Company Note September 30, 2011
CJ E&M (130960)
BUY(Maintain) 3Q11 preview: Taking a breather before the rally
TP: W57,000 (Down)
KOSPI(9/29) 1,769 Short-term profit erosion on mounting production costs; TP lowered Stock Price ('9/29, won) 39,850 We maintain BUY on CJ E&M but trim our TP from W63,000 to W57,000. Given Shares outstanding (mn) 38 the rising costs to produce broadcast content, we lowered our OP estimates 7.4% Market cap (USD mn) 1,288 for 2011 and 2% for 2012, respectively. To derive the new price, we applied a 52-week low/high (won) 27,700/58,400 target EV/EBITDA 6.4x (12MF global media company average) to the 12MF 6M avg. daily turnover (USD mn) 21 EBITDA. Despite the downward price adjustment, we reiterate BUY due to the Free float (%) 56.1 following. First, earnings should improve from 2011. We expect a three-year sales Dividend Yield(2011F, %) 0.0 CAGR of 8.6%, OP of 27% and adj. NP of 26.5% (excluding one-off gains), from Foreign ownership (%) 4.8 2011. Positive catalysts include 1) more competitive broadcasting backed by Major shareholders (%) internally produced content, greater ad and subscription revenues on digital CJ Corp 39.6 subscriber additions, and 2) overall business expansion and brisk overseas market forays in the mid to long term. Second, content distribution is accelerating via Stock performance 1M 6M 12M diverse avenues such as video on demand (VoD), mobile devices and the Internet. Absolute (%) (12.2) (11.0) (15.5) Third, the games division should deliver better earnings in 2012 and onward Relative (%) (8.9) 4.5 (0.9) backed by new titles such as Special Force 2 , which should begin paid services Price chart from Oct.
150 (2010.10.15=100) CJ E&M 3Q11 earnings up YoY, but likely to miss consensus 130 KOSPI We estimate a 12.4% YoY increase in sales to W323.5bn in 3Q11 thanks to 1) 110 higher ad rates* 2) greater subscription revenue, and 3) more overseas concerts 90 and performances (* Super Star K Season 3, airs from Aug and enjoys ad rates that 70 are as high as those of terrestrial programs and fewer free ad slot offerings to 50 major advertisers led to actual ad rate rises). We expect an 8.6% YoY rise in OP to 30 W21.5bn. However, we believe 3Q11 results will fall short of the consensus (OP Oct-10 Jan-11 Apr-11 Jul-11 W24.7bn) due to the following. 1) Production costs jumped by W10bn as CJ E&M added Comedy Big League and Top Gear Korea to its program lineup in a strategic effort to enhance competitiveness before comprehensive channels’ market entry. 2) The marketing cost burden increased due to the delayed launch of Special Force 2 (online first-person shooter) paid services.
Broadcast business, no cause for serious concern As comprehensive channels go on air from 2012, there are concerns that CJ E&M, a leading cable TV player, will see a severe decline in ad revenue growth and higher production costs. However, we believe ad revenue will grow 11% YoY, despite the intensifying competition, as 1) Korea’s four comprehensive channels are likely to generate ad revenue (2012F W225.1bn) by cannibalizing ad market share small- and mid-size program providers (PPs), newspapers and magazines,
Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE Shiwoo Kim Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%) 822-3276-6240 2010A 99 13 9 (0) (69) NA 57 NA 8.6 0.6 (0.1) [email protected] 2011F 1,141 110 166 156 4,893 NA 284 8.1 6.1 1.2 20.1 2012F 1,415 156 162 124 3,298 (32.6) 336 12.1 4.9 1.1 9.4 2013F 1,526 189 202 154 4,103 24.4 379 9.7 4.1 1.0 10.6 2014F 1,635 234 252 196 5,113 24.6 430 7.8 4.2 0.9 11.8
Note: Net profit and EPS are based on figures attributed to controlling interest
CJ E&M (130960)
rather than terrestrial networks and top-tier cable PPs. 2) Comprehensive channels will face challenges securing competitive content in the early stages of operation, which could add more luster to the incumbent CJ E&M. In addition, broadcasting costs (including in-house production, program sourcing costs and others) are forecast to grow 7.2%, by may be more tightly controlled.
Valuation
Value Note 12MF EBITDA (W bn) 322.7 12MF net debt (W bn) -84.7 Target EV/EBITDA (x) 6.4 12MF global media company average Fair EV (W bn) 2,058.9 Fair shareholders’ value (W bn) 2,143.6 Shares outstanding (‘000) 37,552 Excluding treasury shares Target price (KRW) 57,083
Source: Korea Investment & Securities
Changes to earn ings estimates (W bn)
2011F 2012F Previous Revised (% chg) Previous Revised (% chg) Sales 1,121.4 1,140.6 1.7 1,396.7 1,415.1 1.3 OP 119.2 110.3 (7.4) 159.0 155.9 (2.0) NP 164.0 156.2 (4.7) 126.4 123.8 (2.0)
Source: Korea Investment & Securities
Quarterly earnings estimates (guidance basis) (W bn)
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11F 4Q11F (% YoY) (% QoQ) Sales 231.3 258.9 287.8 317.2 272.9 322.5 323.5 357.7 12.4 0.3 Broadcast 107.8 143.5 132.0 165.0 130.1 175.1 170.7 190.6 29.3 (2.5) Games 64.0 61.9 68.7 70.5 75.6 67.2 62.3 66.8 (9.4) (7.4) Films 31.8 24.9 49.9 32.4 30.9 44.8 44.4 45.0 (11.1) (1.0) Music/concerts 27.7 28.6 37.2 49.3 36.3 35.4 46.2 55.3 24.3 30.6 OP 7.9 11.8 19.8 21.2 15.0 35.3 21.5 45.8 8.6 (39.1) Broadcast (2.7) 4.8 0.4 16.1 2.0 22.3 9.4 24.8 2,258.8 (57.7) Games 12.1 3.4 11.8 5.2 12.7 7.8 3.8 8.4 (67.8) (51.3) Films 0.7 3.4 6.0 (2.7) (1.0) 3.4 4.6 6.4 (22.9) 36.1 Music/concerts (2.2) 0.2 1.6 2.6 1.3 1.8 3.6 6.1 127.3 102.0
Source: Company data, Korea Investment & Securities
2 CJ E&M (130960)
Ads revenue trends Subscription revenue trends
(W bn) (W bn) 520 476.6 250 235.1 470 445.1 205.6 401.0 420 200 178.9 370 336.1 293.9 142.3 320 285.9 150 132.4 253.2 270 247.9 105.0 220 100 178.2 77.7 67.2 170 51.7 120 50
70
20 0 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Source: Korea Investment & Securities Source: Korea Investment & Securities
Share for Special Force 2 in Korean net café Unique visitors for Mnet.com
(%) Aion Sudden Attack ('000 users) 18 Special Force Special Force 2 5,000 MelOn M.net Dosirak Soribada
16 4,500 4,000 14 3,500 12 3,000 10 2,500 8 2,000 6 1,500 4 1,000
2 500
0 0 08-01 08-06 08-11 08-16 08-21 08-26 08-31 09-05 09-10 09-15 09-20 09-25 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11
Source: Gametrics Source: Korean click
Num. of audiences and estimated profit from major movies Total audiences for movies that CJ E&M distributed
('000 audiences) (W bn) ('000 audiences) (%) 9,000 5 12,000 70 8,000 Audience (LHS) Audience (LHS) 4 60 7,000 10,000 Expected profit (RHS) MS (RHS) 6,000 3 50 5,000 2 8,000 4,000 40 3,000 1 6,000 2,000 0 30 1,000 0 -1 4,000 20 e t 7 2 n e d d h r ck r 3 ny bl ig ui ory to nda Gl Lov min ruci ds Q rme a Sun tomers G a 2,000 in Sec p g gamin 10 H sfo u us n F C ate Autum Me Me The C a L Tr Morning ious Kung pic 0 0 Sus Jan-10 May-10 Sep-10 Jan-11 May-11
Note: The Crucible, Hindsight are now playing. Source: Korea Investment & Securities Source: Korean Film Council, Korea Investment & Securities
3 CJ E&M (130960)
Balance sheet Income statement
FY-ending Dec. (W bn) 2010A 2011F 2012F 2013F 2014F FY-ending Dec. (W bn) 2010A 2011F 2012F 2013F 2014F Current assets 178 709 717 789 845 Sales 99 1,141 1,415 1,526 1,635 Cash & cash equivalent 43 91 99 122 139 Gross profit 39 377 476 535 598 Accounts & other receivables 83 274 325 351 360 SG&A expense 26 266 319 343 362 Inventory 0 2 3 3 3 Non-current assets 589 1,140 1,216 1,317 1,413 Other operating gains 0 -1 -1 -2 -2
Investment assets 149 526 509 552 592 Operating profit 13 110 156 189 234 Tangible assets 34 54 70 85 97 Financial income 1 9 13 15 16 Intangible assets 394 378 410 435 463 Total assets 767 1,850 1,934 2,106 2,258 Interest income 1 7 11 13 14 Current liabilities 97 202 170 227 204 Financial expense 3 15 13 10 7 Accounts & other payables 30 100 125 130 139 Interest expense 3 13 11 8 5 ST debt & bond 60 65 30 25 15 Other non-operating profit 0 57 3 3 3 Current portion of LT debt 0 6 10 11 12 Gains (Losses) in associates, -1 4 4 4 5 Non-current liabilities 128 149 138 93 71 subsidiaries and JV Debentures 50 70 66 34 20 Earnings before tax 9 166 162 202 252 LT debt & financial liabilities 60 44 28 12 0 Income taxes 4 25 36 45 56 Total liabilities 225 351 308 321 275 Controlling interest 301 1,254 1,379 1,535 1,728 Net profit 6 159 126 157 196 Capital stock 25 190 190 190 190 Net profit of controlling interest 0 156 124 154 192 Capital surplus 276 910 910 910 910 Other comprehensive profit 0 2 2 2 2 Capital adjustments 1 -4 -4 -4 -4 Total comprehensive profit 6 161 128 159 197 Retained earnings 0 156 280 434 626 Total comprehensive profit of Minority interest 241 245 247 250 254 0 158 125 156 193 controlling interest Shareholders' equity 542 1,498 1,626 1,785 1,982 EBITDA 57 28 4 336 379 430
Cash flow Key financial data
FY-ending Dec. (W bn) 2010A 2011F 2012F 2013F 2014F FY-ending Dec. 2010A 2011F 2012F 2013F 2014F
C/F from operating 40 -149 293 352 332 per share data (KRW) EPS -69 4,893 3,298 4,103 5,113 Net profit 6 159 126 157 196 BPS 60,683 33,170 36,474 40,574 45,675 Depreciation 1 13 16 18 20 DPS 0 0 0 0 0 Amortization 43 160 165 171 176 Growth (%) Sales growth NM 1,046.8 24.1 7.8 7.1 Net incr. in W/C -11 -479 -10 10 -56 OP growth NM 778.4 41.3 21.6 23.5 Others 2 -2 -4 -4 -5 NP growth NM NM -20.7 24.4 24.6 C/F from investing -23 -613 -234 -277 -279 EPS growth NM NM -32.6 24.4 24.6 EBITDA growth NM 397.6 18.5 12.7 13.6 CAPEX -9 -33 -31 -33 -31 Profitability (%) Decr. in fixed assets 0 0 0 0 0 OP margin 12.6 9.7 11.0 12.4 14.3 Incr. in investment 21 -372 22 -37 -33 NP margin -0.3 13.7 8.8 10.1 11.7 EBITDA margin 57.3 24.9 23.8 24.8 26.3 Net incr. in intangible assets -21 -144 -197 -196 -204 ROA 0.7 12.2 6.7 7.8 9.0 Others -14 -64 -27 -11 -11 ROE -0.1 20.1 9.4 10.6 11.8 C/F from financing 0 810 -51 -52 -36 Dividend yield 0.0 0.0 0.0 0.0 0.0
Incr. in equity 0 800 0 0 0 Stability Net debt (W bn) 77 -20 -107 -193 -256 Incr. in debts 0 15 -51 -52 -36 Debt/equity ratio (%) 31 12 8 5 2 Dividends 0 0 0 0 0 Valuation (X)
Others 0 -4 0 0 0 PER NM 8.1 12.1 9.7 7.8 PBR 0.6 1.2 1.1 1.0 0.9 C/F from others 0 0 0 0 0 PSR 1.1 1.1 1.1 1.0 0.9 Increase in cash 17 48 8 23 17 EV/EBITDA 8.6 7.2 5.8 5.0 4.2
Note: Based on K-IFRS (consolidated)
4 CJ E&M (130960)
Changes to recommendation and price target
Company (Code) Date Recommendation Price target CJ E&M (130960) 03-22-11 BUY W63,000 09-29-11 BUY W57,000
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0 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11
5 CJ E&M (130960)
■ Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and 15% Underweight: Expected to give a return of +15% or less
■ 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.
■ Important Disclosures 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 Corporation.
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 Corporation 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 Corporation in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment banking services from CJ E&M Corporation in the next 3 months.
Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in CJ E&M Corporation’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 Corporation shares as of September 29, 2011. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of September 29, 2011.
Prepared by: Shiwoo Kim
This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. 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. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client’s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions.
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