CJ ENM (035760) Tving: A new growth driver • CJ ENM's 4Q operating profit of KRW87.9b (up 106% y-y) was driven by the media division that put in strong performances thanks to a turnaround in TV commercial sales and robust growth in digital and content sales. • This year, focus should fall on maximizing content value and accelerating digital innovation, thereby bolstering OTT platform Tving. The firm's efforts on original content production and subscriber expansion should pick up steam. • The media heavyweight should cement its market position but also have to endure short-term earnings deterioration stemming from investments in quality contents (essential for future growth). WHAT’S THE STORY? 4Q review: Sales at CJ ENM fell 6.9% y-y to KRW944.3b in 4Q but operating profit jumped 106% y-y to KRW87.9b. The remarkable earnings growth owed much to the media division, whose sales marked its first y-y growth since 3Q19 as: 1) TV commercial sales increased 7.7% after having contracted around 30% y-y in 1H and 17% y-y in 3Q; and 2) digital and content sales leapt 57.5% and 62.1% y-y, respectively. Backed by improving production cost efficiency, the media operating margin sat at 8.8% (up 7.8%pts y-y). Meantime, the commerce division also performed well, with private brand gross sales up 16.3% y-y for an operating margin of ~~% (up 2.6%pts y-y). Sales at the music business were uninspiring due to the absence of concerts, but profitability picked up y-y thanks to increases in revenue from albums and music streaming services of its own artists. By division, operating profit at: 1) the media business surged 808.9% y-y to KRW41.9b; 2) the commerce division climbed 17.3% y-y to KRW49.1b; and 3) the music operation came in at KRW900m (vs a loss of KRW2.8bin 4Q19). The film business incurred a loss of KRW3.9b. Pinning hope on Tving: Company guidance has 2021 sales rising 12.1% y-y to KRW3.8t and operating profit sliding 8.1% y-y to KRW250b with a dividend payout of 15%. CJ ENM should give an impetus to Tving this year. JTBC Studio already acquired 16.67% stake in the OTT platform and Naver should collaborate with the platform based on its 2020 equity swap. CJ ENM is in talks with others to form more partnerships. It plans to unveil multiple original contents, starting from original entertainment content Girl's High School Mystery Class (launched late January) and Come to Witch's Restaurant. To reinforce Tving's market status, it intends to invest over KRW400b over the next three years to produce popular and well-made content. It also aims to triple the paid subscriber base this year. Such investments to secure quality content, however, should weigh on the bottom line in the short term, a reason why it expects a y-y fall in operating profit this year. (Continued on the next page) 2021. 2. 5 COMPANY UPDATE CJ ENM Reiterating BUY: We keep our SOTP-derived target price of KRW200,000. CJ ENM’s ad sales growth should top market expectations, backed by an ad industry turnaround and competitive content. While the commerce business maintains stable earnings growth, the film and music divisions should achieve y-y earnings improvement. Stepping up investments in Tving (key to the firm’s digital strategy) should be indispensible for future growth and firm needs to put up with near-term earnings deterioration. Table 1. Consolidated results and forecasts (KRWb) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20E 1Q20 2Q20 3Q20 4Q20E 2019 2020 2021E 2022E Sales 860.2 1,005.5 909.9 1,014.1 810.8 837.5 798.6 967.0 810.8 837.5 798.6 967.0 3,789.7 3,391.2 3,669.7 3,936.2 Media 380.0 426.4 426.9 445.1 340.8 406.3 370.6 475.2 340.8 406.3 370.6 475.2 1,678.4 1,590.7 1,744.8 1,909.7 Commerce 324.1 357.6 335.8 409.9 375.9 376.2 344.3 428.0 375.9 376.2 344.3 428.0 1,427.3 1,478.6 1,554.7 1,618.6 Pictures 104.1 67.8 84.3 93.1 54.2 12.5 36.9 18.7 54.2 12.5 36.9 18.7 349.3 141.6 185.0 208.9 Music 52.1 153.8 62.9 66.0 39.8 42.5 46.9 45.1 39.8 42.5 46.9 45.1 334.8 180.3 185.2 198.9 Gross profit 356.8 388.7 345.1 371.5 337.5 365.5 360.5 429.0 337.5 365.5 360.5 429.0 1,462.1 1,483.8 1,521.5 1,673.8 Operating profit 79.0 87.4 60.3 42.7 39.7 73.4 71.0 95.1 39.7 73.4 71.0 95.1 269.4 272.1 255.7 338.0 Media 13.7 36.5 16.1 4.6 3.9 24.9 29.3 39.7 3.9 24.9 29.3 39.7 70.9 99.9 63.9 116.1 Commerce 42.0 36.0 29.4 41.8 37.9 49.8 42.4 53.7 37.9 49.8 42.4 53.7 149.2 179.2 192.4 212.4 Pictures 18.8 10.0 15.8 -1.0 -2.0 -3.5 -4.1 -2.2 -2.0 -3.5 -4.1 -2.2 43.6 -13.5 -12.9 -7.9 Music 4.6 4.9 -1.0 -2.8 -0.0 2.1 3.5 3.9 -0.0 2.1 3.5 3.9 5.6 6.5 12.2 17.5 Pre-tax profit 77.1 89.2 53.9 -30.6 39.1 51.1 51.7 61.3 39.1 51.1 51.7 61.3 189.6 157.0 230.2 314.3 Net profit 42.5 63.2 29.0 -30.5 26.9 33.9 28.6 36.2 26.9 33.9 28.6 36.2 104.2 70.5 145.6 202.4 (controlling) GP margin (%) 41.5 38.7 37.9 36.6 41.6 43.6 45.1 44.4 41.6 43.6 45.1 44.4 38.6 43.8 41.5 42.5 OP margin (%) 9.2 8.7 6.6 4.2 4.9 8.8 8.9 9.8 4.9 8.8 8.9 9.8 7.1 8.0 7.0 8.6 NP margin (%) 4.9 6.3 3.2 -3.0 3.3 4.0 3.6 3.7 3.3 4.0 3.6 3.7 2.8 2.1 4.0 5.1 Chg (%) Sales 10.5 27.2 16.5 5.7 -5.7 -16.7 -12.2 -4.6 -5.7 -16.7 -12.2 -4.6 14.5 -10.5 8.2 7.3 Media 11.6 15.4 4.9 -1.3 -10.3 -4.7 -13.2 6.8 -10.3 -4.7 -13.2 6.8 7.1 -5.2 9.7 9.4 Commerce 7.3 12.4 23.9 1.6 16.0 5.2 2.5 4.4 16.0 5.2 2.5 4.4 10.3 3.6 5.1 4.1 Pictures 30.2 88.2 87.5 78.2 -47.9 -81.5 -56.3 -79.9 -47.9 -81.5 -56.3 -79.9 63.8 -59.5 30.7 13.0 Music -7.3 131.2 8.1 25.6 -23.5 -72.3 -25.5 -31.7 -23.5 -72.3 -25.5 -31.7 43.4 -46.2 2.7 7.4 Gross profit 6.6 17.0 15.6 -12.9 -5.4 -6.0 4.5 15.5 -5.4 -6.0 4.5 15.5 5.0 1.5 2.5 10.0 Operating profit 4.1 37.3 7.0 -14.9 -49.7 -16.1 17.9 122.7 -49.7 -16.1 17.9 122.7 9.5 1.0 -6.0 32.2 Media -44.2 25.1 -56.8 -77.6 -71.7 -31.9 82.1 761.0 -71.7 -31.9 82.1 761.0 -36.4 40.8 -36.1 81.7 Commerce 1.3 5.5 61.7 36.8 -9.8 38.3 44.2 28.5 -9.8 38.3 44.2 28.5 20.0 20.1 7.4 10.4 Turned Turned Remained Turned Turned Turned To remain Turned Turned Turned To remain Turned Turned To remain To remain Pictures 161.7 pos pos neg neg neg neg neg neg neg neg neg pos neg neg neg Turned Turned Turned Turned To turn Turned Turned To turn Music 69.6 16.1 -55.7 -55.7 -49.7 17.3 87.3 42.9 neg neg neg pos pos neg pos pos Turned To turn To turn Pre-tax profit -30.6 2.2 -3.5 -49.3 -42.8 -4.0 -49.3 -42.8 -4.0 -28.3 -17.2 46.6 36.6 neg pos pos Net profit Turned To turn To turn -55.9 -19.8 -30.9 -36.8 -46.3 -1.3 -36.8 -46.3 -1.3 -59.0 -32.3 106.4 39.0 (controlling) neg pos pos GP margin (%pts) -1.5 -3.4 -0.3 -7.8 0.1 5.0 7.2 7.7 0.1 5.0 7.2 7.7 -3.5 5.2 -2.3 1.1 OP margin (%pts) -0.6 0.6 -0.6 -1.0 -4.3 0.1 2.3 5.6 -4.3 0.1 2.3 5.6 -0.3 0.9 -1.1 1.6 NP margin (%pts) -7.4 -3.7 -2.2 -6.9 -1.6 -2.2 0.4 6.8 -1.6 -2.2 0.4 6.8 -4.9 -0.7 1.9 1.2 Note: LG HelloVision (formerly CJ Hello) figures excluded from consolidated results from 2018 due to sale of LG HelloVision Source: Company data, Samsung Securities Samsung Securities (Korea) 2 www.samsungpop.com 2021.