CJ ENM
The author is an analyst for NH Investment & Securities. She can be reached at hzl.lee@nhqv.com -- Ed.
CJ ENM reported an earnings shock, affected by widening losses at new businesses (OTT, US production) and impacts of economic slowdown at the main business, excluding entertainment. A sharp recovery in earnings and share price looks some distance away, but further downside is limited for both.
To weather the storm, supported by main business
We maintain a Buy rating on CJ ENM. Amid lackluster earnings at new businesses, CJ ENM shares have performed sluggishly as of late. However, considering the firm’s main business and stake value, share price downside is limited. We note that CJ ENM’s current market cap can be fully accounted for by combining the operating values of the high growth music arm (W1.6tn) with the stable cash-cow commerce domain (W0.5tn). In addition, with the securitization of non-core assets believed to be underway, a significant improvement in financial soundness is expected.
We maintain our SOTP-calculated TP of W100,000, while adjusting some details in line with business unit reorganization. In estimating operating value, we consider four businesses: 1) broadcast content main business (media platform + pictures & dramas - new businesses (TVING, Fifth Season)); 2) OTT (TVING); 3) commerce; and 4) music. Although we have excluded Fifth Season in our TP calculation, we plan to introduce it after confirming an earnings contribution from stabilized operations. In calculating non-operating value, only the value of Netmarble shares available for securitization were considered.
1Q23 review: Losses at new businesses, but music arm strong
CJ ENM posted consolidated 1Q23 sales of W949bn (-1% y-y) and operating loss of W50.3bn (TTL y-y), delivering an earnings shock amid impacts from new businesses (combined operating loss of W82.0bn at TVING and Fifth Season).
1) Media platform: Operating loss of W34.3bn, affected by ad market slowdown and expanding production cost burden at TVING; 2) Pictures & drama: Operating loss of W40.7bn due to the box office failures of Phantom and Count and a lack of content delivery from Fifth Season; 3) Commerce: OP of W17.5bn on recovering billings and margins; 4) Music: OP of W8.1bn, with solid earnings being recorded despite major lineup inactivity. With comebacks expected for major lineups in 2Q23 and a boy group (ZB1) debut scheduled for 2H23, brisk earnings growth should continue.