J Contentree (036420 KQ ) Growth to shift from multiplex to broadcasting Raise TP to W5,800; Focus on broadcasting potential We keep our Buy rating on J Contentree and raise our target price to W5,800 from W5,000 <Table 3>. We believe the strong potential of the broadcasting business’s intellectual property (IP) investments deserves greater attention than the weakness Media of the multiplex business. We value the multiplex business conservatively at around W330bn (aggregate), Company Update which we believe fully reflects the impact of stiffening competition and delays in operational normalization. Given that Megabox was valued at roughly W560bn just July 24, 2017 three months ago in Korea Multiplex Investment Corporation’s (KMIC) stake sale , we see limited downside to our valuation. On the other hand, we believe the broadcasting busines s, including IP investments, has strong room for growth. We see a clear path for quantitative growth, driven by: (Maintain) Buy 1) increasing content production/distribution income due to more drama programming at JTBC, and 2) expansion into other broadcasting channels and Target Price (12M, W) 5,800 platforms (OTT, etc.). We are also positive on content quality . The company has produced a string of hit dramas following the series Strong Woman Do Bong-soon (its first IP investment project). In 2017, the company’s highest drama viewership Share Price (07/21/17, W) 4,040 rate was 4%p higher than the 2016 level <Figure 4>. We see upside risks to our target P/E of 13.5x for the broadcasting business. Earnings growth should gain Expected Return 44% steam in the coming quarters, supporting multiple expansion. In our opinion , the broadcasting business is currently in the initial stages of a re-rating cycle. We view broadcasting as a quantitative growth story, backed by enhanced content quality. OP (17F, Wbn) 59 2Q17 review: Broadcasting better than expected, but multiplex worse Consensus OP (17F, Wbn) 43 than feared For 2Q17, J Contentree reported consolidated revenue of W101.9bn (+45.8% YoY ) EPS Growth (17F, %) 82.5 and operating profit of W10.4bn (+195.3% YoY ). The earnings contribution of Market EPS Growth (17F, %) 43.3 broadcasting increased sharply, as this was the first quarter in which the new P/E (17F, x) 13.1 drama IP investment business was fully reflected in earnings. The multiplex business continued top-line growth, but expenses rose markedly , leading to Market P/E (17F, x) 10.3 weaker-than-expected profits. KOSDAQ 676.60 Broadcasting (broadcasting + IP investment): Revenue and operating profit Market Cap (Wbn) 461 came in at W54.1bn (+178.2% YoY) and W10.3bn (+566.5% YoY), respectively. The strong performance was attributable to: 1) the licensing of drama Man to Man to Shares Outstanding (mn) 114 Netflix (W6bn), 2) higher ancillary/digital revenues (due to the success of dramas), Free Float (%) 66.5 and 3) increased production revenue (amid increased production costs). Foreign Ownership (%) 1.8 Multiplex: Revenue and operating profit came in at W57.8bn (+12.4% YoY) and Beta (12M) 0.65 W1.1bn (-28.3% YoY), respectively. Despite overall theater attendance falling 0.3% 52-Week Low 3,520 YoY, Megabox’s attendance inched up 1.8% YoY on new theater rollouts. However, the ongoing normalization of new sites opened in 2H16 , as well as the rollout of 52-Week High 4,585 two new locations (Yangsan and Songdo) in the quarter, led to a stee p rise in costs, dragging down margins. (%) 1M 6M 12M Absolute 1.5 2.0 -10.6 Both multiplex and broadcasting look promising in 3Q17 Relative -0.1 -6.2 -6.5 For 3Q17, we expect revenue of W126.3b n (+19.6% YoY) and operating profit of W24.7bn (+67.5% YoY) , with strength coming from both broadcasting (including IP) 120 J Contentree KOSDAQ and multiplex. The broadcasting unit will likely be boosted by distribution income th 110 for hit shows Woman of Dignity (first aired on June 16 ) and Hyori's Bed and Breakfast . In particular, the company should take a greater cut for dramas due to 100 its IP investments. The multiplex business should benefit from peak season effects 90 and the release of domestic tentpole films The Battleship Island and A Taxi Driver . 80 Foreign films have also been doing well in the box office this month. We think seasonal effects could buffer the impact of higher costs, helping to ease some of 70 7.16 11.16 3.17 7.17 the negative sentiment on the multiplex business. FY (Dec.) 12/13 12/14 12/15 12/16 12/17F 12/18F Mirae Asset Daewoo Co., Ltd. Revenue (Wbn) 380 369 306 335 429 482 [Media ] OP (Wbn) 38 36 33 29 56 76 OP margin (%) 10.0 9.8 10.8 8.7 13.8 15.8 Jeong -yeob Park NP (Wbn) -10 0 11 19 38 46 +822 -3774 -1652 [email protected] EPS (W) -139 -1 128 169 308 403 ROE (%) -11.1 -0.1 15.0 26.3 34.6 32.4 P/E (x) - - 43.9 22.9 13.1 10.0 P/B (x) 2.8 2.3 9.5 5.0 3.7 2.7 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates July 24, 2017 J Contentree Earnings forecasts and valuation Table 1. Consolidated quarterly and annual earnings (Wbn, %, mn persons, %p) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17P 3Q17F 4Q17F 2015 2016 2017F Revenue 92 80 106 58 87 102 126 114 350 335 429 Multiplex 64 51 78 61 68 58 90 67 232 255 283 Box office 33 33 49 38 39 33 58 39 143 153 169 Concessions 10 10 15 11 12 10 17 12 43 46 51 Screen ads 7 7 11 8 9 7 13 9 32 34 37 Other 14 2 4 3 8 7 1 8 14 23 25 Broadcasting 19 19 18 26 17 41 33 40 84 83 132 IP investment - - - - 4 13 17 19 0 0 52 Magazines 9 10 10 -28 - - - - 45 1 0 Consolidate d adj . & -1 -1 -1 -1 -2 -10 -14 -12 -11 -4 -38 other Operating profit 12.0 1.8 15.4 -0.2 5.2 10.4 24.8 16.0 31.4 28.9 56.3 OP margin 13.1 2.2 14.6 -0.4 6.0 10.2 19.6 14.1 9.0 8.6 13.1 Multiplex 11.4 2.3 15.4 -6.9 4.3 1.1 16.1 3.6 27.0 22.3 25.0 Broadcasting 2.7 1.5 1.7 2.4 1.0 6.9 2.9 3.8 4.3 8.4 14.6 IP investment - - - - -0.1 3.4 6.9 9.6 0.0 0.0 19.8 Magazines -1.8 -2.1 -1.8 4.2 0.0 0.0 0.0 0.0 -0.4 -1.4 0.0 Pretax profit 8.3 0.9 15.5 10.4 5.1 10.0 25.9 13.3 28.3 35.1 54.4 Net profit 6.6 -0.9 12.3 4.4 3.8 7.7 20.0 10.2 18.1 22.4 41.7 Net margin (%) 7.2 -1.2 11.6 7.6 4.4 7.6 15.8 9.0 5.2 6.7 9.7 Net profit attributable to 5.1 -1.7 11.3 4.5 3.4 7.5 18.3 8.4 11.4 18.2 37.6 controlling interests YoY Revenue 14.5 2.5 2.6 -34.6 -5.3 27.9 19.6 95.8 -11.3 -4.2 27.9 Multiplex 21.1 6.3 9.3 3.9 6.5 12.4 14.6 9.3 -0.1 10.0 10.8 Broadcasting 1.6 -13.1 -21.1 37.7 -13.3 112.9 81.2 53.3 -14.6 -0.5 58.2 Magazines -10.6 -12.9 -2.2 - - - - - -13.1 -97.0 - Operating profit 596.8 -82.2 30.6 TTR -56.8 489.9 60.8 TTB -9.8 -7.8 94.6 Net profit 218.8 TTR 41.2 1,839.6 -42.6 TTB 62.5 130.2 41.0 23.6 86.2 Assumptions Domestic attendance 49.5 45.1 72.4 50.0 52.3 45.0 76.0 49.0 217.3 217.0 222.3 Megabox attendance 9.0 8.5 13.7 9.6 10.2 8.6 14.7 9.5 38.4 40.8 43.1 Megabox share 18.1 18.8 18.9 19.3 19.6 19.2 19.3 19.5 17.7 18.8 19.4 YoY Domestic attendance -2.0 1.2 -0.9 1.7 5.7 -0.3 5.0 -2.0 1.0 -0.1 2.4 Megabox attendance -0.4 9.8 6.4 8.9 14.1 1.8 7.1 -1.0 -2.8 6.1 5.6 Megabox share 0.3 1.5 1.3 1.3 1.5 0.4 0.4 0.2 -0.7 1.1 0.6 Note: Based on consolidated K-IFRS; for YoY comparisons, the magazine business was not reflected as discontinued operations Source: Company data, Mirae Asset Daewoo Research estimates Table 2. Earnings forecast revisions (Wbn, W, %, %p) Previous Revised Change Notes 17F 18F 17F 18F 17F 18F Revenue 404 514 429 482 6.1 -6.3 - Inclusion of broadcasting IP investment earnings Operating profit 43 55 56 70 31.0 27.0 - Margin gains from increased licensing income Net profit 27 33 38 45 40.0 38.3 OP margin 10.6 10.7 13.1 14.5 2.5 3.8 Net margin 6.7 6.4 8.8 9.4 2.1 3.0 Notes: All figures are based on consolidated K-IFRS; net profit is attributable to controlling interests Source: Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 July 24, 2017 J Contentree Table 3.