Earnings Review August 10, 2016 Above CJ E&M (130960) In line Below 12M rating BUY (Maintain) Improved contents capabilities, growth outlook firms 12M TP W95,000 from W110,000 Up/downside +49% What’s new: OP below consensus Stock Data CJ E&M posted 2Q16 sales of W357.3bn (+19.4% YoY) and OP of W14.1bn (-20.8% KOSPI (Aug 9, pt) 2,044 YoY), missing our estimate by 23% and consensus by 24.2%. Sales continued to Stock price (Aug 9, KRW) 63,800 grow across all divisions backed by the media division. However, OP fell as Market cap (USD mn) 2,234 amortization expenses for intangible assets increased at the media division on Shares outstanding (mn) 39 changes in the amortization period of TV show broadcasting rights. Furthermore, 52-Week high/low (KRW) 95,000/61,000 6M avg. daily turnover (USD mn) 18.9 the movie, music and concert divisions posted weaker earnings due to bad debt Free float / Foreign ownership (%) 56.7/18.3 expenses and poor results. However, EBT and NP beat consensus on larger gains Major shareholders (%) on investment in affiliates of W43bn (+226.3% YoY). Of note, Netmarble Games CJ Corp and 5 others 42.9 accounted for W39.2bn (W7.6bn in equity method gains and W31.6bn in appraisal NPS 5.1 gains from recapitalization). Valuation 2015A 2016F 2017F Pros: Robust media performance PE (x) 57.2 26.6 25.2 Media sales reached W268.4bn (+20.1% YoY), consisting of ad sales of W132.2bn PB (x) 2.0 1.5 1.4 (+7.2% YoY), license fees of W47.0bn (flat YoY) and others W89.1bn (+67.8% ROE (%) 3.6 5.8 5.8 DY (%) 0.2 0.3 0.5 YoY). We attribute the rapid growth in the miscellaneous category to increasing EV/EBITDA (x) 8.2 5.9 5.1 digital ads, VOD and overseas content sales. In addition, hit TV shows in 2Q16, EPS (KRW) 1,409 2,399 2,535 including Another Miss Oh and Show Me the Money season 5 contributed to better BPS (KRW) 40,188 42,355 44,558 TV ad sales, despite the weak overall TV ad market. However, media OP improved Performance only 4.4% due to the revised amortization standards, and we forecast earnings 1M 6M 12M growth will ramp up from next year. Absolute (%) (9.0) (24.9) (19.6) Relative to KOSPI (%p) (13.1) (31.5) (21.3) Cons: Movie losses expand 12MF PE trend Operating losses at the movie division expanded to W6.6bn, versus W4.1bn in 2Q15. Backed by the hit release Handmaiden (4.2mn viewers, W34.1bn at the box (X) 12MF PER (LHS) (KRW) 200,000 60.0 price (RHS) 180,000 office), 2Q16 movie sales reached W26.0bn (+81% YoY). However, the rest of the 50.0 160,000 movie lineup disappointed, and losses expanded due to W1.6bn in bad debt 140,000 40.0 120,000 expense from liquidation of RK, a US-based distributor. 30.0 100,000 80,000 Conclusion: Media growth to ramp up in 2H16, maintain BUY 20.0 60,000 40,000 We maintain BUY, but we lower our SotP-derived TP 13.6% to W95,000. We lower 10.0 20,000 our TP as the Netmarble Game’s recapitalization should dilute the value of CJ 0.0 0 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 E&M’s stake. In the media division, the revised amortization standards should Source: WISEfn consensus result in lower amortization costs, which should accelerate earnings growth from next year. As such, divisional OP should surge to W92.5bn in 2017, versus W62.5bn this year. Earnings from overseas should also grow steadily on localization efforts based on content planning and development capabilities. (W bn, %, %p) 2Q16P Change 2016F KIS est. Actual Diff. Consensus QoQ YoY KIS Consensus Sales 335 357 6.6 346 13.9 19.4 1,536 1,467 OP 18 14 (23.0) 19 58.4 (20.8) 6770 Minha Choi OP margin 5.5 4.0 (1.5) 5.4 1.1 (2.0) 4.3 4.8 822-3276-6260 EBT 18 48 160.6 26 225.4 126.2 10795 [email protected] NP 14 43 198.8 19 228.2 225.2 9376 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 AT THE END OF THIS REPORT. CJ E&M (130960) Table 1. 2Q16 Earnings review (W bn) 2Q15 1Q16 2Q16 QoQ YoY KIS % differ. Consensus % differ. Sales 299.2 313.5 357.3 13.9% 19.4% 335.0 6.6% 345.6 3.4% OP 17.8 8.9 14.1 58.4% (20.8%) 18.3 (23.0%) 18.6 (24.2%) OP margin (%) 6.0 2.8 4.0 1.1%p (2.0%p) 5.5 (1.5%p) (1.4%p) 5.4 EBT 21.1 14.6 47.6 225.4% 126.2% 18.3 160.6% 25.6 86.1% Controlling NP 13.3 13.2 43.2 228.2% 225.2% 14.5 198.8% 18.6 132.4% Source: CJ E&M, FnGuide, Korea Investment & Securities Figure 1. Quarterly sales and OPM (W bn) (%) 500 Sales (L) OPM (R) 8 450 6 400 4 350 300 2 250 0 200 (2) 150 (4) 100 50 (6) 0 (8) 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16F Source: CJ E&M, Korea Investment & Securities Figure 2. Media sales and OPM Figure 3. Movie sales and OPM (W bn) (%) (W bn) (%) 140 15 350 Sales (L) OPM (R) 12 Sales (L) OPM (R) 10 10 300 120 8 5 6 250 100 0 4 (5) 200 80 2 (10) 0 60 150 (15) (2) 40 (20) 100 (4) (25) (6) 50 20 (30) (8) 0 (10) 0 (35) 1Q 13 3Q 13 1Q 14 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16 F 1Q 13 3Q 13 1Q 14 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16 F Source: CJ E&M, Korea Investment & Securities Source: CJ E&M, Korea Investment & Securities 2 CJ E&M (130960) Figure 4. Music sales and OPM Figure 5. Performance sales and OPM (W bn) (%) (W bn) (%) 70 Sales (L) OPM (R) 6 12 Sales (L) OPM (R) 50 4 60 10 0 2 50 0 8 (50) (2) 40 (4) 6 (100) 30 (6) 4 (150) 20 (8) (10) 2 (200) 10 (12) 0 (14) 0 (250) 1Q 13 3Q 13 1Q 14 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16 F 1Q 13 3Q 13 1Q 14 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16F Source: CJ E&M, Korea Investment & Securities Source: CJ E&M, Korea Investment & Securities Table 2. Quarterly earnings (W bn) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16F 4Q16F 2015 2016F 2017F Sales 293.1 299.2 370.0 385.0 313.5 357.3 429.0 436.2 1,347.3 1,536.0 1,658.2 Media 177.9 223.5 227.6 280.5 225.4 268.4 251.8 317.8 909.5 1,063.4 1,156.5 Movies 65.9 31.5 93.1 47.8 40.3 40.6 124.9 58.6 238.3 264.4 282.0 Music 41.9 43.2 48.5 50.5 44.6 47.2 51.4 53.3 184.1 196.6 207.7 Performance 7.4 1.0 0.8 6.2 3.3 1.1 0.8 6.5 15.4 11.6 12.0 COGS 227.2 218.8 286.5 286.9 236.7 269.8 331.8 315.2 1,019.4 1,153.6 1,222.7 COGS-to-Sales (%) 77.5 73.1 77.4 74.5 75.5 75.5 77.3 72.3 75.7 75.1 73.7 GP 65.9 80.4 83.5 98.1 76.8 87.4 97.2 121.0 327.9 382.4 435.4 GP margin (%) 22.5 26.9 22.6 25.5 24.5 24.5 22.7 27.7 24.3 24.9 26.3 SG&A 56.7 62.6 69.9 86.0 67.9 73.3 82.5 91.9 275.2 315.7 333.9 SG&A-to-Sales (%) 19.4 20.9 18.9 22.3 21.7 20.5 19.2 21.1 20.4 20.6 20.1 OP 9.2 17.8 13.6 12.1 8.9 14.1 14.7 29.0 52.7 66.8 101.6 OPM (%) 3.1 6.0 3.7 3.1 2.8 4.0 3.4 6.7 3.9 4.3 6.1 Media 2.5 19.6 7.0 17.0 5.1 20.5 7.5 29.4 46.2 62.5 92.5 Movies 6.5 (4.1) 7.7 (4.1) 3.8 (6.6) 6.9 (1.2) 6.0 2.8 7.4 Music 0.2 2.1 (0.3) (1.3) (0.1) 1.3 0.7 0.2 0.7 2.1 2.2 Performance 0.1 0.2 (0.9) 0.4 0.1 (1.0) (0.3) 0.6 (0.2) (0.6) (0.5) EBT 105.1 21.1 33.1 (100.0)14.6 47.6 18.2 26.3 59.3 106.8 123.0 Controlling NP 91.2 13.3 27.8 (77.9) 13.2 43.2 14.8 21.4 54.3 92.5 97.8 (% YoY) Sales 10.6 5.5 7.8 12.9 7.0 19.4 15.9 13.3 9.3 14.0 8.0 Media 4.4 6.9 11.2 16.0 26.7 20.1 10.6 13.3 10.1 16.9 8.8 Movies 32.5 4.5 (0.2) 25.6 (38.9) 28.8 34.2 22.6 12.8 10.9 6.7 Music 3.3 1.8 16.5 (9.9) 6.3 9.4 6.0 5.6 1.9 6.8 5.6 Performance 68.2 (42.8) (79.0) 25.0 (55.7) 3.0 6.0 5.0 4.4 (24.3) 3.2 COGS 8.0 (1.9) 0.6 10.8 4.2 23.3 15.8 9.9 4.3 13.2 6.0 COGS-to-Sales (%p) (1.9) (5.5) (5.6) (1.4) (2.0) 2.4 (0.1) (2.2) (3.6) (0.6) (1.4) GP 20.5 32.8 43.4 19.7 16.5 8.7 16.5 23.3 28.4 16.6 13.9 GP margin (%p) 1.9 5.5 5.6 1.4 2.0 (2.4) 0.1 2.2 3.6 0.6 1.4 SG&A (2.2) (9.4) 1.7 19.0 19.7 17.1 18.1 6.9 2.7 14.7 5.8 SG&A-to-Sales (%p) (2.5) (3.4) (1.1) 1.1 2.3 (0.4) 0.3 (1.3) (1.3) 0.1 (0.4) OP NA NA NA 24.6 (2.9) (20.8) 8.1 140.3 NA 26.7 52.1 OPM (%p) 4.4 9.0 6.7 0.3 (0.3) (2.0) (0.2) 3.5 4.9 0.4 1.8 Media NA NA NA (23.2) 105.6 4.4 6.0 72.3 2,048.9 35.2 48.0 Movies 50.5 NA 18.1 NA (41.8) NA (11.2) NA NA (53.0) 165.9 Music NA NA NA NA NA (37.5) NA NA NA 212.5 6.5 Performance NA NA NA NA 109.0 NA NA 44.7 NA NA NA EBT NA NA NA NA (86.1) 126.2 (45.0) NA NA 79.9 15.2 Controlling NP NA NA (90.1) NA (85.6) 225.2 (46.8) NA (75.8) 70.3 5.7 Source: CJ E&M, Korea Investment & Securities 3 CJ E&M (130960) Figure 6.