CJ ENM Yeonggwang Aftermath... Key to Profitability Recovery

Im Kyung CJ Group Vice Chairman is delivering an acceptance speech at the 92nd Academy Awards.

Despite the Oscar Four-Crown Legend of the Movie 'Parasite,' Profitability Declines

Media Operating Profit Drops Sharply by 7.8 Billion KRW, 78%

Film and Music Also Record Operating Losses of 1 Billion KRW and 2.8 Billion KRW Respectively

Visual Effects Companies, Hallyu Tourism Complex, etc.

Large-Scale Investments in Content and Overseas Business Lead to Increased Borrowings

Significant Time Expected Before Contributions to Profit

[Asia Economy Reporters Lim Jeong-su, Jang Hyo-won] CJ ENM, spotlighted for its investment in the film 'Parasite,' stands at a crossroads between growth and decline. Its core business, the media sector, is gradually losing ground due to competition from global Over-The-Top (OTT) online video services. The commerce business, which acts as a cash cow, faces limited growth prospects as e-commerce increasingly encroaches on its market share. The film and music sectors still hold a low sales proportion and exhibit high performance volatility.

The CJ Group plans to enhance profitability through business efficiency improvements but has yet to find a definitive breakthrough. To secure growth momentum, it is making large-scale investments in content and overseas businesses, but market outlooks on business performance are not entirely optimistic. If investments do not translate into results, CJ Group’s major affiliates such as CJ CheilJedang and CJ Logistics may struggle under heavy debt burdens.

◆ Media, Film, and Music Underperform... 'Commerce' Also Faces Limits

CJ ENM’s profitability continues to be unstable. On the 13th, CJ ENM announced that its consolidated sales for the fourth quarter of last year reached 1.0141 trillion KRW, a 5.7% increase compared to the same period the previous year. Despite the sales increase, operating profit fell by 14.9% to 42.8 billion KRW. This was due to increased cost burdens from higher depreciation expenses caused by large-scale investments and rising production costs such as labor expenses.

It is known that depreciation expenses account for nearly 20% of CJ ENM’s cost of sales. Large-scale investments in dramas and other content are capitalized as intangible assets and amortized as expenses when sales occur, so the more investments increase, the greater the burden of intangible asset amortization. Cost of sales and selling and administrative expenses together account for 93% of total sales.

The decline in profitability appeared in most business sectors except for commerce. CJ ENM’s business is broadly divided into media, commerce, film, and music sectors. As of the fourth quarter of last year, the sales proportions by sector were 43.9%, 40.4%, 9.2%, and 6.5%, respectively, with media and commerce accounting for the majority of sales. The media sector, which has the highest sales proportion, recorded an operating profit of 4.6 billion KRW, a sharp 78% drop compared to the same period last year. Film and music recorded operating losses of 1 billion KRW and 2.9 billion KRW, respectively, in the fourth quarter of last year.

The media sector operates 17 broadcasting channels including tvN, OCN, and Mnet, and engages in broadcasting content sales and advertising businesses. Among these, TV advertising revenue decreased by 2.4% compared to the same period last year due to the overall market downturn. Although cable channels increased, the overall advertising market share remains stagnant. The broadcasting advertising market size was 4.1577 trillion KRW in 2018, a mere 2.6% increase from 4.0514 trillion KRW in 2017.

In the fourth quarter of last year, CJ ENM’s profits from sales of entertainment and drama broadcasting content also declined by 9.6%. Its subsidiary, drama production company Studio Dragon, recorded an operating loss of 4.1 billion KRW.

On the other hand, the commerce business posted an operating profit of 41.8 billion KRW in the fourth quarter of last year, a 37% increase from the same period the previous year. Commerce primarily involves product sales through TV home shopping channels and online platforms. Sales of private label brands, which have relatively high profit margins, increased by 28.1%, improving both scale and profitability. However, commerce is also considered to have reached its growth limit. It is analyzed that the proliferation of home shopping channels and the growth of social commerce companies such as Coupang and Wemakeprice are gradually eroding its growth momentum.

◆ Increasing Financial Burden... Investment Outcomes Uncertain

CJ ENM is making large-scale investments in content and overseas businesses to maintain growth momentum. On the 11th, CJ ENM invested 5 billion KRW in Dexter, a VFX (visual effects) specialist company involved in films such as 'Along with the Gods,' 'Ashfall,' and 'Parasite,' becoming its second-largest shareholder. On the same day, CJ ENM invested in and formed a strategic partnership with Skydance, a Hollywood production company known for films like 'Terminator.'

The CJ Live City project, aimed at creating a Hallyu content tourism complex, is also expected to be launched in earnest this year. CJ Live City, a subsidiary of CJ ENM, plans to build a complex in Goyang, Gyeonggi Province, featuring K-pop performance venues, shopping facilities, and theme parks. The project scale is a total of 1.9 trillion KRW. Upon receiving approval from Gyeonggi Province, CJ ENM and the CJ Group will proceed with investments.

It is understood that some investment funds have been secured. Last year, CJ ENM sold its 50%+1 share in CJ Hello (now LG HelloVision) to LG Uplus for 800 billion KRW, securing cash assets. According to SK Securities, excluding transfer taxes and existing share values, approximately 326 billion KRW in cash inflow is expected. Adding cash assets of 346.2 billion KRW and short-term financial products of 163.8 billion KRW as of the third quarter of last year, about 800 billion KRW can be utilized as investment funds.

The financial situation is relatively sound compared to other major affiliates within the CJ Group. However, during the merger process of CJ O Shopping (the surviving entity) and CJ E&M, CJ ENM exercised stock purchase rights and bought back treasury shares worth 503.8 billion KRW, and borrowings increased as investments in content expanded. The combined net borrowings of the two companies, which were around 500 billion KRW before the merger, surged to 1.4 trillion KRW by the end of 2018 after the merger. By the end of the third quarter last year, it exceeded 1.5 trillion KRW. Recently, CJ ENM also took on financial burdens by acquiring the CJ Human Resources Development Center site and building, which CJ CheilJedang sold for financial restructuring, for 52.9 billion KRW.

Although 'Parasite' has increased CJ ENM’s brand recognition domestically and internationally, it remains uncertain whether large-scale investments will yield results. Moreover, even if results appear, it is widely expected to take considerable time. Kim Min-jung, a researcher at Hi Investment & Securities, said, "The content business will experience operating leverage effects as additional revenue expands based on competitive advantages," but added, "The increased production costs to enhance global content competitiveness mean it will take some time before these contribute to profits."

This content was produced with the assistance of AI translation services.