CFA Institute Research Challenge hosted by CFA Society of Korea Sogang University 1 Student Research Media Industry, Contents Sector This report is published for educational p urposes only by students competing in the CFA Institute Research Challenge. Jcontentree (KQ 036420) Date: 30 Dec, 2013 Recommendation: Buy Price: KRW 4,125 Target Price: KRW 5,430 (2015F) USD/KRW: 1,055.6 Upside: 31.64% Executive summary Market Profile With Industry and JTBC ready, the time to harvest profit is coming! 52-Week Price Range (KRW) 3,815-5,650 We initiate coverage of Jcontentree with a BUY and target price of KRW 5,430 (Upside is Average Daily Volume 929,874 32%) because the company has constructed an effective ‘Business portfolio’, and the company Shares Outstanding 65.50mn is now entering a ‘success sequence’. Jcontentree has two business sectors: platform and Main Shareholders 22.29mn content. Platform sector plays a role like a ‘root’ of the tree. Also, based on this ‘root’, the Joongang Ilbo 7.36mn company is now reaping ‘fruit’ in their content sector. Joongang Media Network 7.44mn The period of content has finally arrived. Seok-hyun, Hong 6.56mn The Korean media industry is now in the transitional period from the platform stage to content Jung-do, Hong 0.93mn stage. Accordingly, Korea media industry has lots of potential for revenue growth. First, the Market Capitalization (KRW) 270.2bn price of content is rising. Second, the quantity of content is increasing. This potential is ROE 2015E 10.38% prominent especially in cable channels. Content of cable channels gets competitiveness Debt to Equity 2015F 142.58% because it can make more attractive content without any regulation seen in terrestrial channels. EPS (KRW) 2015F 289 FRUITS (Broadcasting); main powerful driver of Jcontentree BPS (KRW) 2015F 2,116 The company provides drama to JTBC (one of the cable channels) and distributes the content P/E Ratio 2015F 14.26x aired on JTBC. First the company will sell more drama because JTBC will schedule more P/B Ratio 2015F 1.95x drama based on their capital strength. Second the company gets more profit from distribution Source: Korea exchange, team estimates because of increasing price and quantity. Moreover the OPM of broadcasting sector will be improved from around 2% to 9% in 2015F. ROOTS (Platform); providing energy for Jcontentree Platform sector including movie and magazine businesses is a strong cashcow for Jcontentree. Both of them have low risk but also stable profit. Movie market has grown 14% annually Figure 1. Jcontentree’s price history compared based on increase of price and quantity. Movie business also has stable cash flow through with KOSDAQ last five years. operational efficiency. With magazine business its market share ranks the top in the magazine (Unit: KRW, point). industry. Moreover fashion, male, and luxury magazines which the company publishes are all 7,000 600 in growing trend. Valuation SOTP valuation suggests 31.64% upside potential with implied P/E ratio 18.92x in 2015F 3,500 500 (including dilution effect of 8.09% and reduction in interest expenses). This multiple is appropriate because it is still undervalued compared with the average of peer’s P/E ratio 23.2x. Therefore, target price KRW 5,430 calculated from SOTP valuation is favorable. CJ E&M which is a representative peer company of Jcontentree shows a P/E ratio 48.4x. Now, 0 400 Jcontentree is ready to grow structurally and shows an undervalued P/E multiple of 14.26x. It is reasonable for Jcontentree to reach 18.92x. Price(L) KOSDAQ(R ) Investment risks Source: Korea exchange, team research Jcontentree issued a convertible bond with zero-coupon on Oct 17, 2013. Dilution effect will be 6.75% in 2015F and it can be 8.09% if stock price falls below KRW 3,395. However, by repayment of debt and refinancing, the company reduced interest expenses. Because interest effect covers dilution effect, CB will have a limited impact on the company. 1 CFA Institute Research Challenge 30 Dec, 2013 Business Description Jcontentree is a content company based on media platforms. The company which started from Figure 2. Sale structure of Jcontentree a newspaper company, IS Daily Sports, now belongs to a media company, Joongang Media Network. (Appendix 1) 2012 Figure 3. Management structure of Jcontentree 27% 73% 2015F Source: Company report (2013) Platform: ‘Root’ of Jconten‘tree’ Platform part plays a role of cashcow for the company. The platform sector comprises movie 36% (Megabox) and magazine (Joongang M&B) parts. Megabox manages multiplex theaters and currently has 20% of the entire movie market. (Appendix 2) Also, Joongang M&B publishes 64% magazines which have high awareness in Korea. The number of platforms in mass media industry is rare because of enormous initial cost. It also has entry barrier by being selected with awareness. Therefore, having famous platforms means that the company generates profit continuously. Content Platform Content: ‘Fruit’ of Jconten‘tree’ Content part, especially broadcasting, has grown up over the market because of their superiority in making content. Dramahouse&JcontentHub, which is a subsidiary of the Source: Company data, team estimates company, is in charge of broadcasting channel (JTBC) from production to distribution. In other words, Jcontentree provides and distributes TV programs for JTBC simultaneously. Therefore, it is expected that Jcontentree has a chance to make double profit for one TV program of JTBC. In case of Q channel, it is aired on various TV program by purchasing 2nd copyright of the TV program. There is no tasty ‘Fruit’ without strong ‘Root’ Jcontentree draw up growth strategy led by effective business portfolio. The company is to maximize profitability by entering the content industry that generates infinite added value, based on earnings from stable platform. By having strong platforms, Jcontentree has been secured steady revenue. In addition, the company has raised profitability by investing on their content which has an infinite value. To make good content, it is necessary to invest in infrastructure for content. In case of Jcontentree, it is possible to make great content because of huge investment based on strong cashcow. Therefore, short-term goal of the company is to secure the growth potential and stability at the same time. And final goal of the company is becoming a comprehensive media company based on stable cashflow in platform sector. (Appendix 3) 2 CFA Institute Research Challenge 30 Dec, 2013 Figure 5. Worldwide content sales. Industry Overview and Competitive Positioning (Unit: KRW billion ) 1,994 2,100 1,890 Industry overview; the period of content has finally arrived. 1,782 The Korea media industry is now the transitional period from platform stage to content stage. (Figure 4) In the past, the main part of the media industry was the platform industry. However, 1,400 the future of the media industry is expected to be driven by the content industry. According to the diversification of the platforms (Smartphone and Tablet PC), consumers could actively choose content regardless of time and location. So, quality of content ‘itself’ (not platforms) is 700 the main factor for consumers to choose content. Therefore, further media industry will be led by the content industry. (Figure 5) - 2010 2011 2012 2013F2014F2015F Figure 4. Change in media industry Platform is main Content is main Source: Korea Creative Content Agency (KOCCA) Platform’s Variance of Convergence Age of high- golden age Platform of Media quality content One way, collective consumption of Content Duplex, individual consumption of Content Source: Team research Figure 6. Average revenue per unit (Unit: KRW) High potential in Korea content market Edited ARPU First, the price of content is rising. In broadcasting market, average revenue per user in Korea (by GDP level and viewing time) is KRW 9,000 compared to that of USA, KRW 21,196, considering both GDP level and USA 21,196 viewing time (Figure 6, Appendix 4). Thus, there is much possibility for a price rise of content Korea 9,000 as the media industry develops. Second, the quantity of content is increasing. As broadcasting is converted from analogue to digital in 2013, the compatibility of VOD (Video on demand) is Multiples 2.36x improved. Therefore, more platforms can distribute content easily, and it leads to an increase Source: IMF, emarketer, Korea Communications Commission in sales of VOD. With Japan, VOD sales increased 123% after broadcasting converted to team estimates digital in 2011. (Appendix 5) Figure 7. Change of viewer ratings in USA Cable channel is main fruit (Unit: % ) This potential is prominent especially in cable channels. Nowadays, content of cable channel 60 gets competitiveness because it can make more attractive content without regulations seen in 55.3 terrestrial channels. Cable channels can produce violent and sexually suggestive content which fill viewer’s need. Therefore, the border between cable channels and terrestrial channels 50 49.5 becomes vague as viewer ratings of cable channels rise. In USA, viewer ratings of cable 44.4 channels outdid that of terrestrial channels in 2002. (Figure 7) And Korean broadcasting market is also showing the signs of this trend. For example, viewer ratings of “Answering 40 38.9 1994” aired on tvn (cable channel) got first place for the same time. Thus, it’s not far in the 35 future that cable channels can compete evenly with terrestrial channels. (Appendix 6) 30 Figure 8. Competitors of Jcontentree Total terrestrial channels Total CA channels Source: Neilson research Source: Each company, team research 3 CFA Institute Research Challenge 30 Dec, 2013 Platforms: Movie and magazine already in mature period CJ CGV is the main competitor of Jcontentree in movie sector, which accounts for 41% of the market.