20171109-三星证券-Sluggish_results,_but_aggressive_guidance_7页_362kb

CJ E&M (130960) Summary

Core Content

CJ E&M reported its 3Q17 results, which showed an operating profit of KRW12.7 billion, falling short of consensus forecasts by 26%. Despite a 5.7% year-over-year increase in ad sales, the company's broadcasting segment underperformed, primarily due to increased content production costs and a loss from its subsidiary CJ Blue in Vietnam. The company also revised its 2017 operating profit guidance downward by 10% to KRW90 billion, while expecting a 15% increase in broadcasting ad sales for 2018, which is seen as aggressive.

The current price of CJ E&M is KRW89,400, with a target price of KRW100,000, reflecting a 11.9% upside. The analyst has maintained a BUY recommendation, citing the rising value of CJ E&M's stake in Netmarble as a key factor in the target price revision.

Main Points

• 3Q17 Performance:

  • Operating profit: KRW12.7 billion, down 26% from consensus.
  • Broadcasting ad sales: KRW9.2 billion, up 5.6% year-over-year but below expectations.
  • Content production costs increased, leading to losses in the entertainment division.
  • The movie division suffered a loss of KRW1.7 billion due to weak performance of The Battleship Island movie.
  • The music division contributed KRW6.8 billion in operating profit, driven by the success of Wanna One.

• Guidance and Outlook:

  • 2017E operating profit guidance was cut to KRW90 billion.
  • 2018E broadcasting ad sales are expected to grow by 15%, assuming a low single-digit market growth and increased market share.
  • The analyst sees the 2018 guidance as ambitious, especially given the upcoming Winter Olympics.

• Valuation and Target Price:

  • The 12-month target price was raised by 15% to KRW100,000.
  • The firm's operating value is estimated at KRW1.1 trillion, based on 15x P/NOPAT.
  • The low valuation is attributed to the analyst's conservative broadcasting ad market assumptions.
  • If ad sales meet the company's guidance, the target price may be revised further.

• Financial Highlights:

  • Sales for 3Q17 were KRW440 billion, up 16.2% year-over-year.
  • Operating profit for 3Q17 was KRW13 billion, a 318.3% increase from the previous quarter.
  • Pre-tax profit was KRW24 billion, a 152.7% increase from the previous quarter.
  • Net profit was KRW12 billion, up 380.9% year-over-year.

Key Changes

CJ E&M vs. The Street

• Number of estimates: 17
• Target price: KRW101,824
• Recommendation: 4.0
• BUY: 5
• HOLD: 3
• SELL: 2
• SELL★★★: 1

Key Comments from Earnings Call

• Low Broadcasting Earnings:

  • Due to increased production costs for entertainment content and a KRW2.6 billion loss from CJ Blue in Vietnam.

• Achieving 15% Ad Sales Growth:

  • Expected to come from growth in general programming and CATV channels, along with the rebranding of second-tier channels.

• High Corporate Tax Rate:

  • Resulted from recognizing deferred tax liabilities from the IPO of Netmarble Games.
  • The effective tax rate would have been 22% without this.

• Studio Dragon Performance:

  • Made an operating profit of KRW29.5 billion for 1Q-3Q17 on sales of KRW214.9 billion.

• Content Exports and Amortization Costs:

  • Content exports reached KRW45.1 billion in 3Q17.
  • Amortization costs fell by 21% year-over-year to KRW80 billion.

Target Price Calculation

Summary of 3Q Results

Revisions to Full-Year Forecasts

Valuation Summary

Financial Ratios

Compliance Notice

• The analyst did not hold any shares or convertible debt instruments in the company as of Nov 8, 2017.
• Samsung Securities' holdings would not exceed 1% of each company's outstanding shares if debt instruments were converted.
• The report is not influenced by external factors and reflects the analyst's views.
• All content is copyrighted and may not be altered or distributed without permission.
• This is not an offer to buy or sell securities.