CFA Institute Research Challenge

Transcription

1 CFA Institute Research Challenge hosted by CFA Society of Korea Sogang University 1

2 Student Research Media Industry, Contents Sector This report is published for educational purposes only by students competing Jcontentree (KQ 3642) in the CFA Institute Research Challenge. Date: 3 Dec, 213 Price: KRW 4,125 Recommendation: Buy Target Price: KRW 5,43 (215F) USD/KRW: 1,55.6 Upside: 31.64% Executive summary Market Profile 52-Week Price Range (KRW) 3,815-5,65 Average Daily Volume 929,874 Shares Outstanding Main Shareholders Joongang Ilbo Joongang Media Network Seok-hyun, Hong Jung-do, Hong Market Capitalization (KRW) 65.5mn 22.29mn 7.36mn 7.44mn 6.56mn.93mn 27.2bn ROE 215E 1.38% Debt to Equity 215F % EPS (KRW) 215F 289 BPS (KRW) 215F 2,116 P/E Ratio 215F 14.26x P/B Ratio 215F 1.95x Source: Korea exchange, team estimates Figure 1. Jcontentree s price history compared with KOSDAQ last five years. (Unit: KRW, point). 7, 6 With Industry and JTBC ready, the time to harvest profit is coming! We initiate coverage of Jcontentree with a BUY and target price of KRW 5,43 (Upside is 32%) because the company has constructed an effective Business portfolio, and the company is now entering a success sequence. Jcontentree has two business sectors: platform and content. Platform sector plays a role like a root of the tree. Also, based on this root, the company is now reaping fruit in their content sector. The period of content has finally arrived. The Korean media industry is now in the transitional period from the platform stage to content stage. Accordingly, Korea media industry has lots of potential for revenue growth. First, the price of content is rising. Second, the quantity of content is increasing. This potential is prominent especially in cable channels. Content of cable channels gets competitiveness because it can make more attractive content without any regulation seen in terrestrial channels. FRUITS (Broadcasting); main powerful driver of Jcontentree The company provides drama to JTBC (one of the cable channels) and distributes the content aired on JTBC. First the company will sell more drama because JTBC will schedule more drama based on their capital strength. Second the company gets more profit from distribution because of increasing price and quantity. Moreover the OPM of broadcasting sector will be improved from around 2% to 9% in 215F. ROOTS (Platform); providing energy for Jcontentree Platform sector including movie and magazine businesses is a strong cashcow for Jcontentree. Both of them have low risk but also stable profit. Movie market has grown 14% annually based on increase of price and quantity. Movie business also has stable cash flow through operational efficiency. With magazine business its market share ranks the top in the magazine industry. Moreover fashion, male, and luxury magazines which the company publishes are all in growing trend. 3,5 5 4 Valuation SOTP valuation suggests 31.64% upside potential with implied P/E ratio 18.92x in 215F (including dilution effect of 8.9% and reduction in interest expenses). This multiple is appropriate because it is still undervalued compared with the average of peer s P/E ratio 23.2x. Therefore, target price KRW 5,43 calculated from SOTP valuation is favorable. CJ E&M which is a representative peer company of Jcontentree shows a P/E ratio 48.4x. Now, Jcontentree is ready to grow structurally and shows an undervalued P/E multiple of 14.26x. It is reasonable for Jcontentree to reach 18.92x. Price(L) KOSDAQ(R ) Source: Korea exchange, team research Investment risks Jcontentree issued a convertible bond with zero-coupon on Oct 17, 213. Dilution effect will be 6.75% in 215F and it can be 8.9% if stock price falls below KRW 3,395. However, by repayment of debt and refinancing, the company reduced interest expenses. Because interest effect covers dilution effect, CB will have a limited impact on the company. 1

3 Business Description Figure 2. Sale structure of Jcontentree 212 Jcontentree is a content company based on media platforms. The company which started from a newspaper company, IS Daily Sports, now belongs to a media company, Joongang Media Network. (Appendix 1) Figure 3. Management structure of Jcontentree 27% 73% 215F Source: Company report (213) 36% 64% Platform: Root of Jconten tree Platform part plays a role of cashcow for the company. The platform sector comprises movie (Megabox) and magazine (Joongang M&B) parts. Megabox manages multiplex theaters and currently has 2% of the entire movie market. (Appendix 2) Also, Joongang M&B publishes magazines which have high awareness in Korea. The number of platforms in mass media industry is rare because of enormous initial cost. It also has entry barrier by being selected with awareness. Therefore, having famous platforms means that the company generates profit continuously. Content Platform Source: Company data, team estimates Content: Fruit of Jconten tree Content part, especially broadcasting, has grown up over the market because of their superiority in making content. Dramahouse&JcontentHub, which is a subsidiary of the company, is in charge of broadcasting channel (JTBC) from production to distribution. In other words, Jcontentree provides and distributes TV programs for JTBC simultaneously. Therefore, it is expected that Jcontentree has a chance to make double profit for one TV program of JTBC. In case of Q channel, it is aired on various TV program by purchasing 2 nd copyright of the TV program. There is no tasty Fruit without strong Root Jcontentree draw up growth strategy led by effective business portfolio. The company is to maximize profitability by entering the content industry that generates infinite added value, based on earnings from stable platform. By having strong platforms, Jcontentree has been secured steady revenue. In addition, the company has raised profitability by investing on their content which has an infinite value. To make good content, it is necessary to invest in infrastructure for content. In case of Jcontentree, it is possible to make great content because of huge investment based on strong cashcow. Therefore, short-term goal of the company is to secure the growth potential and stability at the same time. And final goal of the company is becoming a comprehensive media company based on stable cashflow in platform sector. (Appendix 3) 2

4 Figure 5. Worldwide content sales. (Unit: KRW billion ) 2,1 1,994 1,89 1,782 1, F214F215F Source: Korea Creative Content Agency (KOCCA) Industry Overview and Competitive Positioning Industry overview; the period of content has finally arrived. The Korea media industry is now the transitional period from platform stage to content stage. (Figure 4) In the past, the main part of the media industry was the platform industry. However, the future of the media industry is expected to be driven by the content industry. According to the diversification of the platforms (Smartphone and Tablet PC), consumers could actively choose content regardless of time and location. So, quality of content itself (not platforms) is the main factor for consumers to choose content. Therefore, further media industry will be led by the content industry. (Figure 5) Figure 4. Change in media industry Platform is main Content is main Platform s golden age Variance of Platform Convergence of Media Age of highquality content One way, collective consumption of Content Duplex, individual consumption of Content Source: Team research Figure 6. Average revenue per unit (Unit: KRW) Edited ARPU (by GDP level and viewing time) USA 21,196 Korea 9, Multiples 2.36x Source: IMF, emarketer, Korea Communications Commission team estimates Figure 7. Change of viewer ratings in USA (Unit: % ) High potential in Korea content market First, the price of content is rising. In broadcasting market, average revenue per user in Korea is KRW 9, compared to that of USA, KRW 21,196, considering both GDP level and viewing time (Figure 6, Appendix 4). Thus, there is much possibility for a price rise of content as the media industry develops. Second, the quantity of content is increasing. As broadcasting is converted from analogue to digital in 213, the compatibility of VOD (Video on demand) is improved. Therefore, more platforms can distribute content easily, and it leads to an increase in sales of VOD. With Japan, VOD sales increased 123% after broadcasting converted to digital in 211. (Appendix 5) Cable channel is main fruit This potential is prominent especially in cable channels. Nowadays, content of cable channel gets competitiveness because it can make more attractive content without regulations seen in terrestrial channels. Cable channels can produce violent and sexually suggestive content which fill viewer s need. Therefore, the border between cable channels and terrestrial channels becomes vague as viewer ratings of cable channels rise. In USA, viewer ratings of cable channels outdid that of terrestrial channels in 22. (Figure 7) And Korean broadcasting market is also showing the signs of this trend. For example, viewer ratings of Answering 1994 aired on tvn (cable channel) got first place for the same time. Thus, it s not far in the future that cable channels can compete evenly with terrestrial channels. (Appendix 6) Figure 8. Competitors of Jcontentree Total terrestrial channels Total CA channels Source: Neilson research Source: Each company, team research 3

5 Platforms: Movie and magazine already in mature period CJ CGV is the main competitor of Jcontentree in movie sector, which accounts for 41% of the market. (Appendix 2) Movie market is now in oligopoly situation by three major companies, CJCGV, Lotte Cinema and Megabox. Megabox occupies third place in market, accounting for 2%. (Appendix 7) Oricom is the main competitor in magazine sector which publishes Vogue, allure and GQ. Jcontentree has first place in the market and Oricom is second. Content: Broadcasting now in growth period CJ E&M has the most similar structure with Jcontentree. It runs distribution, PP (program provider) and production together with making vertical integration. Therefore, CJ E&M is the first channel which competes with terrestrial channels. And Jcontentree is a second mover which is now following the path of CJ E&M Investment Summary Figure 9. Viewer rating of JTBC (Unit: %) FRUITS (Broadcasting); Main powerful driver of Jcontentree Broadcasting sector is main driver for Jcontentree. Jcontentree is affiliate with JTBC and forms vertical integration in broadcasting. In the value-chain Jcontentree does in-house production and is also sole distributor of JTBC. Therefore the power of JTBC is an important issue. They established a broadcasting station in Dec 211. Therefore they are in the early stage but grow faster compared to other start-up channels. (TV Chosun, Channel A, MBN) Moreover they make popular programs which capture the audience, and also their viewer rating will be increased.5% to 1.53% in 214F. (Figure 9) Figure 1. Vertical integration of broadcasting sector Production Broadcast Distribution F Source: Nielson Korea, team estimates Jcontentree JTBC Jcontentree Source: Team research Figure The joiner of IPTV (Unit: Million) Production; Fruitful regardless of any weather Jcontentree provides at least half of the dramas aired on JTBC and this will be maintained. (Appendix 8) Thus compared to other productions, the company can generate relatively stable sales. As for outstanding productions, they don t have a fixed customer. They have to get contracts with broadcasting. (Appendix 9) Moreover Jcontentree will sell more dramas because JTBC have high possibility to schedule more episodes. It is because JTBC has enough capital (Appendix 1) and drama is the most profitable content. TV news just generates the profit from advertisement but the drama can get the profit from advertisement, OST, export and merchandise. Thus the trend is televising more drama and cable channel grow faster than terrestrial. (Appendix 11) Therefore the sales from production will increase 14% in 215F. Furthermore the company makes popular and high quality drama like Painter of the wind which received the grand prize F 215F Source: Korea Communication Commission Distribution; Low investment, high profit JTBC continuously make popular content and the company has the right to sell all the content aired on the channel. As price and quantity will be increased, the company gets more profit from distribution. The price of VOD was increased and it will reach a reasonable price. Currently the VOD price of terrestrial channels is KRW 1, and they can set the price differently based on their popularity. However the VOD price of JTBC is KRW 7. As the demand of the VOD is increased, the price will be raised at least to the level of its terrestrial channels. Thus if they make good content, they can generate an enormous profit. Obviously 1) the number of the content will be raised and also 2) the number of distribution channels will be increased. In the past the company could just distribute to other cable channels, but now they can sell more VOD through the new platforms according to the trend in the industry. 4

6 Especially CAGR of Internet Protocol Television (IPTV) joiner is 62% and the growth trend will be maintained. (Figure 11) 3) Moreover Jcontentree has bestselling VOD. (Appendix 12) Figure 12. Comparison of OPM 24% 16% 2% 8% 16% 13% 11% % CJ CGV Jcontentree Source: Each company data Figure 13. Market Share of Magazine business 18% 17% 17% 16% 12% 12% 9% 8% 8% 8% ROOTS (Platform); providing energy for Jcontentree. Platform sector including movie and magazine businesses is strong cashcow for Jcontentree. These two businesses will make stable profit based on operational efficiency and brand s competitiveness. Broadcasting business can grow more rapidly by means of the strong cash flow. Platform and content sectors create a synergy effect in terms of finance. Movie business; deep roots based on operational efficiency. The two factors that make business financially powerful are 1) high OPM, and 2) maintaining market share. Thanks to these things, Jcontentree has a great ability to create cash in domestic movie market. In Korea movie theater market, Jcontentree s OPM is 2.1% in 212, which is about twice as high as CJ CGV s (1.9%). (Figure 12, Appendix 13~16) It means that the company can secure lots of cash stably compared to the competitor. Furthermore, the company will maintain its market share (2%) in domestic movie market because of more efficient investment. The company is investing in direct management theater rather than foreign theater. The operational efficiency increases through this investment strategy. And the major competitor cannot take Jcontentree s share because the market share is restricted to less than 5% by the government. (Appendix 2) Magazine business; small but strong roots coming from popular brands. Magazine business is affected by brand awareness and competitiveness. The company s magazines such as ELLE, Cosmopolitan, and Instyle are the top brands in domestic magazine market. Through these variable and popular brands, market share of Jcontentree is recording No.1 in domestic market. And the company will not lose dominance over the competitor. (Figure 13) Although the growth rate of printing industry is decreasing, Jcontentree s magazine business can keep growing. The reason is that 8% of the brands, whose genres are fashion, male, and luxury magazines, are showing upward trend. These markets are expected to increase by 5.7% until 215F. It is based on the growth of male and female fashion industry and consumption of luxury items. (Appendix 17) 6% F 214F Jcontentree Oricom Valuation Source: Cheil worldwide Inc., team estimates To calculate the price of Jcontentree, we selected SOTP valuation method because each business sector has independent characteristics. We applied DCF valuation, EV/EBITDA valuation and P/E ratio valuation for the movie sector, the magazine sector and broadcasting sector respectively. Figure 14. SOTP valuation table with target year 215F. Business Field Sales OP OPM NI Valuation Method (Unit: KRW billion) Target Target Multiplier Price Broadcasting sector % 15 P/E Ratio 21.4x KRW 2,25 Movie sector % 3 DCF Valuation - KRW 3,4 Magazine sector % -2 EV/EBITDA 5.35x KRW -12 Total % 43 KRW 5,43 Source: Team estimates SOTP valuation suggests 31.64% upside potential with implied P/E ratio 18.92x in 215F (including dilution effect of 8.9% and reduction in interest expenses). This multiple is appropriate because it is still undervalued compared with the average of peer s P/E ratio 23.2x. (Figure 15) Therefore, target price KRW 5,43 calculated from SOTP valuation is favorable. CJ E&M which is representative peer company of Jcontentree shows P/E ratio 48.4x. Now, Jcontentree is ready to grow structurally and shows undervalued P/E multiple of 14.26x. It is reasonable for Jcontentree to reach 18.92x. Details of valuations are as follows. 5

7 Figure 15. Financial informations of peer companies in 213F (Unit: KRW billion, x, %) Company Sales OP OPM NI PER PBR ROE imbc % x 2.x 14.4% SBS Contentshub % x 2.3x 18.4% CJ E&M 1, % x 1.1x 2.2% Chorokbaem % x 1.8x 12.4% ihq % x 2.7x 8.% CJ CGV % x 2.8x 1.6% ORICOM % 4 6.2x.6x 1.5% Source: Each company data, team estimates 1) Broadcasting Sector P/E ratio In regard to valuation of broadcasting sector, we used P/E ratio. And the price is KRW 2,25. We applied target P/E ratio 21.4x and expected EPS KRW 15 in 215F. Broadcasting Sector is the most powerful driver of high growth in the company. The sales of this sector are KRW 166 billion in 215F. This is 69% growth compared to 212. Figure 16. Profit structure of broadcasting sector Source: Team research Figure 17. DCF Valuation & Assumptions (Unit: KRW) Cost of debt 7.% Tax rate 22.58% After tax cost of debt 5.42% Risk free rate 3.53% E(Rm) 1.78% Beta.7732 Cost of equity 9.14% Weight of debt.65 Weight of equity.35 WACC 6.73% Perpetual growth rate 1.% WACC 6.73% Continuing Value PV of continuing value PV of FCFF Operating Asset Non-Operating Asset Firm Value Net debt Value of equity 455,615mn 33,51mn 97,883mn 428,383mn 52,515mn 48,899mn 99,4mn 381,499mn Source: Team estimates Broadcasting sector generates profit through production and distribution. And major factors are the number of selling dramas and the profit from the platform. First, based on the capital strength of JTBC (Appendix 18), we estimate the number of dramas. Moreover in 215F the profit from product placement advertisement (PPL) will increase to 25%. Second we apply the growth rate of SBS contentshub which is representative distribution. The most attractive point of this part is that Jcontentree gets 3% profit purely without any extra costs. Furthermore the commission to JTBC is decreased from 76% to 7% in 214F. Therefore the OPM will increase 2% to 9% in 215F. (Appendix 19) We pick the peer group based on their business. (Appendix 2) And we calculate the weighted average P/E ratio based on the profit structure of Jcontentree. 2) Movie sector - DCF Valuation To calculate the value of Megabox, we used a DCF valuation model. Because Megabox generates stable cash flow and capital structure is not changed in the estimation period. Sales We anticipated that sales in 213F is about KRW 214 billion. It will show growth rate of 11% more than the previous year. Up to 217F, we estimated sales by using the linear regression analysis method. We placed sales of Megabox as the dependent variable, and placed average ticket price (P) and admission per capita (Q) as the independent variables. (Appendix 21~23) Perpetual growth rate To obtain continuing value, we put 1% of permanent growth rate. The amount of household consumption in cultural industry has increased steadily, and the number of annual admissions per capita is lower than OECD countries (OECD = 5 times, Korea = 3.3 times). From these reasons, it is determined that the amount of consumption in movie will increase up to 4.5 and it will maintain this level. 6

8 CAPEX In regard to the characteristics of movie industry, capital expenditure scarcely occurs, and it seems to maintain the current level. However, we estimated that the additional capital expenditure of about KRW 1.5 billion will be generated annually. Because remodeling expenditure of about KRW 7 million is generated when consignment theater switches to direct management. We assumed this switching will occur to two theaters annually. WACC In order to estimate the cost of equity of 9.14%, we used CAPM. We applied 1-year government bond risk-free rate of 3.53% and 1-year rate of return on KOSPI of 1.78% for expected rate of market return. From CJ CGV's beta, we calculated adjusted beta of.7732 by using pure-play method. The after-tax cost of debt was calculated by using value of 5.42% for Megabox because of cost of debt of 7% and marginal tax rate of 22.58%. As a result, we obtained the weighted average cost of capital of 6.73%. (Appendix 24) 3) Magazine business - EV/EBITDA Valuation Jcontentree runs JoongangM&B as its magazine business. Its OP has been constantly positive. However, because of the interest cost, net income is negative. We used EV/EBITDA for valuating since it can consider both OP and interest cost. According to pro-forma income statement, OP will be about KRW 6 billion in 215F. Considering expected OP, depreciation, and net liabilities, we estimated the target price of this business to be KRW -12 in 215F. Sales and Debt The estimated sales of this business are KRW 116 billion in 215F. It is decreased by 1.25% compared to that of in 212. Firstly, the sales of magazine are comprised of advertisement sales (7%) and product sales (3%). Advertisement sales increase in accordance with the growth rate of the magazine advertisement market. In estimating product sales, comprehensive female magazine sales has decreased but the sales of fashion, male, and luxury magazines have increased. For depreciation, we assumed that the depreciation rate is stable because magazine s depreciation comprises just 2% of SG&A, which is quite small. For the net liabilities, we applied the company s repayment plan, which reduces the short-term debt by KRW 1 billion each year. Target EV/EBITDA We estimated the market capitalization of magazine business by considering the trend of peer s EV/EBITDA multipliers in the last four years. Peer groups of the company include Samsungbooks, Yearimdang, and Oricom. EV/EBITDA multiples of the three peers have maintained four to seven in the last four years. Therefore, we applied averaged EV/EBITDA multiplier of 5.35 to evaluate the market capitalization. We assumed that 5.35 will remain the same for three forward years, because printing media is generally in downtrend but advertisement sales is increasing. As a result of applying this multiplier of 5.35, the target price of magazine business is KRW -12 in 215F. Even though the present price is minus, it will improve by repaying the short-term debt constantly. (Appendix 25) Financial Analysis Figure 18. Annual operating profit margin of Jcontentree (Separate basis). (Unit: KRW billion, %) F Sales EBIT EBIT Margin -13.6% 6.4% 6.2% 4.6% Source: Company data, team estimates Improvement in operating profit after merger with JoongangM&B Jcontentree that had run sports newspaper business showed vulnerable operating margin around -1% until 21. However, after Jcontentree merged JoongangM&B which had improved operating profitability in May 211, the firm's operating margin improved to around 6% in 211 and 212. There seems to be a negative effect on making operating profit better than before because advertisement market is shrinking followed by the overall economic recession. However, favorable operating profitability is expected to come based on a sustainable business in magazine sector. (Figure 18) 7

9 Figure 19. Sales, EBIT margin, and NI margin of Jcontentree (Unit: KRW billion) 6 4 6% 1% 13% 14% 11% 12% 6% 7% 9% % % Complement to volatility of other business from excellence in the movie business earnings Under the consolidation basis, movie business is generating most of operating profit and magazine business is also making small but steady profit, too. In the first half of 213, due to seasonality of the advertisement market, magazine and broadcasting business marked operating loss. However, as the profit derived from the movie business offsets this loss, entire profitability is maintained. (Figure 19) 2-15% -18% -25% -3% Sales(L) EBIT margin(r) NI margin(r) Source: Company data, team estimates Heavy debt caused by large-scale acquisitions Due to debt from large equity investments such as the Cinus stake acquisition, business area expansion and increased loans to affiliates, debt scale is heavy and short-term repayment burden is high compared to company's size and cash flow. Under separate basis, annual interest expense of debt is more than KRW 5 billion. However, Megabox and HearstJoongang, which have good earnings, alleviate some of this burden with their stable dividend income of about KRW 3 billion. (Figure 2) Figure 2: Debt condition of Jcontentree(separate basis) (Unit: KRW million) Category St. Debt 41, 6,368 68,523 68,51 67,389 72, Current Portion of Lt. Debt 23, 25,36 25,256 25,143 25,614 Current Portion of Bond 22, Lt. Debt - 5,876 3,657 2,673 2,9 1,293 Bonds Total Debt 63,26 89,244 97,216 96,43 94,541 98,97 Cashable Assets 3,146 5,162 5,299 3, ,69 Net Debt 6,6 84,82 91,917 92,617 93,964 96,838 Payment Guarantees 25,15 62,892 68,653 66,881 71,87 82,251 Total Financial Burden 85,21 146,974 16,57 159, , ,89 Lt. and St. Loans 11,885 7,975 12,491 13,663 1,299 9,775 Debt to Equity Ratio 7.% 134.3% 144.% 136.% 131.7% 141.% Level of Dependence on Debt 76.1% 43.9% 45.6% 44.3% 44.2% 45.5% Total Debt/EBITDA Consolidated Total Debt 93, , ,787 22,35 26,613 27,631 Consolidated Net Debt 79,757 12, , , , ,76 Source: Company data Reduced financial flexibility due to payment guarantees In the process of taking over Megabox in 211, Jcontentree made an agreement that provides payment guarantee of KRW 39 billion with Korea Multiplex Investment Corporation (KMIC) which owns 5% stake of Megabox. As a result, at the end of Jun 213, long-term and shortterm loans for subsidiaries and affiliates are KRW 1.3 billion and payment guarantees approach KRW 78.1 billion. These loans and guarantees are reducing the company's financial flexibility. However, in consideration of the credibility of the Joongang Ilbo and the value of KMIC's stockholding, there is a low possibility that the payment guarantees (KRW 57.6 billion) of the Joongang Ilbo (KRW 18.6 billion) and KMIC (KRW 39 billion) become contingent liabilities. Therefore, actual burden is not too heavy. (Appendix 26) Other Headings Magazine Publication Mobile publication is growing quickly because Korea has a super-high penetration rate of smartphone, 67.6%. Nowadays, Jcontentree publishes some mobile magazines already, and it is going to invest more on mobilization. 8

10 Figure 21: The musical industry of Korea. (Unit: KRW billion) F215F Source: Korea musical theater association Musicals The growth rate of Korea musicals market is high. However, it relies on purchasing popular foreign musicals or performances. However, buying foreign musicals is absolutely disadvantageous to distribution in Korea. Recently, people s perception of musicals changes from high-level culture to popular culture. Thus, despite relatively high price, some musicals had good results. (Ex. The phantom of the Opera, and Wicked). Therefore, the growth rate of the local-made musicals can also be noticeable if high-quality musicals are performed. (Figure 21) JTBC s additional support for content production costs The company can receive about KRW 18.5 billion from JTBC by 213F s. According to KCC s (Korea Communications Commission) correction order in 213, JTBC must fulfill the amount of KRW 91.5 billion which JTBC planned to invest first but not performed. Considering that half of JTBC dramas are produced by the company, the company gets 2.2% of all investment. (Appendix 27, 28) Also, we expect that 3 dramas produced during the second half of the year can be supported by additional KRW 6.1 billion in average. JTBC s new cable channels, positive for Jcontentree JTBC plans to run drama, entertainment, and sports cable channels in a similar way to those of terrestrial competitors, SBS and MBC. Though all these channels proprietor is JTBC, Jcontentree is going to distribute all the content aired on three channels. Assuming the company distributes them exclusively, we expect the sales from distribution sector will be increased. With terrestrial already running cable channels, their in-house distribution company s sales increased by 79.3% in the second year. (Appendix 29) Investment Risks Issuing convertible bond Jcontentree issued a convertible bond with zero-coupon on October 17, 213. Conversion price was KRW 4,85, the scale was KRW 18 billion, and maturity was five years. Based on 215 when early redemption is started, dilution effect from issuing CB will be 6.27%. The company used this bond to repay debt. In addition, the company refinanced KRW 22 billion of debt at the same time. As a result, the company reduced about KRW 2 billion of interest expenses. Diluted EPS which includes the interest effect increases by 1.35%. Therefore, effect from issuing CB does not have a significant effect on the company. According to the indenture, however, this bond is re-evaluated every month. This provision may become a problem when stock price falls continuously. The bottom of conversion price is KRW 3,395 and dilution effect of that is 8.9%. Then, because interest effect compensates dilution effect, EPS can be reduced by.69%. However, considering the growth potential in the future and limitary dilution effect, convertible bond is not a major risk for this company. Financial burden with acquisition of additional shares of Megabox Under the agreement signed with Korea Multiplex Investment Corporation (KMIC) which holds shares of 5% of the Megabox, Jcontentree has a call option which allows the company to purchase shares of the Megabox that are held by KMIC. If Jcontentree acquires additional shares of Megabox, there exists the burden of funding associated with it. Also, it is notable that KMIC has a right to force sale of shares held by KMIC if the value of total share of Megabox exceeds KRW 65 billion. 9

11 Adjusting ticket revenue sharing rate of Megabox. June 213, CJ CGV adjusted ticket revenue sharing rate which had been applied to the Korean film from theater 5%, distribution 5% to theater 45%, distribution 55%. Followed by CJ CGV, Lotte Cinema also participated in adjusting the rate in September 213. It can be expected that Megabox also participates in this adjustment. Even if the revenue obtained from the screening of Korean films is reduced 1% by the adjustment, the target area is limited only to Seoul and the adjustment is preceded with direct management theater. In consideration of these points, the impact of the adjustment on the company's sales seems to be insignificant. Re-approval of comprehensive channels KCC is going to carry out the re-approval of four start-up channels including JTBC in the first half of 214. JTBC is the principal source of profit on the company s broadcasting sector. Therefore, the fact whether JTBC is re-approved or not can have a decisive effect. Considering the standard of re-approval, it focuses on broadcasting fairness and balance of programs. JTBC has the most similar programming with terrestrial channels among the four start-up channels. It means that if JTBC is re- approved, it is expected that this re-approval event is not a heavy risk for Jcontentree. Figure 22: Fluctuation of the advertisement industry 2% 15% 1% 5% % -5% 3.76% -3.39% 17.13% 1.16% 5.5% 4.84% 3.2% 2.8% Advertisement expenses growth rate GDP growth rate Source: Cheil worldwide Inc., korea economic research institute, team estimates Sensitivity of advertisement market to GDP In magazine sector, advertisement revenue accounts for 7%. Advertisement market of magazine makes up around 5% of the total advertisement market. Currently, advertisement market for new media such as internet, mobile and e-books is expanding. However, the attractiveness of magazine advertisement market is decreasing. Other sectors are also affected by the cycle of advertisement market because they make profit from advertisement, too. Correlation between GDP and sales of advertisement market which are related to company s business sector shows strong positive correlation of.97. It can be interpreted that this company reacts to the economic cycle sensitively. According to Bank of Korea, GDP growth rate in 213F will be about 2.8%, advertisement market will be expected to grow up to 4.84%. This rate is lower by about.66%p than previous year's advertisement market sales. (Figure 22) Possibility of lowering the support of JTBC JTBC provides 9% to Jcontentree for drama production cost. But terrestrial channels provide only 6% for production cost, and the production company complements the rest by PPL. It is because of the awareness difference between channels. Therefore, with high awareness, terrestrial channels can be sponsored by lots of PPL compared to start-up channels. But recently, the awareness of start-up channels, especially JTBC, is increasing through popular entertainment programs and dramas. Thus, there is a high possibility that JTBC can also lower the rate of production cost of dramas. If it is realized, Jcontentree should get more PPL, making the risk of success and failure of dramas large. Uncertainty of content s success Broadcasting production business has instability because content before it is aired is uncertain to succeed. Generally, when the cast and staff are popular, the possibility of the success is raised. Also, programs aired on other channels at the same time are also able to affect its success. If content in process finishes early due to low viewer ratings, production companies have more burden. In case of The end of the world, JTBC shortened the broadcasting period from 2 to 12 episodes due to unexpected low viewer ratings (highest.89%). Even though Jcontentree had invested KRW 2 billion in the drama in the initial stages, the company could withdraw only KRW 1.2 billion from JTBC. Thus it could not avoid heavy deficit. It is possible to think the uncertainty is the company s operational risk because it cannot completely exclude the possibility of content s early finish. 1

12 Appendix 1. Joongang media group management structure Joongang Media Network Joongang Daily JTBC Megabox Jcontentree Dramahouse& JcontentHub Joongang Culture Media IS Plus Corp. Joongang Media Q Channel Seol & Company Jcontentree can utilize their affiliated company, especially JTBC. Jcontentree is affiliated with Joongang Media Network. Joongang Media Network is a media company that managed one of the most famous newspaper companies in Korea (Joongang Daily). And also the company which started from newspaper company founded the Cable TV channel (JTBC) in Dec 211. Therefore, Jcontentree is also affiliated with JTBC, and their broadcasting sector is closely related to JTBC. With the power of these relationships, the broadcasting sector has stability and growth potential by using their Cable Channel. Appendix 2. Shares of theater (Multiplex) market in Korea (212). 1% 28% 41% CJ CGV Megabox Lotte Cinema Others 2% Source: Korean film council Oligopoly movie market in Korea In theater market, Jcontentree (Megabox) is 3 rd place of entire movie market (2%). In Korea, three major companies possess 9% of entire theater market. Market Share will not be invaded It is expected that their market share will not invaded at all because of Korean law. According to Fair Trade Commission in Korea, it is prohibited that a sole company has market share over the 5%. CJ CGV, which is the 1 st place of the market, has 41% market share in Korea, and also Lotte cinema has 28% market share. The Fair Trade Commission restricted that CJ CGV or Lotte Cinema invaded another movie market. In fact, their competitors gave up expand market share in Korea, and then entered another market, China and Vietnam. Therefore, their movie sector, Megabox, has strong stability with this law. 11

13 Appendix 3. Business Field of Jcontentree with BCG Matrix Source: Team estimates, company data The Success Sequence of Jcontentree There is a famous theory called Success Sequence in BCG Matrix. The theory claimed that it is necessary to construct effective business portfolio. In this theory, a Successful company must have five processes as follows: 1) A part of the company started Question Mark would move to Star, and as the market entered age of saturation, they would move to Cashcow slowly. 2) A goal of Cashcow sector is to generate enormous and stable cash inflow. 3) By having a cashcow, a company should support another part that placed in Question Mark or Young Star. 4) Question Mark or Young Star part would grow up Star supported by cashflow. 5) Therefore, a company must have plenty of Cashcow, and a little of Question Mark or Young Star but they didn t have Dog. Jcontentree is going to follow their Success Sequence. 1) The company already has strong Cashcow as movie (Megabox), magazine (Joongang M&B). 2) Two parts of the company generates cash flow enormously and stable. 3) By having movie part and magazine part, the company is going to support Broadcasting sector, which are placed in Question Mark or Young Star 4) With this cashflow, broadcasting sector (Dramahouse&JcontentHub) would grow up to Star. 5) In other words, Jcontentree already have plenty of Cashcow and Young Star. 12

14 Appendix 4. Calculating edited ARPU Unit: million digital TV subscriber Unit: KRW ARPU USA 1 6, Korea 24 9, Multiples Source: KCC (Korea communications commission) GDP per person USA 49,61 Korea 23,679 Unit: KRW Multiples.47 Source: IMF(International Monetary Fund) TV viewing time USA 4.5 Korea 3.3 Multiples.74 Unit: Hour Source: Emarketer Edited ARPU (by price level and viewing time) USA 21,196 Korea 9, Unit: KRW Multiple 2.36 To calculate edited ARPU, we searched original ARPU of USA and Korea. And to compare it on the same condition, we consider two major factors, GDP for price level and viewing time. The GDP per person in USA is.47 times of Korea. And TV viewing time of USA is.74 times of Korea. Therefore, we multiplied.47 and.74 to the original ARPU of USA, KRW 6,. Finally, we derived edited ARPU of USA, KRW 21,196. Appendix 5. VOD sales in Japan 12 (Unit: JPY Appendix 6. Viewer ratings of answering (Unit: %) 11.9% % Source: Association of digital content Source: Neilson Korea 13

15 Appendix 7. Number of movie screen in Korea 2,5 1,975 2, (Unit: Screen) 2,15 1,5 1, 1, Source: Korea Film Council The mature period in Korea movie market The theater market is expected to enter the mature period. Number of screen in Korea grew up annually 18.6% from 23 to 27. In other words, movie companies in Korea invested aggressively to expand their theaters, or screen numbers. However, after 27, the number of screens grew slowly while growth of the movie consumer is high. It means that the theater companies have a strategy that maintain the same level, not invest aggressively. Appendix 8. Composition of production of JTBC s 56% DRAMAHOUSE DRM L.G.H Production SamHwa networks LOGOS FILM Source: Team research Appendix 9. The number of drama produced by PAN entertainment 6 (Unit: Program) F Source: Team research PAN entertainment which is one of the famous production companies just recorded half the sales compared to last year. 14

16 Appendix 1. The Production cost of Start-up Channels (Unit: KRW billion) Appendix 11. The trend of televising dramas (Unit: Program) MBN TV Chosun Channel A JTBC Source: KCC Terrestrial Cable Source: KOCCA Appendix 12. Top 1 VOD among start-up channel NO Tittle Broadcast 1 Witch Hunt JTBC 2 Hidden Singer 2 JTBC 3 Ssuljeon JTBC 4 Your Neighbor s Wife JTBC 5 Heartless City JTBC 6 Can We get married JTBC 7 Hidden Singer 1 JTBC 8 Better Off With Kids JTBC 9 Oldest JTBC 1 Now we are going Channel A Source: Tving Appendix 13. Operational Margin of Movie sector Appendix 14. Personnel Expenses / Sales in Movie 25% 2% 15% 11.5% 16.3% 2.1% 9% 6% 8.% 6.7% 5.5% 1% 3% 5% % % Source: Company data Source: Company data 15

17 Appendix 15. Sharing ticket revenue / Sales in Movie Appendix 16. Rent cost / Sales in Movie sector 36% 35.7% 25% 35% 34% 34.4% 2% 2.1% 19.% 33% 33.1% 15% 15.1% 32% 31% % Source: Company data Source: Company data Appendix Profit structure of movie ticket 1% 8% 6% 4% 2% % 3% 3% 1% 1% 43.5% 39.2% 43.5% 47.8% Korean Movie Foreign Movie Korea Film Council VAT Revenue to theater Revenue to investment, distribution company Source: Korea Film council Appendix Korean movie vs Foreign movie in Korea market 7% 6% 58.8% 5% 4% 46.6% Korean Movie Foreign Movie 3% Source: Korea Film council From 21 to 212, the movie sector of Jcontentree, Megabox, has been enormously changed in financial area. The operational margin of Megabox was increased by 9% from 21 to 212. (Appendix 13) The reason that OPM was higher is due to three things: 1) Personnel Expenses, 2) Rent cost, 3) Sharing ticket revenue. First, Megabox cut off the rate of personnel expenses by 2.5%p in this period. For this reason, Megabox could increase OPM by 2.5%p. (Appendix 14) 16

18 Second, sharing ticket revenue was cut off by 2.6%p in this period (Appendix 15). The reason why sharing ticket revenue decreased is a market factor. Rate of Korean made movie (Korean made, not imported foreign movie) has increased in this period from 46.6% to 58.8%. (Appendix 15-2) Also, Korean made movie is favorable to theater because Korean made movie share more revenue compared to foreign movie by about 4%p. (Appendix 15-1) It means that if Korean made movie market has increased, the theater could get more revenue. Third, Rent cost was decreased by 5%p from 21 to 212 because Megabox has been overweighting in consignment theaters. (Appendix 16) For these reasons, Megabox cut off the expenses by 1%p, and the effect is that the OPM has increased about 9%p. We expected that their OPM will slow down slightly (Appendix 3), but not rapidly decrease because 1) Korean made movie market has still increased, 2) Korea movie market is in the mature period. Therefore, their OPM risk is not significant. Appendix 17. Growth of fashion, male and luxury magazines (Unit: KRW billion) F 214F 215F Fashion Male Luxury Source: Cheil worldwide Inc., team estimates 8% of Jcontentree s magazines belong to fashion, male, and luxury genres. While women s magazine is in down trend of growth, other genres (fashion, male, luxury) are growing rapidly. Sales from the three magazines had CAGR 1.2% in last five years. Such a high growth rate will be maintained continuously. The growth rate is expected to be 4.7% in 214F and 6.64% in 215F. Thanks to these magazines, Jcontentree s magazine business can get enough cash flow to invest in broadcasting business. Appendix 18. Net income of JTBC 1 (Unit: KRW billion) (5) 3 (3) F 214F 215F 216F 217F (28) (6) (1) (133) (19) (15) Source: KCC, team estimates Currently JTBC is in an early stage. Therefore they have to invest a lot of money and their net income is negative. But they can bear it because of strong capital. Based on our estimation JTBC will turn-around in 215F. Thus they can invest more which means the production cost will be increased and they will schedule more dramas. In the case of terrestrial, the number of drama was increased form 72 in 29 to 82 in

19 Appendix 19. The valuation of broadcasting sector (Unit: KRW million, KRW) F 214F 215F 216F 217F Sales 98, , , ,8 185,59 198,874 Cost 96,61 116, , , , ,723 EBIT 1,512-1,17 5,755 14,587 2,21 24,15 Taxable income 85 5,236 11,513 19,795 24,693 28,271 Net income 2,351 4,84 8,98 15,44 19,261 22,51 EPS Source: Company data, team estimates In 212net income is higher because of the deferred income tax. And in 213F because of early finishing of <The End of The World> they showed the negative profit. Appendix 2. Peer groups of broadcasting sector Production Distribution Program Provider IHQ Chorokbaem SBS ContentsHub imbc CJ E&M KNN YTN WOW TV KMH TBC SBS EPS , , ,58 P/E ratio Source: Company data, team estimates The peer group of production is PAN Entertainment, IHQ, Samwha Networks and Chorokbaem. But PAN Ent. is too overvalued and Samwha Networks showed negative net income. Therefore both of them are not appropriate for comparison. And the peer group of distribution is SBS contentshub and imbc. JTBC is inferior to major channels. But in consideration of growth, it will be fair. The peer group of PP (program provider) is CJ E&M, KNN, YTN, WOW TV, KMH and SBS. All of them run broadcasting stations. Appendix 21. Multiple linear regression analysis data for estimate Megabox sales. Appendix 22. Trends of Average Ticket Price, Admission per capita in US, Canada box office (Unit: USD (L), Person(R)) Dependent Variable: Megabox Sales Method: Least Squares Sample: Mean of ATP is Variable Coefficient(million) t-statistic Prob. C - 364, Average Ticket Price Admission per Capita 64, R-squared.94 Adjusted R-squared.92 F-statistic Prob(F-statistic). Durbin-Watson stat 2.7 Source: Team research 3 2 ATP(L) Admissions per Capita(R) Source: Motion Picture Association of America, team research 18

20 Appendix 23. Estimated Sales & View per capita in Korea (Unit: KRW Billion, times) 3 2 Sales View Per Capita US & Canada VPC = 4.5 Times F 214F 215F 216F 217F Source: Team estimates The result of multiple regression analysis shows that t-statistics of every independent variable are significant because the absolute values of them are more than 2. In addition, F-statistics of also explains the adequacy of the model and R-squared of.94 describes the high fitness of linear regression line which accounts for the sales of Megabox. In the United States, average ticket price has grown 2.8% per year and average of admission per capita has been about 4.5 times since 24. So, based on the US, we estimated that ATP (Average Ticket Price) growth rate will be CAGR 1.79% and admission per capita approaches 4.5 during the estimation period. 19

21 Appendix24. Assumption of Weighted Average Cost of Capital (WACC) Description Cost of Debt 7.% Weighted average interest rate of Jcontentree Tax rate 22.58% Tax rate of Megabox in 212 (Source: Company report in 212) After tax cost of debt 5.42% = Cost of Debt (1 - Tax Rate) Risk Free Rate 3.53% Yield on the KOR National bond 1Y in 213/12/27 E(Rm) 1.78% 1-year rate of return on KOSPI for expected rate of market return Beta.7732 **see below Cost of Equity 9.14% Using CAPM = Rf + B ( E(Rm) - Rf ) Weight of Debt.65 = Net Debt / (Net Debt + Equity) (Source: Company report in 212) Weight of Equity.35 = 1 Weight of Debt WACC 6.73% = {COD * (1 Tax rate) * Weight of Debt} + (COE * Weight of Equity) Beta Pure Play Method (Unlevering CJ CGV) We calculated adjusted beta of.7732 by using pure-play method from CJ CGV s beta. The reason why we use the beta of CGV is as follows: 1) We cannot get the flow of stock price of Megabox because Megabox is not a listed company. For this reason, we could not obtain beta. 2) Therefore, we calculated by using the beta of CJ CGV which is listed on KOSPI, not KOSDAQ. Calculating unlevered beta formula is as follows: Unlevered beta = Levered beta /(1+(1-t)D/E) CGV s Debt to equity ratio in 212 was.99 and tax rate was.23 The beta of CGV in last 2 years is.47, according to the formula, the unlevered beta of CGV is.27. And then, calculating a beta of company formula is as follows: B company = B unlevered(1+(1-t)d/e) Megabox s debt to equity ratio in 212 was 1.84 and tax rate is.23. And it is possible to apply the unlevered beta of CGV,.27. According to this formula, the beta of Megabox is To avoid instability problem of beta, we used adjusted beta. The formula for adjusted beta of Megabox can be presented as follows: Adjusted beta B = 1/3 + (2/3 *.6598) =.7732 Appendix 25. Valuation of printing media section (Unit KRW million, x) 213F 214F 215F Sales 114, , ,729 OP 5,51 5,53 6,97 EBITDA 1,437 1,886 11,455 Target EV/EBITDA EV 55,838 58,241 61,288 Market Value -15,593-12,19-8,143 Total number of shares Target Price Source: Team estimates 2

22 Appendix 26. Offer and benefit details for affiliate and relative (Unit: KRW million) Relation Corporate Name F Offer Affiliate Joongang Ilbo 21,834 18,59 Joongang Books 3,318 8,939 Joongang Entertainment and Sports 1,68 1,2 Joongang Ilbo Sisamedia 1,2 1,2 Joongang Animation 1,622 1,662 JTBC 3,9 Clip Service 5,2 2,6 Relative Korea Multiplex Investment Corporation 39, 39, Total offer 74,53 82,251 Benefit Affiliate Joongang Ilbo 2,7 17,69 Source: Company Report Appendix JTBC program portion by genres 7.8% 11.8% 59.1% 21.3% Report Culture Drama Entertainment Source: JTBC Appendix 28. Subsidy difference between in-house and outsourced production from the channel. (Unit: KRW million) 2, 17,495 15, 1, 95 : 5 5, 915 In-house Outsource Source: KCC To calculate 2.2% we consider program portion of JTBC and subsidy to in-house and outsourced production from the channel. From all JTBC program, drama accounts for 21.3%. Among that portion, in-house production gets 95% of subsidy on average. So we multiplied.95 to the portion of drama and derived 2.2%. 21