[Click eStock] "CJ CGV, Rising Expectations for China Reopening... Financial Cost Burden Remains"

[Asia Economy Reporter Kwon Jaehee] Samsung Securities has given CJ CGV a hold rating and raised the target price by 11% from the previous level to 20,000 KRW.

CJ CGV, which operates 145 sites in China (as of Q3 2022), is expected to see a full recovery in its Chinese business due to China's transition to a 'With Corona' policy. While countries including South Korea showed box office revenue recovery in 2022, China continued to experience negative growth. This was due to China implementing strict COVID-19 lockdown policies, unlike other countries that began transitioning to endemic status.

As a result, CJ CGV's box office revenue in China last year was 27.5 billion yuan, and the number of viewers was 713.62 million, down 35.8% and 38.8% respectively compared to the same period the previous year.

However, starting with the first major holiday, 'Chunjeol' (Lunar New Year), after easing high-intensity quarantine policies, the Chinese box office has rapidly entered an improvement phase, and CGV's Chinese business profits are expected to improve. The box office revenue during the 7-day Chunjeol holiday reached 6.76 billion yuan (approximately 1.2 trillion KRW), marking the second-highest record following Chunjeol in 2021. The Chinese business, which recorded an operating profit of 18.2 billion KRW in 2019, turned to a loss of 76.7 billion KRW in 2020 when the pandemic began, and is expected to show a loss of 83.2 billion KRW in 2022. A return to profitability with 300 million KRW is anticipated in 2023.

[Image source=Yonhap News]

However, financial risks and the burden of increased convertible bond (CB) issuance remain. Due to the prolonged pandemic, financial burdens have accumulated, resulting in significant financial costs. Since turning to net losses in 2018, it is likely that CJ CGV will record a net loss for the fifth consecutive year in 2022. The company has expanded capital through a 22 billion KRW rights offering in 2020, issuance of hybrid capital securities (8 billion KRW in October and 20 billion KRW in December), convertible bond issuance of 30 billion KRW in 2021, a third-party allotment rights offering of 15 billion KRW in 2022, and issuance of perpetual convertible bonds worth 40 billion KRW. The conversion price of the 40 billion KRW convertible bonds issued last year is 22,000 KRW. If the stock price rises above the conversion price, some investors are likely to realize gains by selling, which could weigh on the stock price.

Researcher Choi Minha of Samsung Securities analyzed, "The Chinese multiplex business is expected to show significant performance improvement compared to the previous year, leading to an upward revision of the target price due to the increased value of the Chinese business. However, although profitability is expected to improve compared to the previous year, the financial burden remains large, and the substantial outstanding balance of previously issued convertible bonds will limit upward pressure on the stock price."