data, Korea Investment & Securities

CJ E&M (130960)

Company overview & Glossary

¢ Company overview

The no. 1 content specialist in Korea was formed by a merger among CJ Group’s entertainment division and six media subsidiaries: CJ Entertainment, CJ Media, On Media, M-net Media, CJ Internet and O’ Media Holdings. The company became CJ E&M on March 1, 2011.The company operates broadcast, films, music and performance businesses. The flagship broadcast division owns 18 TV channels in Korea, including tvN, OCN and Mnet, and operates the media (content) business in other Asian countries such as China and Vietnam.

¢ Glossary

ò Core program: Broadcast programs with over 2% viewership ratings

ò Video on demand (VoD): A service that allows subscribers to view programming at any time through the Internet or other communication line

16 CJ E&M (130960)

Balance sheet Income statement FY-ending Dec. (W bn) 2013A 2014A 2015F 2016F 2017F FY-ending Dec. (W bn) 2013A 2014A 2015F 2016F 2017F Current assets 1,005 1,039 1,014 1,084 1,154 Sales 1,188 1,233 1,344 1,452 1,559 Cash & cash equivalents 332 34 55 80 100 COGS 950 977 1,006 1,044 1,102 Accounts & other receivables 408 372 406 438 468 Gross profit 238 255 338 408 457 Inventory 7 5 6 6 7 Non-current assets 1,207 1,318 1,360 1,410 1,456 SG&A expenses 246 268 291 316 343

Investment assets 240 475 496 522 537 Operating profit (8) (13) 48 92 114 Tangible assets 135 88 99 106 126 Financial income 13 15 21 22 22 Intangible assets 783 695 699 711 717 Total assets 2,212 2,357 2,374 2,494 2,610 Interest income 8 10 15 16 17 Current liabilities 536 581 511 645 650 Financial expenses 23 23 22 21 21 Accounts & other payables 392 363 396 428 436 Interest expenses 14 15 13 12 12 ST debt & bonds 78 45 45 45 45 Other non-operating profit (18) (39) (16) (16) (16) Current portion of LT debt 4 102 0 100 100 Gains (Losses) in associates, 2 10 18 23 26 Non-current liabilities 401 271 319 221 222 subsidiaries and JV Debentures 249 150 200 100 100 Earnings before tax (34) (50) 48 100 126 LT debt & financial liabilities 122 103 100 100 100 Income taxes (9) 7 5 10 13 Total liabilities 937 852 830 866 873 Controlling interest 1,234 1,509 1,546 1,628 1,732 Net profit 1 233 43 90 113 Capital stock 194 194 194 194 194 Net profit of controlling interest 5 225 42 87 109 Capital surplus 973 973 973 973 973 Other comprehensive profit (4) (5) (5) (5) (5) Other reserves (20) 28 28 28 28 Total comprehensive profit (3) 228 38 85 108 Retained earnings 96 316 358 445 553 Total comprehensive profit of Minority interest 41 (4) (2) 1 5 3 221 37 82 104 controlling interest Shareholders' equity 1,275 1,506 1,544 1,629 1,737 EBITDA 334 290 349 400 425

Cash flow Key financial data

FY-ending Dec. (W bn) 2013A 2014A 2015F 2016F 2017F FY-ending Dec. 2013A 2014A 2015F 2016F 2017F

C/F from operations 388 195 325 364 357 Per-share data (KRW) EPS 134 5,821 1,080 2,246 2,823 Net profit 1 233 43 90 113 BPS 31,992 39,100 40,047 42,155 44,837 Depreciation 21 19 15 16 17 DPS 0 0 0 0 0 Amortization 321 284 287 292 294 Growth (%) Sales growth (14.8) 3.7 9.0 8.0 7.4 Net incr. in W/C (5) (99) (4) (14) (47) OP growth NM NM NM 93.6 23.7 Others 50 (242) (16) (20) (20) NP growth (86.3) 4,336.0 (81.5) 108.0 25.7 C/F from investing (326) (640) (246) (336) (332) EPS growth (86.4) 4,244.0 (81.4) 108.0 25.7 EBITDA growth (17.2) (13.2) 20.6 14.4 6.3 Capex (32) (19) (28) (24) (38) Profitability (%) Decr. in fixed assets 1 1 1 1 1 OP margin (0.7) (1.0) 3.5 6.3 7.3 Incr. in investment (6) (501) (8) (7) 6 NP margin 0.4 18.2 3.1 6.0 7.0 EBITDA margin 28.1 23.5 26.0 27.6 27.3 Net incr. in intangible assets (300) (327) (291) (304) (300) ROA 0.0 10.2 1.8 3.7 4.4 Others 11 206 80 (2) (1) ROE 0.4 16.4 2.7 5.5 6.5 C/F from financing 104 146 (58) (3) (4) Dividend yield - - - - - Dividend payout ratio 0.0 0.0 0.0 0.0 0.0 Incr. in equity 0 138 0 0 0 Stability Incr. in debt 109 14 (57) 0 0 Net debt (W bn) 58 (113) (110) (135) (155) Dividends 0 0 0 0 0 Debt/equity ratio (%) 35.6 26.7 22.3 21.2 19.9

Others (5) (6) (1) (3) (4) Valuation (x) PE 227.6 6.6 53.3 25.6 20.4 C/F from others 1 (0) 0 0 0 PB 1.0 1.0 1.4 1.4 1.3 Increase in cash 167 (299) 21 25 20 EV/EBITDA 3.8 4.7 6.1 5.2 4.9

Note: K-IFRS (consolidated)

CJ E&M (130960)

Changes to recommendation and price target

Company (Code) Date Recommendation Price target CJ E&M (130960) 05-10-13 BUY W44,000 08-09-13 BUY W49,000 11-14-13 BUY W44,000 04-09-14 NR - 04-27-15 BUY W76,000

80,000

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0 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14

■ Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance ò BUY: Expected to give a return of +15% or more ò Hold: Expected to give a return between -15% and +15% ò Underweight: Expected to give a return of -15% or less ò Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings.

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■ 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.

■ Important compliance notice As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of CJ E&M.

There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance.

Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for CJ E&M in the past 12 months;

Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from CJ E&M in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking services from CJ E&M in the next 3 months.

Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in CJ E&M’s securities at the time that the research report was published.

Korea Investment & Securities Co., Ltd. does not own over 1% of CJ E&M shares as of April 27, 2015. 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 covered in this report as of April 27, 2015.

Prepared by: Heuiseok Jeong

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HONG KONG DANIEL KIM, Managing Director, Head of HK Sales ([email protected] +852 2530 8950) DAN SONG, Sales ([email protected], +822-3276-5621) Korea Investment & Securities Asia, Ltd. Suite 2220, Jardine House 1 Connaught Place, Central, Hong Kong Fax: 852-2530-1516

SINGAPORE SUNG NAMGOONG, Managing Director, Head of Singapore Sales ([email protected] +65 6501 5601) ALEX JUN, Sales ([email protected] +65 6501 5602) Korea Investment & Securities Singapore Pte Ltd 1 Raffles Place, #43-04, One Raffles Place Singapore 048616 Fax: 65 6501 5617

LONDON JJ MOON, Managing Director ([email protected] +44 207 065 2765) Korea Investment & Securities Europe, Ltd. 2nd Floor, 35-39 Moorgate London EC2R 6AR Fax: 44-207-236-4811 Telex: 8812237

This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on this report and the company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is not intended for the use of private investors.

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