Regional Company Focus CJ ENM Bloomberg: 035760 KS, Reuters: 035760.KS Refer to important disclosures at the end of this report DBS Group Research . Equity 9 Nov 2018 BUY, KRW219,000 KOSDAQ: 693.7 Strength in content business (Closing price as of 08/11/18) underpins earnings Price Target 12-mth: KRW300,000 • If not for IPTV commission hike, 3Q18 earnings would Reason for Report: 3Q18 earnings review have been a positive surprise Potential catalyst: Synergies between its digital channels and • To continue outperforming the market in terms of TV ad commerce business revenue growth Where we differ: We are more optimistic than the market for FY18F, but more conservative for FY19/20F • Commerce margins to recover in near term Analyst • Retain BUY, keep our TP of KRW300,000 Regional Research Team [email protected] Media: Stronger than expected TV and digital ad revenue. CJ ENM’s media division posted its highest-ever quarterly OP of KRW37.2bn (+305% y-o-y) in 3Q18. With the airing of premium content such as Price Relative ‘Boyfriend’ and ‘Memories of the Alhambra’ and several other 350,000 130 popular shows in 4Q18, CJ ENM’s TV ad revenue outperformance 300,000 120 250,000 110 and digital ad revenue growth should persist. Sales to Chinese and 100 200,000 global over-the-top (OTT) service providers also seem likely. 90 150,000 80 Commerce: Temporary dent to margins. Gross merchandise sales 100,000 70 50,000 60 were solid at KRW935.9bn (+5% y-o-y) with KRW80.2bn from T 0 50 commerce (+36% y-o-y) and KRW267.5bn from mobile commerce Nov-14 Jun-15 Jan-16 Aug-16 Mar-17 Oct-17 May-18 Stock price(LHS,KRW) Rel. to KOSDAQ(RHS,pts) (+24% y-o-y). But due to a transmission commission hike by IPTVs Forecasts and Valuation (+KRW13bn y-o-y), CJ ENM’s commerce margins eroded FY Dec (KRW bn) 2017A 2018F 2019F 2020F temporarily. Its margins should recover after 4Q18. Revenue 2,260.0 3,358.8 4,559.7 4,965.8 Overseas expansion likely for movie division; more sub-label EBITDA 469.1 556.5 703.6 819.9 Operating profit 224.5 269.3 397.2 479.8 collaboration for music division. Despite cinema revenue growth, Pre-tax Profit 184.3 273.6 381.2 463.8 the movie unit posted 3Q18 operating losses of KRW2.3bn, Net Profit 143.4 211.6 304.9 371.0 suffering declines in film sales to the ancillary market, Net Pft (Pre Ex.) 143.4 211.6 304.9 371.0 musical/theatrical performance sales, and ‘other’ sales. The unit Net Pft Attributable to plans to expand its business overseas, rather than in Korea where its Controlling Interest 130.9 180.3 243.9 296.8 EPS (KRW) 21,054 15,623 11,124 13,536 earnings have been very volatile. The music unit recorded marked EPS Pre Ex. (KRW) 23,078 18,337 13,905 16,920 revenue growth in concerts (+27% y-o-y) and sub-record labels EPS Gth (%) 458.6 -25.8 -28.8 21.7 (+140% y-o-y). The unit is likely to maintain stable profits, EPS Gth Pre Ex (%) 340.2 -20.5 -24.2 21.7 broadening its collaboration with sub-labels like AOMG, Jellyfish, Diluted EPS (KRW) 21,054 15,623 11,124 13,536 and Swing Entertainment. Net DPS (KRW) 3,000 3,200 3,360 3,530 BV Per Share (KRW) 165,443 93,043 100,968 111,144 Top pick in media sector. Given its development of solid content PE (X) 11.0 14.0 19.7 16.2 line-ups, CJ ENM’s competitiveness should remain strong going PE Pre Ex. (X) 10.0 11.9 15.7 12.9 P/Cash Flow (X) 3.0 5.3 9.4 8.0 forward. Synergies between DIA TV, Dada Studio, digital channels EV/EBITDA (X) 4.1 7.8 6.2 5.3 and its commerce business are expected in 2019 onwards. The Net Div Yield (%) 1.3 1.5 1.5 1.6 possibility of the sale of its investment assets such as CJ Hello P/Book Value (X) 1.4 2.4 2.2 2.0 should be positive for CJ ENM’s short term share price. We retain Net Debt/Equity (X) 0.3 CASH CASH CASH ROE (%) 14.7 13.8 14.3 16.0 the stock as our top pick, and keep our SOTP-based TP of KRW300,000. Earnings Rev (%): (17.1) (14.8) (3.3) Consensus EPS (KRW): 13,096 14,109 15,640 At A Glance Other Broker Recs: B : 13 S : 0 H : 0 Issued Capital (m shrs) 21.93 Mkt. Cap (KRWbn/US$m) 4,802/4,299 ICB Industry: Retail – Discretionary ICB Sector: Consumer Discretionary Major Shareholders Principal Business: CJ ENM provides television shopping services. It CJ Corp and 5 others (%) 42.7 also produces movies, broadcasts, performances, music, and Free Float (%) 46.83 animation. Avg. Daily Vol.(‘000) 125 Source of all data: Company, DBS Bank, Bloomberg Finance L.P ed: KK / sa: LEY, CS Company Focus CJ ENM Media: Stronger than expected TV and digital ad revenue. Against this backdrop, CJ ENM’s media division posted its 3Q18 TV ad revenue of KRW145.3bn (+24% y-o-y) highest-ever quarterly OP of KRW37.2bn (+305% y-o-y) in outpaced market growth. Broadcast of premium content 3Q18. With the airing of premium content such as such as ‘Mr. Sunshine’ boosted viewer ratings and ad ASP. ‘Boyfriend’ and ‘Memories of the Alhambra’ and several Platform in platform (PIP) traffic growth and digital-only other popular shows in 4Q18, CJ ENM’s TV ad revenue content traffic growth helped increase digital ad revenue by outperformance and digital ad revenue growth should 54% y-o-y. Content sales revenue, including overseas sales persist. Sales to Chinese and global over-the-top (OTT) of ‘Mr. Sunshine’, also posted strong growth of 59% y-o-y. service providers also seem likely. Earnings review Unit: KRW bn, % Preliminary earnings Vs. our estimates y-o-y q-o-q Vs. consensus estimates ‘18.09P ‘18.09F Diff. (%) ‘17.09A Diff. (%) ‘18.06A Diff. (%) ‘18.09F Diff. (%) Revenue 1,096.3 1,033.7 6.1 540.7 102.8 585.2 87.3 1,050.6 4.4 OP 76.5 8.0 856.5 49.2 55.6 49.6 54.1 85.4 (10.4) NP 54.3 81.3 (33.2) 26.4 105.4 27.7 95.9 70.0 (22.5) Margin (%) OP margin 7.0 0.8 9.1 8.5 8.1 Net margin 5.0 7.9 4.9 4.7 6.7 Difference (ppts) OP margin 6.2 (2.1) (1.5) (1.1) Net margin (2.9) 0.1 0.2 (1.7) Note 1: Based on consolidated K-IFRS Note 2: 2Q18 numbers are based on CJ O Shopping’s financial statements. CJ ENM’s (merged company) earnings were applied from 3Q18 Source: DBS Bank Page 2 Company Focus CJ ENM CJ ENM: TP calculation 1) Operating value (KRW bn) FY19F revenue OP Post-tax OP Target Multiple Fair value Remarks Media (incl. movies) 1,797.9 152.5 122.0 22.5 2,745.6 30% premium over global media peers' average 2019F PE 10% premium over domestic home shopping peers' average Commerce 1,312.9 141.3 113.0 10.3 1,168.7 2019F PE 10% discount to domestic top 3 entertainment peers' average Music 243.4 21.6 17.2 24.5 422.6 2019F PE Sum of operating value (a) 4,336.8 2) Investment asset value (KRW bn) Fair value Stake Discount Stake value Remarks Netmarble Games 10,230.7 22.0% 20.0% 1,800.6 Based on Netmarble Games' TP (KRW120,000) CJ Hello 941.3 53.9% 20.0% 405.9 30% premium over CJ Hello's current market cap (7 Nov) Samsung Life Insurance 18,380.0 0.5% 20.0% 73.5 Based on Samsung Life Insurance's current market cap (7 Nov) Sum of investment asset value (b) 2,280.0 Total (a) + (b) 6,616.9 No. of shares ('000 shares) 21,926 Fair price (KRW) 301,781 Target price (KRW) 300,000 Rounded off Current price (KRW) 219,000 Based on closing price as of 8 Nov Upside potential 37.0% Source: DBS Bank CJ ENM: Earnings estimates on a consolidated basis (KRW bn) 1Q18 2Q18 3Q18F 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F 2017 2018F 2019F Revenue 1,033.6 1,049.0 1,096.3 1,112.5 1,053.1 1,120.1 1,158.7 1,212.3 3,973.4 4,291.5 4,544.2 Media 332.5 361.9 406.8 385.1 333.9 407.7 425.1 434.4 1,261.9 1,486.3 1,601.1 Ad 119.6 141.9 145.3 150.8 122.5 145.6 142.4 155.6 495.7 557.7 566.2 TV licence fee revenue 50.2 50.1 49.6 54.9 50.7 50.6 50.1 55.4 203.8 204.8 206.9 Others 162.7 169.8 212.0 179.4 160.7 211.5 232.6 223.3 562.4 724.0 828.0 Movie 80.0 36.0 45.0 52.1 62.8 38.2 44.1 51.7 225.2 213.1 196.8 Cinema 41.5 12.4 28.1 22.2 37.6 13.0 27.0 21.4 111.2 104.1 99.1 Ancillary sales (VoD) 10.5 7.4 6.9 7.4 5.7 8.1 6.6 7.1 33.2 32.3 27.4 Performances 14.4 7.4 4.3 10.3 10.1 7.8 4.5 10.4 26.6 36.4 32.8 Others (exports) 13.6 8.8 5.7 12.2 9.5 9.2 6.0 12.8 54.2 40.3 37.5 Music 56.2 66.5 58.2 60.3 55.0 58.0 64.0 66.3 230.7 241.2 243.4 Albums/records 28.2 29.0 23.0 24.4 24.0 26.1 25.3 26.8 92.2 104.6 102.2 Others 28.0 37.5 35.2 35.9 31.0 31.9 38.7 39.5 138.6 136.6 141.1 Commerce 290.9 307.5 295.0 324.2 313.5 325.2 319.7 354.5 1,193.3 1,217.5 1,312.9 TV 154.1 154.1 145.3 164.1 151.7 153.6 148.3 166.1 645.8 617.7 619.8 Digital 96.4 105.5 99.2 107.2 112.5 113.9 110.0 123.2 385.7 408.3 459.6 Others 40.3 47.9 50.3 52.9 49.3 57.6 61.3 65.3 161.7 191.4 233.5 CJ Hello 274.1 277.2 291.4 290.8 287.8 291.0 305.9 305.3 1,062.3 1,133.4 1,190.1 OP 89.9 79.2 76.5 87.7 77.4 99.3 105.0 110.2 287.6 333.3 392.0 Media 24.6 29.2 37.2 27.4 26.7 38.6 44.1 42.3 61.8 118.4 151.7 Movie 7.2 -3.9 -2.3 2.6 0.2 2.0 -1.9 0.5 -10.4 3.6 0.8 Music 2.7 4.2 3.3 4.8 4.7 5.6 5.3 6.1 11.8 15.0 21.6 Commerce 42.3 33.9 17.8 32.4 31.4 35.8 35.2 39.0 151.6 126.5 141.3 CJ Hello 13.1 15.7 20.5 20.5 14.6 17.3 22.4 22.3 72.9 69.8 76.6 OPM 8.7% 7.5% 7.0% 7.9% 7.4% 8.9% 9.1% 9.1% 7.2% 7.8% 8.6% Media 7.4% 8.1% 9.1% 7.1% 8.0% 9.5% 10.4% 9.7% 4.9% 8.0% 9.5% Movie 9.0% -10.7% -5.1% 5.0% 0.3% 5.2% -4.2% 1.0% -4.6% 1.7% 0.4% Music 4.8% 6.3% 5.7% 7.9% 8.5% 9.6% 8.2% 9.2% 5.1% 6.2% 8.9% Commerce 14.6% 11.0% 6.0% 10.0% 10.0% 11.0% 11.0% 11.0% 12.7% 10.4% 10.8% CJ Hello 4.8% 5.7% 7.0% 7.0% 5.1% 6.0% 7.3% 7.3% 6.9% 6.2% 6.4% Pre-tax profit 122.1 97.8 72.5 83.7 73.4 95.3 101.0 106.2 776.6 376.1 376.0 Corporate tax 23.8 19.0 18.3 16.7 14.7 19.1 20.2 21.2 211.2 77.8 75.2 NP 98.4 78.8 54.2 66.9 58.8 76.2 80.8 85.0 565.4 298.3 300.8 NPM 9.5% 7.5% 4.9% 6.0% 5.6% 6.8% 7.0% 7.0% 14.2% 7.0% 6.6% Controlling-interest NP n.a.