Time to Adopt Long-term Perspective
The author is an analyst of NH Investment & Securities. She can be reached at hzl.lee@nhqv.com. -- Ed.
We lower our TP on CJ ENM to W100,000, reflecting tepid earnings growth at most of its major business arms and declining equity value. But, believing that the firm’s current share price already advance reflects short-term earnings concerns, we point out that these short-term issues stem from investment costs that are laying a foundation for mid/long-term earnings growth. Taking a long-term perspective, we adhere to a Buy rating.
Time to adopt long-term perspective
We lower our TP on CJ ENM by 26% to W100,000 (from W135,000), reflecting downward adjustments to our earnings estimates in light of both sluggish market conditions (amid macroeconomic environment uncertainties) and a decline in equity value. By division: 1) Media: Amid the unavoidable impact of an ongoing slowdown in the broadcast advertising industry, costs related to the firm’s new businesses (OTT, US production company) continue to be burdensome and margins remain anemic; 2) Commerce: A slowing in consumer sentiment appears inevitable due to macro uncertainties; 3) Music: With quarterly earnings likely strengthening on the success of self-nurtured IPs (JO1, INI, and Kep1er), additional IP (Boys Planet) is scheduled to debut in 2023.
However, we stick to a Buy rating, believing that concerns towards short-term earnings slumps at most of CJ ENM’s major divisions (media, commerce) are already baked into its current share price. We advise investors to take a long-term approach, pointing out that the company’s current profitability burden stems from increased investment costs for generating mid/long-term earnings growth.
3Q22 preview: Weathering difficult industry conditions
We expect CJ ENM to post disappointing results for 3Q22, estimating consolidated sales of W1.2tn (+40% y-y) and OP of W55.0bn (-37% y-y). The sluggish earnings trends at most of the firm’s divisions (with the exception being its music business) look likely to continue for now.
1) Media: OP of W20.4bn (-68% y-y). Although sales look to be diversifying on the back of both success of content offerings and a rising number of paid subscribers for the firm’s in-house OTT service, 3Q22 top-line growth was likely restrained by an ongoing general slowdown in the broadcast advertising industry. In the case of Fifth Season (US production company), two works were aired, but further losses were likely incurred due to continued initial cost burden; 2) Commerce: We see OP of W19.9bn (-26% y-y), with the pace of an earnings recovery continuing to be blunted amid unfavorable business environment; 3) Film: We estimate operating losses of W2.6bn (RR y-y)—while Confidential Assignment 2: International enjoyed box office success (surpassing BEP of 3.5mn tickets sold), the attendance numbers for Alienoid fell far below BEP (7mn); 4) Music: OP likely upped to W17.3bn (+58% y-y), led by Japanese boy group (JO1) album sales and arena tours (4 cities, 10 concerts).