Media & Leisure CJ E&M (130960) BUY (Maintain), TP: W95,000 (Maintain) Stock price (Sep 6, KRW) 68,400 Yr to Sales OP NP EPS % chg EBITDA PE EV/EBITDA PB ROE DY Market cap (USD mn) 2,397 Dec (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%) (%) Shares outstanding (mn) 39 2014A 1,233 (13) 225 5,821 4,244.0 290 6.6 4.7 1.0 16.4 - 52W High/Low (KRW) 95,000/61,000 6M avg. daily turnover (USD mn) 17.2 2015A 1,347 53 54 1,409 (75.8) 373 57.2 8.2 2.0 3.6 0.2 Free float (%) 56.7 Foreign ownership (%) 19.0 2016F 1,499 66 92 2,393 69.8 374 29.2 7.0 1.7 5.8 0.3 Major shareholders(%) CJ Corp and 5 others 42.9 2017F 1,655 102 98 2,547 6.4 419 27.4 6.2 1.6 5.9 0.4 NPS 5.1 2018F 1,778 130 130 3,370 32.3 449 20.7 5.7 1.5 7.3 0.4 Performance Content localization key to success 1M 6M 12M Absolute (%) 12.1 (6.7) (12.9) Maintain BUY with TP of W95,000: We maintain BUY with an SotP-derived TP of Rel. to Kospi (%p) 9.7 (12.4) (22.4) W95,000 on CJ E&M, a major content provider. In fact, CJ E&M is benefitting from growing demand both locally and overseas for its competitive content. 1) Studio 12MF PE trend Dragon, a subsidiary that was split off in May, will be used to accelerate production (X) (KRW) 12MF PER (LHS) 200,000 60.0 of competitive content for global viewers. 2) Ad prices should rise for major TV price (RHS) 180,000 50.0 160,000 channels, including tvN and Mnet, which should lift ad sales. 3) Sales of digital 140,000 40.0 120,000 content and ads on diversified platforms, e.g., VOD, PIP and MCN, should serve 30.0 100,000 as new growth drivers. 4) Localization should increase the overseas contribution to 80,000 20.0 60,000 earnings. 40,000 10.0 20,000 0.0 0 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Opportunity for localization strategy to highlight overseas markets: After reinforcing its capacity to develop quality content and bolstering its domestic position, CJ E&M has expanded operations overseas. And, the company has developed a business model based on selling rights for successful content and using a one-source, multi-use (OSMU) plan that localizes content to reflect cultural and social preferences. In fact, CJ E&M is advancing into China through a JV with a local player, and this has reinforced IP competitiveness and enhanced the hit ratio. Unlike production, CJ E&M’s IP are based on several years of expertise and this should help sustain its competitive position. By focusing on localization, the company is able to diversify its local content and quality, and this should limit the negative effects from regulatory pressure related to geopolitical concerns. Reinforced capacity to produce competitive content: In May 2016, CJ E&M split its drama production division and established a subsidiary, Studio Dragon. This move was aimed at reinforcing its capacity to produce content that could appeal to global markets. One of Studio Dragon’s subsidiaries is Hwa & Dam Pictures, which manages Eun-sook Kim, the writer of popular TV shows, including Descendants of the Sun . Another subsidiary, Culture Depot, is a local agency that manages Ji-eun Park, the writer for the TV series My Love From the Star . Going forward, media earnings should pick up, on: 1) better media sales backed by talented writers, 2) stronger results from expanding the distribution of in-house content to terrestrial and other channels, and 3) a growing contribution from overseas markets. TV broadcast sales recovery ramping up: While sales have been growing more rapidly than the market backed by higher ad unit prices at the broadcasting division, Minha Choi earnings growth has stalled due to higher amortization costs following a change in 822-3276-6260 the accounting of copyrights for TV shows. However, we forecast 3Q16 [email protected] broadcasting OP will grow 23% YoY, 4Q16 OP 73% YoY and 2017 OP 51% YoY backed by lower amortization costs. 1 Media & Leisure Figure 1. Content weighting of GDP for major countries Figure 2. Chinese content market forecast (%) (USD bn) (%) 4 3.77 3.76 250 1.8 Contents market size (L) 1.7 3.08 % GDP (R) 200 3 2.60 1.6 2.34 1.5 150 2 1.4 1.42 1.29 1.28 1.22 100 1.3 1 1.2 50 1.1 0 US 0 1.0 India China Korea Japan Taiwan Vietnam 2009 2010 2011 2012 2013 2014 Thailand Indonesia 2015F 2016F 2017F 2018F 2019F Note: based on 2014 Source: KOCCA, Korea Investment & Securities Source: KOCCA, Korea Investment & Securities Table 1. 2H16~17 domestic business plan 3Q16 4Q16 2017 tvN: <Entourage Korea>, <Goblin>, <The tvN: <The Good Wife>, <k2>, <Drinking Society Game> Recruiting talented writers and producers to Solo>, <Three meals a Day> SBS: <The Legend of the Blue Sea> expand the production capacity Media OCN: <Squad 38> MBC: <Woman with a Suitcase> Developing core IPs and widening digital and Mnet: <Unpretty Rapstar 3> KBS: <Road to the Airport> global businesses <Operating Chromite>, <The Map Improving competency for production and <Fabricated City>, <My Annoying Brother>, Pictures Against the World>, <The City of marketing <Master> Madness> <Cooperation>,<The Island>,<Mt.North Fortress> Records: <Eric Nam>, <Jay Park> Records: <Unpretty Rapstar 3>, <Superstar Obtaining new IPs and in-house artists Ost: <Bring It On, Ghost>, <The Good K8> Improving competency for production and Music/Musical Wife> OST: <Entourage Korea>, <Goblin> management Musical: <42nd Street> Musical: <Kinky Boots>, <The Bodyguard> Continuing development of in-house musical IPs Source: CJ E&M, Korea Investment & Securities Table 2. 2H16~17 overseas business plan 3Q16 4Q16 2017 Global co-production to materialize (China Huace China: <Entourage Korea>, <The Media, Thailand True Visions) China: <Another Miss Oh>, <Boys 24> Legend of the Blue Sea> Media Expanding channels at tvN ASIA US: <Better Late Than Never> Launch of global OTT platform Overseas expansion of tving, enhancing OTT service Accelerating R&D and co -production for global Vietnam: <Saigon Bodyguard> China: <Final Recipe> projects Pictures Thailand: <Suddenly Twenty> Vietnam: <The Housemaid> China: <Veteran>, <The Kungfu Robot>, <Sunny> Indonesia: <Cado Cado> Vietnam: <The Girl From Yesterday>, <Wanted> Music/Musical Asia concerts: <Block B>, <Bangtan Boys> China musical: <Thrill Me> Expanding in-house IPs and overseas licenses Source: CJ E&M, Korea Investment & Securities 2 Media & Leisure Table 3. Quarterly earnings (W bn) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16F 4Q16F 2015 2016F 2017F Sales 293.1 299.2 370.0 385.0 313.5 357.3 387.2 440.8 1,347.3 1,498.8 1,655.0 Media 177.9 223.5 227.6 280.5 225.4 268.4 271.9 324.9 909.5 1,090.5 1,214.1 Movies 65.9 31.5 93.1 47.8 40.3 40.6 63.1 56.0 238.3 200.1 221.2 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 227.2 218.8 286.5 286.9 236.7 269.8 296.4 319.5 1,019.4 1,122.4 1,219.7 COGS-to-Sales (%) 77.5 73.1 77.4 74.5 75.5 75.5 76.5 72.5 75.7 74.9 73.7 GP 65.9 80.4 83.5 98.1 76.8 87.4 90.9 121.3 327.9 376.4 435.3 GP margin (%) 22.5 26.9 22.6 25.5 24.5 24.5 23.5 27.5 24.3 25.1 26.3 SG&A 56.7 62.6 69.9 86.0 67.9 73.3 76.9 92.6 275.2 310.6 333.4 SG&A-to-Sales (%) 19.4 20.9 18.9 22.3 21.7 20.5 19.8 21.0 20.4 20.7 20.1 OP 9.2 17.8 13.6 12.1 8.9 14.1 14.0 28.7 52.7 65.7 101.9 OPM (%) 3.1 6.0 3.7 3.1 2.8 4.0 3.6 6.5 3.9 4.4 6.2 Media 2.5 19.6 7.0 17.0 5.1 20.5 8.7 29.4 46.2 63.7 96.3 Movies 6.5 (4.1) 7.7 (4.1) 3.8 (6.6) 5.5 (0.7) 6.0 1.9 5.2 Music 0.2 2.1 (0.3) (1.3) (0.1) 1.3 0.1 (0.4) 0.7 0.9 1.0 Performance 0.1 0.2 (0.9) 0.4 0.1 (1.0) (0.3) 0.5 (0.2) (0.8) (0.6) EBT 105.1 21.1 33.1 (100.0) 14.6 47.6 18.4 25.8 59.3 106.5 123.4 Controlling NP 91.2 13.3 27.8 (77.9) 13.2 43.2 14.9 21.0 54.3 92.3 98.2 (% YoY) Sales 10.6 5.5 7.8 12.9 7.0 19.4 4.7 14.5 9.3 11.2 10.4 Media 4.4 6.9 11.2 16.0 26.7 20.1 19.5 15.8 10.1 19.9 11.3 Movies 32.5 4.5 (0.2) 25.6 (38.9) 28.8 (32.2) 17.3 12.8 (16.1) 10.6 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 3.4 11.4 4.3 10.1 8.7 COGS-to-Sales (%p) (1.9) (5.5) (5.6) (1.4) (2.0) 2.4 (0.9) (2.0) (3.6) (0.8) (1.2) GP 20.5 32.8 43.4 19.7 16.5 8.7 8.9 23.6 28.4 14.8 15.7 GP margin (%p) 1.9 5.5 5.6 1.4 2.0 (2.4) 0.9 2.0 3.6 0.8 1.2 SG&A (2.2) (9.4) 1.7 19.0 19.7 17.1 10.0 7.6 2.7 12.9 7.3 SG&A-to-Sales (%p) (2.5) (3.4) (1.1) 1.1 2.3 (0.4) 1.0 (1.3) (1.3) 0.3 (0.6) OP na na na 24.6 (2.9) (20.8) 3.0 137.6 na 24.8 55.0 OPM (%p) 4.4 9.0 6.7 0.3 (0.3) (2.0) (0.1) 3.4 4.9 0.5 1.8 Media na na na (23.2) 105.6 4.4 23.2 72.5 2,048.9 37.9 51.2 Movies 50.5 na 18.1 na (41.8) na (28.6) na na (68.0) 171.9 Music na na na na na (37.5) na na na 32.0 13.4 Performance na na na na 109.0 na na 5.0 na na na EBT na na na na (86.1) 126.2 (44.5) na na 79.4 16.0 Controlling NP na na (90.1) na (85.6) 225.2 (46.3) na (75.8) 69.9 6.4 Source: CJ E&M, Korea Investment & Securities Figure 3.