Media/Entertainment The golden age of video content The increasing search for content Overweight (Maintain) In just a short period of time, over-the-top (OTT) services have emerged as a key platform for the global media industry. In response, both traditional media companies, Industry Report such as Walt Disney (NYSE: DIS, CP: US$97.06) and Time Warner (NYSE: TWX, CP : US$100.47), and new media companies, such as Netflix (NASDAQ: NFLX, CP : September 5, 2017 US$179.00) and Amazon (NASDAQ: AMZN, CP: US$979.47), are now battling to source large amounts of content from outside providers. As media companies broaden their geographical footprint and turn to content to differentiate their platforms, licensed content, in addition to self-produc ed content, are becoming increasingly important. For example, Netflix is planning to spend W8tr on content alone next year. In our view, Mirae Asset Daewoo Co., Ltd. global competition to license content will play out for quite some time. [Media /Entertainment/Leisure ] We believe the battle for content will benefit video content producers. The proliferation of accessible OTT platforms has created new sources of content demand, Jeong -yeob Park presenting opportunities across different formats, sizes, and targets. We expect +822 -3774 -1652 content licensing to grow and a more diverse range of conten t to attract traffic. We [email protected] view this as another positive change for Korean content producers, which saw increased bargaining power following the introduction of general programming cable channels and the beginning of content exports. We believe some paralle ls can be drawn between the current situation and the 1990s, when the programming of externally-produced dramas was institutionalized in Korea. At the time, demand for content soared alongside the advent of cable TV channels, spawning numerous independent studios. Similarly, we think the current OTT-driven market changes will breathe renewed life into the production industry. Opportunities for channel operators, independent studios, and entertainment agencies We think exports via global OTT services have the potential to become a new revenue stream. OTT services represent a potentially significant market, as they target international audiences. There are also different types of demand and licensing methods available on OTT services, which allow for more predictable and steadier sales. Two Korean dramas ( Secret Forest and Man to Man ) recently grabbed headlines after Netflix bought the licensing rights to the shows for huge sums (W3-6bn). We believe OTT services will be a major boon for the Korean media indu stry, which has been plagued by uncertainties surrounding exports to China. We believe participants in the drama (video) production and programming value chain can take advantage of OTT services’ two profit models (subscription fees and digital adverti sing). First, we look for exports to global premium platforms (based on subscription models). These platforms mostly seek high-quality, genre-oriented content with big budgets. Domestically, we think companies like CJ E&M and J Contentree are better positioned because of their platform-production integration, which makes it easier for them to secure funding and recognition. Second, we see benefits from the growth of the digital advertising market. A greater variety of content formats—such as broadcasting clips, user-generated content (UGC), and web/mobile-only content—are springing up for digital ads, providing producers with additional opportunities. Among multi-channel network (MCN) operators, we believe CJ E&M deserves attention. Meanwhile, entertain ment agencies, which enjoy deep ties with celebrities and directors/writers, are now joining hands with online platform providers. We think their strength in human capital, a critical component of video content, makes them well-positioned to expand their s cope of business and ensure stable demand. Our top picks are CJ E&M (130960 KQ) and SM Entertainment (041510 KQ) We present a Buy rating on CJ E&M with a target price of W97,000, and recommend the stock as our top pick. CJ E& M’s content offerings are strongly positioned not only in the TV segment, but also in digital platforms, and are highly competitive in terms of both advertising and licensing. We also expect drama licensing to gain further steam following the listing of subsidiary Studio Dragon. We present a Buy rating on SM Entertainment with a target price of W37,000. Among entertainment agencies expanding their business scope, we are most optimistic on SM Entertainment, given the earnings visibility of its core business , the addition of the new advertising division, and synergies between existing and new businesses. September 5, 2017 Media/Entertainment C O N T E N T S Key charts 3 1. Full-fledged competition across platforms 6 Changes in overall content value chain 6 Competition among new platforms to gain dominance 10 II. Media content: New opportunities 13 Exports via global OTT services to be new revenue stream 13 Global OTT services to present greater opportunities 15 Content producers facing newfound opportunities amid platform shift 21 III. TV ads: Targeting also holds the key 25 Internet ads > TV ads 25 Competitiveness of media and channels hinges on targeting capabilities 28 IV. Entertainment agencies: Promising new businesses 31 Platform-content (artists) integration is expanding 31 Synergies with main businesses 32 V. Investment strategy and valuation 35 Key Recommendations 38 CJ E&M (130960 KQ) 39 J Contentree (036420 KQ) 55 SM Entertainment (041510 KQ) 61 YG Entertainment Inc. (122870 KQ) 68 Mirae Asset Daewoo Research 2 September 5, 2017 Media/Entertainment Key charts Figure 1. OTT services that have changed the conventional media value chain Source: Mirae Asset Daewoo Research Figure 2. Vertical integration increasing in content production Source: Mirae Asset Daewoo Research Figure 4. Demand for outsourced content to continue to Figure 3. Fragmented competition by revenue model expand, amid shift to integrated competition Competition Competition for for fees advertisers (subscriptions) (ratings) Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 September 5, 2017 Media/Entertainment Figure 5. Big market is emerging (US$mn) 700 600 500 400 300 200 Variety 15% 100 Drama 75% 0 2005 broadcasting 2010 broadcasting 2014 broadcasting 2015 broadcasting Breakdown by Netflix's potential exports exports exports exports genre investments in Asia Note: Netflix’s potential investments in Asia are based on our conservative estimate; Source: KOCCA, Netflix, Mirae Asset Daewoo Research Figure 6. Outsourced content programming act boosted production industry in the past (No.) Increased global OTT (%) 700 No. of active businesses (L) Multi-content demand expected 42 Minimum % of outsourced programs (R) channels established 600 40 500 38 Korean Wave 400 in Japan (2002: Winter Sonata) 36 300 34 200 100 32 0 30 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Note: Active businesses refers to businesses that have supplied at least one product to broadcasters over previous three years Source: KOCCA, Mirae Asset Daewoo Research Figure 7. Emergence of new platform (smartphones) drove up Figure 8. Only a few production companies can afford high content-related stocks steadily production costs (p) Telco Mobile Mobile Mobile (Wbn) 12 100 infrastructure devices platforms content 80 10 Average: W8.8bn 60 8 40 Alcatel-Lucent 6 Apple 20 Alphabet Tencent 0 10 11 12 13 14 15 Source: Thomson Reuters, Mirae Asset Daewoo Research Source: Media reports, Mirae Asset Daewoo Research Table 1. Netflix’s external investments in Asia (Wtr)) Asian investments as a Asian investments as a % of overseas Netflix’s external licensing budget percentage of overseas percentage of external investments (a) investments (b) investments: (a)*(b) 60% 65% 70% 75% 80% 85% 30% 40% 12% 0.6 0.6 0.7 0.7 0.8 0.8 40% 50% 20% 1 1 1.1 1.2 1.3 1.4 45% 55% 25% 1.2 1.3 1.4 1.5 1.6 1.7 50% 60% 30% 1.4 1.6 1.7 1.8 1.9 2 60% 70% 42% 2 2.2 2.4 2.5 2.7 2.9 Source: Mirae Asset Daewoo Research Mirae Asset Daewoo Research 4 September 5, 2017 Media/Entertainment Figure 9. Impact of increase in digital video content Figure 10. Expansion of global OTT market consumption (EB) (US$bn) 80 Other 100 PC internet video ads CAGR: 25.3% File sharing 70 Mobile video ads Video 80 On-demand content 60 Music Subscription content Web surfing 50 SNS 60 40 Software downloads 30 CAGR: 46.1% 40 20 20 10 0 0 2017 2022F 2012 2017F 2021F Source: Ericsson, Mirae Asset Daewoo Research Source: PwC, Mirae Asset Daewoo Research Figure 12. tvN, Mnet, and JTBC produce popular digital Figure 11. Rapid growth of digital ad market content (%) (mn plays) 12 Average growth in most recent three years 30 Views during the fourth week of August 9 25 6 Overall market growth: 2.9% 3 20 0 15 -3 -6 10 -9 5 Print Radio Digital prod. Pay TV Outdoor/ (total) Terrestrial 0 Broadcasting tvN Mnet JTBC YouTube MBC KBS SBS Source: Cheil Worldwide, KOBACO, Mirae Asset Daewoo Research Note: Based on NAVER TV’s Top 100 content; Source: NAVER, Mirae Asset Daewoo Research Figure 13. Targeting capability also important in broadcasting channels (%) 2) Qualitative gap: Audience share - TV ad share (pay TV) 20 1) Narrowing the gap (quantitative): Ad market share reflects Audience share - TV ad share (terrestrial) Ad market share converging with media competiveness 15 audience share (targeting) 10 5 0 -5 -10 -15 2011 2012 2013 2014 2015 2016 Source: AGB Nielson, Cheil Worldwide, KOBACO, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 5 September 5, 2017 Media/Entertainment 1. Full-fledged competition across platforms Changes in overall content value chain Emergence of OTT services leads to diversification of distribution channels Over-the-top (OTT) services have emerged as a key platform for the global media industry.