2H19 Outlook Media Improvement ahead Jeong-yeob Park +822-3774-1652 [email protected] 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 IN APPENDIX 1 AT THE END OF REPORT. Contents [Summary] Large pool of content coming into focus 3 I. 2019 status check 4 II. Medium/long-term outlook 11 III. At a crossroads 13 IV. Global peer group valuations 20 V. Top pick 22 CJ ENM [Summary] Large pool of content coming into focus Shares to be driven by content licensing/sales; Earnings to improve in 2H (P, US$mn) (%) Media/content business model focused on direct sales 500 FTSE KOREAKorea media MEDIA (L) indx (L) Key words: Global platforms, geopolitics, licensing fees, blockbusters, 40 Domestic ad market growth (R, YoY) investments, leverage Broadcast content export growth (R, YoY) 400 30 Media/content business model focused on ads Key words: Domestic market, ad trends, seasonality, politics/sports 300 20 200 10 100 0 OTT export expansion in 2016-18 ＞ Chinese market lull 0 OTT export expansion in 2019F + Chinese market recovery -10 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Note: 2017 exports are based on KOCCA estimates; 2018 exports are based on our estimates. Source: Thomson Reuters, KOCCA, Cheil Worldwide, Mirae Asset Daewoo Research 3| 2H19 Outlook [Media] Mirae Asset Daewoo Research I. 2019 status check: 1) Advertising Sluggish performance of • For 2019, the domestic ad market is expected to grow 3.5% YoY (outpacing GDP growth) to W11.3tr despite the absence of large-scale sporting events. traditional media • We forecast positive growth across all non-print segments, with mobile, generalist channels, and cable TV channels; Continuing continuing to drive growth. • The overall ad market is believed to have slowed down YoY in 1H19 largely due to a tough comparison stemming outperformance of from the Winter Olympic Games and the FIFA World Cup in 2018. digital ads • Decoupling of growth by channel: Digital (+7.6% in 2018; +9.7% in 2019F) > TV (+1.9% in 2018; +2.0% in 2019F) • Digital ad channels are benefiting from both quantitative (increase in time spent) and qualitative (higher cost efficiency relative to TV) factors. Digital surpassed broadcasting in 2016; Digital ads: Small market size relative to time spent Mobile ad market to approach broadcasting ad market in 2019 (Wtr) (%) Time spent share Ad M/S 5.0 TV terrestrial 50 TV terrestrial + Pay-TV 40 4.5 Mobile Digital 30 4.0 20 3.5 10 3.0 0 TV PC Mobile 2.5 (%) 2010 2013 2016 2019F 2.0 50 1.5 40 30 1.0 20 0.5 10 0.0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F Print Radio TV PC Mobile Source: KOBACCO, KOA, CJ ENM, Cheil Worldwide, Mirae Asset Daewoo Research Source: MezzoMedia, Mirae Asset Daewoo Research 4| 2H19 Outlook [Media] Mirae Asset Daewoo Research I. 2019 status check: 1) Advertising Commercial breaks to be • Currently, Korea’s three major terrestrial broadcasters are banned from running commercial breaks; regulations are more lenient in major markets such as the US, Japan, China, France, and the UK. introduced on terrestrial • The Korea Communications Commission (KCC) announced its plans for introducing and regulating terrestrial TV TV channels in 2H commercial breaks in December 2018; terrestrial TV channels could adopt commercial breaks in 2H19 amid the continued earnings slowdown. • Terrestrial broadcasters have already implemented premium commercial messages (PCMs) in an effort to boost profitability. • The adoption of commercial breaks is expected to boost the combined ad revenue of three terrestrial broadcasters by over W100bn. Ad rates relative to audience share (cable > terrestrial) Terrestrial TV channels could adopt commercial breaks in 2H19 (Wmn/%) The KCC attempted to introduce commercial breaks to terrestrial TV channels, but Jun. 2007 12 2014 2015 2016 2017 2018 withdrew its proposal. Sep. 2014 MBC and regional broadcasters called for the adoption of commercial breaks. Dec. 2018 The KCC announced plans to introduce and regulate terrestrial TV commercial breaks. 9 Feb. 2019 Regulations facing delays, with deliberation taking longer than expected. Broadcasting Act At present, there exists a ban on commercial breaks for terrestrial TV channels. The enforcement enforcement decree would have to be amended. 6 decree (Commercials) ② The permissible scope, time, frequency or methods, etc. of commercials under Article 73 of the Broadcasting Act (excluding non-profit, public commercials) shall comply with the standards in the following subparagraphs. 3 1. In cases of TV and radio broadcasting channels of terrestrial broadcasting business Article 59 operators (excluding terrestrial mobile multimedia broadcasting business operators), community radio broadcasting business operators, and terrestrial broadcasting program providers (excluding terrestrial mobile multimedia program providers): (d) Commercial breaks shall not be permitted; this shall not apply to broadcasts, such as athletic games, cultural or art events, etc., that have intermittent pauses or preparation 0 periods. CJEM (tvN) SBS KBS2 MBC Source: Nielsen, CJ ENM, Mirae Asset Daewoo Research Source: National Assembly Law Information Center, Mirae Asset Daewoo Research 5| 2H19 Outlook [Media] Mirae Asset Daewoo Research I. 2019 status check: 2) Content Increase in time slots • For content, broadcasting time slots are essential to securing ad revenue and global sales (content licensing revenue). • As licensing sales are generated after programming, content producers’ earnings are swayed by ratings and boosting licensing sales earnings (two determinants for their investments). • CJ ENM and JTBC have reported strong earnings in 2018-1H19. Studio Dragon and J Contentree will continue to produce high-budget content in 2H19 and beyond. • Opportunities for content producers: SBS is expanding investments, and generalist channels are subject to review for license renewal in 2020. • Content production forecasts for 2019: Studio Dragon (28 titles for domestic, 2 titles each for Netflix [NFLX US/CP: US$385] and China) and J Contentree (13 titles) 2013-18 annual avg. audience share comparison: Terrestrial and generalist channels to increase drama time Marked rises for cable and generalist channels slots in 2H19 (%) 16 150 Total no. of drama time slots in Korea 12 8 120 4 0 90 CJ E&M JTBC KBS2 MBC SBS (%) 50 60 40 30 20 30 10 0 Cable Generalist Terrestrial 0 2016 2017 2018 2019F Source: Nielsen, CJ ENM, Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research 6| 2H19 Outlook [Media] Mirae Asset Daewoo Research I. 2019 status check: 2) Content Better outlook for 2H19 • Shares of media and content platform companies were stagnant in 1H due to weaker earnings visibility (resulting from content depreciation starting in 4Q18) and a lack of blockbusters. • Overseas sales of dramas, including Encounter, Romance Is a Bonus Book, Abyss, and Sky Castle, remained robust. • The drama lineup for 2H19 is expected to be stronger. • Content producers could deliver earnings surprises on the back of well-established overseas distribution networks and a steady increase in content prices. Stable overseas sales of non-tentpole content in 1H Popular TV programs in 2018-1H19 (production costs of W800mn or below per episode) Misty (Feb. 2018) My Mister (Mar. 2018) Are You Human? (Jun. 2018) JTBC tvN, CPI 272.4 KBS2, CPI 272.1 Something in the Rain I Live Alone (Mar. 2018) (Apr. 2018) MBC, CPI 278.6 JTBC Mr. Sunshine (Jul.-Sep. 2018) tvN, CPI 293.4 High-budget content to be released in 2H Produce 48 (Jul-Aug. 2018) (production costs of W1bn or over per episode) Mnet, CPI 302.1 Sky Castle New Journey to the (Dec. 2018) JTBC West (Nov. 2018) tvN, CPI 283.0 Dr. Prisoner (Mar. 2019) KBS2, CPI 296.2 100 Days My Prince The President's Aide Encounter (Nov. 2018) (Oct. 2018) (May 2019, JTBC) tvN, CPI 326.0 Arthdal Chronicles (Jun. 2019, tvN) tvN, CPI 287.2 Note: Weekly content power index (CPI) Source: Press materials, Mirae Asset Daewoo Research Source: Nielsen, CJ ENM, Mirae Asset Daewoo Research 7| 2H19 Outlook [Media] Mirae Asset Daewoo Research I. 2019 status check: 3) Music Healthy corrections • In 1H19, the combined market value of Korea’s three major entertainment firms hit a low of W2.5tr (-22%), due mainly to 4Q18 earnings shocks and a series of celebrity scandals (1Q) . • However, the big three managed to defend their post-2011 valuation low. • Going forward, global digital revenue growth (YouTube Other platforms) and the rising profile of K-pop in the global market should drive continued expansion of both earnings and valuations. Combined market cap of three entertainment firms has Digital revenue expansion and growing profile of K-pop justify bounced back after falling to W2.5tr valuation re-ratings (Wtr) (Wbn) 3.6 Combined market cap 2018 high (10/1): 2019 high (1/7): 40 YouTube-related net revenue (big three) 35 5/3 closing 35 3.3 price: W2.7tr 30 3.0 27 25 2.7 20 17 2.4 15 12 2.1 2019 low (3/15): W2.5tr 10 1.8 5 1.5 0 1/18 3/18 5/18 7/18 9/18 11/18 1/19 3/19 5/19 2017 2018F 2019F 2020F Source: FnGuide, Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research estimates 8| 2H19 Outlook [Media] Mirae Asset Daewoo Research I. 2019 status check: 3) Music Solid earnings and • Market growth forecast (CAGR) for 2017-21: +2.3% for Japanese concerts, -2.7% for domestic album sales, +7% for valuation variables digital music • Negative growth of domestic album sales eased: 1.9mn copies for BTS (August 2018), 1.2mn copies for EXO (November 2018) • Korean artists will likely grab an increasing share of the Japanese concert market through 2020: The current generation of idols appears to be reaching dome tour status more quickly than in the past.