EQUITYEQUITY RESEARCH RESEARCH 5 Mar 2008 CJ (001040 KS) CJ Corporation (001040 KS) BUY (Upgrade) Waiting for positive signals as it converts to a holding company Patrick Kim (82-2-769-3809) [email protected] Upgrade to BUY, and boost TP to W120,000 We have a BUY rating on CJ Corporation (CJ), setting our target price at W120,000. Based Share price (Mar 5) W73,300 on our sum-of-parts valuation we derived our target price by adding the per share stake value Six-month TP W120,000 of W131,650 to the per share tangible asset value of W5,080, and then deducting W16,260 Par value W5,000 per share in borrowings. KOSPI 1,676.18 52 week high/low W147,968/W64,000 It has been half a year since it converted to a holding company structure Capital stock In Sep 2007, CJ began to convert to a holding company with a subsidiary spin-off. Then in W137.7bn (Common stock) Dec 2007, as it completed a tender offer for shares of CJ CheilJedang, CJ emerged as an Market cap W2,062.6bn undisputed holding company. As such, the company is comprised of a total of 15 subsidiaries, Foreign ownership 15.5% including three food production and food service companies, five E&M (Entertainment & Performance (%) Absolute Relative Media) companies, three new retail businesses, and three companies working in either the 1 m 0.4 1.3 financial industry or the infrastructure industry. Meanwhile, it has six listed subsidiaries and 6 m -11.5 1.3 nine unlisted ones. 12 m -32.3 -42.9 The share catalyst will be its improved earnings from non-listed subsidiaries The company’s business portfolio highlights its stable business diversification, which might Share price help offset the risks from each individual business. However, as it posts continued losses (‘000W) Outperformance(RHS)(%) 160 0 from some of its E&M and construction companies this is adversely impacting CJ’s stake 140 -10 value. Nonetheless, CJ Investment Securities has recently moved into the black after having 120 -20 continuously recorded losses. This subsidiary has also launched a moderate restructuring in 100 -30 a bid to enhance profitability in its loss-making divisions. This will provide a lift to the value of 80 -40 CJ’s subsidiary stakes going forward. 60 -50 40 The shares look cheap - BUY -60 20 It appears that CJ’s current market value reflects uncertainties surrounding the future -70 07.02 07.05 07.08 07.11 08.02 operating results of its subsidiaries. However, its current market value has dropped below the value of its stakes in listed subsidiaries and does not price in the value of its unlisted subsidiaries’ shares nor the value of other assets including its available-for-sale securities. Therefore, we find the shares undervalued and have a BUY rating on the stock with a target price of W120,000. Forecasts and Valuations FY Sales OP Pre-tax profit NP EPS Chg P/E P/B EV/EBITDA ROE Net D/E (Wbn) (Wbn) (Wbn) (Wbn) (W) (% yoy) (x) (x) (x) (%) (%) 2006A 2,650 192 216 140 4,895 -7.7 24.4 2.2 18.1 9.1 74.9 2007A 1,973 163 82 38 1,418 -71.0 58.2 1.3 9.4 2.3 20.1 2008F 217 172 154 112 4,055 185.9 0.0 0.0 1.9 6.3 18.1 2009F 235 195 182 132 4,793 18.2 0.0 0.0 1.5 7.0 15.5 2010F 258 213 201 146 5,293 10.4 0.0 0.0 1.3 7.2 13.1 Source: Daishin Securities Research Center EQUITY RESEARCH CJ (001040 KS) 5 . Summary . Valuation 6 1. Valuation 8 2. Sum-of-Parts valuation applying a discount . Determinants of CJ’s corporate value 9 1. The value of its subsidiary stakes 11 2. CJ’s tangible assets 12 3. Another important value – brand value . SWOT analysis 14 1. Strengths 16 2.Weaknesses 19 3.Opportunities 20 4.Threats 22 . Conclusion – CJ’s value is swayed by its subsidiaries EQUITY RESEARCH CJ (001040 KS) ʐ. Summary Even in light of its Some of the CJ Corporations’ (CJ) subsidiaries will likely continue posting losses for the time being and this will subsidiaries deteriorating undermine the holding company’s equity method gains going forward. CJ’s current stock price has factored in the profitability, shares in CJ are uncertainties regarding the performance of its subsidiaries. Nevertheless, even if we take a conservative stance significantly undervalued towards its subsidiaries’ earnings we still believe CJ is undervalued. The rationale behind this stance is as follows: 1. We applied a 40% discount to the net asset values of four of its subsidiaries (CJ Development, CJ Entertainment, CJ Media and CJ Oliveyoung), which are continuing to record net losses. 2. CJ decided to impose brand usage fees on its subsidiaries, but since 2008 is the first year that these will take effect, and as it is impossible to estimate the size of the cash inflows generated by these fees, we have chosen to not yet reflect them in our valuation. Fair per share value Using our DCF metric, we estimated CJ’s stake value at W131,650 per share and its tangible assets at W5,080 estimated at W120,000 per share, and then summed up both figures before subtracting its per share borrowings of W16,260. We then arrived at a fair per share value of W120,000. As such, we think the stock is presently undervalued. A key factor determining CJ Entertainment, CJ Development and CJ Media are reporting massive net losses with the booking of sizeable CJ’s long term value is bad debt expenses. These have were incurred as the companies respectively faced problems regarding pre- whether its subsidiaries can funded movie production, unsold housing and copyrights. Moreover, equity method losses from subsidiaries are secure profitability increasingly impacting CJ’s performance. We think these losses demonstrate a side effect of CJ’s policy to turn to M&A’s in order to boost its growth potential. Nevertheless, the company’s holdings in CJ CheilJedang, which make up the greatest portion of its subsidiary holdings, are generating stable earnings. However, as the food & beverage industry enters a mature phase there will only be limited profit growth from this business. Furthermore, despite CJ’s dominant market share in the entertainment & media business, this business unit’s profitability also falls short of expectations. Meanwhile, after having continued to report massive losses that have adversely impacted CJ’s corporate value, CJ Investment & Securities (CJIS) has moved into the black. We also have a positive view on the possibility that CJIS will go public on the stock exchange this year. CJ’s stake value is a key Ironically, the pricing-in of the sluggish performance of the company’s subsidiaries’ will provide a boost to its stake factor in determining its value in the long run. Given its current profit structure, CJ will inevitably pursue efforts to reinvent itself. One of the corporate value major advantages of a holding company is to create a business environment where corporate restructuring can be made in the most appropriate way. This may provide momentum for boosting CJ’s shares. Obviously, some of its business units are recording lower margins, but their M/S’s remain steady in their respective industries and they are still taking leading roles in determining market prices as well. Consequently, assuming all of the following: a positive corporate restructuring, including a business portfolio reshuffle; a conservative investment approach, and a profit-oriented management policy in judging feasibility (for example setting an ROI target at a specific level during the restructuring), CJ’s stake value will rapidly get closer to its fair value. EQUITY RESEARCH CJ (001040 KS) ʑ. Valuation 1. Valuation Rating: BUY, TP of W120,000 Valuation We have a BUY rating on CJ, setting our target price at W120,000. Based on our sum-of-parts valuation we derived our target price by adding its per share stake value at W131,650, to the per share market value of its headquarters building at W5,080, and then subtracted W16,260 per share in borrowings. Available-for-sale securities CJ’s stake value includes both the value of its holdings in subsidiaries and the value of its available-for-sale may finance the company’s (AFS) securities. Since it has a limited capacity to generate cash as a holding company, CJ may dispose of its future investments AFS securities if additional investment money is needed. Its major securities under this classification include: 58,823 shares in Samsung Everland (a 2.35% stake) and 639,434 shares in Samsung Life Insurance (a 3.20% stake). Also, its shares in DreamWorks Animation (worth approx. W84.0bn as of Mar 3, 2008) may now be classified as AFS securities. CJ is trading at a 33.1% As of Mar 3, CJ is trading at a 33.1% discount to its NAV (net asset value). In other words, the holding discount to its NAV company’s current market value is about 66.9% of the total sum of its stakes (both those listed and non-listed) and its tangible assets, after subtracting its total borrowings. As such, theoretically CJ’s stock price holds more than a 33.1% upside potential. Therefore, we believe the shares are currently undervalued and we have a bullish outlook that the discount to its NAV will be reduced as the company sees a gradual improvement in its equity method gains from subsidiaries.