[Into the Stocks] CJ ENM Quickly Recovers from Direct Hit of COVID-19

Achieved 37% of Annual Operating Profit Target in 1Q
Comprehensive Recovery from Content to Music Streaming
Uncertainties Remain in Investment Execution and Competition with Other OTTs

[Asia Economy Reporter Minwoo Lee] CJ ENM posted a 'surprise performance' in the first quarter of this year, far exceeding market consensus despite it being a traditionally off-season period. The company appears to be recovering comprehensively from the direct impact of COVID-19 last year, across various video content and music. However, due to the nature of the content industry, additional investments may deviate from expectations, which remains a concern. It is also uncertain whether Tving can secure an advantage in the paid membership competition against other online video services (OTT).

1Q Recovery from COVID-19 Impact... Strong Performance Exceeding Expectations

According to the Financial Supervisory Service's electronic disclosure system on the 7th, CJ ENM recorded consolidated sales of 791.9 billion KRW and operating profit of 93.6 billion KRW in the first quarter of this year. Sales decreased by 2.33% compared to the same period last year, but operating profit increased by 135.81%. The operating profit exceeded consensus by 67.8%. In just one quarter, the company achieved 37% of its annual operating profit target (guidance) of 250 billion KRW.

The 'surprise performance' was mainly driven by the media business. The media business alone recorded an operating profit of 53.8 billion KRW, marking an all-time high. The operating profit margin also reached 13.9%. TV advertising, a major revenue source for the broadcasting business, increased by 24.5% compared to the same period last year, contributing to profit growth. Content with high public interest such as 'Vincenzo', 'Mr. Queen', and 'Youn's Kitchen' played a significant role. The digital division, including the OTT 'Tving', saw operating profit grow by 34% year-on-year, supporting the overall performance. Core subsidiary Studio Dragon also posted operating profit 24% above consensus in the first quarter. The film business recorded a loss of only 100 million KRW due to strong sales of old titles' secondary rights. The music division achieved the second-highest operating profit ever at 6.2 billion KRW, driven by expanded online concerts and successful new artists.

Changes in Tving's amortization standards?from 100% cost recognition to 60% for three months and 40% for the following 21 months?also had a positive impact. Although significant investments in Tving will begin in the second quarter, the possibility of upward revision of profit guidance has increased. Particularly, Tving's subscribers rose 29% compared to the previous quarter, and the partnership with Naver, which started in March, will be reflected from the second quarter, suggesting growth commensurate with investment speed. Furthermore, the quantity and quality of anticipated works are expected to increase toward the second half of the year, following titles like 'Seobok', 'The Witch's Diner', and 'New Journey to the West'. Lee Ki-hoon, a researcher at Hana Financial Investment, predicted, "Operating profit is expected to approach 300 billion KRW, which was anticipated before the conservative guidance of 250 billion KRW was presented at the beginning of the year."

Stock Price Rebound Begins... Securities Firms Raise Targets

The somewhat sluggish stock price has recently begun to rebound. Despite CJ ENM posting strong results in the fourth quarter of last year, the stock price plummeted after the company set its operating profit guidance for this year at 250 billion KRW, which was considered overly conservative, down 8.1% year-on-year. The stock price, which had risen to 174,000 KRW on January 26, declined continuously to intraday lows of 138,000 KRW on March 2. Since then, the previously weak stock price started moving ahead of the first quarter earnings announcement. Early in the trading session on the day, CJ ENM's stock price rose 2.19% from the previous day to 158,300 KRW. Compared to the closing price of 141,000 KRW on the 29th of last month, the stock has risen for five consecutive trading days, increasing by about 12.3%.

In this favorable atmosphere, securities firms have also begun to raise their target prices in unison. Eugene Investment & Securities raised its target price from 200,000 KRW on the 21st of last month to 220,000 KRW, a 10% increase. Shinhan Investment Corp. also raised its target to 180,000 KRW, up 5.9%. Hana Financial Investment proposed a target price of 210,000 KRW, up 10.5% from before.

Remaining Concerns Including Fierce Competition

However, some question whether the stable growth in performance seen in the first quarter will continue. While the results clearly showed growth and profit improvement through content competitiveness, full-scale investments have not yet been made. Additionally, the gap between the company's guidance, market expectations, and actual results raises concerns about performance uncertainty. Furthermore, the imminent entry of overseas OTTs such as Disney and Apple TV into the domestic market will inevitably increase competition, and the continued decline of cable due to digital transition may also be a burden.

Shin Eun-jung, a researcher at DB Financial Investment, pointed out, "Although the stock price may rebound in the short term, there may be limitations due to performance uncertainty, so it is necessary to approach by checking quarterly results." Against this backdrop, DB Financial Investment maintained a 'Hold' investment opinion and a target price of 180,000 KRW for CJ ENM. IBK Investment & Securities lowered its target price by about 5.3%, from 190,000 KRW to 180,000 KRW.