Rising OTT Competition And Production Costs Will Pressure Earnings And Margins

Catalysts

About CJ ENM

CJ ENM is a diversified Korean entertainment and commerce company focused on creating, distributing and monetizing media, music, film, OTT and live commerce content globally.

What are the underlying business or industry changes driving this perspective?

• Global OTT demand for Korean content is increasingly being served by large international studios and local competitors, so CJ ENM's reliance on presales and minimum guarantees from partners like Warner Bros Discovery, Disney Plus and Max may compress pricing power and cap long term content revenue growth.
• The rapid shift of advertising budgets from traditional TV to digital, despite CJ ENM's strong drama ratings, suggests a structural decoupling between viewership and TV ad sales that could keep media platform revenues subdued and limit operating leverage improvements.
• Escalating production costs for premium dramas and variety content, combined with the need to invest heavily in ancillary IP, fandom platforms and overseas remakes, risks outpacing monetization gains and eroding operating margins across Studio Dragon and CJ ENM Studios.
• The aggressive global expansion of TVING and Mnet Plus into Southeast Asia, Japan and the greater Chinese market requires sustained marketing and technology spending. If subscriber and fan monetization lag, losses at these platforms could drag on consolidated earnings beyond current expectations.
• Commerce growth is increasingly tied to mobile live commerce and high margin beauty and health supplements, but intensified competition from larger e commerce platforms and social commerce channels may limit pricing flexibility and slow margin expansion, constraining future profit growth.

Assumptions

This narrative explores a more pessimistic perspective on CJ ENM compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming CJ ENM's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 1.5% today to 1.3% in 3 years time.
• The bearish analysts expect earnings to reach ₩72.2 billion (and earnings per share of ₩3264.25) by about December 2028, down from ₩83.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ₩218.9 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.3x on those 2028 earnings, up from 15.4x today. This future PE is greater than the current PE for the KR Entertainment industry at 13.1x.
• The bearish analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.85%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Strategic global partnerships, including the joint planning and production of premium K content with Warner Bros Discovery, expanding distribution into Japan, the U.S., Latin America and the Middle East and leveraging platforms like HBO Max and Disney Plus, could materially lift overseas content sales and stabilize long term revenue growth.
• Evidence of rising content competitiveness, such as TVN dramas reaching peak ratings above 17.1% and multiple series topping Netflix global non English rankings, combined with presales of key titles like Typhoon Family and Pro Bono, may support sustained pricing power and higher operating margins in the drama and film businesses.
• Rapid traction of digital and fan platforms, with TVING advertising revenue up 75 percent year on year and Mnet Plus daily active users growing more than 1,000 percent since January, suggests scalable monetization of advertising, fan clubs and commerce that could drive faster than expected growth in revenue and earnings from 2026 onward.
• Improving profitability in Commerce, driven by expansion of mobile live commerce, a shift toward high margin beauty and health supplements, and stronger private brand portfolios, alongside cost controls in content production at Studio Dragon, could offset media platform weakness and support a structural improvement in consolidated net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for CJ ENM is ₩46538.06, which represents up to two standard deviations below the consensus price target of ₩83312.5. This valuation is based on what can be assumed as the expectations of CJ ENM's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩116000.0, and the most bearish reporting a price target of just ₩43000.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be ₩5629.5 billion, earnings will come to ₩72.2 billion, and it would be trading on a PE ratio of 19.3x, assuming you use a discount rate of 12.8%.
  
• Given the current share price of ₩61600.0, the analyst price target of ₩46538.06 is 32.4% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.