CJ E&M (130960) Company Report / Media & Ad. April 28, 2015 12M rating BUY (Reinstate) Evolve into a money-making media 12M TP W76,000 Up/downside +32% enterprise Stock Data Reinstate coverage with BUY and TP W76,000 KOSPI (Apr 27, pt) 2,158 We reinstate coverage of CJ E&M with BUY and a TP of W76,000. Our TP Stock price (Apr 27, KRW) 57,600 is a sum-of-the-parts of the media operation and the value of shares held Market cap (USD mn) 2,079 in subsidiary Netmarble Games. The media business value is derived by Shares outstanding (mn) 39 applying the global peer average of 25x PE (20% discount to the global 52-Week high/low (KRW) 60,800/32,300 peer avg.) to 2015-2016F average OP (after 10% tax). The games 6M avg. daily turnover (USD mn) 18.1 subsidiary stake value was calculated based on the Netmarble Games Free float / Foreign ownership (%) 56.7/11.4 share acquisition price NCsoft paid in a recent deal. CJ E&M has built a Major shareholders (%) profit-generating structure led by the broadcast business via platform CJ Corp. and 5 others 42.9 diversification and overseas expansion. After making an operating loss of NPS 7.3 W12.6bn in 2014, the firm should turn around with a positive OP of W47.6bn in 2015F and gain 94% in 2016F. The media business valuation EPS revision (KIS estimates, KRW) multiple would drop to 24x 2015F PE and 12x 2016F PE (vs. peer avg. Previous Revised (%) 37x and 27x, respectively) if the subsidiary stake value is not taken into 2015F 1,080 - account. 2016F 2,246 - 2017F 2,823 - Better profits driven by greater content sales such as VoD CJ E&M is the biggest beneficiary of the shift in Korea’s media industry. As Performance selective content consumption is becoming possible thanks to platform 1M 6M 12M diversity, there is mounting demand for CJ E&M’s competitive content. Of Absolute (%) 8.1 66.2 14.3 note, we draw attention to growing content sales such as video on demand Relative to KOSPI (%p) 1.2 54.6 4.9 (VoD). With ad and subscription revenue facing limited growth, we believe 12MF PE greater content sales will drive profit improvement at the broadcast business. We estimate broadcast OP will grow 1,699% YoY in 2015F and (x) (KRW) 93% YoY in 2016F. 12MF PER (LHS) 70,000 60.0 price (RHS) 60,000 50.0 Group-wide cost controls; Big chance of success in China 50,000 At CJ E&M, more efficient execution of production costs would push up 40.0 40,000 profitability. Cost controls being promoted by the overall media business of 30.0 30,000 CJ Group will likely remain in place. The chance of success also seems 20.0 high for its China business. CJ E&M is able to produce content across 20,000 wide-ranging genres and this would enable favorable profit sharing for the 10.0 10,000 company. The China business will become profitable. 0.0 0 May-10 May-11 May-12 May-13 May-14 2013A 2014A 2015F 2016F 2017F Source: WISEfn consensus Sales (W bn) 1,188 1,233 1,344 1,452 1,559 OP (W bn) (8) (13) 48 92 114 EBT (W bn) (34) (50) 48 100 126 NP (W bn) 5 225 42 87 109 EBITDA (W bn) 334 290 349 400 425 Net debt (W bn) 58 (113) (110) (135) (155) OP margin (%) (0.7) (1.0) 3.5 6.3 7.3 ROE (%) 0.4 16.4 2.7 5.5 6.5 Dividend yield (%) - - - - - EPS (KRW) 134 5,821 1,080 2,246 2,823 chg. (% YoY) (86.4) 4,244.0 (81.4) 108.0 25.7 BPS (KRW) 31,992 39,100 40,047 42,155 44,837 DPS (KRW) 0 0 0 0 0 Heuiseok Jeong PE (x) 227.6 6.6 53.3 25.6 20.4 822-3276-6277 PB (x) 1.0 1.0 1.4 1.4 1.3 [email protected] EV/EBITDA (x) 3.8 4.7 6.1 5.2 4.9 Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS AT THE END OF THIS REPORT. Company report focus What is the report about? Company highlights • Identify a structural change in CJ E&M’s media business 1) Historical share performance • Analyze growth potential in a changing media industry from a • Down (August 2011-July 2012): Slower broadcast earnings mid to long-term perspective growth; Mounting losses from music and games • Measure potential profit growth by analyzing the VoD market • Gradual upward (August 2012-April 2014): Overall OP growth • Provide an interpretation of cost control efforts driven by games • Analyze capacity at the Chinese business, for which • Down (May 2014-October 2014): Broadcast earnings erosion expectations are high caused by greater production costs and so forth, after removing the games business from consolidated accounting Key assumptions and valuation • Up (November 2014-present): Better broadcast earnings confirmed by 4Q14 results; A surge in content sales driven by • Key assumptions: 1) A structural turnaround at the broadcast core productions business on greater content sales such as VoD; 2) Better profitability at the media business on cost controls CJ E&M share performance Media business OP and OPM by unit (W bn) (KRW) 80,000 Broadcast earnings erosion confirmed Slower broadcast earnings after separation of the games 2013 2014 2015F 2016F Loss-making music and games business Broadcast OP 1.7 2.2 38.7 74.8 60,000 OPM(%) 0.2 0.3 4.4 7.9 Improved games earnings Films OP 4.7 (4.0) 6.2 10.7 OPM(%) 2.2 (1.9) 2.6 4.2 40,000 Music/Performance OP (14.3) (10.8) 2.7 6.7 OPM(%) (6.9) (5.5) 1.3 2.7 20,000 Expectations for a structural turnaround at broadcast business Source: Company data, Korea Investment & Securities 0 • Valuation (SotP): For media, 25x PE is applied to 2015-2016F Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 average OP (assuming 10% tax); For games, NCsoft’s Source: Company data, Korea Investment & Securities Netmarble Games share acquisition value is used (Table 1 on pg. 2) 2) Evolving into a money-making media enterprise • Broadcast-driven profit growth: The broadcast division’s profit Sensitivity & scenario analysis improves thanks to greater content sales abroad and VoD sales on the back of diverse platforms • CJ E&M’s earnings hinge on how strongly the broadcast OP • CJ E&M has tightened production cost controls since 2H14, advances also observed at CJ Group’s other media businesses such as • Magnitude of the broadcast business turnaround would be a CJ CGV and CJ HelloVision key share price determinant • Across-the-board profitability improvement is likely on cost controls TP impact of broadcast OP changes (KRW) • Chinese business will very likely succeed given the firm’s 2016F broadcast OP (W bn) ability to produce wide-ranging content genres; Enjoy 59.8 67.3 74.8 82.2 bargaining power over partners and more favorable profit 2015F broadcast 30.9 69,160 71,367 73,573 75,780 OP (W bn) 34.8 70,302 72,508 74,715 76,921 distribution is achievable 38.7 71,443 73,649 75,856 78,063 • The firm is stepping up its drive for the animation business that 42.5 72,584 74,791 76,997 79,204 is anticipated to become another growth engine; Likely to Source: Company data, Korea Investment & Securities bolster content sales and add to the licensing revenue Risks/opportunities Peer comparison • Risks: Sharp slowdown for ad business conditions and the • 24x 2015F PE and 12x 2016F PE (excl. the value of shares domestic film industry held in the games subsidiary) • Opportunities: Accelerating changes in the online (mobile) • Peers trade at 37x 2015F PE and 27x 2016F PE media industry • See Table 2 on pg. 2 for valuation details Contents I. Valuation ................................................................................................................................................................................................. 2 1. Reinstate coverage with BUY and TP W76,000 2. Investment points: Full-fledged profit improvement led by media II. Evolving into a money-making media enterprise ................................................................................ 4 1. Profit-generating structure built led by broadcast business 2. Cost controls a widespread change across CJ media business 3. China business has big chance of success 4. Full-spectrum animation business also deserves attention III. Earnings forecast: Enter profit growth phase ...................................................................................... 15 Company overview & Glossary ...................................................................................................................................... 16 CJ E&M (130960) I. Valuation 1. Reinstate coverage with BUY and TP W76,000 SotP-based TP of We reinstate coverage of CJ E&M with BUY and a TP of W76,000. Our TP is the W76,000 sum-of-the-parts of the media operation and the value of shares held in the games subsidiary (Table 1). To drive the media business value, we applied 25x PE, which is 20% discounted to the global peer average. While some high valuation online media firms, such as Netflix, lifted the peer average, we view 25x PE as justified given the strong profit growth of CJ E&M’s media business and bright growth prospects for the online environment. The games subsidiary stake value was calculated using the Netmarble Games share acquisition price NCsoft paid in a recent deal. Media business 24x We believe CJ E&M is still undervalued despite a 51% YTD share price gain.