An Earnings Shock Expected
The author is an analyst of NH Investment & Securities. She can be reached at hzl.lee@nhqv.com. -- Ed.
We expect ContentreeJoongAng’s 4Q22 results to carry an earnings shock on further operating losses at its broadcasting division due to an insufficient number of airings. With all of its major works (eg, Reborn Rich and Jung_E) proving to be global box office hits, the only missing ingredient for earnings improvement is a sufficient number of airings. Thus, now is the time to pay attention to the firm’s efforts to stabilize its airing schedule.
Better to be in need of quantity rather than quality
We maintain a Buy rating on ContentreeJoongAng. At the broadcasting division, although the current number of airings is disappointing, we point out that the firm has secured a mid/long-term virtuous cycle (deliver high-quality works → obtain global hits → secure future seasons → strengthen profitability) through its various global successes. Recent releases Jung_E, Reborn Rich, and Big Bet are all global hits, and follow-up seasons for some older titles are already in production. The company should enjoy stronger profitability within the year, as D.P. season two is scheduled for release in 3Q23. Starting with its resumption of Wednesday/Thursday drama slots in December, the firm is trying to increase its number of airings. And, expectations for simultaneous airings of Korean dramas in China remain valid. The cinema division should also help to drive mid/long-term growth thanks to synergies with a recently acquired indoor playground business.
We adhere to our SOTP-derived TP of W39,000, using 2023 as our base year. For the broadcasting division, we cut our target 2023F EV/EBITDA by 10% to 15x (the 2023F average of global peers), but we have pushed up our earnings estimates in light of a time slot recovery trend. For the cinema division, we maintain a 2023F EV/EBITDA of 5x (based on the mature cinema market), but we made some adjustments to our earnings estimates to reflect lower-than-expected box office performance as of late.
4Q22 preview: Insufficient airings + unfavorable box office
We forecast consolidated 4Q22 sales of W195.2bn (-11% y-y) and operating losses of W9.7bn (RR y-y), resulting in an earnings shock due to both an insufficient number of airings and sluggish box office performance.
Broadcasting: We see 4Q22 operating losses of W9.3bn (RR y-y). Although revenue related to Reborn Rich is to be reflected for the quarter, poor earnings were likely inescapable due to a lack of broadcasting slots. Turning to the firm’s domestic subsidiaries, operating losses look to be lessening significantly thanks to the effects of OTT original delivery. But, we believe that the US subsidiary will book large-scale operating losses due to delayed delivery of works. Meanwhile, PPA amortization expense (W4.1bn/quarter) remains a burden.
Cinema: We estimate operating losses of W0.1bn (RR y-y). A weak lineup led to a box office slump in 4Q22, and investment- and distribution-related gains were likely limited.