Cj Enm(035760

August 9, 2018

Result Comment

CJ ENM (035760 KS)

Decent performance



2Q consolidated operating profit in line at W79.2bn

Price (Aug. 8)

(re-initiate)

3Q consolidated operating profit estimated at W86bn; earnings to stay solid

W236,200

Re-initiate coverage on CJ ENM with a BUY rating and a target price of W270,000

Target Price % variance

W270,000
14.3%

2Q consolidated operating profit in line at W79.2bn

CJ ENM posted its first results after the merger on July 1. Consolidated operating profit came in at W79.2bn in 2Q, meeting our forecast of W79.3bn.

HeeJin Park SeJong Hong

(82-2) 3772-1562 [email protected]

(82-2) 3772-1584 [email protected]

The E&M division delivered solid earnings with sales up 9.2% YoY and operating profit up 25% YoY. Broadcasting exceeded expectations with operating profit increasing 22% YoY to W29.2bn. Ad sales growth of 10.2 YoY also turned out better than expected. Music and cinema showed mixed results. The music division posted sales of W66.5bn (+41.1% YoY) and operating profit of W4.2bn (+114% YoY) on strengthening IP (intellectual property) business. By contrast, the cinema/performance division remained in the red with an operating loss of W3.9bn due to stagnant growth of moviegoers and weak line-up. The commerce division (CJ O shopping) registered standalone operating profit of W40.3bn and consolidated W33.9bn. The standalone figure was in line with estimate (W40.5bn), whereas the consolidated figure was sluggish due to inventory losses at an overseas subsidiary.

Market Cap. Par Value
W5,179.0bn/ US4,543.0mn
W5,000
Outstanding Shares Free Floating Shares 52-Week High/Low
21.9mn
10.3mn(46.9%)
W286,400/W191,100
60-Day Avg. Trading Volume 60-Day. Avg. Trading T/O Foreign Ownership
76,069shrs W18,287mn
20.91%

3Q consolidated operating profit estimated at W86bn; earnings to stay solid

In 3Q, the E&M division’s operating profit is expected to expand up to W33.8bn (+165.7% YoY) thanks to the subsidiary Studio Dragon. The subsidiary’s consolidated operating profit is projected to surge 251.8% YoY to W23.4bn. Sharp growth should be reported in both the top line and profits. Record quarterly earnings may be anticipated in 3Q on recognition of revenues from the drama title Mr. Sunshine. The cinema division is likely to be able to narrow its losses due to favorable seasonality. The commerce division should see standalone operating profit increase 19% YoY to W36.2bn. We forecast CJ ENM’s consolidated operating profit to reach W86bn in 3Q.

Major Shareholders

12M
3M
12.4% 15.9% 14.9% -6.5%
Relative performance

Re-initiate coverage on CJ ENM with a BUY rating and a target price of W270,000

We suggest a target price of W270,000 for CJ ENM, reflecting the effect of the merger and the value of individual business units. We recommend a BUY rating in view of: 1) robust broadcasting growth backed by advertising and copyrights (2018F operating profit +91.7% YoY); 2) stable profits generated by CJ O Shopping; and 3) expanding market cap. of Studio Dragon.



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 certification and important disclosures & disclaimers at theendof this report.

(W bn)

1,095.9 1,136.5 1,174.0 1,243.5 1,338.9

OP
(W bn)

144.9 157.5 163.8 178.4 192.4

Pre-tax (W bn)

44.8
158.7 174.0 184.4 195.6

NP
(W bn)

16.1
128.2 132.9 133.4 142.3

EPS
(Won)

2,587
20,621 21,389 21,459 22,894

Growth
(%)

(73.4) 697.0
3.7

BPS
(Won)

1.5 1.8 1.6 1.4 1.3

ROE Net Debt to Equity
(X)

63.0 11.2 11.0 11.0 10.3

2016 2017 2018F 2019F 2020F
109,908 129,150 147,628 165,886 185,385
5.6 7.8
28.7 26.2 24.2

17.3 15.5 13.7 13.0
(13.8) (21.3) (26.0) (28.4)
0.3 6.7

Source: Company data, Shinhan Investment

CJ ENM

Result Comment

2Q18 results (IFRS consolidated)

(bn KRW, %)

Sales OP NP OPM NPM

1,049.0
79.2 73.8
7.8

977.6
88.3
440.0
9.6

7.3
(10.4) (83.2)

1,031.7
89.9 96.4
9.0

1.7
(12.0) (23.4)

SHIC Consensus

83.9 69.4
8.4
79.3 61.2
7.9

Source: Company data, Shinhan Investment Corp.

Earnings forecast revision (IFRS consolidated)

Before
2018F

4,410.6
338.8 274.6
8.4

After
2018F

4,388.8
349.8 315.7
8.6

Change (%)
2018F

(0.5)
3.3
14.9

(bn KRW, %)

Sales OP

4,721.1
397.1 320.0
9.3

(0.1)
5.1
4,716.9
417.5 343.5
9.8

Source: Company data, Shinhan Investment Corp. Note: 1) Earnings forecast comparison between post-merger entity and revision made after the 2Q earnings release
2) For the newly merged entity, we believe it is more important to check revised earnings forecasts and quarterly earnings projections provided below than changes in before and after figures.

Quarterly earnings (K-IFRS consolidated)

394.2 425.4 440.1 490.4 476.5 464.4 530.1 579.5 523.5 578.6 578.8 638.5 2,050.4 2,319.4 2,505.0 285.7 332.1 317.2 359.1 340.4 361.9 381.6 413.6 374.2 451.1 409.5 454.2 1,497.5 1,689.0 1,809.4
CJ E&M Broadcasting

52.0
44.5 48.7
47.6 75.3
50.0 81.3
65.6 70.6
36.0 66.5
72.6 75.9
77.7 88.1
82.8 66.5
49.2 78.2

274.9 290.4 259.0 312.1 272.4 283.9 267.7 319.2 282.2 292.6 276.6 339.6 1,143.2 1,191.0 1,256.8 275.2 275.7 278.2 290.8 286.5 291.3 291.1 295.3 288.2 294.4 294.4 296.8 1,164.2 1,173.8 1,183.0
Commerce (net sales) CJ Hello

78.8 23.4 37.8 17.6 85.2
9.7
(2.8) 88.4 23.6 45.7 19.1 94.9
8.4
3.5
61.0 12.7 29.8 18.5 67.5
6.7
6.7
62.1
3.5
5.8
90.0 34.5 42.3 13.1 96.5 10.7 20.9
3.3
9.4
79.2 29.5 33.9 15.7 73.8
6.1
6.8
86.0 33.8 35.4 16.7 70.0 11.7 20.4
4.6

44.2 17.5 75.4
9.4
41.2 45.8 16.7 87.7
5.7
56.2 41.7 17.3 94.5 12.1 24.6
2.2
37.3 37.3 17.2 76.1
5.6
39.8 130.9 174.5 187.1

17.6 68.6
3.9

10.2
3.5
9.4
17.2
3.5
7.5
13.1
2.5
5.5 8.0 3.2 5.5 0.8 7.0 7.2 6.9 6.4 6.9 9.0 7.4

0.5
19.1
1.5
16.2
0.1

Commerce (net sales) CJ Hello

4.1
(2.2)
5.6

(0.8) 15.4
162.2
6.6
(1.6) 26.3

OP growth E&M

47.6 12.0 (25.7)

19.4
8.1
45.5 90.5 23.0
9.8

33.3 10.9 11.3
8.8

(14.9)

5.3
20.4 107.2
8.8 1.0 8.8 (13.5)
Commerce CJ Hello
43.7
(20.7) 24.1
8.9

(9.7)
3.7
7.7
(1.0)
9.9
(26.2)
14.1
8.4

13.1 (22.2)
27.1 (9.1)
9.4
2.8
NP growth OPM

6.9
5.6 6.2
8.6 9.3
7.5 7.0

6.6
8.9

Source: Company data, Shinhan Investment Corp. Note: 1) CJ O Shopping and CJ E&M merged on July 1, 2018
2) Quarterly earnings before 2Q18 based on the simple sum of SHIC estimates by business; other operations/consolidated adjustments not reflected, figures may differ from IR data 3) As for full-year 2018, 1Q is based on SHIC estimates and 2Q-4Q based on the newly merged entity

CJ ENM

Result Comment

Valuation

operations valued atW800bn
Considering faster ad sales growth vs. terrestrialbroadcasting
2,282.9

Cinema/performance Music
258.2 415.6
B. Market cap. of Showbox C. 25x operating profit D. 11x 12MF profit
Considering low profitability vs. high market share Reflecting rapid improvement in profitability

Combined business value of media & retailoperations
E = A + B+ C + D
4,452.2

Netmarble (game) CJ Hello (cable channel) Combined stake value Total business value Net debt
2,026.7
915.0
F. 25% discount to valueof stakein Netmarble (22.1% equitymethod) G. TargetPBR of 0.7x applied to 2018F BPS
2,941.7 7,393.9 1,469.1 5,924.8 270,215 270,000 236,200
14.3
H = F + G I = E+ H

Total enterprise value Valuepershare (KRW) Targetprice (KRW) Currentprice (KRW) Gap (%)
K = I + J Total outstanding shares 21,926,384 Previous targetprice W274,000 August 8 close
Excluding treasuryshares

Source: Shinhan Investment Corp.

2018F EPS growth and PER vs. domestic/overseas contents providers
2018F PBR and ROE vs. domestic/overseas contents providers

30 20 10
0

News Corp
Jcontentree

CJ ENM

Walt Disney

CJ ENM

Viacom

ROE(%)
30
EPSgrowth (%)

Valuation of domestic and overseas contents providers

PER
2019F

EBITDA

782.5
73.1 17.9 21.4
7.1
(13.8) 250.0 127.4
25.4 97.6 25.5
3.9
13.0 32.5 15.2 16.3
110.9
10.1
7.2
4.3 4.8 0.8 3.8
29.5
7.1 1.6 0.9
10.3 11.0
6.6
22.7 14.0
5.6
20.6
9.2
(22.9)
3.0
16.9 31.6 14.2 15.4 71.4
9.0
3.5 4.2 0.8 3.3
21.1
5.2 1.3 0.9
22.9 14.2
5.8
Jcontentree SBS
9.5

Walt Disney (U.S.) Netflix (U.S.) CBS (U.S.)
194,172.7 171,607.2
22,434.0 13,358.8
9,920.7
11.0 75.9
8.9
25.5 26.7 84.9 23.8
2.4

52.1
8.3
22.4 30.1 64.7 21.3
2.2
35.8
7.0
24.5
7.0
55.2 12.1

News Corp (U.S.)
(2.7) 10.4

Source: Bloomberg consensus, Shinhan Investment Corp.

CJ ENM

Result Comment

2018F EPS growth and PER vs. domestic/overseas retailers

2018F PBR and ROE vs. domestic/overseas retailers

PER (x)

PBR (x) 2.0

Seven & i

Holdings

Walmart

GS Retail

Hanwha

Galleria Timeworld

Nordstrom

GS Home

E-mart

Shinsegae

Hyundai Home

Shopping

Shinsegae
Shopping

Network

CJ ENM

E-mart

Hyundai Home Shopping

Network

Macy's

GS Home Shopping

Hyundai

Department Store

Hyundai

Department Store

Lotte Shopping

ROE(%)
20

EPSg rowth (%)
40.0 60.0

Valuation of domestic and overseas retailers

PER
2019F

EBITDA

EBITDA
ROE

Department store
LotteShopping HyundaiDepartmentStore Shinsegae
5,722.8 2,298.1 3,160.3
193.5
(0.7) (8.2) 40.0
3.9
TP
13.8 45.1 TP
41.9
8.3
0.5 0.6 0.9 0.6 2.3 2.5 9.2 0.8 0.5 1.1 0.9 4.3 1.1
-
5.2 6.3 9.8 7.9 6.5 5.6 6.5
12.1
5.1 3.8 3.4
10.3
7.2 8.2
-
1.1 7.1

7.9
0.5 0.5 0.8 0.6 2.1 1.9 7.3 0.8 0.5 1.1 0.8 3.5 1.0
-
4.2 5.6
10.0
5.7 6.4 6.2 6.5
11.1
5.4 3.5 2.7 9.3 6.4 7.8
-
3.7

12.2 10.9 17.9 10.8 17.2 85.1 16.6
8.9

13.1 13.5 10.3 14.7 34.4 58.5 10.0
8.7
6.7
HanwhaGalleriaTimeworld Kohl’s

13,671.6 13,534.7
9,553.1 4,928.3
844.3

21.2 (6.7)
13.1 22.7 56.5
1.0
3.1 1.3 1.7
29.3
1.2
15.9 17.3 51.2
2.3

IsetanMitsukoshi J.C.Penney

(2.4) (81.4)
3.6 (11.2)

HyundaiHomeShopping Network CJENM
1,296.8 1,380.0 5,179.0
421.2
(2.7) (3.5)
45.1 52.1
12.9
9.4
11.0

73.1 (13.8)
2.8 5.8
36.2 (38.3)
13.0
9.5
22.7 12.7 16.6 12.4 23.2 34.7
6.8

9.2
22.9 11.7 20.2 12.7 23.4 30.4
7.5

2.8
2.9
12.1 30.4
2.8

45.4 18.6 17.5 17.3 21.3 43.0 30.6 19.5 14.7 20.2 32.1 17.4
10.4 34.8 18.1 15.6 14.9 18.7 34.8 28.1 23.2 12.3 18.9 29.1 15.5

4.3 5.5 1.2 1.6 2.5 8.6 2.3 0.7 3.5 7.7 4.0
19.5 10.6
7.7
3.9 4.2 4.3 1.1 1.6 2.4 8.3 2.4 0.7 3.4 6.7 3.7

2,869.1
23.9
-
16.6
-
15.7
8.2 8.6 6.6
15.7 14.3
6.5 9.0 9.1
16.4
8.2
13.7
7.5 8.1 6.3
11.8 13.4
6.7 8.0 9.3
15.3
8.3

16.6 18.2 16.0
8.8

3.5
-
15.8 87.2
-
6.0
FamilyMart PresidentChain Lawson
40,566.7 13,730.0 11,897.7
6,749.5

(0.7)
5.2
8.6

9.8 (65.7) 4.1 (26.3) 5.5 (32.7)
23.7 11.9
5.0
29.0 10.4
5.7
Discount store

Target
296,491.6 109,880.9
49,074.4
3.0 9.3 3.4
2.3
19.9 (6.0)
16.6 25.5 23.4

24.5 24.1

Cj Enm(035760

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