July 16, 2012 Industry Report Media (Overweight) Daewoo Securities Co., Ltd. Transforming into content players Jee-hyun Moon +822-768-3615 Initiate coverage on the media sector with Overweight rating [email protected] KoreaÊs media sector appears to have reached a turning point, backed by increasing revenues from overseas markets, an easing regulatory environment, and improving media content. Against this backdrop, we initiate coverage of the Korean media sector with an Overweight rating. Our recommendation is premised on the following four assumptions: Major media firms are steadily transforming themselves into content providers, helped by in-house content production and rising use of smart devices. Revenue sources, which have been primarily driven by domestic revenues, are diversifying into overseas markets thanks to structural growth of global revenues. Key media beneficiary of easing regulations is the advertising sector, which is expected to steadily grow through improved and eased regulations related to the broadcast segment. Marketing campaigns arising from major events in 2012, such as the London Olympics and the presidential election, should provide a catalyst to the advertising segment. Cheil Worldwide is our top pick We present Cheil Worldwide (Reinstate/030000 KS/Buy/TP: W26,000) as our top pick. The company is expected to benefit from Samsung ElectronicsÊ marketing campaigns in the short term. Additionally, it is increasingly securing overseas customers and has plans to acquire foreign advertising agencies this year. The company is expected to be re-rated in the long term, if its global expansion efforts prove sustainable. We present Buy on KT Skylife (Reinstate/053210 KS/Buy/TP: W31,000). KT Skylife should benefit from KTÊs efforts to bolster its media business, and the companyÊs earnings are expected to improve on subscription growth and rising high-margin sales. Although CJ E&M (Initiate/130960 KQ/Trading Buy/TP: W30,000) currently displays poor profitability, the companyÊs earnings should gradually pick up in 2H, backed by rising competitiveness related to in-house content production. Media sector index trend and forecast (p) Focused on Combined overseas broadcasting content and ad revenues (R) (Wbn) 140 domestic market Media sector index (L) 2,400 Affected by Event: Yeosu Expo, 120 domestic economy, 2,000 limited ad market growth London Olympics, and seasonality Presidential election 100 1,600 80 1,200 60 800 Structural growth: 40 Content revenues, 400 regulatory easing, overseas expansion 20 0 01 02 03 04 05 06 07 08 09 10 11 12F 13F Source: KDB Daewoo Securities Research, Reuters, Cheil Worldwide, KOCCA, KDB Daewoo Securities Research Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. I. Investment summary ................................................................................................................... 3 1. Initiate coverage on the media sector with Overweight ............................................................ 3 2. Korean media industry at a turning point .................................................................................. 3 3. Present Cheil Worldwide as top pick ........................................................................................ 5 II. Media industry outlook ............................................................................................................... 6 1. Market size and value chain ...................................................................................................... 6 2. Media industry driven by advertising; Diversified revenue sources........................................ 11 3. Room for further growth of ad market ..................................................................................... 19 4. Content competitiveness is becoming critical ......................................................................... 31 5. Growth potential of becoming comprehensive media groups ................................................ 35 6. Key risks to the media industry ............................................................................................... 39 III. Media industry issues .............................................................................................................. 40 1. Near-term event: Olympic effects ........................................................................................... 40 2. Near-term event: Impact of presidential election .................................................................... 44 3. Industry trend: Maturing pay-TV market ................................................................................. 49 4. Industry trend: Rising mobile demand .................................................................................... 50 5. Domestic issues: General programming channels ................................................................. 51 6. Growth stages of media group ................................................................................................ 54 IV. Investment strategy and valuation ........................................................................................ 70 1. Investment strategy: Note short-term events and long-term structural growth! ............................ 70 2. Valuations of domestic media firms ........................................................................................ 72 3. Valuations of overseas peers .................................................................................................. 73 Cheil Worldwide (030000 KS) ...................................................................................................... 78 KT Skylife (053210 KS)................................................................................................................. 95 CJ E&M (130960 KQ) .................................................................................................................. 107 2 July 16, 2012 Media I. Investment summary 1. Initiate coverage on the media sector with Overweight Focus on top-tier media We present the Korean media sector, which appears to have reached an inflection point, firms undergoing with an Overweight rating, for the following four assumptions: transformation 1) Major media firms are transforming themselves from platform to content players. 2) Revenues sources, which were driven by domestic revenues, are diversifying into overseas markets thanks to structural growth of global revenues. 3) The domestic market is expected to grow further, aided by the easing and improvement of regulations. 4) Marketing campaigns for major events scheduled in 2012 are expected to provide a catalyst to the media sector. Top-tier media firms will likely continue to record growth thanks to fundamental changes occurring in the market. SBS has posted content sales growth on the back of 1) rising overseas demand and 2) increasing copyrights from in-house production. Cheil Worldwide is increasingly securing overseas customers, and plans to acquire foreign advertising agencies this year. The company is expected to be re-rated in the long term, if it can sustain solid growth. 2. Korean media industry at a turning point In 2012, the Korean We believe that the Korean media industry is at a turning point, as: 1) major regulations that media industry is at a had stifled growth have begun to ease; and 2) major media firms are experiencing turning point; Time to fundamental changes amid an improving market environment. find new growth Deregulation, voiced loudly by both the media industry and the stock market, has recently strategies materialized thanks to regulatory changes in the ad market, a major revenue source for the media industry. In particular, the broadcasting ad market, which had displayed limited growth due to strict regulations and slow revisions to the broadcasting act, has introduced competition after 30 years of monopoly, backed by the creation of private media representatives. In addition, total ad-time cap and mid-program advertising, which were introduced to liberalize the advertising market, are proving effective in the pay-TV market. As such, these measures are now being considered for extension to terrestrial broadcasting. Considering such progress, we believe the advertising market holds high growth potential. Figure 1. Overweight rating for Korean media sector; Top pick is Cheil Worldwide Growing into Deregulation Bigger Players Revenue Events Diversification Media sector Companies are transforming reaches a turning point Cheil Worldwide SBS KT Skylife CJ E&M Overweight Source: KDB Daewoo Securities Research KDB Daewoo Securities Research 3 July 16, 2012 Media Media firmsÊ fundamentals are changing, as content and overseas revenues are expanding in addition to domestic advertising revenues. Content platforms have been diversifying thanks to new innovations in telecommunications technology, including LTE, and the advancement of IT devices, such as smartphones. Furthermore, demand for content is expanding from small and simple content, such as digital music and image files, to premium multimedia content. Media firms, such as SBS and CJ E&M, have been preparing to raise their content revenues by increasing in-house content production and endeavoring to secure copyrights. As such, the fundamental nature of media firms is evolving from a simple broadcaster to producer of premium content. Rising overseas demand is also accelerating the evolution