CJ E&M (130960.KQ) Expect solid earnings improvement on stronger content competitiveness Company Comment │ Nov 22, 2017 Backed by both the upcoming Pyeongchang Olympics and an ongoing recovery in the domestic ad market, CJ E&M appears set to enjoy solid earnings growth in 2018. Also positive, CJ E&M’s EV should strengthen going forward in line with the rising values of its stakes in Studio Dragon and Netmarble Games. Buy (maintain) TP W130,000 (raise) CP (‘17/11/21) W92,000 Anticipate healthy earnings growth in 2018 Sector Media Kospi/Kosdaq 2,530.7 / 789.38 In 2018, we expect CJ E&M to show sales of W2.01tn (+10.4% y-y), operating Market cap (common) US$3,258.41mn profit of W122.9bn (+39.6% y-y), and net profit of W176.8bn (-63.5% y-y). Outstanding shares (common) 38.7mn Believing that this earnings improvement will be spearheaded by efforts to 52W high (’17/11/15) W97,300 strengthen content competitiveness, we maintain CJ E&M as our top pick low (’16/12/05) W53,800 amongst media industry players. Average trading value (60D) US$23.69mn Dividend yield (2017E) 0.22% Our key investment points for CJ E&M include: 1) a brisk earnings uptrend at Foreign ownership 28.3% its media content division on the firm’s improved content competitiveness; 2) the fact that the company has secured production capabilities via subsidiaries Major shareholders CJ Corp and 5 others 42.9% Studio Dragon (for which an IPO is soon slated) and JS Pictures; 3) its beefed Wellington Management Hong 6.1% up competiveness as a comprehensive media platform player (including the Kong Limited & 1 other advantage of having affiliates Culture Depot, Hwaendam Pictures and KPJ’s hit- making show writers under its umbrella); 4) anticipated earnings growth at its Share perf 3M 6M 12M music business in keeping with the company’s proven track record in generating Absolute (%) 28.5 15.0 41.5 Relative (%p) 5.3 -5.9 11.8 strong synergies between its music business with media broadcasting domains, as evidenced by the success of its reality television music competition series 2016 2017E 2018F 2019F Produce 101, Show Me the Money, and Sixteen. Sales 1,538 1,816 2,005 2,144 Chg 14.2 18.0 10.4 6.9 Studio Dragon IPO bodes well for CJ E&M OP 28 88 123 161 OPM 1.8 4.8 6.1 7.5 The fact that the initial listing price for Studio Dragon’s upcoming IPO has been NP 62 485 177 236 set at lofty W35,000/share, (market cap of W981.3bn) bodes well for the value EPS 1,605 12,518 4,565 6,091 of CJ E&M’s stake in the drama production company. That being said, CJ Chg 14.4 680.1 -63.5 33.4 E&M’s share price has been correcting as of late on concerns that after the IPO for Studio Dragon, investors might offload CJ E&M shares while expanding P/E 44.2 7.3 20.2 15.1 their exposure to CJ E&M’s media subsidiaries. P/B 1.8 1.8 1.6 1.5 EV/EBITDA 7.4 7.0 7.0 6.5 However, we point out that CJ E&M’s links to Studio Dragon go well beyond ROE 4.0 27.2 8.4 10.2 possessing equity in it. Noting that a direct connection exists between Studio Debt/equity 72.9 67.0 64.6 60.4 Dragon’s content production capabilities and the power of CJ E&M’s Net debt 367 388 361 258 broadcasting platform, we expect Studio Dragon’s strengthened production Units: Wbn, %, won, x prowess to translate into higher ads sales growth at CJ E&M going forward. Note 1: NP excludes minority interests Thus, we view the recent market concerns that Studio Dragon’s listing will drive Note 2: EPS, P/E, P/B, ROE based on NP (excl minority interests) down CJ E&M’s share price as being overblown. Source: NH I&S Research Center estimates Adhering to a Buy rating, we raise our target price on CJ E&M from W110,000 to W130,000 in reflection of: 1) Studio Dragon’s upcoming IPO; 2) the expanding EV of Netmarble Games (subsidiary); and 2) a change in the base year (2017 → 2018) used for our target price calculations. 4Q17 preview (Units: Wbn, %) 4Q17E 4Q16 1Q17 2Q17 3Q17 1Q18F Revised y-y q-q Previous Consen Sales 488.8 394.2 425.4 440.1 556.2 13.8 26.4 555.5 510.1 440.1 Operating profit 1.9 23.4 23.6 12.7 28.3 1,403.6 122.5 28.1 25.2 25.4 Operating margin 0.4 5.9 5.6 2.9 5.1 - - 5.1 4.9 5.8 Pre-tax profit -4.2 45.2 537.2 23.9 44.2 TTP 85.0 49.3 38.3 42.1 Jaemin Ahn, Analyst Net profit (excl 822)768-7647, [email protected] 3.8 33.2 404.9 11.7 35.1 818.7 199.4 39.2 30.5 32.1 minority interests) Note: K-IFRS consolidated basis; Source: CJ E&M, FnGuide, NH I&S Research Center estimates CJ E&M www.nhqv.com Earnings forecasts (IFRS consolidated) (Units: Wbn, won, x, %) 2016 2017E 2018F 2019F Sales - Revised 1,538 1,815 2,005 2,144 - Previous - 1,815 1,984 2,108 - Change - 0.0 1.1 1.7 Operating profit - Revised 28.0 88.0 122.9 161.2 - Previous - 87.8 117.7 156.5 - Change - 0.3 4.4 3.1 Operating margin - Revised 1.8 4.8 6.1 7.5 EBITDA 427.6 577.2 568.0 601.2 Net profit (excl minority interests) 62.2 484.8 176.8 235.9 EPS - Revised 1,605 12,518 4,565 6,091 - Previous - 12,623 4,292 5,670 - Change - -0.8 6.3 7.4 P/E 44.2 7.3 20.2 15.1 P/B 1.8 1.8 1.6 1.5 EV/EBITDA 7.4 7.0 7.0 6.5 ROE 4.0 27.2 8.4 10.2 Note: EPS, P/E, P/B, and ROE based on net profit (excluding minority interests) Source: NH I&S Research Center estimates SOTP-based EV of W4.8tn (Units: Wbn, won) Value Value/share Remarks (Wbn) (Won) Media content 2,005 46,124 Media sector average P/E of 25.0x Film 360 9,288 Showbox and NEW’s average PSR of 2.1x (our estimates) YG Entertainment, FNC Entertainment, JYP Entertainment and LOEN’s average Music 338 8,733 P/E of 19.1x (consensus) 30% discount to Interpark’s performing arts division’s PSR of 1.4x = PSR of 1.0x Performing arts 22 577 (our estimates) Operating value - ① 2,726 70,373 Stake: 22.02% Netmarble Games 2,483 64,112 30% discount to Nov 10 2017 closing price of W189,000 Treasury shares 9 224 Non-operating value - ② 2,492 64,337 Net debt (- net cash) - ③ 361 9,323 EV (①+②-③) 4,857 125,387 Source: NH I&S Research Center 2 CJ E&M www.nhqv.com Quarterly earnings forecasts (Units: Wbn, %) 1Q17 2Q17 3Q17 4Q17E 1Q18F 2Q18F 3Q18F 4Q18F 2016 2017E 2018F Sales 394.2 425.4 440.1 556.2 440.1 482.4 479.0 603.9 1,538.4 1,815.8 2,005.4 Media content 285.7 332.1 317.2 434.2 336.3 380.0 349.7 467.4 1,128.4 1,369.2 1,533.4 Ad 108.3 128.8 117.4 174.0 121.8 141.5 128.8 193.1 488.2 528.6 585.3 Broadcasting fee income 48.9 49.3 51.2 52.7 50.5 51.0 53.3 52.2 196.8 202.1 207.1 Other 128.5 154.0 148.6 207.5 164.0 187.5 167.5 222.0 443.3 638.5 741.0 Film 56.5 44.5 47.6 42.6 44.0 43.3 38.1 43.8 189.6 191.2 169.2 Theater 47.0 18.6 23.3 24.1 25.2 20.5 17.6 23.6 126.9 113.0 87.0 Secondary distribution 4.0 9.8 12.0 6.9 8.0 8.8 7.7 7.4 26.8 32.8 31.9 Other 5.6 16.1 12.2 11.6 10.7 14.0 12.8 12.7 35.8 45.5 50.3 Music 47.4 47.1 66.3 72.8 54.5 54.4 84.4 86.6 199.4 233.7 279.9 Performing arts 4.6 1.6 8.9 6.6 5.3 4.8 6.9 6.0 21.0 21.7 23.0 Operating profit 23.4 23.6 12.7 28.3 25.4 37.4 28.0 32.0 28.0 88.0 122.9 Operating margin 5.9 5.6 2.9 5.1 5.8 7.8 5.8 5.3 1.8 4.8 6.1 Media content 20.1 24.0 9.2 25.9 23.9 35.1 21.7 27.2 46.5 79.1 108.0 Film 1.9 -1.6 -1.7 -1.5 -0.8 0.2 1.2 0.0 -23.9 -2.9 0.6 Music 2.4 2.0 6.8 5.0 3.5 3.5 6.6 6.1 7.2 16.2 19.6 Performing arts -1.0 -0.7 -1.5 -1.1 -1.2 -1.3 -1.5 -1.3 -1.8 -4.4 -5.4 Pre-tax profit 45.2 537.2 23.9 44.2 42.1 59.4 60.8 68.8 67.5 650.5 231.1 Net profit (excl minority interests) 33.2 404.9 11.7 35.1 32.1 45.4 46.5 53.0 62.2 484.8 176.8 Source: CJ E&M, NH I&S Research Center 3 CJ E&M www.nhqv.com STATEMENT OF COMPREHENSIVE INCOME Valuation / Profitability / Stability (Wbn) 2016/12A 2017/12E 2018/12F 2019/12F 2016/12A 2017/12E 2018/12F 2019/12F Sales 1,538 1,816 2,005 2,144 Price/Earnings (x) 44.2 7.3 20.2 15.1 Growth (%) 14.2 18.0 10.4 6.9 Price/Book Value (x) 1.8 1.8 1.6 1.5 COGS 1,190 1,367 1,526 1,594 Price/Gross Cash Flow (x) 6.4 6.4 6.6 6.2 Gross Profit 349 449 480 550 Price/Sales (x) 1.8 2.0 1.8 1.7 Gross margin (%) 22.7 24.7 23.9 25.6 EV/EBITDA (x) 7.4 7.0 7.0 6.5 SG&A 321 361 357 388 EV/EBIT (x) 113.8 45.7 32.5 24.1 Operating Income 28 88 123 161 Fully diluted EPS (won) 1,605 12,518 4,565 6,091 Growth (%) -46.9 214.7 39.6 31.2 BVPS (won) 39,922 52,241 56,606 62,498 Operating margin (%) 1.8 4.8 6.1 7.5 Sales PS (won) 39,720 46,882 51,777 55,355 EBITDA 428 577 568 601 ROE (%) 4.0 27.2 8.4 10.2 Non-Operating Profit 40 562 108 147 ROA (%) 2.4 15.4 4.8 6.0 Financial Income(Costs) -18 -17 -18 -17 ROIC (%) 3.2 15.0 8.1 9.7 Other Non-Operating Profit -24 -15 -15 -15 Dividend Yield (%) 0.3 0.2 0.2 0.2 Gains(Losses) in Associates, Subsidiaries and JVs 81 594 141 179 Payout Ratio (%) 12.4 1.6 4.4 3.3 Pre-tax Profit from Cont.