[Click eStock] "CJ CGV, Positive Cost Efficiency... Target Price Up 8%"

Shinyoung Securities Report

[Asia Economy Reporter Minji Lee] Shin Young Securities maintained a neutral investment opinion on CJ CGV on the 10th. The target price was raised by 8% to 26,000 KRW due to a significant reduction in losses from cost-cutting.

In the first quarter, CJ CGV recorded sales of 172.5 billion KRW, down 29% compared to the same period last year. Operating losses narrowed to 62.8 billion KRW. By segment, domestic (-52.7 billion KRW), Turkey (-4.2 billion KRW), Indonesia (-5.5 billion KRW), and 4DX (-4.3 billion KRW) regions continued to show losses following last year. China posted a profit of 2.3 billion KRW, turning positive, and Vietnam also earned an operating profit of 3.2 billion KRW, a 433% increase.

Shin Su-yeon, a researcher at Shin Young Securities, said, “The first-quarter performance exceeded market expectations because China and Vietnam successfully contributed to operating profits as the number of viewers recovered, centered on local content,” adding, “It is also positive that operational efficiency is being improved across all regions through rent and labor cost reductions.”

Domestic sales in the first quarter were about 21% of the sales in the first quarter of 2019, mainly due to a lack of released content. In contrast, China has rapidly normalized, with Lunar New Year movie attendance this year exceeding the 2019 level. Researcher Shin explained, “This momentum is continuing into the second quarter, and if Hollywood films scheduled for release from May join the local anticipated titles, sales growth beyond expectations can be expected.”

Vietnam also recovered to about 60% of the sales in the first quarter of 2019, thanks to three local releases in the first quarter, and is expected to maintain a positive trend in the second quarter. Turkey’s sales recovery is slow due to ongoing business suspensions, but preparations are underway to resume operations in line with Hollywood film releases, along with cost efficiency measures. Indonesia continues to struggle due to a resurgence of COVID-19 and the absence of Hollywood releases, but the loss margin has decreased. 4DX sales improved somewhat with the release of “Demon Slayer,” and a gradual recovery is expected in the second quarter.

Researcher Shin said, “Despite increased operational uncertainties due to COVID-19, cost efficiency was achieved through workforce reductions and renegotiations of lease contract terms, reducing operating losses, which is positive,” adding, “Since content supply is a variable for the number of viewers, if the release of ‘Fast & Furious’ on the 19th proceeds as planned, gradual improvement can continue.”

The company announced last month the issuance of 300 billion KRW worth of new convertible bonds. This is to prepare for cash outflows such as the 350 billion KRW TRS maturity settlement in May and concerns over capital erosion due to continued operating losses and operating cash outflows. Researcher Shin said, “The issuance of convertible bonds amid difficult market conditions is an event that proves the company’s competitiveness is recognized,” adding, “With the TRS maturity repayment and liquidity secured, financial concerns for the first half have been resolved for now, so attention should be paid to the timing of performance improvement following market recovery.”